As filed with the Securities and Exchange Commission on July 24, 1997
SEC File No. ______
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
Registration Statement
Under the Securities Act of 1933
CTI INDUSTRIES CORPORATION
(Name of Small Business Issuer in its charter)
Delaware 3970 36-2848943
(State or jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification No.)
organization) Code Number)
22160 North Pepper Road
Barrington, Illinois 60010
(847) 382-1000
(Address and Telephone Number of Principal Executive Offices)
22160 North Pepper Road
Barrington, Illinois 60010
(Address of Principal Place of Business)
Howard W. Schwan, President
22160 North Pepper Road
Barrington, Illinois 60010
(847) 382-1000
(Name, address and telephone number of Agent for Service)
Copies to:
John M. Klimek, Esq. Rubi Finkelstein, Esq.
Fishman Merrick Miller Genelly Orrick, Herrington & Sutcliffe LLP
Springer Klimek & Anderson, P.C. 666 Fifth Avenue
30 North LaSalle, Suite 3500 New York, New York 10103-0001
Chicago, Illinois 60602 (212) 506-5000
(312) 726-1224 (212) 506-5151 (Facsimile)
(312) 726-2649 (Facsimile)
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration
Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box |_|
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
FACING SHEET CONTINUED ON NEXT PAGE
<PAGE>
CONTINUATION OF FACING SHEET
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of Each Class Proposed Maximum Proposed Maximum Amount of
of Securities To Be Amount To Be Offering Price Aggregate Registration
Registered Registered(1) Per Share (2) Offering Price (2) Fee
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units, each consisting of one share
of Common Stock, $.065 Par
Value ("Common Stock") and one
Common Stock Purchase Warrant
("Redeemable Warrant") 1,533,332(3) $ 4.50 $ 6,899,994.00 $2,090.91
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock 1,533,332(4) ----- -------- ------
- ----------------------------------------------------------------------------------------------------------------------------------
Redeemable Warrants 1,533,332(5) ----- -------- ------
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock Issuable Upon
Exercise of the Redeemable
Warrants 1,533,332 $ 6.75(6) $10,349,991.00 $3,136.36
- ----------------------------------------------------------------------------------------------------------------------------------
Underwriter's Warrants(7) 133,333 $.0001 $ 13.33 $ 0(8)
- ----------------------------------------------------------------------------------------------------------------------------------
Units issuable upon exercise of
Underwriter's Warrants, each Unit
consisting of one share of
Common Stock and one
Redeemable Warrant 133,333 $ 5.40(9) $ 719,998.20 $ 218.18
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock 133,333 ----- -------- ------
- ----------------------------------------------------------------------------------------------------------------------------------
Redeemable Warrants 133,333 ----- -------- ------
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock Issuable Upon
Exercise of the Redeemable
Warrants Included in the
Underwriter's Warrants 133,333 $ 6.75 $ 899,997.75 $ 272.73
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL $18,869,994.28 $5,718.18
===================================================================================================================================
<FN>
(1)Pursuant to Rule 416, there are also being registered such
indeterminable number of securities which may be issued as a result of the
anti-dilution provisions of the Warrants and the Underwriter's Warrants.
(2)Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(3)Includes 199,999 Units subject to sale upon exercise of
over-allotment option granted to Underwriter which may be offered to cover
over-allotments, if any.
(4)Includes 199,999 shares of Common Stock included in the Units which
may be offered to cover over-allotments, if any.
(5)Includes 199,999 Redeemable Warrants included in the Units which may
be offered to cover over-allotments, if any.
(6)Represents the exercise price of the Redeemable Warrants.
(7)Represents warrants, to be issued to the Underwriter, to purchase
Common Stock and Redeemable Warrants.
(8)No separate registration fee is required pursuant to Rule 457(g).
(9)Represents the exercise price of the Underwriter's Warrants.
</FN>
</TABLE>
(ii)
<PAGE>
CTI INDUSTRIES CORPORATION
CROSS REFERENCE SHEET
Showing the Location in the Prospectus
of Information Required by Items of Form SB-2
<TABLE>
<CAPTION>
Registration Statement
Item Number and Heading Location in Prospectus
- ----------------------- ----------------------
<S> <C> <C>
1. Front of Registration Statement and Outside
Front Cover Page of Prospectus....................................... Outside Front Cover of Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus.................................................. Inside Front and Outside Back Cover Pages of
Prospectus
3. Summary Information and Risk Factors................................. Prospectus Summary; Risk Factors
4. Use of Proceeds...................................................... Use of Proceeds
5. Determination of Offering Price...................................... Outside Front Cover Page; Risk Factors;
Underwriting
6. Dilution............................................................. Dilution
7. Selling Security Holders............................................. N/A
8. Plan of Distribution................................................. Outside Front Cover Page of Prospectus;
Underwriting
9. Legal Proceedings.................................................... Business - Legal Proceedings
10. Directors, Executive Officers, Promoters
and Control Persons.................................................. Management; Principal Stockholders
11. Security Ownership of Certain
Beneficial Owners and Management..................................... Principal Stockholders
12. Description of Securities............................................ Description of Capital Stock; Underwriting
13. Interest of Named Experts and Counsel................................ Experts
14. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities....................................... Management - Limitation of Liability and
Indemnification; Underwriting
15. Organization Within Last Five Years.................................. Not Applicable
16. Description of Business.............................................. Prospectus Summary; Risk Factors;
Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Business; Management; Certain Transactions;
Financial Statements
17. Management's Discussion and Analysis or
Plan of Operation.................................................... Management's Discussion and Analysis of
Financial Condition and Results of Operations
18. Description of Property.............................................. Business - Manufacturing
19. Certain Relationships and
Related Transactions................................................. The Company; Certain Transactions
20. Market for Common Equity and
Related Stockholder Matters.......................................... Risk Factors; Description of Capital Stock
21. Executive Compensation............................................... Management - Executive Compensation
22. Financial Statements................................................. Financial Statements
23. Changes in and Disagreements With
Accountants on Accounting and Financial
Disclosure........................................................... Change in Independent Accountants
</TABLE>
(iii)
<PAGE>
SUBJECT TO COMPLETION, DATED , 1997
PROSPECTUS
CTI Industries Corporation
1,333,333 UNITS
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK
AND
ONE REDEEMABLE WARRANT
This Prospectus relates to an offering (the "Offering") of 1,333,333
Units (the "Units"), each Unit consisting of one share of common stock, $.065
par value per share ("Common Stock"), and one redeemable common stock purchase
warrant ("Redeemable Warrant") of CTI Industries Corporation, a Delaware
corporation (the "Company"). The shares of Common Stock and Redeemable Warrants
comprising the Units are separately tradeable commencing upon issuance. Each
Redeemable Warrant entitles the registered holder thereof to purchase one share
of Common Stock at an initial exercise price of $__________ [150% of the initial
public offering price per Unit], subject to adjustment, at any time from
issuance until __________, 2002 [60 months after the date of this Prospectus].
The Company shall have the right to redeem all, but not less than all, of the
Redeemable Warrants, commencing __________, 1998 [12 months after the date of
this Prospectus] at a price of $.05 per Redeemable Warrant on 30 days' prior
written notice, provided that the Company shall have obtained the consent of
Joseph Stevens & Company, Inc. (the "Underwriter"), and the average closing bid
price of the Common Stock equals or exceeds 150% of the then exercise price per
share, subject to adjustment, for any 20 trading days within a period of 30
consecutive trading days ending on the fifth trading day prior to the date of
the notice of redemption. See "Description of Securities -- Redeemable
Warrants."
Prior to the Offering, there has been no public market for the Units, the
Common Stock or the Redeemable Warrants, and there can be no assurance that such
a market will develop after the completion of the Offering or, if developed,
that it will be sustained. It is currently anticipated that the initial public
offering price will be $4.50 per Unit. The offering price of the Units and the
exercise price and other terms of the Redeemable Warrants were determined by
negotiation between the Company and the Underwriter and are not necessarily
related to the Company's asset or book values, results of operations or any
other established criteria of value. See "Risk Factors," "Description of
Securities" and "Underwriting." The Company has applied to include the Units,
the Common Stock and the Redeemable Warrants on the Nasdaq SmallCap Market
("Nasdaq") under the symbols "CTINU," "CTIN" and "CTINW," respectively. The
Company and the Underwriter may jointly determine, based upon market conditions,
to delist the Units upon the expiration of the 30-day period commencing on the
date of this Prospectus.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" LOCATED ON PAGE 8, AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===================================================================================================================
Price to Public Underwriting Discounts(1) Proceeds to Company(2)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Unit........................ $ $ $
- -------------------------------------------------------------------------------------------------------------------
Total(3)........................ $ $ $
===================================================================================================================
<FN>
(1) Does not include additional compensation payable to the Underwriter in the
form of a non-accountable expense allowance. In addition, see "Underwriting"
for information concerning indemnification and contribution arrangements and
other compensation payable to the Underwriter.
(2) Before deducting estimated expenses of $______ payable by the Company,
including the Underwriter's non-accountable expense allowance.
(3) The Company has granted to the Underwriter an option (the "Over-Allotment
Option"), exercisable for a period of 45 days after the date of this
Prospectus, to purchase up to 199,999 additional Units upon the same terms
and conditions set forth above, solely to cover over-allotments, if any. If
the Over-Allotment Option is exercised in full, the total Price to Public,
Underwriting Discounts and Proceeds to Company will be $_____________,
$____________ and $______________, respectively. See "Underwriting."
</FN>
</TABLE>
<PAGE>
The Units are being offered by the Underwriter, subject to prior sale,
when, as and if delivered to and accepted by the Underwriter, and subject to
approval of certain legal matters by its counsel and subject to certain other
conditions. The Underwriter reserves the right to withdraw, cancel or modify the
Offering and to reject any order in whole or in part. It is expected that
delivery of the Units offered hereby will be made against payment, at the
offices of Joseph Stevens & Company, Inc., New York, New York, on or about
_________, 1997.
JOSEPH STEVENS & COMPANY, INC.
The date of this Prospectus is _______________, 1997.
<PAGE>
[PHOTOGRAPHS]
The Company intends to furnish to the registered holders of the Units,
Redeemable Warrants and Common Stock, annual reports containing financial
statements audited by its independent accounting firm and quarterly reports for
the first three quarters of each fiscal year containing unaudited interim
financial information.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
UNITS, COMMON STOCK AND/OR REDEEMABLE WARRANTS, INCLUDING PURCHASES OF THE
UNITS, COMMON STOCK AND/OR REDEEMABLE WARRANTS TO STABILIZE THEIR RESPECTIVE
MARKET PRICES, PURCHASES OF THE UNITS, COMMON STOCK AND/OR REDEEMABLE WARRANTS
MAINTAINED BY THE UNDERWRITER IN THE UNITS, COMMON STOCK AND/OR REDEEMABLE
WARRANTS, RESPECTIVELY, AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus. In
July, 1997, the Company restated its Certificate of Incorporation to provide for
Common Stock and Class B Common Stock. The shares of Class B Common Stock
contain rights identical to shares of Common Stock, except that shares of Class
B Common Stock, voting separately as a class, have the right to elect four of
the Company's seven directors. Shares of Common Stock and Class B Common Stock,
voting together as a class, vote on all other matters including electing the
remaining directors. Also in July, 1997, the Company effected a 1 for 2.6
reverse stock split of both its Common Stock and Preferred Stock. Upon the
closing of the Offering, the holders of the Company's then outstanding
Convertible Preferred Stock will convert all outstanding shares of such
Convertible Preferred Stock into 1,098,901 shares of Class B Common Stock.
Except as otherwise noted, all information in this Prospectus gives retroactive
effect to the aforementioned recapitalization, the 1 for 2.6 reverse stock split
and conversion of Convertible Preferred Stock, and assumes no exercise of the
Over-Allotment Option or the Underwriter's Warrants. See "Description of Capital
Stock." Investors should carefully consider the information set forth under the
heading "Risk Factors."
The Company
CTI Industries Corporation (the "Company") manufactures and sells mylar
balloons and believes it is the third largest manufacturer of mylar balloons in
the world. The Company also sells latex balloons, novelty and "message" items,
such as mugs and banners, and toy products, such as inflatable masks, punch
balls and water bombs, and produces laminated and specialty films for food
packaging and other commercial uses. The Company's balloons and related products
are sold throughout the United States and in 30 foreign countries through a wide
variety of retail outlets including grocery, general merchandise and drugstore
chains, such as Eckerd Drug Stores and the Safeway and Winn Dixie grocery
chains, card and gift shops, such as Hallmark and Factory Card Outlet stores,
and party goods stores, such as Party City, as well as through florists and
balloon decorators. The Company estimates the worldwide wholesale market for
latex and mylar balloons to be in excess of $570 million. During fiscal 1996,
the Company manufactured and sold over 15 million mylar balloons.
The mylar balloon, actually a balloon made of a nylon based material
with metallized and polyethylene coatings, has become a popular medium of social
expression. Most mylar balloons contain printed characters, designs and
messages. The Company maintains licenses on numerous characters and designs,
including, for example, Peanuts(TM) characters, Garfield(TM), Precious
Moments(TM) and Hallmark.
To meet the needs of the mylar balloon market, the Company has
developed sophisticated film products and techniques which have other
applications. The Company's expertise in multi-color printing, with water-based
ink in particular, has enabled the Company to expand its business to include the
production of film wrappers for consumables. The Company produces, laminates and
prints films for food packaging companies and manufactures custom film products
for other commercial uses.
The Company is a fully integrated designer and manufacturer of its
mylar balloon product line and believes that its facilities are among the most
advanced in the industry. The Company is a party to a long term agreement with a
Mexican manufacturer under which a broad line of latex balloons are manufactured
for the Company. The Company thereby has a competitive source of supply of
quality latex balloon products which it markets with its mylar balloon line. The
Company has also established a joint venture with this Mexican manufacturer for
the packaging of balloon products and printing of latex balloons.
3
<PAGE>
The Company's objective is to become a dominant participant in the
worldwide mylar and latex balloon industry. To achieve this objective, the
Company is pursuing a business strategy that includes the following principal
elements:
Strengthen and Expand Marketing Efforts. The Company is
focusing its sales and marketing efforts to strengthen,
develop and expand its relationships with balloon distributors
and believes it can expand the business volume generated
through current distributors of its products. The Company also
intends to seek out relationships with new distributors both
in current markets and in new sales areas and plans to pursue
additional national chain accounts. The Company is developing
relationships with independent sales representatives for the
marketing of its toy-grade latex balloons, inflatable masks
and other toy/novelty products and also is expanding its
marketing efforts for its laminated and specialty film
products.
Increase Production Capability. The Company plans to purchase
additional printing, graphic and laminating equipment which
will allow it to increase its production capabilities and
enable it to produce eight-color mylar balloons and custom
film products.
Secure Supply. The Company plans to secure its low cost, high
quality source of latex balloons by providing capital in the
form of loans to its Mexican supplier of these products. The
Company believes this relationship provides the Company with a
competitive advantage over its competitors.
Expand Balloon Design and Product Development. By continuing
to expand its design and research and development departments,
the Company plans to develop new balloon designs and create or
license additional characters for display on its balloons to
increase the demand for its products. The Company also intends
to expand its toy/novelty product line of toy- grade latex
balloons, inflatable masks, punch balls and water bombs.
Develop Alternative Sales Channels. The Company plans to
develop strategic alliances with greeting card companies and
other members of the social expression industry to more
effectively market its products. The Company will seek to
become the supplier of custom, special order balloon products
to major distributors and suppliers.
The Offering
Securities offered by the
Company.................... 1,333,333 Units, each Unit consisting of one
share of Common Stock and one Redeemable
Warrant. The shares of Common Stock and
Redeemable Warrants comprising the Units will be
detachable and separately tradeable upon
issuance. Each Redeemable Warrant entitles the
registered holder thereof to purchase one share
of Common Stock at an initial exercise price of
$____ per share [150% of the initial public
offering price per Unit], subject to adjustment,
at any time following the date of issuance until
___________, 2002 [sixty months from the date of
this Prospectus]. The Company
4
<PAGE>
shall have the right to redeem all, but not less
than all, of the Redeemable Warrants commencing
________, 1998 [twelve months from the date of
this Prospectus] at a price of $.05 per
Redeemable Warrant on 30 days' prior written
notice, provided that (i) the average closing
bid price of the Common Stock equals or exceeds
150% of the then exercise price per share,
subject to adjustment, for any 20 trading days
within a period of 30 consecutive trading days
ending on the fifth trading day prior to the
date of the notice of redemption, and (ii) the
Company shall have obtained the consent of the
Underwriter. See "Description of Capital Stock."
Common Stock outstanding Common Stock Class B Common Stock
before the Offering...... 1,010,202(1) 1,098,901
Common Stock to be
outstanding after
the Offering.............. 2,343,535(1) 1,098,901
Redeemable Warrants
to be outstanding
after the Offering....... 1,333,333(1)
Proposed NASDAQ SmallCap
Market Symbols............ Units: CTINU
Common Stock: CTIN
Redeemable Warrants: CTINW
Use of Proceeds............
The net proceeds of the Offering will be used
(i) to repay bank indebtedness of approximately
$1,250,000, including accrued interest, (ii)
$400,000 for sales and marketing programs, (iii)
$1,100,000 for improvements to plant and
equipment, (iv) $400,000 for loans to Mexican
supplier, (v) $150,000 for investment in Mexican
joint venture, (vi) $400,000 for product
development and character and image licenses and
(vii) the balance ($1,000,000) for working
capital and general corporate purposes.
Risk Factors................. Investment in the Units offered hereby is highly
speculative and involves significant risks and
substantial dilution. See "Risk Factors."
-----------------------
(1)Excludes (i) warrants to purchase an aggregate of 230,769 shares of
Common Stock at an exercise price of $.91 per share, (ii) warrants to purchase
277,244 shares of Common Stock at an exercise price of $3.12 per share and (iii)
300,000 shares of Common Stock issuable pursuant to options which may be granted
under the Company's stock option plan.
5
<PAGE>
Summary Financial Information
(in thousands except share and per share data)
The following table sets forth summary financial data of the Company
for the two years ended October 31, 1996 and 1995 (collectively, the "Year-End
Data") and as of April 30, 1997, and for the six month periods ended April 30,
1996 and 1997. The Year-End Data has been derived from the audited financial
statements of the Company appearing elsewhere herein, which have been audited by
Coopers & Lybrand L.L.P. The summary financial data set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and the Financial Statements and notes
thereto and other financial and statistical data appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
Years Ended October 31, Six Months Ended April 30,
-------------------------- --------------------------
1995 1996 1996 1997
----------- ----------- ----------- -----------
Consolidated Statement of
Operations Data:
<S> <C> <C> <C> <C>
Net sales ......................... $ 22,784 $ 13,910 $ 7,884 $ 8,736
Cost of sales ..................... $ 15,078 $ 8,558 $ 4,798 $ 5,384
----------- ----------- ----------- -----------
Gross profit ...................... $ 7,706 $ 5,352 $ 3,086 $ 3,352
Operating Expenses:
General and administrative ..... $ 2,900 $ 2,055 $ 1,196 $ 900
Selling ........................ $ 3,770 $ 2,387 $ 1,332 $ 1,364
Advertising and marketing ...... $ 2,356 $ 592 $ 341 $ 468
Plant shut down expense ........ $ 850 -- -- --
----------- ----------- ----------- -----------
Total operating expenses .......... $ 9,876 $ 5,034 $ 2,869 $ 2,732
----------- ----------- ----------- -----------
Operating income (loss) ........... $ (2,170) $ 318 $ 217 $ 620
Other income (expense) ............ $ (1,497) $ (495) $ (285) $ (229)
Income tax benefit(expense) ....... $ 774 $ (6) $ -- $ --
----------- ----------- ----------- -----------
Net income (loss) ................. $ (2,893) $ (183) $ (68) $ 391
Dividends applicable to Convertible
Preferred Stock .................. -- $ (74) $ (11) $ (65)
----------- ----------- ----------- -----------
Net income (loss) applicable to
common shares .................... $ (2,893) $ (257) $ (79) $ 326
=========== =========== =========== ===========
Net income (loss) per common and
common equivalent share .......... $ (2.14) $ (.20) $ (.06) $ .26
=========== =========== =========== ===========
Weighted average number
of common and common equivalent
shares outstanding ................ 1,353,384 1,290,267 1,324,080 1,254,124
=========== =========== =========== ===========
Pro forma per share data
reflecting recapitalization (1):
Net income (loss) per
common share and common
equivalent share .............. $ (.11) $ .17
Weighted average common
shares and common equivalent
shares outstanding ............ 2,301,756 2,265,612
</TABLE>
6
<PAGE>
April 30, 1997
-----------------------------
Pro Forma
Pro Forma(2) As Adjusted(2)(3)
------------ -----------
Consolidated Balance Sheet Data:
Working capital .................... $ 1,311 $ 4,383
Total assets ....................... $11,522 $14,994
Long-term debt, less current portion $ 3,738 $ 3,738
Total liabilities .................. $10,114 $ 8,864
Stockholders' equity ............... $ 958 $ 5,680
- -------------
(1) Pro forma per share data gives effect to the conversion of all
convertible preferred stock into common shares as if it occurred as of November
1, 1995 using the treasury stock method. The following table presents a
reconciliationof the pro forma weighted average common shares used in the pro
forma per share computations.
Six Months
Year Ended Ended
October 31, 1996 April 30, 1997
---------------- --------------
Weighted average common
shares outstanding ................ 1,026,572 990,428
Conversion of preferred stock ....... 1,011,489 1,011,489
Warrants ............................ 263,695 263,695
---------- ----------
2,301,756 2,265,612
========== ==========
(2) Gives retroactive effect to recapitalization and conversion of
Convertible Preferred Stock to shares of Class B Common Stock and issuance of
$865,000 of notes in June, 1997. See "Certain Transactions."
(3) Adjusted to give effect to the Offering assuming an initial public
offering price of $4.50 per Unit and the initial application of the net proceeds
therefrom.
7
<PAGE>
RISK FACTORS
The purchase of Units offered hereby involves substantial risks and
immediate substantial dilution. Prospective investors should carefully consider
the risk factors set forth below in addition to the other information contained
in this Prospectus before purchasing the securities offered hereby.
Operating Results; History of Losses. Although the Company had net
income of $391,000 for the six months ended April 30, 1997, the Company's
revenues and results of operations have fluctuated materially during the last
five fiscal years. For the fiscal year ended October 31, 1995 and 1996, the
Company experienced net losses of $2,893,000 and $183,000, respectively. There
can be no assurance the Company can maintain profitability. See "Selected
Financial Data," Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Financial Statements and notes thereto included
herein.
Additional Capital Requirements; Uncertainty of Additional Funding.
Based on its current operating plan, the Company anticipates that its existing
capital resources together with the proceeds of this Offering will be adequate
to satisfy its requirements for at least 12 months from the date of this
Prospectus. Thereafter, the Company may require additional capital in order to
expand its business. There can be no assurance that the Company will be able to
secure additional debt or equity financing or that such financing will be
available on favorable terms. Historically, the Company has been substantially
dependent upon bank debt financing and debt and equity financing and guarantees
from its affiliates. There can be no assurance that the Company's affiliates
will continue to extend or guarantee such financing. See "Certain Transactions."
Additionally, financing, if any, may be either equity, debt or a combination of
debt and equity. An equity financing could result in dilution in the Company's
net tangible book value per share of Common Stock. The Company has agreed not to
sell or offer for sale any of its securities for a period of 18 months following
the date of this Prospectus without the consent of the Underwriter. If the
Company is unable to obtain additional financing, if needed, the Company's
ability to meet its obligations and to expand its operations will be materially
and adversely affected. See "Business" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Financial Statements
and notes thereto included herein.
Dependence on Limited Product Lines. The business of the Company is
dependent on three principal product lines -- mylar balloons, latex balloons and
specialty and printed films. Competition in each of these product lines is
intense. There can be no assurance that the Company will be able to establish or
maintain sales in all or any of these lines sufficient to achieve or sustain
profitability. If demand for one or more of these product lines is not developed
or maintained, as the case may be, whether due to competition, product
performance, customer assessment of the Company's resources, technological
changes or other factors, the Company's operations will be materially adversely
affected. See "Business--Products."
Dependence on Supplier. The Company is dependent on a supplier located
in Mexico for the manufacture of its latex balloon product line. This supplier
has experienced financial difficulty and has sought protection from its
creditors in a "Suspension of Payments" proceeding similar but not identical to
a reorganization proceeding under U.S. bankruptcy laws. The loss of the source
of supply for the latex balloon product line for any reason would materially
adversely affect the business of the Company. The Company has entered into an
agreement to provide capital in the form of loans to the Mexican supplier, and
has made loans and advances to the supplier to date in the amount of $300,000.
In the event the Mexican supplier is unsuccessful in negotiating a
reorganization with its creditors and is forced into bankruptcy, the collection
of all or any portion of such advances is unlikely. A portion of the proceeds of
this Offering will be used to provide such loans to the Mexican supplier. See
"Use of Proceeds" and "Business-Manufacturing."
8
<PAGE>
Dependence On Key Personnel. The Company's success depends to a
significant degree on the continued service of certain key management personnel,
in particular Howard W. Schwan, the Company's President and John C. Davis, the
Company's Executive Vice President of Sales. The loss or interruption of Messrs.
Schwan or Davis' services, for whatever reason, would have a material adverse
effect on the Company. In the event of the loss of services of either Mr. Schwan
or Mr. Davis, no assurance can be given that the Company will be able to obtain
the services of adequate replacement personnel. The Company has entered into a
five year employment agreement with Mr. Schwan and has extended the term of Mr.
Davis' employment agreement through January, 2000. Mr. Schwan's agreement
includes provisions under which Mr. Schwan agrees not to compete with the
Company for a period of three years after termination of his employment with the
Company. See "Management-Executive Compensation-Employment Agreement."
Related Party Transactions; Potential Conflicts of Interest. In June,
1997, the Company issued notes in the principal amount of $865,000, together
with warrants to purchase 277,244 shares of the Company's Common Stock at $3.12
per share. A substantial portion of these notes and warrants were purchased by
an investor group including Howard W. Schwan, John H. Schwan and Stephen M.
Merrick, current members of Company management. The notes will not be repaid out
of the proceeds of the Offering nor will the shares of Common Stock underlying
the warrants be included in the Offering. The Company believes that all of these
arrangements are favorable to the Company and were entered into on terms
reflecting arms' length negotiation; however, since no independent appraisals
evaluating these affiliated business transactions were obtained, there can be no
assurance that such transactions were based on terms no less favorable than
could have been obtained from unaffiliated third parties. Potential conflicts of
interest could arise between the Company and the affiliated parties in
connection with the future enforcement, amendment or termination of these
arrangements. See "Management," "Certain Transactions" and "Principal
Stockholders."
Stephen M. Merrick, Chief Executive Officer and principal shareholder
of the Company is also a member of Fishman Merrick Miller Genelly Springer
Klimek & Anderson, P.C., the law firm which represents the Company in this
Offering and which has passed on the validity of the Units. Other members of
Fishman Merrick Miller Genelly Springer Klimek & Anderson, P.C. also have an
equity ownership interest in the Company. A conflict may arise between the
responsibilities and duties of Fishman Merrick Miller Genelly Springer Klimek &
Anderson, P.C., Mr. Merrick, and/or the other members of the firm, as
shareholders, as officers of the Company, and as counsel to the Company. See
"Certain Transactions" and "Legal Matters."
Possible Control by Insiders; Reduced Probability of Change in Control.
Upon completion of the Offering, the Company's executive officers and directors
will beneficially own 65% of the outstanding Class B Common Stock and will
beneficially own approximately 37% of the outstanding Common Stock (45% if their
shares of Class B Common Stock are converted to shares of Common Stock) and will
be able to elect at least a majority of the Company's directors and thereby
direct the policies of the Company. As a result of the executive officers owning
the majority of the Class B Common Stock and thereby being able to elect a
majority of the Company's directors, it is less likely that an outside party
will seek to obtain control of the Company through the purchase of Common Stock.
See "Principal Stockholders", "Management" and "Description of Capital Stock."
Competition. The markets in which the Company competes are highly
competitive and rapidly changing. A number of companies offer products and
services which are the same or similar to those offered by the Company. The
Company's ability to compete depends upon many factors within and outside its
control. There are a number of well-established competitors in each of the
Company's product lines,
9
<PAGE>
several of which possess substantially greater financial, marketing and
technical resources and established, extensive direct and indirect channels of
distribution for their products and services. As a result, such competitors may
be able to respond more quickly to new developments and changes in customer
requirements, or to devote greater resources to the development, promotion and
sale of their products and services than the Company. Competitive pressures
include, among other things, price competition, new designs and product
development and copyright licensing. There can be no assurance that the Company
will be able to compete successfully against current or future competitors, or
that competitive pressures will not have a material adverse effect on the
Company's business, operating results and financial condition.
See "Business - Competition."
Dependence on Licenses. Particularly in connection with its mylar
balloon product line, the Company relies significantly on the use of character
and other copyright licenses to develop, maintain and market its products and to
compete against other companies having licenses for other characters and
copyrights. All of the Company's licenses are for one or two year terms. The
loss of one or more of its present significant licenses or the failure to obtain
new licenses as they become available could have a material adverse effect on
the business of the Company. There is intense competition among the
manufacturers of mylar balloons to obtain and maintain such licenses and there
can be no assurance that the Company will be able to retain or obtain current or
new licenses. See "Business-Competition."
No Dividends. The Company has never paid any dividends on its Common
Stock and does not currently intend to pay dividends on its Common Stock in the
foreseeable future. The Company currently intends to retain all its earnings, if
any, to finance the development and expansion of its business. It is also likely
that the Company will be required to agree to restrictions on the payment of
dividends in connection with future financings. See "Dividend Policy."
Broad Discretion of Management in Use of Proceeds. Approximately 39% of
the estimated net proceeds of the Offering (approximately 47% if the
Over-Allotment Option is exercised in full) is to be used for sales and
marketing activities, character and copyright licensing and working capital and
general corporate purposes. Accordingly, the Company's management will have
broad discretion as to the application of such proceeds. See "Use of Proceeds."
Securities Eligible for Future Sale. Sales of substantial amounts of
Common Stock after the Offering could adversely affect the market price of the
Company's Common Stock. The number of shares of Common Stock available for sale
in the public market is limited by restrictions under the Securities Act of
1933, as amended (the "Securities Act"), and by lock-up agreements pursuant to
which the holders of all of the issued and outstanding shares prior to the
Offering have agreed not to sell or dispose of any of their shares for a period
of 18 months after the date of this Prospectus (the "Lock-up Period") without
the prior written consent of the Underwriter. The Underwriter may, in its sole
discretion and at any time without notice, release all or any portion of the
shares subject to such lock-up agreements. Although the Underwriter does not
currently intend to release all of such shares from the lock-up agreements prior
to their expiration, it may from time to time release all or a portion thereof,
depending on a securityholder's individual circumstances, as market conditions
permit. Of the 2,343,535 shares of Common Stock that will be outstanding after
the Offering, the 1,333,333 shares underlying the Units sold in this Offering
will be freely tradeable without restriction or further registration under the
Securities Act, except that shares owned by "affiliates" of the Company, as that
term is defined in Rule 144 ("Rule 144") under the Securities Act
("Affiliates"), may generally only be sold in compliance with applicable
provisions of Rule 144. The remaining 1,010,202 shares of Common Stock and the
1,098,901 shares of Class B Common Stock (and Common Stock underlying the Class
B Common Stock) will be "restricted securities," as that term is
10
<PAGE>
defined in Rule 144, and in certain circumstances may be sold without
registration pursuant to such rule. After the Offering, substantially all of the
restricted shares will be eligible for sale in compliance with Rule 144;
however, all of these shares are subject to lock-up agreements and will be
subject to restrictions on sale until the expiration of the Lock-up Period,
unless released therefrom by the Underwriter. See "Management--Stock Option
Plan," "Description of Capital Stock," "Securities Eligible for Future Sale" and
"Underwriting."
The Redeemable Warrants and the shares of Common Stock underlying such
Redeemable Warrants, upon exercise thereof, will be freely tradeable without
restriction under the Securities Act, except for any Redeemable Warrants or
shares of Common Stock purchased by Affiliates, which will be subject to the
resale limitations of Rule 144.
Absence of Public Market; Arbitrary Determination of Offering Price;
Possible Volatility of Stock Price. Prior to this Offering, there has been no
public market for the Units, the Common Stock or the Redeemable Warrants, and
there can be no assurance that an active public market for any such securities
will develop or be sustained after the Offering. The initial public offering
price of the Units and the terms of the Redeemable Warrants has been determined
by negotiations among the Company and the Underwriter and may not necessarily
bear any relationship to the assets, book value, earnings or net worth of the
Company or any other recognized criteria and should not be considered to be an
indication of the actual value of the Company. Accordingly, the initial public
offering price may bear no relationship to the trading prices of the securities
offered hereby after the consummation of this Offering, and there can be no
assurance that these prices will not decline below the initial public offering
price. See "Underwriting." The trading prices of the Units, the Common Stock and
the Redeemable Warrants could be subject to wide fluctuations in response to
actual or anticipated quarterly operating results of the Company, announcements
of the Company or its competitors and general market conditions, as well as
other events or factors. In addition, the stock markets have experienced extreme
price and volume trading volatility in recent years. This volatility has had a
substantial effect on the market price of many small capitalization companies,
and has often been unrelated to the operating performance of those companies.
This volatility may adversely affect the market price of the Units, Common Stock
and Redeemable Warrants.
Dilution; Disproportionate Risk to Purchasers of Units. Purchasers of
the Units at the initial public offering price will experience immediate and
substantial dilution in the net tangible book value per share of Common Stock of
$2.85 or 63% ($2.73 or 61%, if the Over-Allotment Option is exercised in full).
The existing stockholders of the Company have acquired their respective equity
interests at costs substantially below the offering price in this Offering.
Accordingly, to the extent that the Company incurs losses, the purchasers of the
Units will bear a disproportionate risk with respect to such losses. See
"Dilution."
Underwriter's Potential Influence on the Market. It is anticipated that
a significant portion of the Units offered hereby will be sold to customers of
the Underwriter. Although the Underwriter has advised the Company that it
intends to make a market in the Units, the Common Stock and the Redeemable
Warrants, it will have no legal obligation to do so. The prices and the
liquidity of the Units, the Common Stock and the Redeemable Warrants may be
significantly affected by the degree, if any, of the Underwriter's participation
in the market. No assurance can be given that any market activities of the
Underwriter, if commenced, will be continued. See "Underwriting."
Continued Quotation on the Nasdaq SmallCap Market; Potential Penny
Stock Classification. The Company has applied to have the Units, the Common
Stock and the Redeemable Warrants approved for quotation on the Nasdaq SmallCap
Market and believes it will meet the initial listing requirements upon
11
<PAGE>
consummation of this Offering. However, there can be no assurance that a trading
market for these securities will develop, or if developed, that it will be
maintained. In addition, no assurance can be given that the Company will be able
to satisfy the criteria for continued quotation on the Nasdaq SmallCap Market
following this Offering. Failure to meet the maintenance criteria in the future
may result in the Units, the Common Stock and the Redeemable Warrants not being
eligible for quotation.
If the Company were removed from the Nasdaq SmallCap Market, trading,
if any, in the Units, the Common Stock or the Redeemable Warrants would
thereafter have to be conducted in the over-the-counter market in so-called
"pink sheets" or, if then available, Nasdaq's OTC Bulletin Board. As a result,
holders of the Units, the Common Stock and the Redeemable Warrants would find it
more difficult to dispose of, or to obtain accurate quotations as to the market
value of, such securities.
In addition, if the Units, the Common Stock or the Redeemable Warrants
are delisted from trading on Nasdaq and the trading price of the Common Stock is
less than $5.00 per share, trading in the Common Stock would also be subject to
the requirements of Rule 15g-9 promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Under such rule, broker/dealers who
recommend such low-priced securities to persons other than established customers
and accredited investors must satisfy special sales practice requirements,
including a requirement that they make an individualized written suitability
determination for the purchaser and receive the purchaser's written consent
prior to the transaction. The Securities Enforcement Remedies and Penny Stock
Reform Act of 1990 also requires additional disclosure in connection with any
trades involving a stock defined as a penny stock (generally, according to
recent regulations adopted by the Securities Exchange Commission (the
"Commission"), any equity security not traded on an exchange or quoted on Nasdaq
that has a market price of less than $5.00 per share, subject to certain
exceptions), including the delivery, prior to any penny stock transaction, of a
disclosure schedule explaining the penny stock market and the risks associated
therewith. Such requirements could severely limit the market liquidity of the
Units, the Common Stock and the Redeemable Warrants and the ability of
purchasers in the Offering to sell their securities in the secondary market.
There can be no assurance that the Units, Common Stock and Redeemable Warrants
will not be delisted or treated as a penny stock.
Current Prospectus and State Blue Sky Registration Required to Exercise
Redeemable Warrants. The Redeemable Warrants issued in the Offering are not
exercisable unless, at the time of exercise, the Company has distributed a
current prospectus covering the shares of Common Stock issuable upon exercise of
such Redeemable Warrants and such shares have been registered, qualified or
deemed to be exempt under the securities laws of the state of residence of the
holder who wishes to exercise such Redeemable Warrants. In addition, in the
event any Redeemable Warrants are exercised at any time after nine months from
the date of this Prospectus, the Company will be required to file a
post-effective amendment and deliver a current prospectus before the Redeemable
Warrants may be exercised. Although the Company will use its best efforts to
have all such shares so registered or qualified on or before the exercise date
and to maintain a current prospectus relating thereto until the expiration of
such Redeemable Warrants, there is no assurance that it will be able to do so.
Holders of Redeemable Warrants who exercise such Redeemable Warrants at a time
the Company does not have a current prospectus may receive unregistered and,
therefore, restricted shares of Common Stock. Although the Units will not
knowingly be sold to purchasers in jurisdictions in which the Units are not
registered or otherwise qualified for sale, purchasers may buy Redeemable
Warrants in the after market or may move to jurisdictions in which the shares
underlying the Redeemable Warrants are not registered or qualified during the
period that the Redeemable Warrants are exercisable. In this event, the Company
would be unable to issue shares to those persons desiring to exercise their
Redeemable Warrants unless and until the shares and Redeemable Warrants could be
qualified for sale in the jurisdiction
12
<PAGE>
in which such purchasers reside, or an exemption from such qualification exists
in such jurisdiction, and holders of Redeemable Warrants would have no choice
but to attempt to sell the Redeemable Warrants in a jurisdiction where such sale
is permissible or allow them to expire unexercised.
Redemption of Redeemable Warrants. Commencing _____________, 1998 [12
months from the date of this Prospectus], the Company shall have the right to
redeem all, but not less than all, of the Redeemable Warrants, at a price of
$.05 per Redeemable Warrant on 30 days' prior written notice, provided that the
Company shall have obtained the consent of the Underwriter, and the average
closing bid price of the Common Stock equals or exceeds 150% of the then
exercise price per share, subject to adjustment, for any 20 trading days within
a period of 30 consecutive trading days ending on the fifth trading day prior to
the date of the notice of redemption. In the event the Company exercises the
right to redeem the Redeemable Warrants, such Redeemable Warrants will be
exercisable until the close of business on the date fixed for redemption in such
notice. If any Redeemable Warrant called for redemption is not exercised by such
time, it will cease to be exercisable and the holder will be entitled only to
the redemption price.
Forward-Looking Information and Associated Risk. This Prospectus
contains various forward- looking statements, including statements regarding,
among other things, (i) the Company's growth strategy, (ii) anticipated trends
in the Company's business, and (iii) the Company's ability to enter into
contracts with licensors, suppliers, distributors and strategic partners. These
statements are based upon management's current beliefs as well as assumptions
made by management based upon information currently available to it. These
statements are subject to various risks and uncertainties, including those
described above, as well as potential changes in economic or regulatory
conditions generally which are largely beyond the Company's control. Should one
or more of these risks materialize or changes occur, or should management's
assumptions prove incorrect, the Company's actual results may vary materially
from those anticipated or projected.
13
<PAGE>
THE COMPANY
Background. The Company was incorporated as Container Technologies, Inc.
under the laws of the State of Delaware on October 14, 1983, and changed its
name to CTI Industries Corporation on August 2, 1985. The principal executive
offices of the Company are located at 22160 North Pepper Road, Barrington,
Illinois 60010; the Company's telephone number is (847) 382-1000. See
"Business--Property." A predecessor company, Creative Technology, Inc., was
organized as an Illinois corporation on December 9, 1975 and was merged into the
Company in October, 1983. CTI Balloons Ltd. ("CTI Balloons"), the Company's
wholly-owned subsidiary, was organized as a corporation under the laws of the
United Kingdom on October 2, 1996. On October 24, 1996, the Company entered into
an agreement with CTI Balloons pursuant to which all of the assets and
liabilities of the Company in its branch operation in the United Kingdom were
sold and transferred to CTI Balloons and all of the capital stock of CTI
Balloons was issued and delivered to the Company. Unless otherwise specified,
all references herein to the Company shall refer to the Company, its predecessor
Creative Technology, Inc. and its wholly-owned subsidiary, CTI Balloons.
Change in Control. In March and May of 1996, a group of investors made
an equity investment of $1,000,000 in the Company in return for 1,098,091 shares
of Preferred Stock, $.91 par value. Each share of Preferred Stock was entitled
to an annual cumulative dividend of 13% of the purchase price, and was
convertible into one share of Common Stock. The shares of Preferred Stock,
voting separately as a class, were entitled to elect four of the Company's
directors. Members of such investment group included Howard W. Schwan, John H.
Schwan and Stephen M. Merrick, current members of management. See "Management"
and "Certain Transactions."
Recapitalization. In July, 1997, the Company effected a
recapitalization (the "Recapitalization") without a formal reorganization. As
part of the Recapitalization, the Board of Directors approved the creation of
Class B Common Stock, approved a 1 for 2.6 reverse stock split on both the
Common Stock and Preferred Stock, and negotiated a conversion effective upon the
closing of this Offering of all then outstanding shares of the Company's
Convertible Preferred Stock into an aggregate of 1,098,901 shares of Class B
Common Stock. The shares of Class B Common Stock contain rights identical to
shares of Common Stock, except that shares of Class B Common Stock, voting
separately as a class, have the right to elect four of the Company's seven
directors. Shares of Common Stock and Class B Common Stock, voting together as a
class, vote on all other matters, including the election of the remaining
directors. The recapitalization and related transactions were approved by
written consent of the shareholders. See "Description of Capital Stock."
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Units offered by
the Company hereby, after deduction of the underwriting discounts, the
Underwriter's non-accountable expense allowance and other estimated expenses of
the Offering payable by the Company, are expected to aggregate $4,722,000
($5,505,000 if the Over-Allotment Option is exercised in full).
The following table summarizes the Company's estimated use of the net
proceeds:
Approximate Approximate
Application of Proceeds Amount Percentage
- ----------------------- ---------- ----------
Repayment of bank indebtedness(1).................. $ 1,250,000 26.4%
Selling and marketing(2) .......................... $ 400,000 8.5%
Plant and equipment(3)............................. $ 1,100,000 23.3%
Loans to Mexican supplier(4)....................... $ 400,000 8.5%
Investment in Mexican joint venture(4) ............ $ 150,000 3.2%
Character and other licenses....................... $ 400,000 8.5%
Working capital and general corporate purposes..... $ 1,022,000 21.6%
---------- -----
Total........................................ $ 4,722,000 100%
========== =====
- --------------------
(1)Repayment of revolving line of credit. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations-Liquidity and
Capital Resources."
(2)Includes hiring of additional personnel in marketing, product design
and development, and sales, and acquiring product displays for expansion into
additional retail locations. See "Business-Marketing, Sales and Distribution."
(3)Includes purchase of laminating and coating equipment and graphics
equipment, including eight- color graphic printer. See "Business-Manufacturing."
(4)See "Business-Manufacturing" for description of loan to Mexican
supplier and further investment in Mexican joint venture.
In the event the Underwriter exercises the Over-Allotment Option in
full, the Company will utilize the additional net proceeds for general corporate
purposes.
The Company anticipates that the proceeds from the Offering, together
with its current capital resources and projected cash flow from operations, will
be sufficient to satisfy its requirements for at least 12 months from the date
of this Prospectus. Thereafter, the Company may need to raise additional funds
to expand its operations. There can be no assurance that additional financing
will be available or if available will be available on favorable terms. If the
Company is unable to obtain such additional financing, the Company's ability to
maintain its current level of operations will be materially and adversely
affected. See "Risk Factors--Additional Capital Requirements; Uncertainty of
Additional Funding."
15
<PAGE>
Pending application of the proceeds of the Offering, the Company
intends to invest the net proceeds in certificates of deposit, money market
accounts, United States government obligations or other short-term interest
bearing obligations of investment grade.
Proceeds of this Offering may also be used, if the Company so elects,
to acquire companies or products that complement its business or operations. In
the ordinary course of its business, the Company from time to time evaluates
companies for acquisition and products for acquisition or license. Except as
otherwise disclosed herein, the Company has no agreement or arrangement with
respect to any such acquisition or license.
DIVIDEND POLICY
The Company has never paid any dividends on its Common Stock and does
not currently intend to pay dividends on its Common Stock in the foreseeable
future. The Company currently intends to retain all its earnings to finance the
development and expansion of its business. It is also likely that the Company
will be required to agree to restrictions on the payment of dividends in
connection with future financings, if any.
See "Risk Factors--No Dividends."
16
<PAGE>
CAPITALIZATION
The following table sets forth the proforma capitalization of the
Company as of April 30, 1997, and as adjusted to reflect the sale of the Units
offered hereby at an assumed initial public offering price of $4.50 per Unit and
the initial application of the net proceeds therefrom (after deducting the
underwriting discounts and estimated Offering expenses payable by the Company).
The pro forma column gives retroactive effect to the recapitalization and
conversion of Convertible Preferred Stock to shares of Class B Common Stock upon
the closing of the Offering and the issuance of $865,000 of notes in June, 1997.
See "The Company- Recapitalization" and "Certain Transactions." This table
should be read in conjunction with the Company's financial statements attached
hereto.
April 30,1997
-----------------------
Pro Forma
Pro Forma As Adjusted
(in thousands)
Long-term debt, less current portion ...... $ 3,738 $ 3,738
------- -------
Stockholders' equity
Common Stock, $.065 par value,
11,000,000 shares authorized,
1,010,202 shares outstanding,
pro forma, 2,343,535 shares
pro forma as adjusted(1) .............. $ 75 $ 162
Class B Common Stock, $.91 par value,
1,100,000 shares authorized,
1,098,901 shares outstanding .......... $ 1,000 $ 1,000
Additional paid-in capital .............. $ 248 $ 4,883
Retained earnings ....................... $ 463 $ 463
Treasury stock .......................... $ (371) $ (371)
Redeemable common stock ................. $ (450) $ (450)
Stock Subscription Receivable ........... $ (7) $ (7)
------- -------
Total stockholders' equity ........... $ 958 $ 5,680
------- -------
Total capitalization ............. $ 4,696 $ 9,418
======= =======
- -------------------
(1)Excludes (i) warrants to purchase an aggregate of 230,769 shares of
Common Stock at an exercise price of $.91 per share, (ii) warrants to purchase
277,244 shares of Common Stock at an exercise price of $3.12 per share, and
(iii) 300,000 shares of Common Stock issuable pursuant to options which may be
granted under the Company's stock option plan.
17
<PAGE>
DILUTION
"Net tangible book value per share" represents the amount of total
tangible assets of the Company reduced by the amount of total liabilities and
divided by the number of shares of capital stock outstanding. "Dilution"
represents the difference between the price per share to be paid by new
investors for the shares of Common Stock included in the Units offered hereby,
and the pro forma net tangible book value per share as of April 30, 1997, after
giving effect to the Offering. The pro forma net tangible book value per share
at April 30, 1997, also gives retroactive effect to the recapitalization and
conversion of the Company's Preferred Stock into shares of Class B Common Stock
upon the closing of the Offering. See "Certain Transactions." At April 30, 1997,
the pro forma net tangible book value of the capital stock was (including shares
of Class B Common Stock) $958,000 in the aggregate, or $.45 per share. After
giving effect to the sale of the shares of Common Stock included in the Units
offered hereby (at the assumed initial public offering price of $4.50 per Unit,
resulting in estimated net proceeds of $4,722,000, after deducting underwriting
discounts and estimated Offering expenses payable by the Company and assuming no
value is attributed to the Redeemable Warrants included in the Units), the pro
forma net tangible book value of the capital stock (including shares of Class B
Common Stock), as of April 30, 1997, would have been $5,680,000 in the
aggregate, or $1.65 per share. This represents an immediate increase in pro
forma net tangible book value of $1.20 per share to existing stockholders and an
immediate dilution per share of $2.85, or 63%, to new investors in the Offering.
The following table illustrates the dilution per share as described
above:
Initial public offering price per share of Common Stock .... $4.50
Pro forma net tangible book value per share
(including shares of Class B Common Stock)
before Offering ........................................ $.45
Increase attributable to new investors ................... $1.20
-----
Pro forma net tangible book value per share
(including shares of Class B
Common Stock) after the Offering ......................... $1.65
-----
Dilution per share to new investors ........................ $2.85
=====
Based on the foregoing assumptions, the following table sets forth, as
of completion of the Offering, the number of shares purchased from the Company,
the total cash consideration paid to the Company and the average price per share
paid by the existing stockholders and by new investors purchasing shares of
Common Stock included in the Units in the Offering (assuming no value is
attributed to the Redeemable Warrants).
<TABLE>
<CAPTION>
Total
Shares Purchased Consideration
----------------- ------------------- Average Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Common Stock
holders ................ 1,010,202 29% $ 256,388 3.53% $ .25
Class B Common Stock
holders ................ 1,098,901 32% $1,000,000 13.78% $ .91
New Investors ............ 1,333,333 39% $6,000,000 82.69% $4.50
---------- ---- ----------- ----
Total .................... 3,442,436 100% $7,256,388 100%
========== === =========== ===
</TABLE>
18
<PAGE>
If the Over-Allotment Option is exercised in full, the pro forma net
tangible book value at April 30, 1997, after giving effect to the Offering
(assuming no value is attributed to the Redeemable Warrants included in the
Units), would be approximately $6,463,000 or $1.77 per share, and the dilution
per share to new investors would be approximately $2.73 or 61%.
The foregoing also assumes no exercise of the Redeemable Warrants, the
Underwriter's Warrants or any outstanding stock options or warrants. As of April
30, 1997, there were outstanding warrants to purchase an aggregate of 230,769
shares of Common Stock at an exercise price of $.91 per share. Subsequent to
April 30, 1997, the Company issued $865,000 of notes, together with warrants to
purchase up to 277,244 shares of Common Stock at a price of $3.12 per share. See
"Certain Transactions." The Company has a total of 300,000 shares of Common
Stock reserved for issuance upon the exercise of stock options which may be
granted from time to time pursuant to its stock option plan. See "Management--
Executive Compensation--Stock Option Plan." To the extent that any options or
warrants are exercised at a price per share less than the initial public
offering price, there will be further dilution to new investors.
19
<PAGE>
SELECTED FINANCIAL DATA
(in thousands except share and per share data)
The following table sets forth selected financial data of the Company
for the two years ended October 31, 1996 and 1995 (collectively, the "Year-End
Data"), and for the six months ended April 30, 1997 and 1996. The Year-End Data
has been derived from the audited financial statements of the Company appearing
elsewhere herein, which have been audited by Coopers & Lybrand L.L.P. The
selected financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Financial Statements and notes thereto and other financial and
statistical data appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Six Months
Year Ended October 31, Ended April 30,
-------------------------- --------------------------
1995 1996 1996 1997
----------- ----------- ----------- -----------
Consolidated Statement of Operations Data:
<S> <C> <C> <C> <C>
Net sales .............................. $ 22,784 $ 13,910 $ 7,884 $ 8,736
Cost of sales .......................... $ 15,078 $ 8,558 $ 4,798 $ 5,384
----------- ----------- ----------- -----------
Gross profit ........................... $ 7,706 $ 5,352 $ 3,086 $ 3,352
Operating Expenses:
General and administrative ......... $ 2,900 $ 2,055 $ 1,196 $ 900
Selling ............................ $ 3,770 $ 2,387 $ 1,332 $ 1,364
Advertising and marketing .......... $ 2,356 $ 592 $ 341 $ 468
Plant shut down expense ............ $ 850 -- -- --
----------- ----------- ----------- -----------
Total operating expenses ............... $ 9,876 $ 5,034 $ 2,869 $ 2,732
----------- ----------- ----------- -----------
Operating income (loss) ................ $ (2,170) $ 318 $ 217 $ 620
----------- ----------- ----------- -----------
Other income (expense) ................. $ (1,497) $ (495) $ (285) $ (229)
----------- ----------- ----------- -----------
Income (loss) before income taxes ...... $ (3,667) $ (177) $ (68) $ 391
Income tax benefit (expense) ........... $ 774 $ (6) $ -- $ --
----------- ----------- ----------- -----------
Net income (loss) ...................... $ (2,893) $ (183) $ (68) $ 391
Dividends applicable to Convertible
Preferred Stock ....................... -- $ (74) $ (11) $ (65)
----------- ----------- ----------- -----------
Net income (loss) applicable to
common shares ......................... $ (2,893) $ (257) $ (79) $ 326
=========== =========== =========== ===========
Net income (loss) per common and
common equivalent share ............... $ (2.14) $ (.20) $ (.06) $ .26
=========== =========== =========== ===========
Weighted average number
of common and common equivalent
shares outstanding ..................... 1,353,384 1,290,267 1,324,080 1,254,124
=========== =========== =========== ===========
Pro forma per share data
reflecting recapitalization(1):
Net income (loss) per
common share and common
equivalent share .............. $ (.11) $ .17
Weighted average common
shares and common equivalent
shares outstanding ............ 2,301,756 2,265,612
</TABLE>
- --------------------
(1) Pro forma per share data gives effect to the conversion of all
convertible preferred stock into common shares as if it occurred as of November
1, 1995 using the treasury stock method.
20
<PAGE>
Consolidated Balance Sheet Data: Pro Forma(1)
October 31, April 30,
1996 1997
--------- ---------
Working capital............................. $ 347 $ 1,311
Total assets................................ $ 10,286 $ 11,522
Long term debt, less current portion........ $ 3,105 $ 3,738
Total liabilities........................... $ 9,355 $ 10,114
Stockholders' equity........................ $ 481 $ 958
- --------------------
(1)Gives retroactive effect to recapitalization and conversion of
Convertible Preferred Stock to shares of Class B Common Stock and issuance of
$865,000 of notes in June, 1997. See "Certain Transactions."
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
In February, 1996, there was a change of control and management of the
Company. Since that time, new management has focused its efforts on (i) reducing
costs of operations, (ii) achieving liquidity, (iii) formulating and
implementing plans and programs to increase revenues and (iv) achieving
profitability. Operating expenses were reduced from 1995 to 1996 by over $4.8
million, a reduction of approximately 49%. The net loss of the Company was
reduced from the 1995 level of $2,893,000 to $183,000 for fiscal 1996. While net
sales decreased 39% in fiscal 1996 to $13,910,000 from $22,784,000 in fiscal
1995, net sales for the six months ended April 30, 1997 have increased 11% from
net sales for the same period in 1996. For the six months ended April 30, 1997,
the Company had net income of $391,000 compared to a net loss of $68,000 for the
same period in 1996. Working capital increased to $490,000 on April 30, 1997
from $347,000 on October 31, 1996. During the past 18 months, the Company has
introduced over 180 new mylar balloon designs, has out-sourced the manufacture
of and engaged in active marketing of latex balloons and introduced several new
products. Approximately $1.9 million of new financing has been provided in
private financings and a new bank loan and line of credit in the aggregate
amount of $6.3 million has been obtained.
The Company anticipates investing $1.1 million of the proceeds of this
offering in capital items and operations to improve the products, production
capacity, marketing efforts, product development and operations of the Company.
The Company plans to make capital investments of approximately $2.8 million, a
portion of which will be financed through equipment leases or otherwise, in
plant improvements and equipment which will increase production capacity and
which will allow the Company to print eight-color designs in the mylar product
line and the laminated and printed films business. The Company plans to make
loans to its supplier of latex balloons to further assure the source of supply.
The Company plans to invest a portion of the proceeds of the Offering for the
hiring of personnel in marketing, product design and development and sales to
enhance the Company's product design and development efforts, its product line,
marketing, customer service and support and sales effort.
Results of Operation
Net Sales. For the six months ended April 30, 1997, net sales increased
to $8,736,000 from $7,884,000 for the same period in 1996, an increase of
approximately 11%. This increase in net sales was a reflection principally of
increases in the sales of latex balloons and printed and laminated films. For
the fiscal year ended October 31, 1996, net sales were $13,910,000, as compared
to net sales of $22,784,000 for the fiscal year ended October 31, 1995. The 39%
decline in sales for that period was a result of (i) a decline of approximately
$2 million in the sales of latex balloons because of the closing of the
Company's latex balloon manufacturing operations in September, 1995 and the lack
of supply of latex balloons from October, 1995 to June, 1996, (ii) a decline in
sales of mylar balloons of approximately $6 million resulting primarily from the
loss of several national account customers and (iii) the elimination of sales of
plush toys which represented approximately $900,000 in sales during fiscal 1995.
During fiscal 1995, mylar balloons represented approximately 87% of
revenues, latex balloons 11% of revenues and laminated and printed films
approximately 2% of sales. During fiscal 1996, mylar balloons represented 87% of
sales, latex balloons 4% of sales and laminated and printed films 9% of sales.
During the six months ended April 30, 1997, mylar balloons represented 80% of
sales, latex balloons 8% of sales and laminated and printed films 12% of sales
as compared to 92%, 2% and 6%, respectively, for the six
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<PAGE>
months ended April 30, 1996. The Company anticipates that the percentage of
sales represented by latex balloons and laminated and printed films will
continue to increase during fiscal 1997 and 1998.
Cost of Sales. For the six months ended April 30, 1997, cost of sales
represented 61.6% of net sales as compared to 60.8% for the same period in 1996.
For the fiscal year ended October 31, 1996, cost of goods represented 61.5% of
net sales as compared to 66.2% for the fiscal year ended October 31, 1995.
Administrative. For the six months ended April 30, 1997, administrative
expenses were $900,000, or 10.3% of sales as compared to $1,196,000, or 15.2% of
sales, for the same period in the prior year. For the fiscal year ended October
31, 1996, general and administrative expenses were $2,055,000, or 14.8% of
sales, as compared to $2,900,000, or 12.7% of sales, for the prior fiscal year.
The decreases were the result of a number of items including the reduction in
accounting and financial staff, and reduction in certain executive salaries and
expenses, and a reduction in overhead expenses.
Selling. For the six months ended April 30, 1997, selling expenses were
$1,364,000, or 15.6% of net sales, as compared to $1,332,000, or 16.9% of net
sales for the same period in the prior year. For the fiscal year ended October
31, 1996, selling expenses were $2,387,000, or 17.2% of net sales, as compared
to selling expenses of $3,770,000, or 16.5% of sales for the fiscal year ended
October 31, 1995.
Advertising and Marketing. For the six months ended April 30, 1997,
advertising and marketing expenses were $468,000, or 5.4% of sales, as compared
to advertising and marketing expenses of $341,000, or 4.3% of sales, for the
same period in the prior year. The increase in these expenses was a result of
catalogue printing costs and service fees paid on national account sales
programs. For the fiscal year ended October 31, 1996, advertising and marketing
expenses were $592,000 compared to $2,356,000 for the fiscal year ended October
31, 1995. This decrease of $1,764,000 was the result of a significant decline in
the cost of printed materials incurred by the Company, particularly in its
catalogue, as well as a decline in print advertising. Service fees related to
national account sales programs declined with the loss of several national
account customers.
Plant Shutdown Expenses and Loss on Disposition of Latex Equipment. In
fiscal 1995, the Company ceased latex manufacturing operations at its Cary,
Illinois facility and sold its latex balloon manufacturing equipment. See
"Business-Manufacturing." Shutdown expenses of $850,000 were accrued for rent,
utilities, operating expenses, building rehabilitation and latex inventory
write-down during this period. A loss on disposition of latex equipment was
incurred in fiscal 1995 of $822,000 upon sale of the equipment and the
forgiveness of the $400,000 receivable relating to the sale.
Other Expenses. For the six months ended April 30, 1997, interest
expense was $304,000 as compared to $317,000 for the same period in the prior
year. For the fiscal years ended October 31, 1995 and 1996, interest expense was
$800,000 and $553,000, respectively. The reduction in interest expense is a
reflection of the reduction in the aggregate indebtedness of the Company and the
new bank loan arrangement in September, 1996 at overall rates of interest less
than the prior bank loan rates.
Net Income or Loss. For the six months ended April 30, 1997, the
Company had net income of $391,000 as compared to a net loss of $68,000 for the
same period in the prior year. For the fiscal year ended October 31, 1996, the
Company had net loss of $183,000 as compared to a net loss of $2,893,000 for the
prior fiscal year.
23
<PAGE>
Liquidity and Capital Resources
Cash flow used in operations during the six months ended April 30, 1997
was $911,000. This resulted primarily from increased sales and resulting
increases in accounts receivable of over $1,000,000. During fiscal years 1995
and 1996, the Company had cash flows from operations of $541,000 and $840,000,
respectively. During fiscal 1996, cash raised from the issuance of Preferred
Stock and the new revolving line of credit was used in part to reduce accounts
payable and accrued expenses.
At April 30, 1997 the Company maintained no cash balance, which is
consistent with the Company's current cash management policy of utilizing its
revolving line of credit for liquidity. As of October 31, 1996, the Company had
cash and cash equivalents of $131,000. As of April 30, 1997, the Company had
working capital of $490,000. Working capital as of October 31, 1996 was
$347,000.
During the past eighteen months, the Company has funded its operations
primarily through the cash provided by its operating activities, a private
placement financing of Preferred Stock, funding provided by a new bank loan and
line of credit and a private placement of notes and warrants. In early 1996, the
Company completed a private placement of 1,098,901 shares of Preferred Stock,
par value $.91 per share, for gross proceeds of $1,000,000. The Preferred Stock
included a cumulative preferred dividend at the rate of 13%. The shares of
Preferred Stock will be converted into 1,098,901 shares of Class B Common Stock
upon the closing of this Offering. See "The Company-Recapitalization."
In September, 1996, the Company entered into a Loan Agreement with a
bank under which the bank provided loans and a line of credit to the Company
aggregating $6,300,000. The arrangement included term loans in the amount of
$3,300,000 and a revolving line of credit providing for maximum advances of
$3,000,000 of which $57,000 was unused at April 30, 1997. The term loans are due
on September 1, 2001, and bear interest at either 8.75% or prime plus 1%. The
revolving loan was due on September 1, 1997 and has been renewed until July 1,
1998. The revolving line of credit bears interest at prime plus 1%. During July,
1997, the same bank provided additional term loans to the Company in the
aggregate amount of $475,000. All these loans are secured by all of the
Company's assets. Three principal shareholders of the Company, John H. Schwan,
Howard W. Schwan and Stephen M. Merrick have guaranteed these obligations. A
portion of the proceeds of this Offering will be used to pay down the revolving
line of credit. See "Use of Proceeds."
During June, 1997, the Company completed a private placement of notes
and warrants for gross proceeds of $865,000. The notes issued in the placement
are subordinated unsecured two year notes, bearing interest at the rate of 10%
per annum. Individuals participating in the placement received five year
warrants to purchase 277,244 shares of Common Stock of the Company at the price
of $3.12 per share. Two officers and directors of the Company applied advances
made by them to the Company in January, 1997, in the aggregate amount of
$400,000 toward the purchase of the notes and warrants. See "Certain
Transactions."
During fiscal 1995 and 1996, the Company invested $479,000 and
$496,000, respectively, in plant and equipment and has invested $343,000 during
the six months ended April 30, 1997.
During fiscal 1995 and 1996, the Company utilized $124,000 and
$336,000, respectively, in financing activities, principally the reduction of
bank indebtedness. During the six months ended April 30, 1997, the Company has
generated $1,155,000 in financing activities.
24
<PAGE>
The Company believes that the net proceeds of this offering, together
with existing capital resources and cash generated from operations, will be
sufficient to meet the Company's requirements for at least 12 months following
the date of this Prospectus. Thereafter the Company may require additional
capital in order to expand its business and there can be no assurance that the
Company will be able to secure additional debt or equity financing or that such
financing will be available on favorable terms. See "Risk Factors-Additional
Capital Requirements; Uncertainty of Additional Financing."
Seasonality
In the mylar product line, sales have historically been seasonal with
approximately 17% to 27% of annual sales of mylar being generated in December
and January and 13% to 15% of annual mylar sales being generated in June and
July in recent years. The sale of latex balloons and laminated film products
have not historically been seasonal, and to the extent sales in these areas
increase as a percentage of total sales, this should decrease the seasonality of
the Company's total net sales.
25
<PAGE>
BUSINESS
General
Background. CTI Industries Corporation (the "Company") manufactures and
sells mylar balloons and believes it is the third largest manufacturer of mylar
balloons in the world. The Company also sells latex balloons, novelty and
"message" items, such as mugs and banners, and toy products, such as inflatable
masks, punch balls and water bombs, and produces laminated and specialty films
for food packaging and other commercial uses. The Company's products are sold
throughout the United States and in 30 foreign countries through a wide variety
of retail outlets including grocery, general merchandise and drugstore chains,
such as Eckerd Drug Stores and Safeway and Winn Dixie grocery chains, card and
gift shops, such as Hallmark and Factory Card Outlet stores, and party goods
stores, such as Party City, as well as through florists and balloon decorators.
The Company estimates the worldwide wholesale market for mylar and latex
balloons to be in excess of $570 million.
The mylar balloon, actually a balloon made of a nylon based material
with metallized and polyethylene coatings, has become a popular medium of social
expression. Most mylar balloons contain printed characters, designs and
messages. The Company maintains licenses on numerous characters and designs,
including, for example, Peanuts(TM) characters, Garfield(TM), Precious
Moments(TM) and Hallmark.
To meet the needs of the mylar balloon market, the Company has
developed sophisticated film products and techniques which have other
application. The Company's expertise in multi-color printing using water-based
ink, in particular, has enabled the Company to expand its business to include
the production of film wrappers for consumables. The Company produces, laminates
and prints films for food packaging companies and provides custom film products
for other commercial uses.
The Company is a fully integrated designer and manufacturer of its
mylar balloon product line and believes that its facilities are among the most
advanced in the industry. The Company is a party to a long term agreement with a
Mexican manufacturer under which a broad line of latex balloons are manufactured
for the Company. The Company thereby has a competitive source of supply of
quality latex balloon products which it markets with its mylar balloon line. The
Company has also established a joint venture with this Mexican manufacturer for
the packaging of balloon products and printing of latex balloons.
Business Plan. Upon assuming control in early 1996, new management
concentrated initially on reducing costs of operations, achieving liquidity and
profitability and formulating plans to increase revenues. Having achieved these
goals in late 1996 and early 1997, management's focus turned to generating
increased sales and market share to position itself as a market leader.
To achieve this goal, the Company is focusing its efforts on developing
sales and marketing programs to strengthen, develop and expand its relationship
and sales to its distributors, national chains and other buyers of its products.
In addition to expanding the core U.S. market, the Company will seek to increase
its presence in emerging markets for its balloon and related products, such as
Europe and Central and South America. The Company will also seek additional
distributors for its toy/novelty line of products and will continue to expand
its customer base for its laminated and specialty film products.
26
<PAGE>
To enable the Company to meet customer demand for high quality,
multi-color mylar balloons and custom film products, the Company will invest in
new laminating and graphic equipment, including an eight- color graphic printer.
The Company also intends to assure its supply of competitively priced latex
balloons by providing capital in the form of loans to its Mexican supplier of
such products. The Company believes that this will provide it with added control
over supply and give the Company an advantage over other latex balloon
distributors.
The Company will continue its efforts to license new characters and
designs for its mylar balloons and to develop or license new balloon designs to
increase consumer demand for its products. The Company's catalogue published in
June 1997, introduced over 100 new balloon designs. The Company has recently
introduced a lower-priced, higher quality standard line of latex balloons and
has introduced a number of new latex balloon colors and now manufactures mylar
and latex balloons in coordinated colors. Further, with the introduction of
inflatable masks the Company has entered the novelty/toys market. The Company
believes that its full line of mylar and latex balloons and its manufacturing
capability may afford the Company a competitive advantage in the market.
The Company will continue to seek out new methods for the sale of its
products, including strategic partnerships with companies engaged in the
greeting card, party goods and related businesses to take advantage of these
entities' distribution channels and resources. The Company will continue to
offer custom balloon manufacture for distributors and suppliers to position
itself as a full service manufacturer.
Industry Overview
The mylar balloon came into existence in the late 1970s. During the
1980s, the market for mylar balloons grew rapidly. Initially, the product was
sold principally to individual vendors, small retail outlets and at fairs,
amusement parks, shopping centers and other outdoor facilities and functions.
Because of its ability to remain buoyant for a long period of time when filled
with helium and its facility for the printing of graphics and messages, the
product has significant appeal as a novelty and message item. Mylar balloons
became part of the "social expression" industry, carrying graphics designs,
characters and messages like greeting cards. In the mid-1980s, the Company and
other participants in the market began licensing character and cartoon images
for printing on the balloons and directed marketing of the balloons to retail
outlets including grocery, general merchandise and drugstore chains, card and
gift shops, party goods stores, as well as florists and balloon decorators.
The Company estimates that the wholesale world market for mylar
balloons is approximately $120 million. Mylar balloons are sold in the United
States and in Europe, several countries in the Far East, Canada and to an
increasing extent in Latin America. The United States, however, is by far the
largest market for these products. Particularly in areas of Europe and Latin
America, mylar balloons are also sold by individual vendors at fairs, amusement
parks and other public areas.
There are presently seven manufacturers of mylar balloons whose
products are sold in the United States. Five of these companies maintain their
own production facilities in the United States. Several companies market and
sell mylar balloons designed by them and manufactured by others for them.
Mylar balloons are marketed in the United States and foreign countries
through wholesalers or distributors and directly to retail customers. Often the
sale of mylar balloons by the wholesalers/distributors is accompanied by related
27
<PAGE>
products including latex balloons, floral supplies and candy containers.
Although, the latex balloon market overlaps the mylar balloon market, the latex
balloon market has been in existence for a longer period than mylar balloons and
extends to more customers and market categories than mylar balloons.
There are three separate latex balloon product lines: (i) high quality
decorator balloons, (ii) standard novelty balloons and (iii) printed balloons.
The high quality decorator balloons are generally sold to and through balloon
decorators and are generally of higher quality and price than the standard line
of balloons. The standard line of balloons is sold widely in retail stores
including many of the same outlets as mylar balloons. Printed latex balloons are
sold both in retail outlets and for balloon decoration purposes including floral
designs.
There are five principal manufacturers of latex balloons whose products
are sold in the United States. It is estimated that the wholesale world market
for latex balloons exceeds $450 million.
While the market for printed and laminated films is fragmented, the
Company believes it is a multi-billion dollar industry.
Products
Mylar Balloons. The mylar balloon is actually composed of a base nylon
material which is coated on one side with a metal deposit and on the other with
polyethylene. Typically, the balloon film is printed with graphic designs and
messages.
The Company manufactures over 380 balloon designs, in different shapes
and sizes.
o Superloons(TM) are 18" balloons in round or heart shape,
generally made to be filled with helium and remain buoyant for
long periods. This is the predominant mylar balloon size.
o Ultraloons(TM) are 34" balloons made to be filled with helium
and remain buoyant.
o Miniloons(TM) are 9" balloons made to be air-filled and sold
on holder-sticks or for use in
decorations.
o Card-B-Loons(TM) (4 1/2") and Pixiloons(TM) (2 1/2") are
air-filled balloons, often sold on a stick, used in floral
arrangements or with a container of candy.
o Shape-A-Loons(TM) are shaped balloons made to be filled with
helium.
o Minishapes are small shaped balloons designed to be air filled
and sold on sticks as toys or inflated characters.
o Walk-abouts(TM) are helium filled shaped balloons with
attached arms and legs.
o Smackers(TM) are helium filled red lip-shaped balloons.
o You Name It(TM) are balloons to which lettering can be
attached for a personalized message.
28
<PAGE>
In addition to size and shape, a principal element of the Company's
mylar balloon products is the printed design or message contained on the
balloon. These designs include figures and licensed characters many of which are
well-known licensed characters. The Company maintains licenses for Peanuts(TM),
Garfield(TM), Precious Moments(TM), Hallmark, Hallmark Shoebox(TM), Ziggy(TM),
Grimmy(TM), Elephantz(TM), Paddington(TM), Face-Offs(TM), Gibson Greetings(TM),
Postman Pat(TM) and several others. See "Business- Patent, Trademarks and
Copyrights."
Latex Balloons. The Company sells a high end line of latex balloons
under the product line name Hi-Tex(TM) and a standard line of latex balloons
marketed under the name Partyloons(TM).
Toys and Novelty. The Company also manufactures or sells additional and
related novelty items including mugs, banners and inflatable masks. With its
standard line of latex balloons and newly introduced inflatable masks, the
Company has made entry into the toy market. The Company intends to develop and
acquire additional novelty and toy lines of products, in many cases products
which can be sold in conjunction with its existing products including latex
punch balls and water bombs.
Packaging Films. The Company fabricates and prints films for use in
food packaging. The Company has developed sophisticated methods for the printing
of films, including the use of water-based ink. These techniques have proven
desirable for companies engaged in packaging food products, particularly candy
and snack items, with the result that the Company now provides printed packaging
films for several food packaging companies, including Farley Candies, and
intends to expand and extend this business line.
Custom Film Products. In addition to printed films for food packaging,
the Company fabricates custom film products for various commercial and
industrial purposes. These now include "dunnage" bags (inflatable film products)
used in the packaging of goods and systems for the storage of clothing items.
Marketing, Sales and Distribution
The Company markets and sells its mylar balloon, latex balloon and
related novelty products throughout the United States and in over 30 foreign
countries. The Company maintains a marketing, sales staff and support staff of
11 individuals and a customer service department of 16 individuals. European
sales are conducted by CTI Balloons, the Company's subsidiary located in Rugby,
England. Sales in other foreign countries are made generally to distributors in
those countries and are managed at the Company's principal offices.
The Company sells and distributes its products principally through a
network of over 350 distributors and wholesalers situated throughout the United
States and in a number of foreign countries. These distributors and wholesalers
are engaged principally in the sale of balloons and related products (including
such items as plush toys, mugs, containers, floral supplies and other items).
These distributors and wholesalers, in turn, sell balloons and related products
to retail outlets including grocery, general merchandise and drug store chains,
card and gift shops, party goods stores, as well as florists and balloon
decorators. The Company intends to use a portion of the proceeds of this
Offering to expand its marketing efforts with current distributors and to seek
out new distributors both in current markets and in new sales areas. While the
Company will continue to focus on the core U.S. market, it will also seek to
exploit other world markets such as Europe and South America. No distributor or
other customer accounts for more than 10% of the Company's sales revenues. Most
sales are on an individual order basis.
29
<PAGE>
The Company also sells balloons and related products to certain
national chain stores including grocery, general merchandise and drugstore
chains and party goods stores. The Company's largest chain store customer is
Eckerd Drug Stores. The Company also sells its balloons to individual retail
outlets generally through coordinated efforts with its distributors.
The Company has entered into an agreement with a major greeting card
company under which such company will act as an agent for the sale of the
Company's balloon products in retail outlets to which such company sells
greeting cards. Under the agreement, this company takes orders for balloons,
services the display of balloons and maintains inventory in the stores. The
Company pays this company a commission on sales the company generates and
services. The Company is pursuing similar strategic partnerships with other
companies in the expression industry.
The Company has established independent sales representatives for the
sale of its toy/novelty line which include the standard quality latex balloon,
inflatable masks, punch balls and water bombs. These products constitute a
separate product class requiring a different distribution network.
The Company engages in a variety of advertising and promotional
activities to promote the sale of its balloon products. Each year, the Company
produces a complete catalogue of its balloon products, and also prepares various
flyers and brochures for special or seasonal products, which are disseminated to
thousands of customers, potential customers and others. The Company participates
in numerous trade shows for the gift, novelty, balloon and other industries and
advertises in a number of trade and other publications. The Company also attends
licensing shows for the purpose of seeking out additional design licenses.
The Company markets and sells its printed and laminated films directly
and through independent sales representatives. The Company markets these
products to companies which package their products in plastic wrapping, in
particular food products such as candies.
Manufacturing
Production and Operations. At the Barrington, Illinois headquarters,
the Company owns and operates a modern facility which includes machines of its
own design and construction which fabricate mylar balloons, banners and
packaging bags. These production systems include a patented system for the
production and insertion of valves in balloons. These machines have the capacity
to manufacture approximately 55 million 18" balloons annually.
The Company owns and operates graphic machinery at its facility in
Barrington, Illinois that is used for the printing of films for mylar balloons
and for printed and laminated films. The Company's use of water-based ink makes
its printed films attractive to food processors for the packaging of their
products. The Company intends to use a portion of the proceeds of this Offering
for the acquisition of additional graphic equipment which will be located at
this facility. See "Use of Proceeds."
At the Barrington facility, the Company owns and operates two
laminating machines. The Company intends to use a portion of the proceeds of
this Offering for the purchase of additional laminating machinery which will
substantially enhance the capacity of the Company to produce laminated films.
See "Use of Proceeds."
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<PAGE>
The Company also maintains a graphic arts and development department
which designs its balloon products and graphics. The Creative Department
operates a networked, computerized graphic arts system for the production of
these designs and of printed materials including catalogues, advertisements and
other promotional materials.
The Barrington facility also includes a computerized customer service
department which receives and fulfills over 50,000 orders annually.
Pulidos et Terminados Finos. The Company's latex balloons are
manufactured for it by Pulidos et Terminados Finos S.A. de C.V. ("P&TF"), a
Guadalajara, Mexico company engaged principally in the manufacture of latex
balloons. The Company believes that P&TF owns and operates the second largest
latex balloon manufacturing facility in the world. In 1995, the Company entered
into an agreement with P&TF under which (i) the Company sold to P&TF all of its
latex balloon manufacturing equipment (for the manufacture of decorator
balloons) and such equipment is now operated by P&TF, (ii) P&TF has agreed for a
period of 10 years to supply balloons exclusively to the Company for the United
States and Canada manufactured on such equipment and (iii) for such 10 year
period, P&TF has agreed to supply to the Company, exclusively in the United
States except as to two other companies, all balloons manufactured by P&TF.
Commencing in 1996, P&TF began manufacturing the Company's high-end line of
latex balloons exclusively for the Company for the United States and also
manufactures a standard line of latex balloons which the Company distributes
throughout the United States and in various foreign countries under the product
line name Partyloons(TM).
P&TF has experienced financial difficulties and in 1995, sought
protection from creditors in a "Suspension of Payment" proceeding in Mexico
similar, but not identical to, a reorganization under U.S. bankruptcy laws. See
"Risk Factors--Dependence on Supplier." The Company believes it has an
opportunity to further secure its source of supply by providing necessary
funding to P&TF. In July, 1997, the Company entered into an Agreement with P&TF
whereby it agreed to subscribe for a note of P&TF in the principal amount of
U.S.$1,200,000 and an option to purchase a portion of P&TF's capital stock. The
Company has also agreed to make advances to P&TF in an amount up to U.S.$400,000
prior to the closing of the transaction contemplated by the Agreement. The
advances are secured by shares of capital stock of P&TF. The purchase price for
the note and option is to be paid by (i) applying the advances made prior to the
closing, (ii) by forgiving $400,000 of debt relating to the 1995 acquisition by
P&TF of the Company's latex balloon manufacturing equipment and (iii) a cash
payment for the balance. In addition to the purchase of notes and options, the
Company has also agreed to loan or provide for a loan of up to an additional
$800,000 to P&TF. The Company's obligations to purchase the note and option are
subject to the termination of P&TF's Suspension of Payment proceeding, the
payment or settlement of P&TF's current bank debt and the successful completion
of this Offering. The Company believes this relationship provides the Company
with a competitive advantage over its competition. A portion of the proceeds of
this Offering will be used to finance the acquisition of the note and option.
See "Use of Proceeds."
P&TF maintains two manufacturing facilities in Guadalajara, Mexico
totaling approximately 60,000 square feet of manufacturing, office and warehouse
space and operates seven latex balloon machines having the capacity to produce
approximately 1 billion latex balloons annually.
CTF International. In September, 1996, the Company and P&TF entered
into a joint venture agreement to organize and operate CTF International, a
Mexican corporation. The joint venture is owned equally by the Company and P&TF.
CTF leases a facility of 15,000 square feet in Guadalajara, Mexico.
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<PAGE>
CTF engages in the packaging of balloons for the Company and P&TF and in the
printing of latex balloons. The Company believes it can achieve significant
savings in overhead, labor and other operating costs through the operation of
CTF and expects CTF to be an independent profit center. A portion of the
proceeds of this Offering will be used to finance the operations of CTF. See
"Use of Proceeds."
Competition
The balloon and novelty industry is highly competitive, with numerous
competitors. There are presently seven major manufacturers of mylar balloons
whose products are sold in the United States including Anagram International,
Inc., M&D Balloons, Inc., Pioneer Balloon, Convertidora International, Classic
Balloon and Betallic. Several companies, including American Greetings, Amscan
and Flowers, Inc., market and sell mylar balloons designed by them and
manufactured by others for them.
There are at least seven manufacturers of latex balloons whose products
are sold in the United States including Globus Occidental, Pioneer Balloon,
National Latex, Maple City, Tilco and P&TF. The market for film packaging and
custom products is fragmented, and competition in this area is difficult to
gauge. However, there are numerous participants in this market and the Company
can expect to experience intense quality and price competition.
Many of these Companies offer products and services which are the same
or similar to those offered by the Company and the Company's ability to compete
depends on many factors within and outside its control. There are a number of
well-established competitors in each of the Company's product lines, several of
which possess substantially greater financial, marketing and technical resources
and established, extensive, direct and indirect channels of distribution for
their products and services. As a result, such competitors may be able to
respond more quickly to new developments and changes in customer requirements,
or devote greater resources to the development, promotion and sale of their
products and services than the Company. Competitive pressures include, among
other things, price competition, new designs and product development and
copyright licensing. See "Risk Factors-Competition."
Patents, Trademarks and Copyrights
In connection principally with its mylar balloon business, the Company
has developed or acquired a number of intellectual property rights which are
significant to its business.
Copyright Licenses. The most significant of these rights are licenses
on a number of popular characters. The Company presently maintains approximately
20 licenses and produces balloon designs utilizing the characters covered by the
licenses. Licenses are generally maintained for a one or two year term, although
the Company has maintained long term relationships with a number of its
licensors and has been able to obtain renewal of its license agreements with
them. The Company has held a license on Peanuts(TM) characters for over 11
years, on Garfield(TM) for more than 10 years and on Hallmark designs for
approximately 10 years.
Trademarks. The Company is the owner of over 23 registered trademarks
in the United States relating to its products. Many of these trademarks are
registered in foreign countries, principally in the European Community.
Patent Rights. The Company is the owner of, or licensee under, several
patents relating to balloon products. These include (i) ownership of two
patents, and a license under a third, relating to self-sealing
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<PAGE>
valves for mylar balloons and methods of making balloons with such valves and
(ii) a patent on a combination of a greeting card and balloon connected by a
ribbon contained in single package.
Research and Development
The Company maintains a product development and research department of
six individuals for the development or identification of new balloons and
related products, product components and sources of supply. Research and
development includes (i) creative product development, (ii) creative marketing,
and (iii) engineering development. During its fiscal years 1995 and 1996, the
Company estimates that the total amount spent on research and development
activities was approximately $306,000 and $201,000, respectively.
Employees
As of June 30, 1997, the Company had 146 full-time employees, of whom
nine are executive or supervisory, 22 are in sales, 106 are in manufacturing and
nine are clerical. The Company believes that its relationship with its employees
is satisfactory.
Legal Proceedings
On October 27, 1995, an action entitled National Sales Services, Inc.
v. CTI Industries Corporation, No. 95 L 15381 was filed in the Circuit Court of
Cook County, Illinois. In the action National Sales Services claims that there
is due to it from the Company for service rendered in the maintenance of product
at retail stores, pursuant to an agreement for such services, the sum of
$101,323. The Company has filed an answer to the complaint denying the claims
and asserting several affirmative defenses, including that National Sales
Services (i) failed to perform the agreement, (ii) failed to perform certain
conditions precedent and (iii) failed to perform the services claimed. The
Company also filed a counterclaim alleging damages of $152,512 for breach of the
agreement by National Sales Services. The Company intends to actively defend the
claim and pursue its counterclaim.
By letter dated October 28, 1996, Kredietbank of Antwerp, Belgium
communicated to the Company that it had determined to terminate the opening of a
credit which it claimed to have granted to the Company. In the letter,
Kredietbank claimed that it was entitled to close the current account and claim
repayment of the entire debit balance immediately. Kredietbank further stated
that the letter was a notice of the termination of the credit and included a
request that the Company settle its current account in full. The amount claimed
to be due is believed to be approximately $450,000. Management of the Company
has communicated that Kredietbank advanced certain funds to a former subsidiary
of the Company -- Superloon N.V., a Belgium company -- but has stated that , at
no time, has Kredietbank ever advanced or loaned any funds to the Company.
Management of the Company does not believe the Company is obligated with respect
to the credit referred by Kredietbank.
Regulatory Matters
The Company's manufacturing operations are subject to the U.S.
Occupational Safety and Health Act ("OSHA"). The Company believes it is in
material compliance with OSHA. The Environmental Protection Agency regulates the
handling and disposal of hazardous materials. As the Company printing operations
utilize only water-based ink, the waste generated by the Company's production
process is not deemed hazardous. The Company believes it is in material
compliance with applicable environmental rules
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<PAGE>
and regulations. A number of states have enacted laws limiting or restricting
the release of helium filled mylar balloons. The Company does not believe such
legislation will have any material effect on its operations.
Property
The Company owns its principal plant and offices located in Barrington,
Illinois, approximately 45 miles northwest of Chicago, Illinois. The facility
includes approximately 75,000 square feet of office, manufacturing and warehouse
space.
The Company also leases approximately 62,500 square feet of space in
Cary, Illinois expiring December 31, 1999. The Company has subleased
approximately 70% of this space through August, 1998. The Company's monthly rent
(net of subleases) is $5,957. The facility is utilized for warehouse and latex
balloon printing.
The Company leases 15,000 square feet of office and warehouse space in
Rugby, England at an annual lease cost of $54,000 expiring 2019. This facility
is utilized for product packaging operations and to manage and service the
Company's operations in England and Europe.
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<PAGE>
MANAGEMENT
Directors and Executive Officers
The Company's current directors and executive officers and their ages,
as of June 30, 1997, are as follows:
Name Age Position with Company
----------------- --- --------------------------
John H. Schwan............. 53 Chairman and Director
Stephen M. Merrick......... 55 Chief Executive Officer, Secretary,
Chief Financial Officer and Director
Howard W. Schwan........... 43 President
John C. Davis.............. 64 Executive Vice President and
Director
Sharon Konny............... 39 Manager of Finance and
Administration
Brent Anderson............. 31 Vice President of Manufacturing
Stanley M. Brown........... 51 Director
All directors hold office until the annual meeting of stockholders next
following their election and/or until their successors are elected and
qualified. Officers are elected annually by the Board of Directors and serve at
the discretion of the Board. Information with respect to the business experience
and affiliation of the directors and the executive officers of the Company is
set forth below.
John H. Schwan, Chairman. Mr. Schwan has been an officer and director
of the Company since January, 1996. Mr. Schwan has been the President and
principal executive officer of Packaging Systems, Inc. and affiliated companies
for over the last 10 years. Mr. Schwan has over 20 years of general management
experience, including manufacturing, marketing and sales. Mr. Schwan served in
the U.S. Army Infantry in Vietnam from 1966 to 1969, where he attained the rank
of First Lieutenant. See "Certain Transactions."
Stephen M. Merrick, Chief Executive Officer and Secretary. Mr. Merrick
was President of the Company from January, 1996 to June, 1996 to June, 1997 when
he became Chief Executive Officer of the Company. Mr. Merrick devotes a portion
of his time to his position as Chief Executive Officer of the Company and is
engaged in the practice of law and other business activities. He has been a
director and Secretary of the Company since inception. Mr. Merrick is a
principal of the law firm of Fishman Merrick Miller Genelly Springer Klimek &
Anderson, P.C. of Chicago, Illinois and has been engaged in the practice of law
for more than 30 years. He is also Secretary, Director and a member of the
Management Committee of Reliv' International, Inc. (NASDAQ), a manufacturer and
direct marketer of nutritional supplements and food products.
Howard W. Schwan, President. Mr. Schwan has been associated with the
Company for 17 years principally in the management of the production and
engineering operations of the Company. Mr. Schwan was appointed as Vice
President of Manufacturing in November, 1990, and was appointed as President in
June, 1997. Mr. Schwan manages administration, production and engineering
functions as well as the sales function for latex balloons and custom and
created films. See "Certain Transactions."
John C. Davis, Executive Vice President-Sales. Mr. Davis has been
associated with the Company since 1975 and was President and a director of the
Company from that time to January, 1996. Mr. Davis
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<PAGE>
has been active in a sales and marketing capacity and, in January, 1996, became
Executive Vice President of Sales.
Sharon Konny, Manager of Finance and Administration. Ms. Konny has been
Manager of Finance and Administration at the Company since October, 1996. From
November of 1992 to 1996, she was an Assistant Vice President of First Chicago
Corporation, initially as Loan Servicing Manager of the Mortgage Services
Division and in December, 1994, achieving the position of Manager of Financial
Administration for the First Card Division. She became a Certified Public
Accountant in 1992.
Brent Anderson, Vice President of Manufacturing. Mr. Anderson has been
employed by the Company since January, 1989, and has held a number of
engineering positions with the Company including Plant Engineer and Plant
Manager. In such capacities Mr. Anderson was responsible for the design and
manufacture of much of the Company's manufacturing equipment. Mr. Anderson was
appointed Vice President of Manufacturing in June, 1997.
Stanley M. Brown, Director. Mr. Brown was appointed as a director of
the Company in January, 1996. Mr. Brown has been President of Inn-Room Systems,
Inc., a manufacturer and lessor of in-room vending systems for hotels since
March, 1996 and, since 1990, has been President of Surface Preparation Systems,
Inc., a company engaged in the business of developing and marketing equipment
for the preparation, cleaning and profiling of concrete and other surfaces. From
1968 to 1989, Mr. Brown was with the United States Navy as a naval aviator,
achieving the rank of Captain. During his term with the U.S. Navy he served in
various command and staff positions including an Amphibious Helicopter Carrier
(with 2,500 personnel), an anti-submarine, aviation squadron and at the
Pentagon. Mr. Brown was awarded 2 Meritorious Service Medals, 3 Navy
Commendation Medals and campaign and service medals from the Pacific and
Atlantic Fleets.
John H. Schwan and Howard W. Schwan are brothers.
Executive Compensation
Summary Compensation Table. The following table sets forth certain
information with respect to the compensation paid or accrued by the Company to
its President, Chief Executive Officer and any other officer who received
compensation in excess of $100,000.
Annual Compensation
-------------------------------------------
Name and Principal Other Annual All Other
Position Salary Bonus Compensation Compensation
Year ($) ($) ($) ($)
Stephen M. Merrick 1996 $ 45,000 --- --- ---
Chief Executive 1995 --- --- --- ---
Officer 1994 --- --- --- ---
Howard W. Schwan 1996 $108,500 --- $ 6,957(1) $ 1,250(3)
President 1995 $ 94,231 --- $ 6,933(1) $ 1,242(3)
1994 $ 90,096 $ 28,986 $ 6,813(1) $ 1,159(3)
John C. Davis 1996 $195,177 --- $11,438(2) $ 3,252(3)
Executive Vice 1995 $280,000 $248,000 $23,747(2) $ 5,150(3)
President-Sales 1994 $237,000 $450,000 $44,367(2) $ 7,170(3)
Footnotes on next page
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<PAGE>
- -----------------
(1)Perquisites include country club membership ($5,000).
(2)Perquisites include country club membership ($5,000) and allocated
personal use of Company vehicles ($5,158 in 1996, $16,767 in 1995 and $37,387 in
1994).
(3)Company contribution to the Company 401(k) Plan as pre-tax salary
deferral.
No executive officer owns any options or warrants issued in connection
with their employment. Certain executive officers received warrants to purchase
Common Stock of the Company in connection with their guarantee of certain bank
loans secured by the Company. See "Certain Transactions." No executive officer
received or exercised any stock options during the fiscal year ended October 31,
1996.
Employment Agreement.
In April, 1996, the Company entered into an employment agreement with
John C. Davis as Executive Vice President-Sales, which provided for an annual
salary of $150,000. The term of the agreement was through January 31, 1998. On
June 27, 1997, the agreement was amended to extend the term through January 31,
2000, and to provide for an annual salary of $120,000 per year. The agreement
contains covenants of Mr. Davis with respect to use of the Company's
confidential information and establishing the Company's rights to inventions
created by Mr. Davis during the term of employment.
In June, 1997, the Company entered into an Employment Agreement with
Howard W. Schwan as President, which provides for an annual salary of $135,000.
The term of the Agreement is through June 30, 2002. The Agreement contains
covenants of Mr. Schwan with respect to the use of the Company's confidential
information, establishes the Company's right to inventions created by Mr. Schwan
during the term of employment, and includes a covenant of Mr. Schwan not to
compete with the Company for a period of 3 years after the date of termination
of the Agreement.
Stock Option Plan
A total of 300,000 shares of Common Stock are reserved for issuance
under the Stock Option Plan. No options have yet been granted. The plan provides
for the award of options, which may either be incentive stock options ("ISOs")
within the meaning of Section 422A of the Internal Revenue Code of 1986, as
amended (the "Code") or non-qualified options ("NQOs") which are not subject to
special tax treatment under the Code. The Plan is administered by the Board or a
committee appointed by the Board (the "Administrator"). Officers, directors, and
employees of, and consultants to, the Company or any parent or subsidiary
corporation selected by the Administrator are eligible to receive options under
the plan. Subject to certain restrictions, the Administrator is authorized to
designate the number of shares to be covered by each award, the terms of the
award, the date on which and the rates at which options or other awards may be
exercised, the method of payment and other terms.
The exercise price for ISOs cannot be less than the fair market value
of the stock subject to the option on the grant date (110% of such fair market
value in the case of ISOs granted to a stockholder who owns more than 10% of the
Company's Common Stock). The exercise price of a NQO shall be fixed by the
Administrator at whatever price the Administrator may determine in good faith.
Unless the Administrator determines otherwise, options generally have a 10-year
term (or five years in the case of ISOs granted to a participant owning more
than 10% of the total voting power of the Company's capital stock). Unless the
Administrator provides otherwise, options terminate upon the termination of a
participant's
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<PAGE>
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.
Generally, awards must be exercised by cash payment to the Company of
the exercise price. However, the Administrator may allow a participant to pay
all or a portion of the exercise price by means of a promissory note, stock or
other lawful consideration. The Plan also allows the Administrator to provide
for withholding and employment taxes payable by a participant to the Company
upon exercise of the award.
In the event of any change in the outstanding shares of Common Stock by
reason of any reclassification, recapitalization, merger, consolidation,
reorganization, spin-off, split-up, issuance of warrants or rights or
debentures, stock dividend, stock split or reverse stock split, cash dividend,
property dividend or similar change in the corporate structure, the aggregate
number of shares of Common Stock underlying any outstanding options may be
equitably adjusted by the Administrator in its sole discretion.
The Company has agreed that for a 18-month period commencing on the
date this Prospectus that it will not, without the consent of the Underwriter,
adopt or propose to adopt any plan or arrangement permitting the grant, issue or
sale of any shares of its securities or issue, sell or offer for sale any of its
securities, or grant any options for its securities, except for options to
purchase up to an aggregate of 300,000 shares of Common Stock which shall have
an exercise price per share no less than the greater of (a) the initial public
offering price of the Units set forth herein and (b) the fair market value of
the Common Stock on the date of grant. No option or other right to acquire
Common Stock granted, issued or sold during this period shall permit (a) the
payment with any form of consideration other than cash, (b) payment of less than
the full purchase price or exercise price for such shares of Common Stock or
other securities of the Company on or before the date of issuance, or (c) the
existence of stock appreciation rights, phantom options or similar arrangements.
Limitation of Liability and Indemnification. As permitted by the
Delaware General Corporation Law ("DGCL"), the Company has included in its
Certificate of Incorporation a provision to eliminate the personal liability of
its directors for monetary damages for breach or alleged breach of their
fiduciary duties as directors, except for liability (i) for any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) for acts or
omissions not in good faith or which involved intentional misconduct or a
knowing violation of law, (iii) in respect of certain unlawful dividend payments
or stock redemptions or repurchases, as provided in Section 174 of the DGCL, or
(iv) for any transaction from which the director derived an improper personal
benefit. The effect of this provision in the Company's Certificate of
Incorporation is to eliminate the rights of the Company and its stockholders
(through stockholders' derivative suits on behalf of the Company) to recover
monetary damages against a director for breach of the fiduciary duty of care as
a director except in the situations described in (i) through (iv) above. This
provision does not limit nor eliminate the rights of the Company or any
stockholder to seek non-monetary relief such as an injunction or rescission in
the event of a breach of a director's duty of care. These provisions will not
alter the liability of directors under federal securities laws.
The Certificate of Incorporation and the by-laws of the Company provide
that the Company is permitted to indemnify its officers and directors, employees
and agents under certain circumstances. In addition, if permitted by law, the
Company is permitted to advance expenses to its officers and directors as
incurred in connection with proceedings against them in their capacity as a
director or officer for which they may be indemnified upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that such person is not entitled to
indemnification. At present, the Company is not aware of any pending or
threatened litigation or proceeding involving a director, officer, employee or
agent of the Company in which indemnification would be required or
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<PAGE>
permitted. The Company believes that its charter provisions and indemnification
agreements are necessary to attract and retain qualified persons as directors
and officers.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors and officers of the Company pursuant to the
foregoing provisions or otherwise, the Company has been advised that in the
opinion of the Securities and Exchange Commission ("Commission"), such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's capital stock, as of the date of this
Prospectus by (i) each stockholder who is known by the Company to be the
beneficial owner of more than 5% of the Company's Common Stock or Class B Common
Stock, (ii) each director and executive officer of the Company who owns any
shares of Common Stock or Class B Common Stock, and (iii) all executive officers
and directors as a group. Except as otherwise indicated, the Company believes
that the beneficial owners of the shares listed below have sole investment and
voting power with respect to such shares.
<TABLE>
<CAPTION>
Shares of Class B Shares of Common
Common Stock Stock Beneficially Percent of Common Stock(4)
Name and Address(1) Beneficially Owned(2)(3) Owned(2) Prior to Offering After Offering
- ------------------- ------------------------ -------- ----------------- --------------
<S> <C> <C> <C> <C>
Stephen M. Merrick 219,781 318,807(5) 23.55 14.88
John H. Schwan 329,670 189,103(6) 22.57 14.29
Howard W. Schwan 164,835 92,949(7) 11.70 7.29
John C. Davis ----- 464,281(8) 21.52 13.30
Sharon Konny ----- ------ ------ ------
Brent Anderson ----- ------ ------ ------
Stanley M. Brown
747 Glenn Avenue
Wheeling, IL ----- ------ ------ ------
Frances Ann Rohlen
c/o Cheshire Partners
1504 Wells
Chicago, IL 60610 274,725 ------ 13.03 7.98
Philip W. Colburn 109,890 118,267(9) 10.82 6.63
All directors and
executive officers as
a group (7 persons) 714,286 1,065,140 67.99 45.04
- ------------------
<FN>
(1 Except as otherwise indicated, the address of each stockholder
listed above is c/o CTI Industries Corporation, 22160 North Pepper Road,
Barrington, Illinois 60010.
(2) A person is deemed to be the beneficial owner of securities that
can be acquired within 60 days from the date set forth above through the
exercise of any option, warrant or right. Shares of Common Stock subject to
options, warrants or rights that are currently exercisable or exercisable within
60 days are deemed outstanding for purposes of computing the percentage
ownership of the person holding such options, warrants or rights, but are not
deemed outstanding for purposes of computing the percentage ownership of any
other person.
Footnotes continued on next page
40
<PAGE>
(3) Figures below represent all Class B Common Stock outstanding.
Beneficial ownership of shares of Class B Common Stock for Messrs. Merrick, John
Schwan, Howard Schwan and Ms. Rohlen include indirect ownership of such shares
through CTI Investors, L.L.C. See "Certain Transactions."
(4) Assumes conversion of all shares of Class B Common Stock into
shares of Common Stock.
(5)Includes warrants to purchase up to 76,923 shares of Common Stock at
$.91 per share and warrants to purchase up to 100,961 shares of Common Stock at
$3.12 per share.
(6)Includes warrants to purchase up to 76,923 shares of Common Stock at
$.91 per share and warrants to purchase up to 112,180 shares of Common Stock at
$3.12 per share.
(7)Includes warrants to purchase up to 76,923 shares of Common Stock at
$.91 per share and warrants to purchase up to 16,026 shares of Common Stock at
$3.12 per share.
(8)Includes warrants to purchase up to 48,077 shares of Common Stock at
$3.12 per share, and 230,769 shares of Common Stock subject to redemption by the
Company. See "Certain Transactions."
(9)Includes shares held by immediate family members.
</FN>
</TABLE>
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<PAGE>
CERTAIN TRANSACTIONS
In March 1996, the Company entered into a Stock Redemption Agreement
with John C. Davis which was subsequently amended June 27, 1997. Under the
amended Stock Redemption Agreement the Company has the right but not the
obligation to redeem up to 333,333 shares of Common Stock owned by Mr. Davis at
the price of $1.95 per share at any time through January 31, 1998. Commencing
March 1, 1998 through February 28, 2000, the Company is obligated to pay to Mr.
Davis, for the redemption of shares at $1.95 per share (i) an amount equal to 2%
of the Company's pretax profits each fiscal quarter (beginning with the quarter
ended February 28, 1998) and (ii) an amount equal to 2% (but not to exceed
$8,000) of the amount by which latex and mylar balloon revenues exceed $1.3
million in any month. The Company also has the right to redeem additional shares
of Common Stock from Mr. Davis during this period at $1.95 per share, provided
that the total number of shares subject to redemption under the Stock Redemption
Agreement does not exceed 333,333. As of the date of this Offering 102,564
shares of Common Stock have been redeemed pursuant to the Stock Redemption
Agreement.
In March and May of 1996, a group of investors made an equity
investment of $1,000,000 in the Company in return for 1,098,901 shares of
Preferred Stock, $.91 par value. Each share of Preferred Stock was entitled to
an annual cumulative dividend of 13% of the purchase price, and was convertible
into one share of Common Stock. The shares of Preferred Stock, voting separately
as a class, were entitled to elect four of the Company's directors. CTI
Investors, L.L.C., an Illinois limited liability company, invested $900,000 in
the shares of Preferred Stock. Members of CTI Investors, L.L.C. include Howard
W. Schwan, John H. Schwan and Stephen M. Merrick, members of management, and
Frances Ann Rohlen. See "Management."
In July, 1997, the shares of Preferred Stock were converted into shares
of Class B Common Stock in connection with the recapitalization of the Company.
See "The Company--Recapitalization" and "Principal Shareholders."
In December, 1996, Howard W. Schwan, John H. Schwan and Stephen M.
Merrick were each issued warrants to purchase 76,923 shares of the Company's
Common Stock at an exercise price of $.91 per share in consideration of their
facilitating and guaranteeing a bank loan to the Company in the amount of $6.3
million. The warrants have a term of six years. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation."
In June, 1997, the Company issued in a private placement notes in the
principal amount of $865,000, together with warrants to purchase up to 277,244
shares of the Company's Common Stock at an exercise price of $3.12 per share.
The warrants have a term of five years. Howard W. Schwan, John H. Schwan,
Stephen M. Merrick and John C. Davis, members of management, purchased $50,000,
$350,000 and $300,000 and $150,000, respectively, of the notes and warrants. Mr.
John Schwan and Mr. Merrick applied advances of $200,000 each, made to the
Company in January, 1997, toward the purchase of notes and warrants. See "Risk
Factors--Related Party Transactions; Potential Conflicts of Interest."
Stephen M. Merrick, Chief Executive Officer of the Company, is a
principal of the law firm of Fishman Merrick Miller Genelly Springer Klimek &
Anderson, P.C. which serves as general counsel of the Company. Fishman Merrick
Miller Genelly Springer Klimek & Anderson, P.C. will pass on the validity of the
Units in the Offering. In addition, Mr. Merrick owns 219,781 shares of Class B
Common Stock, 140,923 shares of Common Stock, warrants to purchase 76,923 shares
of Common Stock at $.91 per share, and warrants to purchase 100,961 shares of
Common Stock at 3.12 per share. Other members of the firm of Fishman Merrick
Miller Genelly Springer Klimek & Anderson, P.C. own an aggregate of 53,561
shares of Common Stock. See "Legal Matters."
John H. Schwan is the president and shareholder of Packaging Systems,
Inc. and affiliated companies. The Company made purchases of packaging materials
from these entities in the amount of $1,106,649 during the year ended October
31, 1996 and $145,267 for the six months ended April 30, 1997.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 11,000,000
shares of Common Stock, $.065 par value, and 1,100,000 shares of Class B Common
Stock, $.91 par value and 2,000,000 shares of Preferred Stock, $.91 par value.
On the date of this Prospectus, after giving effect to the recapitalization and
the conversion, the Company has outstanding 1,010,202 shares of Common Stock
held of record by over 20 stockholders and 1,098,901 shares of Class B Common
Stock held of record by 2 stockholders. All outstanding shares of capital stock
of the Company are fully paid and non-assessable.
Common Stock and Class B Common Stock
The holders of Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of the stockholders. Holders
of Common Stock will vote together with holders of Class B Common Stock, on a
one vote for each share basis, on all matters submitted to a vote of
stockholders except the election of directors. Holders of Common Stock and Class
B Common Stock shall share equally, on a per share basis, in all dividends
declared by the Company and will participate equally in the proceeds of
dissolution of the Company, on a per share basis.
Holders of Class B Common Stock, voting separately as a class, have the
right to elect four of the Company's seven directors, and will vote together
with holders of Common Stock, as a class, on the election of the remaining three
directors. Neither the Common Stock or Class B Common Stock possess cumulative
voting rights or preemptive rights. Holders of Class B Common Stock have the
right to convert their shares into shares of Common Stock, on a share for share
basis at any time, and such shares will automatically convert on July 23, 2002.
The Units
Each Unit consists of one share of Common Stock and one Redeemable
Warrant, which entitles the registered holder thereof to purchase one share of
Common Stock at an initial exercise price of $____ [150% of the initial public
offering price per Unit] per share, subject to adjustment. The shares of Common
Stock and Redeemable Warrants comprising the Units will be detachable and
separately tradeable upon issuance. The Company and the Underwriter may jointly
determine, based upon market conditions, to delist the Units upon the expiration
of the 30-day period commencing on the date of this Prospectus.
The Redeemable Warrants
The Redeemable Warrants will be issued under and subject to the terms
of a Warrant Agreement (the "Warrant Agreement") dated as of the date hereof
between the Company and Continental Stock Transfer & Trust Company, as warrant
agent (the "Warrant Agent"). Set forth below is a summary of certain provisions
of the Warrant Agreement. Such summary does not purport to be complete and is
subject to and qualified in its entirety by reference to all of the provisions
of the Warrant Agreement. A copy of the Warrant Agreement is filed as an exhibit
to the Registration Statement of which this Prospectus forms a part.
General. Each Redeemable Warrant entitles the registered holder thereof
to purchase one share of Common Stock at an initial exercise price of $____
[150% of the initial public offering price per Unit] per share, subject to
adjustment, at any time following the date of issuance until 5:00 p.m. New York
time, on ______, 2002 [60 months from the date of the Prospectus] (the
"Expiration Date"), unless previously
43
<PAGE>
redeemed. Each Redeemable Warrant will be issued in registered form and will be
transferable from and after the date of issuance and prior to the Expiration
Date. Warrantholders are not entitled, by virtue of being Warrantholders, to
receive dividends or to vote at or receive notice of any meeting of stockholders
or to exercise any other rights whatsoever as stockholders of the Company.
Commencing ________, 1998 [12 months from the date of the Prospectus], the
Company will have the right to redeem all, but not less than all, of the
Redeemable Warrants at a price of $.05 per Redeemable Warrant on 30 days' prior
written notice, provided that the Company shall have obtained the written
consent of Joseph Stevens & Company, Inc. (the "Underwriter"), and the average
closing bid price of the Common Stock equals or exceeds 150% of the then
exercise price per share, subject to adjustment, for any 20 trading days within
a period of 30 consecutive trading days ending on the fifth trading day prior to
the date of the notice of redemption.
Adjustments. The exercise price of the Redeemable Warrants and the
number of shares of Common Stock issuable upon exercise thereof are subject to
adjustment in certain events, including stock splits or combinations, stock
dividends, or through a recapitalization resulting from a stock split or
combination. The remaining shares of Common Stock issuable upon exercise of the
Redeemable Warrant and the purchase price thereof will be appropriately adjusted
by the Company.
Amendments. The Board of Directors of the Company, in its discretion,
may amend the terms of the Redeemable Warrants to, among other things, reduce
the exercise price; provided, however, that no amendment adversely affecting the
rights of the holders of the Redeemable Warrants may be made without the
approval of the holders of not less than a majority of the Redeemable Warrants
then outstanding.
Exercise of Redeemable Warrants. The Redeemable Warrants may be
exercised by surrendering to the Warrant Agent the warrant certificate
evidencing the Warrant, duly executed by the Warrantholder or his duly
authorized agent and indicating such Warrantholder's election to exercise all or
a portion of the Redeemable Warrants evidenced by such warrant certificate.
Surrendered warrant certificates must be accompanied by payment of the aggregate
exercise price of the Redeemable Warrants to be exercised, which payment may be
made, at the Warrantholder's election, in cash or by delivery of a cashier's or
certified check or any combination of the foregoing. A current Prospectus must
be in effect in order for holders of Redeemable Warrants to exercise such
Redeemable Warrants. Pursuant to the terms of the Warrant Agreement, the Company
has agreed to maintain a current Prospectus in effect until the Expiration Date,
subject to certain exceptions.
Upon receipt of duly executed Redeemable Warrants and payment of the
exercise price, the Company shall issue and cause to be delivered, to or upon
the written order of exercising Warrantholders, certificates representing the
number of shares of Common Stock so purchased, if fewer than all of the
Redeemable Warrants evidenced by any warrant certificate are exercised, a new
warrant certificate evidencing the Redeemable Warrants remaining unexercised
will be issued to the Warrantholder.
The Company has authorized and will reserve for issuance a number of
shares of Common Stock sufficient to provide for the exercise of all Redeemable
Warrants. When delivered in accordance with the Warrant Agreement, such shares
will be fully paid and non-assessable.
The Preferred Stock
The Preferred Stock may be issued in one or more series at such times
and for such consideration as shall be authorized from time to time by the Board
of Directors.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock of the Company is
Continental Stock Transfer & Trust Company, New York, New York.
44
<PAGE>
SECURITIES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding an
aggregate of 2,343,535 shares of Common Stock and 1,098,901 shares of Class B
Common Stock assuming (i) the issuance by the Company of 1,333,333 shares of
Common Stock included in the Units offered hereby, (ii) no issuance of shares of
Common Stock underlying the Redeemable Warrants, Underwriter's Warrants or
relating to other outstanding warrants to purchase Common Stock, (iii) no
exercise of outstanding options to purchase Common Stock and (iv) no conversion
of the Class B Common Stock. Of these shares, the 1,333,333 shares included in
the Units will be freely tradeable without restriction or further registration
under the Securities Act, except for shares held by Affiliates of the Company
(whose sales would be subject to certain limitations and restrictions described
below) and the regulations promulgated thereunder).
The remaining shares were sold by the Company in reliance on exemptions
from the registration requirements of the Securities Act and are "restricted
securities" within the meaning of Rule 144 under the Securities Act. Most of
these shares will be eligible for sale in the public market under Rule 144;
however, all of these shares are subject to lock-up agreements whereby such
securities cannot be sold for a period of 18 months from the date of this
Prospectus, unless released therefrom by the Underwriter.
The Redeemable Warrants underlying the Units offered hereby and the
shares of Common Stock underlying such Redeemable Warrants, upon exercise
thereof, will be freely tradeable without restriction under the Securities Act,
except for any Redeemable Warrants or shares of Common Stock purchased by an
Affiliate, which will be subject to the resale limitation of Rule 144 under the
Securities Act.
In addition, without the consent of the Underwriter, the Company has
agreed not to sell or offer for sale any of its securities during the Lock-up
Period, except pursuant to outstanding options and warrants and pursuant to the
Company's existing option plans.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially owned
shares for at least one year is entitled to sell, within any three-month period,
a number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock or (ii) the average weekly trading volume in
the Common Stock during the four calendar weeks preceding such sale, subject to
the filing of a Form 144 with respect to such sale and certain other limitations
and restrictions. In addition, a person who is not deemed to have been an
Affiliate of the Company at any time during the 90 days preceding a sale and who
has beneficially owned the shares proposed to be sold for at least two years
would be entitled to sell such shares under Rule 144 without regard to the
requirements described above. To the extent that shares were acquired from an
Affiliate of the Company, such stockholder's holding period for the purpose of
effecting a sale under Rule 144 commences on the date of transfer from the
Affiliate.
Sales of a substantial amount of Common Stock in the public market
could adversely affect the market price of the Common Stock and could impair the
Company's future ability to raise capital through the sale of its equity
securities.
45
<PAGE>
UNDERWRITING
Joseph Stevens & Company, Inc. (the "Underwriter") has entered into an
Underwriting Agreement with the Company pursuant to which, and subject to the
terms and conditions thereof, it has agreed to purchase from the Company, and
the Company has agreed to sell to the Underwriter, on a firm commitment basis,
all of the Units offered by the Company hereby.
The Company has been advised by the Underwriter that the Underwriter
initially proposes to offer the Units to the public at the public offering price
set forth on the cover page of this Prospectus and that the Underwriter may
allow to certain dealers who are members of the National Association of
Securities Dealers, Inc. ("NASD") concessions not in excess of $____ per Unit,
of which amount a sum not in excess of $__________ per Unit may in turn be
reallowed by such dealers to other dealers. After the commencement of the
Offering, the public offering price, concessions and reallowances may be
changed. The Underwriter has informed the Company that it does not expect sales
to discretionary accounts by the Underwriter to exceed five percent of the
securities offered by the Company hereby.
The Company has granted to Underwriter an option, exercisable within 45
days of the date of this Prospectus, to purchase from the Company at the
offering price, less underwriting discounts and the non-accountable expense
allowance, all or part of an additional 199,999 Units on the same terms and
conditions of the Offering for the sole purpose of covering over-allotments, if
any.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act. The Company has
agreed to pay to the Underwriter a non-accountable expense allowance equal to
three percent (3%) of the gross proceeds derived from the sale of the Units
underwritten, $30,000 of which has been paid to date.
Upon the exercise of any Redeemable Warrants more than one year after
the date of this Prospectus, which exercise was solicited by the Underwriter,
and to the extent not inconsistent with the guidelines of the NASD and the Rules
and Regulations of the Commission, the Company has agreed to pay the Underwriter
a commission which shall not exceed five percent (5%) of the aggregate exercise
price of such Redeemable Warrants in connection with bona fide services provided
by the Underwriter relating to any warrant solicitation. In addition, the
individual must designate the firm entitled to such warrant solicitation fee.
However, no compensation will be paid to the Underwriter in connection with the
exercise of the Redeemable Warrants if (a) the market price of the Common Stock
is lower than the exercise price of the Redeemable Warrants, (b) the Redeemable
Warrants were held in a discretionary account or (c) the Redeemable Warrants are
exercised in an unsolicited transaction. Unless granted an exemption by the
Commission from its Rule 101 under Regulation M promulgated under the Exchange
Act, the Underwriter will be prohibited from engaging in any market-making
activities with regard to the Company's securities for the periods prescribed by
exemption (xi) to Rule 101 prior to any solicitation of the exercise of the
Redeemable Warrants until the later of the termination of such solicitation
activity or the termination (by waiver or otherwise) of any right the
Underwriter may have to receive a fee. As a result, the Underwriter may be
unable to continue to provide a market for the Company's Units, Common Stock or
Redeemable Warrants during certain periods while the Redeemable Warrants are
exercisable. If the Underwriter has engaged in any of the activities prohibited
by Rule 101 under Regulation M during the periods described above, the
Underwriter undertakes to waive unconditionally its rights to receive a
commission on the exercise of such Redeemable Warrants.
46
<PAGE>
In connection with this Offering, the Underwriter and certain selling
group members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Units, the
Common Stock and/or Redeemable Warrants (the "Securities"). Such transactions
may include stabilization transactions effected in accordance with Rule 104 of
Regulation M, pursuant to which such persons may bid for or purchase Common
Stock for the purpose of stabilizing their respective market prices. The
Underwriter also may create a short position for the account of the Underwriter
by selling more Securities in connection with the Offering than it is committed
to purchase from the Company, and in such case may purchase Securities in the
open market following completion of the Offering to cover all or a portion of
such short position. The Underwriter may also cover all or a portion of such
short position, up to 199,999 Units, by exercising the Over-Allotment Option. In
addition, the Underwriter may impose "penalty bids" under contractual
arrangements whereby it may reclaim from a dealer participating in the Offering
for the account of the Underwriter, the selling concession with respect to
Securities that are distributed in the Offering but subsequently purchased for
the account of the Underwriter in the open market. Any of the transactions
described in this paragraph may result in the maintenance of the prices of the
Securities at levels above that which might otherwise prevail in the open
market. None of the transactions described in the paragraph is required, and, if
they are undertaken, they may be discontinued at any time.
All of the holders of the issued and outstanding shares of Common Stock
and Class B Common Stock prior to the Offering have agreed (i) not to, directly
or indirectly, issue, offer to sell, sell, grant an option for the sale of,
transfer, pledge, assign, hypothecate, or otherwise encumber or dispose of
(collectively, "Transfer"), any securities issued by the Company, including
shares of Common Stock and Class B Common Stock or securities convertible into
or exchangeable or exercisable for or evidencing any right to purchase or
subscribe for any shares of Common Stock or Class B Common Stock for a period of
eighteen (18) months from the effective date of the Registration Statement (the
"Lock-Up Period"), without the prior written consent of the Underwriter, except
in a private transaction where the transferee agrees to such restrictions, and
(ii) that, for twenty-four (24) months following the effective date of the
Registration Statement, any public sales of the Company's securities shall be
made through the Underwriter in accordance with its customary brokerage
practices either on a principal or agency basis. An appropriate legend shall be
marked on the face of certificates representing all such securities.
In connection with the Offering, the Company has agreed to issue and
sell to the Underwriter and/or its designees, at the closing of the proposed
underwriting, for nominal consideration, five (5) year Underwriter's Warrants
(the "Underwriter Warrants") to purchase 133,333 Units. The Underwriter's
Warrants are exercisable at any time during a period of four (4) years
commencing at the beginning of the second year after their issuance and sale at
a price of $__________ [120% of the offering price of the Units] per Unit. The
shares of Common Stock, Redeemable Warrants, and shares of Common Stock
underlying the Redeemable Warrants issuable upon the exercise of the
Underwriter's Warrant are identical to those offered to the public. The
Underwriter's Warrants contain anti-dilution provisions providing for adjustment
of the number of warrants and exercise price under certain circumstances. The
Underwriter's Warrants grant to the holders thereof and to the holders of the
underlying securities certain rights of registration of the securities
underlying the Underwriter's Warrants.
The Company has also agreed that for five (5) years from the effective
date of the Registration Statement, the Underwriter may designate one person for
election to the Company's Board of Directors (the "Designation Right"). In the
event that the Underwriter elects not to exercise its Designation Right, then it
may designate one person to attend all meetings of the Company's Board of
Directors for a period of five (5) years. The Company has agreed to reimburse
the Underwriter's designee for all out-of-pocket expenses
47
<PAGE>
incurred in connection with the designee's attendance at meetings of the Board
of Directors. The Company has also agreed to retain the Underwriter as the
Company's financial consultant for a period of twenty-four (24) months from the
date hereof and to pay the Underwriter a monthly retainer of $2,000, all of
which is payable in advance on the closing date set forth in the Underwriting
Agreement. The Underwriting Agreement also provides that the Underwriter has a
right of first refusal for a period of two years from the date of this
Prospectus with respect to any sales of securities by the Company or any of its
present or future subsidiaries.
Prior to this Offering, there has been no public market for the Units,
the Common Stock, or the Redeemable Warrants. Accordingly, the initial public
offering price of the Units and the terms of the Redeemable Warrants were
determined by negotiation between the Company and the Underwriter. Among the
factors considered in determining such prices and terms, in addition to the
prevailing market conditions, included the history of and the prospects for the
industry in which the Company competes, the market price of the Common Stock, an
assessment of the Company's management, the prospects of the Company, its
capital structure and such other factors that were deemed relevant. The offering
price does not necessarily bear any relationship to the assets, results of
operations or net worth of the Company.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a copy
of each such agreement which are filed as exhibits to the Registration
Statement. See "Additional Information."
LEGAL MATTERS
The validity of the Units offered hereby have been passed upon for the
Company by Fishman Merrick Miller Genelly Springer Klimek & Anderson, P.C.,
Chicago, Illinois. Stephen M. Merrick, Chief Executive Officer, and a principal
shareholder, of the Company, is a principal of Fishman Merrick Miller Genelly
Springer Klimek & Anderson, P.C. and members of the firm also have an equity
ownership in the Company. See "Certain Transactions" and "Risk Factors--Related
Party Transactions; Potential Conflicts of Interests." Orrick, Herrington &
Sutcliffe LLP, New York, New York, has acted as counsel for the Underwriter in
connection with the Offering.
EXPERTS
The balance sheets as of October 31, 1996, and the consolidated
statements of operations, stockholders' equity, and cash flows for each of the
two years in the period ended October 31, 1996, included in this Prospectus have
been included herein in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
CHANGE IN INDEPENDENT ACCOUNTANTS
In 1996, the Company voluntarily changed its independent accountants
from Detterbeck & Associates, Ltd. ("Detterbeck") to Jacobson, Scott, Gordon &
Horewitch ("JSG&H"). This change was approved by the Company's Board of
Directors. Detterbeck had been retained to audit the Company's financial
statements as of and for the year ended October 31, 1995. The report of
Detterbeck for the year ended October 31, 1995, which is not included herein,
contained no adverse opinion or disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope or application of accounting principles.
During the year ended October 31, 1995 and through the date of replacement,
there were no disagreements with Detterbeck on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure.
48
<PAGE>
In 1997, the Company voluntarily changed its independent accountants
from JSG&H to Coopers & Lybrand L.L.P. This change was approved by the Company's
Board of Directors. The financial statements for each of the years in the two
year period ended October 31, 1996, were audited by Coopers & Lybrand L.L.P.
JSG&H had been retained to audit the Company's financial statements as of and
for the year ended October 31, 1996. The report of JSG&H for the year ended
October 31, 1996, which is not included herein, contained no adverse opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope or application of accounting principles. During the year ended October 31,
1996 and through the date of replacement, there were no disagreements with JSG&H
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on
Form SB-2, including amendments thereto, relating to the Units offered hereby,
the Common Stock and Redeemable Warrants included therein and the Common Stock
underlying the Redeemable Warrants. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits thereto.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete; however, all material
information with respect to such contracts and documents are disclosed in this
Prospectus. In each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
For further information with respect to the Company and the securities
offered hereby, reference is made to such Registration Statement, exhibits and
schedules. A copy of the Registration Statement may be inspected by anyone
without charge at the public reference facilities maintained by the Commission
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and will also be available for inspection and copying at the regional offices of
the Commission located at 7 World Trade Center, New York, New York 10048 and at
Citicorp Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such material may also be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. Such material may also be accessed electronically by means of
the Commission's home page on the Internet at http://www.sec.gov. As a result of
the Offering, the Company will be subject to the informational requirements of
the Exchange Act. So long as the Company is subject to the periodic reporting
requirements of the Exchange Act, it will furnish holders of the Units, the
Common Stock and the Redeemable Warrants with annual reports containing, among
other information, audited financial statements certified by an independent
accounting firm. The Company also intends to furnish such other reports as it
may determine or as may be required by law.
49
<PAGE>
<TABLE>
<S> <C>
No underwriter, dealer, sales representative or any other person has been
authorized to give any information or to make any representations other than
those contained in this Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Company [LOGO]
or the Underwriter. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there has
been no change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any date subsequent to the date
hereof. This Prospectus does not constitute an offer to sell or a solicitation CTI INDUSTRIES CORPORATION
of an offer to buy any securities offered hereby by anyone in any jurisdiction
in which such offer or solicitation is not authorized or in which the person
making such offer or solicitation is not qualified to do so or to anyone to whom
it is unlawful to make such offer or solicitation.
TABLE OF CONTENTS 1,333,333 Units
Page
---- Each Unit Consisting
Prospectus Summary................................... 3 of
Risk Factors......................................... 8 One Share of Common Stock
The Company.......................................... 14 and
Use of Proceeds...................................... 15 One Redeemable Warrant
Dividend Policy...................................... 16
Capitalization....................................... 17
Dilution............................................. 18
Selected Financial Data.............................. 20
Management's Discussion and Analysis of
Financial Condition
and Results of Operations......................... 22
Business............................................. 26
Management........................................... 35
Principal Stockholders............................... 40 PROSPECTUS
Certain Transactions................................. 42
Description of Capital Stock......................... 43
Securities Eligible for Future Sale.................. 45
Underwriting......................................... 46
Legal Matters........................................ 48
Experts.............................................. 48
Change in Independent Accountants.................... 48
Available Information................................ 49 JOSEPH STEVENS & COMPANY, INC.
Index to Financial Statements........................ F-1
, 1997
</TABLE>
Until ________, 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement is in addition to the obligations of dealers to
deliver a Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
50
<PAGE>
CTI INDUSTRIES CORPORATION AND SUBSIDIARY
REPORT ON AUDIT OF CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 1995 AND 1996
AND THE SIX MONTHS ENDED APRIL 30, 1996 AND 1997 (unaudited)
<PAGE>
CTI Industries Corporation and Subsidiary
Table of Contents
Page(s)
Report of Independent Accountants F-1
Consolidated Financial Statements:
Consolidated Balance Sheets as of October 31, 1996
and April 30, 1997 (unaudited) F-2
Consolidated Statements of Operations for the
years ended October 31, 1995 and 1996
and the six months ended
April 30, 1996 and 1997 (unaudited) F-3
Consolidated Statements of Stockholders' Equity
for the years ended October 31, 1995 and 1996 F-4
Consolidated Statements of Cash Flows for the years
ended October 31, 1995 and 1996 and the six months
ended April 30, 1996 and 1997 (unaudited) F-5
Notes to Consolidated Financial Statements F-6 - F-19
<PAGE>
Report of Independent Accountants
To the Board of Directors of
CTI Industries Corporation
We have audited the accompanying consolidated balance sheet of CTI Industries
Corporation and subsidiary as of October 31, 1996 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended October 31, 1995 and 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CTI Industries
Corporation and subsidiary as of October 31,1996, and the results of its
operations, stockholders' equity and its cash flows for the years ended October
31,1995 and 1996 in conformity with generally accepted accounting principles.
Chicago, Illinois
July 22, 1997
F-1
<PAGE>
CTI Industries Corporation and Subsidiary
Consolidated Balance Sheet
<TABLE>
<CAPTION>
October 31, April 30, 1997
ASSETS 1996 Actual Pro Forma
(unaudited)
Current Assets:
<S> <C> <C> <C>
Cash $ 130,818 $ --
Accounts receivable (less allowance
for doubtful accounts of $ 129,998 at
October 31, 1996 and $ 126,313 at April 30, 1997) 1,665,097 2,679,461
Inventories 4,582,593 4,701,640
Other 218,879 306,243
------------ ------------
Total current assets 6,597,387 7,687,344
------------ ------------
Property and equipment:
Machinery and equipment 6,352,054 6,436,719
Building 2,168,563 2,168,563
Office furniture and equipment 1,082,665 1,263,115
Land 250,000 250,000
Leasehold improvements 147,128 147,128
------------ ------------
10,000,410 10,265,525
Less: accumulated depreciation (6,418,486) (6,546,714)
------------ ------------
Total property and equipment, net 3,581,924 3,718,811
------------ ------------
Other assets:
Deferred financing costs, net 106,224 81,847
Investment in joint venture -- 34,575
------------ ------------
106,224 116,422
------------ ------------
Total assets $ 10,285,535 $ 11,522,577
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,755,700 $ 2,377,383
Line of credit 2,058,816 2,942,683
Stock redemption contract payable - current portion 100,000 75,101
Advances from related parties -- 375,600
Notes payable, current portion 402,798 403,914
Accrued liabilities 932,575 1,022,687
------------ ------------
Total current liabilities 6,249,889 7,197,368
------------ ------------
Stock redemption contract payable 47,908 --
Notes payable 3,056,923 2,872,953
------------ ------------
Total long-term liabilities 3,104,831 2,872,953
------------ ------------
Redeemable common stock 450,000 450,000
Stockholders' equity:
Convertible Preferred stock - $.91 par value,
2,000,000 shares authorized, 1,098,901 shares
issued and outstanding, including accumulated
dividends of $27,625 (October 31, 1996)
and $43,875 (April 30, 1997) 1,027,625 1,043,875 $ --
Common stock - $.065 par value, 11,000,000 shares
authorized, 1,131,507 (October 31, 1996) and 1,154,585
(April 30, 1997) shares issued, 987,125 (October 31, 1996)
and 1,010,202 (April 30, 1997) shares outstanding 73,548 75,048 75,048
Class B Common stock - $.91 par value,
1,100,000 shares authorized, 1,098,901 shares outstanding -- -- 1,000,000
Paid-in-capital 230,348 248,348 248,348
Retained earnings 137,194 462,885 462,885
Less:
Treasury stock - 144,382 shares at cost (370,700) (370,700) (370,700)
Redeemable common stock (450,000) (450,000) (450,000)
Stock subscription receivable (167,200) (7,200) (7,200)
------------ ------------ ------------
Total stockholders' equity 480,815 1,002,256 $ 958,381
------------ ------------ ============
Total liabilities and stockholders' equity $ 10,285,535 $ 11,522,577
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
CTI Industries Corporation and Subsidiary
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years Ended Six Months Ended
--------------------------- ---------------------------
October 31, April 30,
1995 1996 1996 1997
(unaudited)
<S> <C> <C> <C> <C>
Net sales $ 22,783,780 $ 13,910,104 $ 7,883,675 $ 8,736,121
Cost of sales 15,077,979 8,558,053 4,798,353 5,384,031
------------ ------------ ------------ ------------
Gross profit on sales 7,705,801 5,352,051 3,085,322 3,352,090
------------ ------------ ------------ ------------
Operating expenses:
Administrative 2,899,640 2,054,780 1,196,072 900,385
Selling 3,770,462 2,387,027 1,332,154 1,363,865
Advertising and marketing 2,356,255 592,309 340,530 468,344
Plant shutdown expense 850,000 -- -- --
------------ ------------ ------------ ------------
Total operating expenses 9,876,357 5,034,116 2,868,756 2,732,594
------------ ------------ ------------ ------------
Income (loss) from operations (2,170,556) 317,935 216,566 619,496
------------ ------------ ------------ ------------
Other income (expense):
Interest expense (799,839) (553,027) (317,185) (303,942)
Other 125,516 57,986 32,081 75,137
Loss on disposition of latex equipment (822,439) -- -- --
------------ ------------ ------------ ------------
Total other expense (1,496,762) (495,041) (285,104) (228,805)
------------ ------------ ------------ ------------
Income (loss) before income taxes (3,667,318) (177,106) (68,538) 390,691
Income tax expense (benefit) (774,143) 5,934 -- --
------------ ------------ ------------ ------------
Net income (loss) (2,893,175) (183,040) (68,538) 390,691
Dividends applicable to convertible
preferred stock -- (74,211) (10,294) (65,000)
------------ ------------ ------------ ------------
Income(loss)applicable to common shares $ (2,893,175) $ (257,251) $ (78,832) $ 325,691
============ ============ ============ ============
Net Income (loss) per common and common
equivalent shares $ (2.14) $ (0.20) $ (0.06) $ 0.26
============ ============ ============ ============
Weighted average number of common and
common equivalent shares outstanding 1,353,384 1,290,267 1,324,080 1,254,124
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CTI Industries Corporation and Subsidiary
Consolidated Statements of Stockholders' Equity
for the years ended October 31, 1995 and 1996
<TABLE>
<CAPTION>
Less
---------------------------------------
Common Stock Preferred Stock Retained Treasury Stock Redeemable Stock
----------------- Paid-In ----------------- --------------- Common Subscription
Shares Amount Capital Shares Amount Earnings Shares Amount Stock Receivable Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
October 31, 1994 1,131,507 $73,548 $230,348 $3,287,620 41,818 $170,700 $126,450 $ 3,294,366
Net loss (2,893,175) (2,893,175)
--------- ------ -------- --------- ------- -------- -------- --------
Balance,
October 31, 1995 1,131,507 73,548 230,348 394,445 41,818 170,700 126,450 401,191
Payment on stock
subscription
receivable (119,250) 119,250
Preferred stock
subscription
receivable 160,000 (160,000)
Issuance of
preferred stock 1,098,901 $1,000,000 1,000,000
Accumulated
preferred stock
dividends 27,625 27,625
Redeemable
common stock $450,000 (450,000)
Acquisition of
treasury stock 102,564 200,000 (200,000)
Net loss (183,040) (183,040)
Preferred
dividends (74,211) (74,211)
--------- ------ -------- --------- ---------- --------- ------- -------- -------- -------- --------
Balance,
October 31, 1996 1,131,507 73,548 $230,348 1,098,901 $1,027,625 $ 137,194 144,382 $370,700 $450,000 $167,200 $480,815
========= ====== ======== ========= ========== ========= ======= ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CTI Industries Corporation and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended Six Months Ended
------------------------- --------------------------
October 31, April 30,
1995 1996 1996 1997
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(2,893,175) $ (183,040) $ (68,538) $ 390,691
Adjustments to reconcile net loss to cash provided
by (used in) operating activities:
Depreciation and amortization 755,638 371,893 274,332 230,702
Gain on sale of property and equipment (8,500) (20,712) (20,437) (42,942)
Loss on disposition of latex equipment 822,439 -- -- --
Provision for losses on accounts receivable
and inventory 150,000 255,738 84,262 72,600
Deferred income taxes (211,300) -- -- --
Change in assets and liabilities:
Accounts receivable 1,136,740 1,006,439 546,945 (1,022,464)
Inventories 902,389 486,483 1,195,556 (183,547)
Other assets 361,195 (12,526) 41,442 (87,364)
Accounts payable and accrued expenses (474,072) (1,064,584) (777,867) (268,704)
----------- ---------- ----------- -----------
Net cash provided by (used in)
operating activities 541,354 839,691 1,275,695 (911,028)
----------- ---------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of property and equipment 8,500 45,415 21,452 2,942
Purchases of property and equipment (478,637) (495,880) (256,990) (343,193)
Cash surrender value - officers' life insurance -- 10,700 -- --
Investment in joint venture -- -- -- (34,575)
----------- ---------- ----------- -----------
Net cash used in investing activities (470,137) (439,765) (235,538) (374,826)
----------- ---------- ----------- -----------
Cash flows from financing activities:
Stock redemption contract payments -- (52,092) -- (32,807)
Advances on line of credit 3,232,942 3,270,970 702,239 1,367,205
Repayments on line of credit (3,731,857) (4,843,239) (1,915,187) (483,338)
Proceeds from issuance of long-term debt 1,910,273 3,300,000 -- 18,000
Repayment of long-term debt (1,535,236) 2,694,358) (384,118) (200,874)
Proceeds from debt issued to related parties -- -- -- 375,600
Proceeds from issuance of preferred stock -- 840,000 840,000 160,000
Payment of debt issue costs -- (110,400) -- --
Dividends paid -- (46,586) -- (48,750)
----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities (123,878) (335,705) (757,066) 1,155,036
----------- ----------- ----------- -----------
Net increase (decrease) in cash (52,661) 64,221 283,091 (130,818)
Cash at beginning of period 119,258 66,597 66,597 130,818
----------- ----------- ----------- -----------
Cash at end of period $ 66,597 $ 130,818 $ 349,688 $ --
=========== =========== =========== ===========
Supplemental disclosures:
Cash paid for interest $ 777,227 $ 617,952 $ 374,926 $ 328,319
Cash paid for income taxes 5,776
Non-cash financing activities:
Purchase of treasury stock through issuance of
stock redemption contract payable $ 200,000
Assets exchanged for settlement of debt $ 40,000
Common stock warrants exercised in exchange
for contractual services received 19,500
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements
(Information presented for the six month periods ended April 30, 1996 and 1997
is unaudited)
1. Nature of Operations
CTI Industries Corporation (the "Company") and its United Kingdom subsidiary
(CTI Balloons, Ltd.) design, manufacture and distribute balloon products
throughout the world. The Company also operates systems for the production,
lamination and printing of films used for food packaging and other
commercial uses.
Basis of Presentation
The accompanying interim financial statements as of April 30, 1997 and for
the six months ended April 30, 1997 and 1996 and the related disclosures
have not been audited by independent accountants. However, they have been
prepared in conformity with the accounting principles stated in the audited
financial statements for the two years in the period ended October 31, 1996
and include all adjustments, which were of a normal and recurring nature,
which in the opinion of management are necessary to present fairly the
financial position of the Company and results of operations and cash flows
for the periods presented. The operating results for the interim periods are
not necessarily indicative of results expected for the full year.
2. Summary of Significant Accounting Policies
Principle of Consolidation
The consolidated financial statements include the accounts of CTI Industries
Corporation and its subsidiary. All significant intercompany accounts and
transactions have been eliminated.
Foreign Currency Translation
The financial statements of foreign operations are translated into U.S.
dollars in accordance with Statement of Financial Accounting Standards
(SFAS) No. 52. Accordingly, all assets and liabilities are translated at
current rates of exchange, and operating transactions are translated at
weighted average rates during the year. The translation gains and losses, to
the extent material, are accumulated as a component of stockholders' equity.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using standard costs which approximates costing determined on a first-in,
first-out basis.
F-6
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
(Information presented for the six month periods ended April 30, 1996 and 1997
is unaudited)
2. Summary of Significant Accounting Policies, continued
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line and declining-balance methods over estimated useful lives of
the related assets. The estimated useful lives range as follows:
Building 25 years
Machinery and equipment 3-15 years
Office furniture and equipment 5-8 years
Leasehold improvements 5-8 years
Depreciation expense was $755,636 and $367,717 for the years ended October
31, 1995 and 1996, respectively. Effective November 1, 1995, management
determined that the useful life of certain equipment was longer than
originally estimated. A change in accounting estimate was recognized to
reflect this decision, resulting in a reduction in depreciation expense of
$196,318 in 1996.
Plant Shutdown Expenses
During the fiscal year ended October 31, 1995, the Company ceased latex
manufacturing operations at its Cary, Illinois facility. Shutdown expenses
totaling $850,000 were provided for in 1995. The Company also recorded a
loss on the disposition of latex manufacturing equipment of $822,439.
Deferred Financing Costs
Deferred financing costs consist of unamortized financing costs incurred in
connection with the refinancing of long-term debt during fiscal 1996. These
costs are being amortized on a straight-line basis over the term of the
loans. Amortization expense was $4,176 for the year ended October 31, 1996.
Income Taxes
The provision for income taxes and corresponding balance sheet accounts are
determined in accordance with SFAS No. 109, "Accounting for Income Taxes"
("SFAS 109"). Under SFAS 109, deferred tax assets and liabilities are
determined based on temporary differences between the basis of certain
assets and liabilities for income tax and financial reporting purposes, if
any. The deferred tax assets and liabilities are classified according to the
financial statement classification of the assets and liabilities generating
the differences. Income tax expense (benefit) is comprised of the current
tax payable for the period and the change during the period in the deferred
tax assets and liabilities. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be
realized.
F-7
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
(Information presented for the six month periods ended April 30, 1996 and 1997
is unaudited)
2. Summary of Significant Accounting Policies, continued
Revenue Recognition
The Company recognizes revenue using the accrual method of accounting when
title transfers upon shipment.
Concentration of Credit Risk
Concentration of credit risk with respect to trade accounts receivable is
generally diversified due to the number of entities comprising the Company's
customer base. The Company performs ongoing credit evaluations and provides
an allowance for potential credit losses against the portion of accounts
receivable which is estimated to be uncollectible. Such losses have
historically been within management's expectations.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Unaudited Pro Forma Stockholders' Equity
The pro forma stockholders' equity as reflected on the consolidated balance
sheet at April 30, 1997 presents estimated effects of the anticipated
conversion of all outstanding shares of Preferred Stock into shares of Class
B Common Stock on a one-to-one ratio in conjunction with an initial public
offering (Note 15).
Fair Value of Financial Instruments
The Company utilizes a line of credit to finance short-term obligations.
Management believes that this instrument bears interest at a rate which
approximates prevailing market rates for instruments with similar
characteristics, and accordingly, that the carrying value for this
instrument is a reasonable estimate of fair value.
F-8
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
(Information presented for the six month periods ended April 30, 1996 and 1997
is unaudited)
2. Summary of Significant Accounting Policies, continued
Accounting for Stock Options
The Company intends to apply the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", for its employee
stock-based compensation programs. Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation"
encourages, but does not require, companies to recognize compensation
expense for grants of stock, stock options and other equity instruments to
employees based on new fair value accounting rules. Although expense
recognition for employee stock based compensation is not mandatory, SFAS No.
123 requires companies that choose not to adopt the new fair value
accounting to disclose pro-forma net income and earnings per share under the
new method.
Computation of Income (Loss) Per Share
The computation of income (loss) per share as reflected on the consolidated
statement of operations is based on the weighted average number of common
and common equivalent shares outstanding during the period. Common stock
equivalents consist of outstanding stock options, which pursuant to Staff
Accounting Bulletin No. 83 of the Securities and Exchange Commission, are
included in the weighted average shares as if they were outstanding for the
entire period to the extent granted within the twelve months preceding the
contemplated public offering date, using the treasury stock method until
such time as shares are issued.
Information regarding income (loss) per share has been computed on a
historical basis under the provisions of Accounting Principles Board Opinion
No. 15.
Years ended October 31,
----------------------------
1995 1996
Net loss per share $ (2.66) $ (0.25)
========== ==========
Weighted average shares outstanding 1,089,699 1,026,572
========== ==========
Six months ended April 30,
----------------------------
1996 1997
Primary earnings per share:
Net income (loss) per share $ (0.07) $ 0.26
========== ==========
Weighted average common and common
equivalent shares outstanding 1,060,385 1,254,124
========== ==========
Fully diluted earnings per share:
Net income per share $ 0.17
==========
Weighted average common and common
equivalent shares outstanding 2,265,612
==========
F-9
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
(Information presented for the six month periods ended April 30, 1996 and 1997
is unaudited)
2. Summary of Significant Accounting Policies, continued
Computation of Loss Per Share, continued
For the six month period ended April 30,1996, fully diluted earnings per
share has not been presented as the result would be anti-dilutive to the net
loss per share.
Reverse Stock Split
Effective July 22, 1997, the Company approved a reverse stock split of 1
share for every 2.6 shares of common stock outstanding. All share
information retroactively reflects the effect of this split.
3. Inventory
Inventory is comprised of the following:
October 31, April 30,
1996 1997
(unaudited)
Raw materials $ 278,976 $ 291,648
Work in process 510,098 493,748
Finished goods 3,793,519 3,916,244
----------- -----------
Total inventory $ 4,582,593 $ 4,701,640
============ ===========
4. Line of Credit
The Company has a bank line of credit, due July 1, 1998, which provides for
a maximum borrowing limit of $3,000,000 of which $941,184 and $57,317 was
available at October 31, 1996 and April 30, 1997, respectively. Advances
under the line of credit are subject to a borrowing base, as defined in the
line of credit agreement. Interest is payable monthly at prime plus 1%
(prime was 8.25% and 8.5% at October 31, 1996 and April 30, 1997,
respectively). The line of credit is collateralized by all assets of the
Company. The line of credit agreement contains, among other provisions,
certain covenants relating to the maintenance of tangible net worth.
F-10
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
(Information presented for the six month periods ended April 30, 1996 and 1997
is unaudited)
5. Stock Redemption
In March 1996, the Company entered into a Stock Redemption Agreement with a
shareholder which was subsequently amended June 27, 1997. Under the amended
Stock Redemption Agreement the Company has the right but not the obligation
to redeem up to 333,333 shares of Common Stock owned by the shareholder at
the price of $1.95 per share at any time through January 31, 1998.
Commencing March 1, 1998 through February 28, 2000, the Company is obligated
to pay to the shareholder, for the redemption of shares at $1.95 per share
(i) an amount equal to 2% of the Company's pretax profits each fiscal
quarter (beginning with the quarter ended February 28, 1998) and (ii) an
amount equal to 2% (but not to exceed $3,000) of the amount the latex and
mylar balloon revenues exceed $1.3 million in any month. The Company also
has the right to redeem additional shares of Common Stock from the
shareholder during this period at $1.95 per share, provided total number of
shares subject to redemption under the Stock Redemption Agreement does not
exceed 333,333. As of the date of this report, 102,564 shares of Common
Stock have been redeemed under the Stock Redemption Agreement.
6. Notes Payable
Long-term debt at October 31, 1996 consists of:
First Term Loan, payable in monthly installments
of $18,333 including interest at prime
plus 1% due September 1, 2001.
Collateralized by all assets of the Company. $ 1,063,333
Second Term Loan, payable in monthly installments
of $19,617 with interest at 8.75% due at
various times through September 1, 2001.
Collateralized by all assets of the Company. 2,190,663
Installment Loan, payable in monthly installments
of $9,583 plus interest at 10.5% due May 1, 1998.
Collateralized by equipment purchased. 172,495
Installment Loans, payable in monthly installments
of $2,067 including interest at 8.25% and 8.5%
due at various times through May 18, 1998.
Collateralized by vehicles purchased. 33,230
------------
Total 3,459,721
Less current portion 402,798
------------
Total long-term debt $ 3,056,923
============
F-11
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
(Information presented for the six month periods ended April 30, 1996 and 1997
is unaudited)
6. Notes Payable, continued
Future minimum principal payments for amounts outstanding under long-term
debt agreements are as follows for the years ended October 31:
1997 $ 402,798
1998 331,840
1999 270,708
2000 275,392
2001 2,178,983
-----------
$ 3,459,721
===========
The loan agreements contain, among other provisions, certain covenants
relating to the maintenance of tangible net worth.
7. Convertible Preferred Stock
The Company restated its certificate of incorporation to provide for two
classes of capital stock, Common and Preferred.
The total number of shares of Preferred Stock authorized is 2,000,000, with
a par value of ninety-one cents ($.91) per share. The preferred shares are
entitled to preferential cumulative dividends at the rate of 13% per annum
of the par value, payable only when, as, and if declared by the Board of
Directors. As long as the Preferred Stock is outstanding, there shall be no
dividends declared or paid on any shares of Common Stock. Preferred shares
may be converted by the holder into common shares at any time (See Note 15).
F-12
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
(Information presented for the six month periods ended April 30, 1996 and 1997
is unaudited)
8. Income Taxes
The income tax provisions (benefits) as of October 31, are comprised of the
following:
1995 1996
Current:
Federal $(427,843) $ (34)
State (135,000) 192
Foreign -- 5,776
--------- ---------
(562,843) 5,934
--------- ---------
Deferred:
Federal (172,291) --
State (39,009) --
--------- ---------
(211,300) --
--------- ---------
Total income tax
provision (benefit) $(774,143) $ 5,934
========= =========
The components of the net deferred tax asset (liability) are as follows:
<TABLE>
<CAPTION>
October 31, April 30,
1996 1997
(unaudited)
Deferred tax assets:
<S> <C> <C>
Accounts receivable allowance $ 43,331 $ 44,970
Inventory valuation 54,826 80,243
Accrued liabilities 220,964 301,084
Net operating loss carryforwards 452,178 232,740
Alternative minimum tax credit carry forwards 291,759 291,759
---------- ----------
Total deferred tax assets 1,063,058 950,796
---------- ----------
Deferred tax liabilities:
Book over tax basis of capital assets 458,706 476,408
Less: Valuation allowance 604,352 474,388
---------- ----------
Net deferred tax asset (liability) $ -- $ --
========== ==========
</TABLE>
F-13
<PAGE>
CTI Industries Corporationand Subsidiary
Notes to Consolidated Financial Statements, Continued
(Information presented for the six month periods ended April 30, 1996 and 1997
is unaudited)
8. Income Taxes, continued
The valuation allowance relates principally to deferred tax assets that the
Company estimates may not be realizable, including net operating loss
carryforwards and tax credit carryforwards. At October 31, 1996 and April
30, 1997, the Company has net operating loss carryforwards for tax purposes
of approximately $1,200,000 and $600,000, respectively. These carryforwards
expire in the years 2010 and 2011. In addition, the Company has
approximately $292,000 in alternative minimum tax credits which have no
expiration date.
Income tax provisions differed from the taxes calculated at the statutory
federal tax rate as follows:
<TABLE>
<CAPTION>
Years ended Six months ended
------------------------ ------------------------
October 31, April 30,
1995 1996 1996 1997
(unaudited)
<S> <C> <C> <C> <C>
Taxes at statutory rate $(1,246,889) $ (60,216) $ (22,874) $ 108,387
State income taxes (114,846) 127 -- --
Foreign taxes paid -- 5,776 19,168 (113,302)
Increase in valuation allowance 467,707 59,164 3,706 4,915
Other 119,885 1,083 -- --
----------- ----------- ----------- -----------
Income tax provision $ (774,143) $ 5,934 $ -- $ --
=========== =========== =========== ===========
</TABLE>
9. Employee Benefit Plan
Effective January 1, 1993, the Company established a defined contribution
plan for substantially all employees. The plan provides for the Company
matching contributions for the first $300 of employee contributions and an
additional bonus match of 1% of compensation for all participants who are
employees on the last day of the plan year. Profit sharing contributions may
also be made at the discretion of the Board of Directors. Employer
contributions to the plan totaled $86,595 and $52,369 for the years ended
October 31, 1995 and 1996, respectively.
F-14
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
(Information presented for the six month periods April 30, 1996 and 1997 is
unaudited)
1O. Related Party Transactions
The Company obtains legal services from a law firm in which several
shareholders of the law firm are also shareholders of the Company, and in
which one shareholder of the law firm is both a director and a shareholder
of the Company. Legal fees incurred with this firm were $95,217 and $123,872
for the years ended October 31, 1995 and 1996 and $72,624 and $62,814 for
the six months ended April 30, 1996 and 1997.
The Company purchases packaging materials from entities in which
shareholders of the Company maintain an ownership interest. Purchases from
these affiliates were $1,106,649 and $145,267 for the periods ended October
31, 1996 and April 30, 1997, respectively.
11. Joint Venture
Effective September 16, 1996, the Company entered into a joint venture
agreement with a manufacturer in Mexico. The joint venture will engage in
the production and packaging of balloons. Under the agreement, both entities
will hold a 50% interest in the joint venture. As of October 31, 1996, the
joint venture has not commenced operations and the Company has made no
capital investment in the joint venture.
12. Commitments and Contingencies
Operating Leases
The Company leases certain production facilities under a noncancelable lease
with monthly payments of $21,432 expiring December 31, 1999. The Company
subleases approximately 70% of this facility through August, 1998. The
Company's United Kingdom subsidiary also maintains a lease for office and
warehouse space which expires in 2019.
The Company leases a computer system, software, office equipment and
automobiles on operating leases which expire on various dates between May
1997 and May 1999.
The net rent expense of all leases was $502,603 in 1995 and $528,654 in 1996
The future aggregate minimum net lease payments under existing agreements
as of October 31, are as follows:
Lease Sublease
Payments Income Net
1997 $ 556,420 $ 155,726 $ 400,694
1998 334,366 139,280 195,O86
1999 326,587 326,587
2000 99,564 99,564
Thereafter 1,026,000 1,026,000
F-15
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
(Information presented for the six month periods ended April 30, 1996 and 1997
is unaudited)
12. Commitments and Contingencies, continued
Litigation
The Company is a defendant in business-related litigation. Management does
not believe the outcome of such litigation will have a material adverse
effect on the Company's financial position and results of operations.
Licenses
The Company has certain merchandising license agreements that require
royalty payments based upon the Company's net sales of the respective
products. The agreements call for guaranteed minimum commitments that are
determined on a calendar year basis. Future guaranteed commitments due, as
computed on a pro rata basis, as of October 31, are as follows:
1997 $ 270,792
1998 142,594
1999 21,042
13. Future Adoption of Recently Issued Accounting Standards
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share", SFAS
No. 129, "Disclosure of Information about Capital Structure," SFAS No. 130,
"Reporting Comprehensive Income Summary," and SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information".
SFAS No. 128 establishes standards for the computation, presentation, and
disclosure requirements for earnings per share. SFAS No. 129 consolidates
the existing requirements relating to the disclosure of certain information
about an entity's capital structure. SFAS No. 130 establishes standards for
reporting comprehensive income to present a measure of all changes in equity
that result from renegotiated transactions and other economic events of the
period other than transactions with owners in their capacity as owners.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from nonowner sources and includes net income. SFAS No. 131
specifies revised guidelines for determining an entity's operating segments
and the type and level of financial information to be disclosed. This
standard requires that management identify operating segments based on the
way that management disaggregates the entity for making internal operating
decisions.
All of the aforementioned statements are effective for fiscal years
beginning after December 15, 1997. Management has not determined what impact
these standards, when adopted, will have on the Company's financial
statements.
F-16
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
(Information presented for the six month periods ended April 30, 1996 and 1997
is unaudited)
14. Geographic Segment Data (Unaudited)
The Company's operations consist of a single business segment which designs,
manufactures, and distributes balloon products. Transfers between geographic
areas were primarily at cost. The Company's subsidiary has assets consisting
primarily of trade accounts receivable and inventory. Sales and selected
financial information by geographic area for the years ended October 31,
1995 and 1996 are as follows:
<TABLE>
<CAPTION>
United
1995 United States Kingdom Eliminations Consolidated
<S> <C> <C> <C> <C>
Revenues $ 21,807,836 $ 1,544,384 $ (568,440) $ 22,783,780
Operating income (loss) (2,172,089) 1,533 -- (2,170,556)
Net income (loss) (2,894,708) 1,533 -- (2,893,175)
Total assets 10,997,898 767,766 -- 11,765,664
1996
Revenues $ 13,055,900 $ 1,408,683 $ (554,479) $ 13,910,104
Operating income 289,521 28,414 -- 317,935
Net income (loss) (208,784) 25,744 -- (183,040)
Total assets 9,613,062 672,473 -- 10,285,535
</TABLE>
15. Subsequent Events
Recapitalization
In July 1997, the Company authorized a Recapitalization (the
"Recapitalization") without a formal reorganization. As part of the
Recapitalization, the Board of Directors approved the creation of Class B
Common Stock and negotiated a conversion of all then outstanding shares of
the Company's Convertible Preferred Stock into an aggregate of 1,098,901
shares of Class B Common Stock effective with the proposed initial public
offering. The shares of the Class B Common Stock contain rights identical to
shares of Common Stock, except that shares of Class B Common Stock, voting
separately as a class, have the right to elect four of the Company's seven
directors. Shares of the Common Stock and Class B Common Stock, voting
together as a class, vote on all other matters, including the election of
the remaining directors. The Board of Directors also approved a 1 for 2.6
reverse stock split on both the Common Stock and Class B Common Stock. The
Recapitalization and related transactions were approved by written consent
of the shareholders.
F- 17
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
(Information presented for the six month periods ended April 30, 1996 and 1997
is unaudited)
15. Subsequent Events, continued
Stock Option Plan
Under the Company's 1997 Stock Option Plan (effective July 1, 1997), a total
of 300,000 shares of Common Stock are reserved for issuance under the Stock
Option Plan. None of the options have been granted. The Plan provides for
the award of options, which may either be incentive stock options ("ISOs")
within the meaning of Section 422A of the Internal Revenue Code of 1986, as
amended (the "Code") or non-qualified options ("NQOs") which are not subject
to special tax treatment under the Code. The Plan is administered by the
Board or a committee appointed by the Board (the "Administrator"). Officers,
directors, and employees of, and consultants to, the Company or any parent
or subsidiary corporation selected by the Administrator are eligible to
receive options under the Plan. Subject to certain restrictions, the
Administrator is authorized to designate the number of shares to be covered
by each award, the terms of the award, the date on which and the rates at
which options or other awards may be exercised, the method of payment and
other terms.
The exercise price for ISOs cannot be less than the fair market value of the
stock subject to the option on the grant date (110% of such fair market
value in the case of ISOs granted to a stockholder who owns more than 10% of
the Company's Common Stock). The exercise price of a NQO shall be fixed by
the Administrator at whatever price the Administrator may determine in good
faith. Unless the Administrator determines otherwise, options generally have
a 10-year term (or five years in the case of ISOs granted to a participant
owning more than 10% of the total voting power of the Company's capital
stock). Unless the Administrator provides otherwise, options terminate upon
the termination of a participant's employment, except that the participant
may exercise an option to the extent it was exercisable on the date of
termination for a period of time after termination.
Private Placement
In June 1997, the Company issued notes in the principal amount of $865,000,
together with warrants to purchase 277,244 shares of the Company's Common
Stock at $3.12 per share. A substantial portion of these notes and warrants
were purchased by an investor group comprised principally of members of
Company management.
F-18
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
(Information presented for the six month periods ended April 30, 1996 and 1997
is unaudited)
15. Subsequent Events, continued
Public Offering of Common Stock and Warrants
The Company's Board of Directors (the "Board") authorized the filing of a
registration statement on Form SB-2 with the Securities and Exchange
Commission relating to an initial public offering ("IPO") by the Company of
1,333,333 units, each unit consisting of one share of common stock and one
redeemable warrant to purchase one share of common stock. The offering also
includes up to an additional 199,999 units to cover over allotments, if any.
In connection with the offering, the Company has agreed to sell to the
underwriter, for nominal consideration, underwriter's warrants to purchase
an additional 133,333 units.
F-19
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
The Company's Certificate of Incorporation eliminates the
personal liability of directors to the Company or its stockholders for monetary
damages for breach of fiduciary duty to the extent permitted by Delaware law.
The Company's Certificate of Incorporation and By-Laws provide that the Company
shall indemnify its officers and directors to the extent permitted by Subsection
145 of the General Corporation Law of the State of Delaware, which authorizes a
corporation to indemnify directors, officers, employees or agents of the
Corporation in non-derivative suits if such party acted in good faith and in a
manner such party reasonably believed to be in or not opposed to the best
interest of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection 145 further provides that indemnification shall be provided if the
party in question is successful on the merits or otherwise.
Reference is hereby made to the caption "Management -
Limitation of Liability and Indemnification" in the Prospectus which is a part
of this Registration Statement for a description of indemnification arrangements
between the Company and its directors.
The form of Underwriting Agreement, included as Exhibit 1.1,
provides for indemnification of the Company and certain controlling persons
under certain circumstances, including liabilities under the Securities Act of
1933, as amended ("Securities Act"). Insofar as indemnification for liabilities
under the Securities Act may be permitted to directors, officers or persons
controlling the Company pursuant to the foregoing provisions of the Underwriting
Agreement, the Company has been informed that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and therefore is unenforceable.
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses of the distribution other than compensation paid
to the Underwriter, all of which are to be borne by the Company, are as follows:
SEC Registration Fee........................... $ 5,700.00
NASD Fee....................................... 2,500.00
NASDAQ Fees.................................... 10,000.00
*Blue Sky Fees and Expenses..................... 45,000.00
*Transfer Agent Fees............................ 10,000.00
*Accounting Fees and Expenses................... 125,000.00
*Legal Fees and Expenses ....................... 125,000.00
*Printing and Engraving Expenses................ 100,000.00
*Miscellaneous Fees and Expenses................ 26,800.00
------------
Total....................................... $ 450,000.00
============
* All amounts are estimates.
II-1
<PAGE>
Item 26. Recent Sales of Unregistered Securities.
In March and May of 1996, a group of investors made an equity
investment of $1,000,000 in the Company in return for 1,098,901 shares of
Preferred Stock, $.91 par value. CTI Investors, L.L.C., an Illinois limited
liability company, invested $900,000 in the shares of Preferred Stock. Members
of CTI Investors, L.L.C. include Howard W. Schwan, John H. Schwan and Stephen M.
Merrick, members of management, and one other accredited investor. One other
accredited investor invested the remaining $100,000. The sale was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act") as a transaction not involving a public offering. Upon the
closing of the Offering, the shares of Preferred Stock will be converted into
shares of Class B Common Stock.
In December, 1996, Howard W. Schwan, John H. Schwan and Stephen M.
Merrick, members of management, were each issued warrants to purchase 76,923
shares of the Company's Common Stock at an exercise price of $.91 per share in
consideration of their facilitating and guaranteeing a bank loan to the Company
in the amount of $6.3 million. The issuance was exempt from regulation under
Section 4(2) of the Securities Act as a transaction not involving a public
offering.
In June, 1997, the Company issued in a private placement notes in the
principal amount of $865,000, together with warrants to purchase up to 277,244
shares of the Company's Common Stock at an exercise price of $3.12 per share.
Howard W. Schwan, John H. Schwan, Stephen M. Merrick and John C. Davis, members
of management, and one other accredited investor participated in the sale. The
offering was exempt from registration under Section 4(2) of the Securities Act
as a transaction not involving a public offering.
Item 27. Exhibits.
1.1 Form of Underwriting Agreement
3.1 Second Restated Certificate of Incorporation of CTI Industries
Corporation
3.2 By-laws of CTI Industries Corporation
*4.1 Form of Certificate for Common Stock of CTI Industries Corporation
4.2 Form of Underwriter's Warrant Agreement
4.3 Form of Warrant Agreement and Warrant
5.1 Opinion, with Consent, of Fishman Merrick Miller Genelly Springer
Klimek & Anderson, P.C.
10.1 CTI Industries Corporation Stock Option Plan
10.2 Employment Agreement dated April 29, 1996 between CTI Industries
Corporation and John C. Davis
10.3 Stock Redemption Agreement dated March 1, 1996 between CTI Industries
Corporation and John C. Davis
10.4 Agreement dated June 27, 1997 between CTI Industries Corporation and
John C. Davis
*10.5 Third Amendment to Lease Agreement dated August 15, 1994, for premises
located at 675 Industrial Drive, Cary, Illinois
10.6 Form of Warrant dated December 3, 1996 to purchase shares of Common
Stock
10.7 Form of Subscription Agreement dated March, 1996, for purchase of
Preferred Stock
10.8 Form of Subscription Agreement dated June 20, 1997 for promissory notes
and warrants to purchase shares of Common Stock
10.9 Employment Agreement dated June 30, 1997, between CTI Industries
Corporation and Howard W. Schwan
II-2
<PAGE>
10.10 Joint Venture Agreement dated September 16, 1996, between CTI
Industries Corporation and Pulidos & Terminados Finos S.A. de C.V.
10.11 Agreement for purchase of assets dated September 8, 1995, between CTI
Industries Corporation and Pulidos & Terminados Finos S.A. de C.V.
10.12 Amendment dated May 24, 1996, to Agreement for purchase of assets
between CTI Industries Corporation and Pulidos & Terminados Finos S.A.
de C.V.
10.13 Agreement dated July 14, 1997 between CTI Industries Corporation
and Pulidos & Terminados Finos S.A. de C.V.
10.14 Consulting Agreement dated March, 1996 between CTI Industries
Corporation and Michael R. Miller
10.15 Loan and Security Agreement dated August 22, 1996 between the Company
and First American Bank
10.16 Third Amendment to Loan and Security Agreement dated July 1, 1997,
among CTI Industries Corporation, First American Bank, Stephen M.
Merrick, John H. Schwan and Howard W. Schwan
10.17 First Term Note in the sum of $1,100,000 dated August 22, 1996 made by
CTI Industries Corporation to First American Bank.
10.18 Second Term Note in the sum of $2,200,000 dated August 22, 1996 made by
CTI Industries Corporation to First American Bank.
10.19 Revolving Note in the sum of $3,000,000 dated August 22, 1996 made by
the Company to First American Bank.
10.20 Mortgage dated August 22, 1996 for benefit of First American Bank.
10.21 Guaranty dated July 1, 1997, by Stephen M. Merrick, Howard W. Schwan
and John H. Schwan for benefit of First American Bank.
10.22 Third Term Note in the sum of $275,000 dated July 1, 1997 made by CTI
Industries Corporation to First American Bank.
10.23 Fourth Term Note in the sum of $200,000 dated July 1, 1997, made by CTI
Industries Corporation to First American Bank.
10.24 First Amendment to Revolving Note dated July 1, 1997 made by CTI
Industries Corporation to First American Bank.
10.25 Form of Financial Advisory and Consulting Agreement.
11.1 Computation of Earnings Per Share - Annual.
11.2 Computation of Earnings Per Share - Six Months.
*15.1 Letter from Detterbeck & Associates, Ltd.
*15.2 Letter from Jacobson, Scott, Gordon & Horewitch
21 Subsidiaries (incorporate description in Prospectus under "The
Company")
23.1 Consent of Coopers and Lybrand L.L.P.
23.2 Consent of Fishman Merrick Miller Genelly Springer Klimek & Anderson,
P.C. (included in Exhibit 5.1)
24 Power of Attorney (included in signature page)
27 Financial Data Schedule
- ----------------------------------
* To be filed supplementally.
II-3
<PAGE>
Item 28. Undertakings.
1. The Registrant hereby undertakes:
(1) That for purposes of determining any liability under the
Securities Act, treat the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant under Rule 424(b)(1)
or (4) or 497(h) under the Securities Act as part of this Registration
Statement as of the time the Commission declared it effective.
(2) That for the purpose of determining any liability under the
Securities Act, treat each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities offered in the
Registration Statement, and that offering of the securities at that time as
the initial bona fide offering of those securities.
(3) To file, during any period in which it offers or sells
securities, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereto) that, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of Prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in the volume and price represent no more than a 20% change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement;
(iii) to include any additional or changed material
information on the plan of distribution.
(4) To remove from registration by means of a post-effective
amendment any of the securities being registered that remain unsold at the
termination of the offering.
(5) To provide to the Underwriter at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriter to permit prompt delivery to each
purchaser.
2. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling
II-4
<PAGE>
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The Registrant has agreed to indemnify the Underwriter and its
officers, directors, partners, employees, agents and controlling persons as to
any losses, claims, damages, expenses or liabilities arising out of any untrue
statement or omission of a material fact contained in the Registration
Statement. The Underwriter has agreed to indemnify the Registrant and its
directors, officers and controlling persons as to any losses, claims, damages,
expenses or liabilities arising out of any untrue statement or omission in the
Registration Statement based on information relating to the Underwriter
furnished by it for use in connection with the Registration Statement.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Village of Barrington, State of Illinois, on the 24th day of
July, 1997.
CTI INDUSTRIES CORPORATION
By: /s/ Howard W. Schwan
---------------------------
Howard W. Schwan, President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints John H. Schwan and Stephen M. Merrick,
separately, as his true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitition, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments, including post-effective
amendments and related registration statements, to this Registration Statement,
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, full power and authority to do separately and
perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or their
substitute or substitutes may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signatures Title Date
-------------- ------------ --------
/s/ Howard W. Schwan President and Director July 24, 1997
- -------------------------
Howard W. Schwan
/s/ John H. Schwan Chairman and Director July 24, 1997
- -------------------------
John H. Schwan
/s/ Stephen M. Merrick Chief Executive Officer, July 24, 1997
- ------------------------- Secretary, Chief Financial
Stephen M. Merrick Officer and Director
/s/ John C. Davis Vice President and Director July 24, 1997
- -------------------------
John C. Davis
/s/ Sharon Konny Manager of Finance and July 24, 1997
- ------------------------- Administration
Sharon Konny
/s/ Stanley M. Brown Director July 24, 1997
- -------------------------
Stanley M. Brown
II-6
EXHIBIT 1.1
1,333,333 Units, Each
Unit Consisting of One Share of
Common Stock and One Redeemable Warrant
CTI INDUSTRIES CORPORATION
UNDERWRITING AGREEMENT
New York, New York
____________, 1997
JOSEPH STEVENS & COMPANY, INC.
33 Maiden Lane, 8th Floor
New York, New York 10038
Ladies and Gentlemen:
CTI Industries Corporation, a Delaware corporation (the
"Company"), confirms its agreement with Joseph Stevens & Company, Inc. ("JSC")
(hereinafter referred to as "you" or the "Underwriter"), with respect to the
sale by the Company and the purchase by the Underwriter of 1,333,333 units (the
"Units"), each Unit consisting of one (1) share of common stock, ________ par
value (the "Common Stock") and one (1) redeemable warrant (the "Redeemable
Warrants"). Each Redeemable Warrant is exercisable for one share of Common
Stock. The Common Stock and Redeemable Warrants will be separately tradeable
upon issuance and are hereinafter referred to as the "Firm Units." The
Redeemable Warrants are exercisable commencing ________________, 1997 [the date
of the Prospectus] until _____________, 2002 [60 months from the date of the
Prospectus], unless previously redeemed by the Company, at an initial exercise
price equal to $__________ [150% of the initial public offering price per unit]
per share, subject to adjustment. The Redeemable Warrants may be redeemed by the
Company, in whole, and not in part, at a redemption price of five cents ($.05)
per Redeemable Warrant at any time commencing ______________, 1998 [12 months
after the date of the Prospectus] on 30 days' prior written notice provided that
the average closing bid price of the Common Stock equals or exceeds 150% of the
then exercise price per share (subject to adjustment) for any twenty (20)
trading days within a period of thirty (30) consecutive trading days ending on
the fifth (5th) trading day prior to the date of the notice of redemption and
the Company shall have obtained the prior written consent of JSC. Upon the
Underwriter's request, as provided in Section 2(b) of this Agreement, the
Company shall also issue and sell to the Underwriter up to an additional 199,999
Units for the purpose of covering over-allotments, if any. Such 199,999 Units
are hereinafter collectively referred to as the "Option Units." The Company also
proposes to issue and sell to the Underwriter or its designees warrants (the
"Underwriter's Warrants"),
<PAGE>
pursuant to the Underwriter's Warrant Agreement (the "Underwriter's Warrant
Agreement"), for the purchase of an additional 133,333 Units (the "Underwriter's
Units"). The Underwriter's Units, the shares of Common Stock and the Redeemable
Warrants underlying the Underwriter's Units and the shares of Common Stock
underlying the Redeemable Warrants underlying the Underwriter's Units are
hereinafter collectively referred to as the "Underwriter's Securities". The
shares of Common Stock issuable upon exercise of the Redeemable Warrants,
including the Redeemable Warrants underlying the Underwriter's Units, are
hereinafter referred to as the "Warrant Shares." The Firm Units, the Option
Units, the Underwriter's Warrants, the Underwriter's Units and the Warrant
Shares are hereinafter collectively referred to as the "Securities" and are more
fully described in the Registration Statement and the Prospectus referred to
below.
1. Representations and Warranties of the Company. The Company
represents and warrants to, and covenants and agrees with, the Underwriter as of
the date hereof, and as of the Closing Date (hereinafter defined) and the Option
Closing Date (hereinafter defined), if any, as follows:
(a) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement, and amendments
thereto, on Form SB-2 (Registration No. 333-____), including any related
preliminary prospectus or prospectuses (each a "Preliminary Prospectus"), for
the registration of the Securities, under the Securities Act of 1933, as amended
(the "Act"), which registration statement and amendment or amendments have been
prepared by the Company in conformity with the requirements of the Act, and the
rules and regulations of the Commission under the Act. The Company will not file
any other amendment to such registration statement which the Underwriter shall
have objected to in writing after having been furnished with a copy thereof.
Except as the context may otherwise require, such registration statement, as
amended, on file with the Commission at the time it becomes effective (including
the prospectus, financial statements, schedules, exhibits and all other
documents filed as a part thereof or incorporated therein (including, but not
limited to, those documents or that information incorporated by reference
therein) and all information deemed to be a part thereof as of such time
pursuant to paragraph (b) of Rule 430A of the rules and regulations under the
Act), is hereinafter called the "Registration Statement," and the form of
prospectus in the form first filed with the Commission pursuant to Rule 424(b)
of the rules and regulations under the Act is hereinafter called the
"Prospectus." For purposes hereof, "Rules and Regulations" mean the rules and
regulations adopted by the Commission under either the Act or the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as applicable.
(b) Neither the Commission nor any state regulatory authority
has issued any order preventing or suspending the use of any Preliminary
Prospectus, the Registration Statement or the Prospectus or any part of any
thereof and no proceedings for a stop order suspending the effectiveness of the
Registration Statement or any of the Company's securities have been instituted
or are pending or threatened. Each of the Preliminary Prospectus, the
Registration Statement and the Prospectus, at the respective times of filing
thereof, conformed with the requirements of the Act and the Rules and
Regulations, and none of the Preliminary Prospectus, the Registration Statement
nor the Prospectus, at the respective times of filing thereof, contained an
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances in which they
2
<PAGE>
were made, not misleading; provided, however, that this representation and
warranty does not apply to statements made or statements omitted in reliance
upon and in conformity with written information furnished to the Company with
respect to the Underwriter by or on behalf of the Underwriter expressly for use
in such Preliminary Prospectus, the Registration Statement or the Prospectus.
The Company has filed all reports, forms or other documents required to be filed
under the Act and the Exchange Act and the respective Rules and Regulations
thereunder, and all such reports, forms or other documents, when so filed or as
subsequently amended, complied in all material respects with the Act and the
Exchange Act and the respective Rules and Regulations thereunder.
(c) When the Registration Statement becomes effective and at
all times subsequent thereto up to the Closing Date and each Option Closing
Date, if any, and during such longer period as the Prospectus may be required to
be delivered in connection with sales by the Underwriter or a dealer, the
Registration Statement and the Prospectus will contain all statements which are
required to be stated therein in accordance with the Act and the Rules and
Regulations, and will conform to the requirements of the Act and the Rules and
Regulations; and, at and through such dates, neither the Registration Statement
nor the Prospectus, nor any amendment or supplement thereto, will contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances in which they were made, not misleading; provided, however,
that this representation and warranty does not apply to statements made or
statements omitted in reliance upon and in conformity with written information
furnished to the Company with respect to the Underwriter by or on behalf of the
Underwriter expressly for use in the Preliminary Prospectus, Registration
Statement or the Prospectus or any amendment thereof or supplement thereto.
(d) Each of the Company and its wholly-owned subsidiary, CTI
Balloons Ltd., a corporation under the laws of the United Kingdom
("Subsidiary"), has been duly organized and is validly existing as a corporation
in good standing under the laws of the jurisdiction of its incorporation. Each
of the Company and the Subsidiary is duly qualified and licensed and in good
standing as a foreign corporation in each jurisdiction in which its ownership or
leasing of any properties or the character of its operations require such
qualification or licensing. Except as set forth in the Prospectus, neither the
Company nor the Subsidiary owns, directly or indirectly, an interest in any
corporation, partnership, trust, joint venture or other business entity. Each of
the Company and the Subsidiary has all requisite power and authority (corporate
and other), and has obtained any and all necessary authorizations, approvals,
orders, licenses, certificates, franchises and permits of and from all
governmental or regulatory officials and bodies (including, without limitation,
those having jurisdiction over environmental or similar matters), to own or
lease its properties and conduct its business as described in the Prospectus;
each of the Company and the Subsidiary is and has been doing business in
compliance with all such authorizations, approvals, orders, licenses,
certificates, franchises and permits and with all federal, state, local and
foreign laws, rules and regulations to which it is subject; and neither the
Company nor the Subsidiary has received any notice of proceedings relating to
the revocation or modification of any such authorization, approval, order,
license, certificate, franchise or permit which, singly or in the aggregate, if
the subject of an unfavorable decision, ruling or finding, would materially and
adversely affect the condition, financial or otherwise, or the earnings,
prospects, stockholders' equity, value, operations, properties, business or
results of
3
<PAGE>
operations of the Company or the Subsidiary. The disclosure in the Registration
Statement concerning the effects of federal, state, local and foreign laws,
rules and regulations on the Company's business and the Subsidiary's business as
currently conducted and as contemplated are correct in all respects and do not
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances in which they were made,
not misleading.
(e) The Company ____________, and ____________ (collectively,
the "Recapitalization Agreement Participants") have entered into a
recapitalization agreement (the "Recapitalization Agreement") in substantially
the form filed as Exhibit ____ to the Registration Statement, which provided
for, among other things, the following:
i) The Company restated its Certificate of Incorporation to
provide for Common Stock and Class B Common Stock. The shares
of Class B Common Stock contain rights identical to shares of
Common Stock, except that shares of Class B Common Stock,
voting separately as a class, have the right to elect four of
the Company's seven directors of the Company. Shares of Common
Stock and Class B Common Stock, voting together as a class,
vote on all other matters including the election of the
remaining directors of the Company.
ii) The Company effected a 1 for 2.6 reverse stock split of
both its Common Stock and Class B Common Stock.
iii) The holders of the Company's then outstanding Convertible
Preferred Stock shall upon __________ convert all outstanding
shares of such Convertible Preferred Stock into 2,857,143
shares of Class B Common Stock.
The actions effected pursuant to the Recapitalization Agreement have been duly
and validly authorized and have been or will be, as the case may be, duly and
validly consummated by the Company and, to the best of the Company's knowledge,
by each of the Recapitalization Agreement Participants, in compliance with
applicable law, and constitute valid and binding obligations of the Company in
accordance with the terms of the Recapitalization Agreement and as a result of
such transactions, the Company shall have a duly authorized, issued and
outstanding capitalization as set forth in the Prospectus under "Capitalization"
and "Description of Capital Stock" and will have the adjusted capitalization set
forth therein on the Closing Date and the Option Closing Date, if any, based
upon the assumptions set forth therein, and neither the Company nor the
Subsidiary is a party to or bound by any instrument, agreement or other
arrangement providing for it to issue any capital stock, rights, warrants,
options or other securities, except for this Agreement, the Underwriter's
Warrant Agreement and the Warrant Agreement (as defined in Section 1(ff) hereof
of this Agreement) and as described in the Prospectus. The Securities and all
other securities issued or issuable by the Company on or prior to the Closing
Date and each Option Closing Date, if any, conform or, when issued and paid for,
will conform, in all respects to the descriptions thereof contained in the
Registration Statement and the Prospectus. All issued and outstanding securities
of the Company and the Subsidiary have been duly authorized and validly issued
and are fully paid and non-assessable; the holders thereof have no rights of
rescission with respect thereto and are not subject to personal liability by
reason of being such holders; and none of such securities were issued in
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violation of the preemptive rights of any holder of any security of the Company
or any similar contractual right granted by the Company or the Subsidiary. The
Securities to be sold by the Company hereunder and pursuant to the Underwriter's
Warrant Agreement and the Warrant Agreement are not and will not be subject to
any preemptive or other similar rights of any stockholder, have been duly
authorized and, when issued, paid for and delivered in accordance with the terms
hereof and thereof, will be validly issued, fully paid and non-assessable and
conform to the descriptions thereof contained in the Prospectus; the holders
thereof will not be subject to any liability solely as such holders; all
corporate action required to be taken for the authorization, issue and sale of
the Securities has been duly and validly taken; and the certificates
representing the Securities, when delivered by the Company, will be in due and
proper form. Upon the issuance and delivery pursuant to the terms hereof and the
Underwriter's Warrant Agreement of the Securities to be sold by the Company
hereunder and thereunder to the Underwriter, the Underwriter will acquire good
and marketable title to such Securities, free and clear of any lien, charge,
claim, encumbrance, pledge, security interest, defect or other restriction or
equity of any kind whatsoever asserted against the Company or any affiliate
(within the meaning of the Rules and Regulations) of the Company.
(f) The audited financial statements of the Company and the
Subsidiary together with the related notes thereto, included in the Registration
Statement, each Preliminary Prospectus and the Prospectus fairly present the
financial position, income, changes in stockholders' equity and the results of
operations of the Company and the Subsidiary at the respective dates and for the
respective periods to which they apply. Such financial statements have been
prepared in conformity with generally accepted accounting principles and the
Rules and Regulations, consistently applied throughout the periods involved.
There has been no adverse change or development involving a material prospective
change in the condition, financial or otherwise, or in the earnings, prospects,
stockholders' equity, value, operations, properties, business or results of
operations of the Company and the Subsidiary taken as a whole, whether or not
arising in the ordinary course of business, since the date of the financial
statements included in the Registration Statement and the Prospectus; and the
outstanding debt, the property, both tangible and intangible, and the businesses
of each of the Company and the Subsidiary conform in all respects to the
descriptions thereof contained in the Registration Statement and the Prospectus.
The financial information set forth in the Prospectus under the headings "The
Company," "Capitalization," "Financial Statements" and "Management's Discussion
and Analysis of Results of Operations and Financial Condition" fairly presents,
on the basis stated in the Prospectus, the information set forth therein and
such financial information has been derived from or compiled on a basis
consistent with that of the audited financial statements included in the
Prospectus.
(g) Each of the Company and the Subsidiary (i) has paid all
federal, state, local and foreign taxes for which it is liable, including, but
not limited to, withholding taxes and amounts payable under Chapters 21 through
24 of the Internal Revenue Code of 1986, as amended (the "Code"), and has
furnished all information returns it is required to furnish pursuant to the
Code, (ii) has established adequate reserves for such taxes which are not due
and payable, and (iii) does not have any tax deficiency or claims outstanding,
proposed or assessed against it.
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<PAGE>
(h) No transfer tax, stamp duty or other similar tax is
payable by or on behalf of the Underwriter in connection with (i) the issuance
by the Company of the Securities, (ii) the purchase by the Underwriter of the
Securities from the Company, (iii) the consummation by the Company of any of its
obligations under this Agreement or the Underwriter's Warrant Agreement, or (iv)
resales of the Securities in connection with the distribution contemplated
hereby.
(i) Each of the Company and the Subsidiary maintains insurance
policies, including, but not limited to, general liability, property, personal
and product liability insurance, and surety bonds which insure the Company and
the Subsidiary and the employees of each against such losses and risks generally
insured against by comparable businesses. Neither the Company nor the Subsidiary
(i) has failed to give notice or present any insurance claim with respect to any
insurable matter under the appropriate insurance policy or surety bond in a due
and timely manner, (ii) does have any disputes or claims against any underwriter
of such insurance policies or surety bonds, or has failed to pay any premiums
due and payable thereunder, or (iii) has failed to comply with all conditions
contained in such insurance policies and surety bonds. There are no facts or
circumstances under any such insurance policy or surety bond which would relieve
any insurer of its obligation to satisfy in full any valid claim of the Company
or the Subsidiary.
(j) There is no action, suit, proceeding, inquiry,
arbitration, investigation, litigation or governmental proceeding (including,
without limitation, those pertaining to environmental or similar matters),
domestic or foreign, pending or threatened against (or circumstances that may
give rise to the same), or involving the properties or business of, the Company
or the Subsidiary which (i) questions the validity of the capital stock of the
Company, this Agreement, the Underwriter's Warrant Agreement, the
Recapitalization Agreement, the Warrant Agreement or the Consulting Agreement
(as defined in Section 1(gg) hereof) or of any action taken or to be taken by
the Company pursuant to or in connection with this Agreement, the Underwriter's
Warrant Agreement, the Warrant Agreement or the Consulting Agreement, (ii) is
required to be disclosed in the Registration Statement which is not so disclosed
(and such proceedings as are summarized in the Registration Statement are
accurately summarized in all respects), or (iii) might materially and adversely
affect the condition, financial or otherwise, or the earnings, prospects,
stockholders' equity, value, operations, properties, business or results of
operations of the Company and the Subsidiary taken as a whole.
(k) The Company has full legal right, power and authority to
authorize, issue, deliver and sell the Securities, to enter into this Agreement,
the Underwriter's Warrant Agreement, the Recapitalization Agreement, the Warrant
Agreement and the Consulting Agreement and to consummate the transactions
provided for in such agreements; and each of this Agreement, the Underwriter's
Warrant Agreement, the Warrant Agreement and the Consulting Agreement have been
duly and properly authorized, executed and delivered by the Company. Each of
this Agreement, the Underwriter's Warrant Agreement, the Recapitalization
Agreement, the Warrant Agreement and the Consulting Agreement constitutes a
legal, valid and binding agreement of the Company, enforceable against the
Company in accordance with its terms (except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application relating to or affecting the enforcement of
creditors' rights and the application of equitable principles in any motion,
legal
6
<PAGE>
or equitable, and except as obligations to indemnify or contribute to losses may
be limited by applicable law). None of the Company's issue and sale of the
Securities, execution or delivery of this Agreement, the Underwriter's Warrant
Agreement, the Recapitalization Agreement, the Warrant Agreement or the
Consulting Agreement, its performance hereunder and thereunder, its consummation
of the transactions contemplated herein and therein, or the conduct of its
business as described in the Registration Statement and the Prospectus and any
amendments or supplements thereto, conflicts with or will conflict with or
results or will result in any breach or violation of any of the terms or
provisions of, or constitutes or will constitute a default under, or result in
the creation or imposition of any lien, charge, claim, encumbrance, pledge,
security interest, defect or other restriction or equity of any kind whatsoever
upon, any property or assets (tangible or intangible) of the Company or the
Subsidiary pursuant to the terms of (i) the certificate of incorporation or
by-laws of the Company or the Subsidiary, (ii) any license, contract, indenture,
mortgage, lease, deed of trust, voting trust agreement, stockholders' agreement,
note, loan or credit agreement or other agreement or instrument evidencing an
obligation for borrowed money, or any other agreement or instrument to which
either the Company or the Subsidiary is a party or by which it is or may be
bound or to which its properties or assets (tangible or intangible) are or may
be subject, or (iii) any statute, judgment, decree, order, rule or regulation
applicable to the Company or the Subsidiary of any arbitrator, court, regulatory
body or administrative agency or other governmental agency or body (including,
without limitation, those having jurisdiction over environmental or similar
matters), domestic or foreign, having jurisdiction over the Company or the
Subsidiary or any of their activities or properties.
(l) No consent, approval, authorization or order of, and no
filing with, any arbitrator, court, regulatory body, administrative agency,
government agency or other body, domestic or foreign, is required for the
issuance of the Securities pursuant to the Prospectus and the Registration
Statement, this Agreement, the Underwriter's Warrant Agreement and the Warrant
Agreement, the performance of this Agreement, the Underwriter's Warrant
Agreement, the Warrant Agreement and the Consulting Agreement and the
transactions contemplated hereby and thereby, except such as have been obtained
under the Act, state securities laws and the rules of the National Association
of Securities Dealers, Inc. (the "NASD") in connection with the Underwriter's
purchase and distribution of the Securities.
(m) All executed agreements, contracts or other documents or
copies of executed agreements, contracts or other documents filed as exhibits to
the Registration Statement to which the Company or the Subsidiary is a party or
by which it may be bound or to which its assets, properties or business may be
subject have been duly and validly authorized, executed and delivered by the
Company or the Subsidiary, and constitute legal, valid and binding agreements of
the Company and the Subsidiary, enforceable against the Company or the
Subsidiary, as the case may be, in accordance with their respective terms
(except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
relating to or affecting the enforcement of creditors' rights and the
application of equitable principles in any motion, legal or equitable, and
except as obligations to indemnify or contribute to losses may be limited by
applicable law). The descriptions in the Registration Statement of agreements,
contracts and other documents are accurate and fairly present the information
required to be shown with respect thereto by Form SB-2; and there are no
agreements, contracts or other documents which are required by the Act
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<PAGE>
to be described in the Registration Statement or filed as exhibits to the
Registration Statement which are not described or filed as required; and the
exhibits which have been filed are complete and correct copies of the documents
of which they purport to be copies.
(n) Subsequent to the respective dates as of which information
is set forth in the Registration Statement and the Prospectus, and except as may
otherwise be indicated or contemplated herein or therein, neither the Company
nor the Subsidiary has (i) issued any securities or incurred any liability or
obligation, direct or contingent, for borrowed money, (ii) entered into any
transaction other than in the ordinary course of business, or (iii) declared or
paid any dividend or made any other distribution on or in respect of any class
of its capital stock; and, subsequent to such dates, and except as may otherwise
be disclosed in the Prospectus, there has not been any change in the capital
stock, debt (long or short term) or liabilities or any material change in the
condition, financial or otherwise, or the earnings, prospects, stockholders'
equity, value, operations, properties, business or results of operations of the
Company and the Subsidiary taken as a whole.
(o) No default exists in the due performance and observance of
any term, covenant or condition of any license, contract, indenture, mortgage,
lease, deed of trust, voting trust agreement, stockholders' agreement, note,
loan or credit agreement or any other agreement or instrument evidencing an
obligation for borrowed money, or any other agreement or instrument to which the
Company or the Subsidiary is a party or by which the Company or the Subsidiary
is or may be bound or to which the property or assets (tangible or intangible)
of the Company or the Subsidiary is or may be subject.
(p) Each of the Company and the Subsidiary has generally
enjoyed a satisfactory employer-employee relationship with its employees and is
in compliance with all federal, state, local and foreign laws, rules and
regulations respecting employment, employment practices, terms and conditions of
employment and wages and hours. There are no pending investigations involving
the Company or the Subsidiary by the United States Department of Labor or any
other governmental agency responsible for the enforcement of any federal, state,
local or foreign laws, rules and regulations relating to employment. There is no
unfair labor practice charge or complaint against the Company or the Subsidiary
pending before the National Labor Relations Board or any strike, picketing,
boycott, dispute, slowdown or stoppage pending or threatened against or
involving the Company, or any predecessor entity, and none has ever occurred. No
representation question exists respecting the employees of the Company or the
Subsidiary, and no collective bargaining agreement or modification thereof is
currently being negotiated by the Company or the Subsidiary. No grievance or
arbitration proceeding is pending under any expired or existing collective
bargaining agreements of the Company or the Subsidiary. No labor dispute with
the employees of the Company or the Subsidiary exists or is imminent.
(q) Neither the Company nor the Subsidiary maintains, sponsors
or contributes to any program or arrangement that is an "employee pension
benefit plan," an "employee welfare benefit plan" or a "multiemployer plan," as
such terms are defined in Sections 3(2), 3(l) and 3(37), respectively, of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") ("ERISA
Plans"). Neither the Company nor the Subsidiary maintains or contributes, now or
at any time previously, to a defined benefit plan, as defined in Section 3(35)
of ERISA.
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No ERISA Plan (or any trust created thereunder) has engaged in a "prohibited
transaction" within the meaning of Section 406 of ERISA or Section 4975 of the
Code which could subject the Company or the Subsidiary to any tax penalty on
prohibited transactions and which has not adequately been corrected. Each ERISA
Plan is in compliance with all material reporting, disclosure and other
requirements of the Code and ERISA as they relate to any such ERISA Plan.
Determination letters have been received from the Internal Revenue Service with
respect to each ERISA Plan which is intended to comply with Code Section 401(a),
stating that such ERISA Plan and the attendant trust are qualified thereunder.
Neither the Company nor the Subsidiary has ever completely or partially
withdrawn from a "multiemployer plan."
(r) Neither the Company nor the Subsidiary, nor any of their
respective employees, directors, stockholders or affiliates (within the meaning
of the Rules and Regulations), has taken or will take, directly or indirectly,
any action designed to or which has constituted or which might be expected to
cause or result in, under the Exchange Act or otherwise, the stabilization or
manipulation of the price of any security of the Company, whether to facilitate
the sale or resale of the Securities or otherwise.
(s) To the best of the Company's knowledge, none of the
trademarks, trade names, service marks, service names, copyrights, patents and
patent applications, and none of the licenses and rights to the foregoing,
presently owned or held by the Company and the Subsidiary are in dispute or are
in conflict with the right of any other person or entity. Each of the Company
and the Subsidiary (i) owns or has the right to use, free and clear of all
liens, charges, claims, encumbrances, pledges, security interests, defects or
other restrictions or equities of any kind whatsoever, all trademarks, trade
names, service marks, service names, copyrights, patents and patent
applications, and licenses and rights with respect to the foregoing, used in the
conduct of its business as now conducted or proposed to be conducted without
infringing upon or otherwise acting adversely to the right or claimed right of
any person, corporation or other entity under or with respect to any of the
foregoing and (ii) is not obligated or under any liability whatsoever to make
any payments by way of royalties, fees or otherwise to any owner or licensee of,
or other claimant to, any trademark, trade name, service mark, service name,
copyright, patent or patent application except as set forth in the Registration
Statement or the Prospectus. There is no action, suit, proceeding, inquiry,
arbitration, investigation, litigation or governmental or other proceeding,
domestic or foreign, pending or threatened (or circumstances that may give rise
to the same) against the Company which challenges the exclusive rights of the
Company with respect to any trademarks, trade names, service marks, service
names, copyrights, patents, patent applications or licenses or rights to the
foregoing used in the conduct of its business.
(t) Each of the Company and the Subsidiary owns and has the
unrestricted right to use all trade secrets, know-how (including all unpatented
and/or unpatentable proprietary or confidential information, systems or
procedures), inventions, technology, designs, processes, works of authorship,
computer programs and technical data and information that are material to the
development, manufacture, operation and sale of all products and services sold
or proposed to be sold by the Company and the Subsidiary, free and clear of and
without violating any right, lien, or claim of others, including, without
limitation, former employers of its employees.
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<PAGE>
(u) Each of the Company and the Subsidiary has good and
marketable title to, or valid and enforceable leasehold estates in, all items of
real and personal property stated in the Prospectus to be owned or leased by it,
free and clear of all liens, charges, claims, encumbrances, pledges, security
interests, defects or other restrictions or equities of any kind whatsoever,
other than liens for taxes not yet due and payable.
(v) Coopers & Lybrand LLP, whose reports are filed with the
Commission as a part of the Registration Statement, are independent certified
public accountants as required by the Act and the Rules and Regulations.
(w) Except upon the consent of the Underwriter, all officers
and directors, and holders of shares of Common Stock, and securities
exercisable, convertible or exchangeable for share of Common Stock, has executed
an agreement (the "Lock-Up Agreements") pursuant to which he, she or it has
agreed not to, directly or indirectly, offer, sell, transfer, pledge, assign,
hypothecate or otherwise encumber any shares or convertible securities whether
or not owned, or otherwise dispose of any interest therein, without the prior
written consent of the Underwriter, under Rule 144 or otherwise, for a period
commencing on the date hereof and ending eighteen months following the effective
date of the Registration Statement (the "Lock-Up Period"); provided, however,
that private sales or transfers shall be permitted so long as the transferee
agrees in writing to be bound by the terms of this Paragraph (w) as a
precondition to such sale or transfer. Such persons have further agreed in the
Lock-Up Agreements that, for a period extending twenty-four (24) months
following the effective date of the Registration Statement, all public sales of
such securities issued by the Company shall be made through JSC in accordance
with its customary brokerage policies. The Company will cause its transfer agent
to mark an appropriate legend on the face of stock certificates representing all
of such securities and to place "stop transfer" orders on the Company's stock
ledgers.
(x) There are no claims, payments, issuances, arrangements or
understandings, whether oral or written, for services in the nature of a
finder's or origination fee with respect to the sale of the Securities hereunder
or any other arrangements, agreements, understandings, payments or issuances
that may affect the Underwriter's compensation, as determined by the NASD.
(y) The Units, the Common Stock and the Redeemable Warrants
have been approved for quotation on The Nasdaq SmallCap Market ("Nasdaq").
(z) Neither the Company, nor the Subsidiary, nor any of their
respective directors, officers, stockholders, employees, agents or any other
person acting on behalf of the Company or the Subsidiary has, directly or
indirectly, given or agreed to give any money, gift or similar benefit (other
than legal price concessions to customers in the ordinary course of business) to
any customer, supplier, employee or agent of a customer or supplier, or any
official or employee of any governmental agency or instrumentality of any
government (domestic or foreign) or instrumentality of any government (domestic
or foreign) or any political party or candidate for office (domestic or foreign)
or any other person who was, is or may be in a position to help or hinder the
business of the Company or the Subsidiary (or assist the Company or the
Subsidiary in connection with any actual or proposed transaction) which (i)
might subject the Company or the Subsidiary, or any other such person to any
damage or penalty in any civil,
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criminal or governmental litigation or proceeding (domestic or foreign), (ii) if
not given in the past, might have had a material and adverse effect on the
condition, financial or otherwise, or the earnings, business affairs, prospects,
stockholders' equity, value, operations, properties, business or results of
operations of the Company or the Subsidiary, or (iii) if not continued in the
future, might materially and adversely affect the condition, financial or
otherwise, or the earnings, business affairs, prospects, stockholders' equity,
value, operations, properties, business or results of operations of the Company
or the Subsidiary. The Company's and the Subsidiary's internal accounting
controls are sufficient to cause the Company to comply with the Foreign Corrupt
Practices Act of 1977, as amended.
(aa) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter 92-198,
An Act Relating to Disclosure of Doing Business with Cuba, and the Company
further agrees that if it or any affiliate commences engaging in business with
the government of Cuba or with any person or affiliate located in Cuba after the
date the Registration Statement becomes or has become effective with the
Commission or with the Florida Department of Banking and Finance (the
"Department"), whichever date is later, or if the information reported or
incorporated by reference in the Prospectus, if any, concerning the Company's,
or any affiliate's, business with Cuba or with any person or affiliate located
in Cuba changes in any material way, the Company will provide the Department
notice of such business or change, as appropriate, in a form acceptable to the
Department.
(bb) Except as set forth in the Prospectus, no officer,
director or stockholder of the Company or the Subsidiary, and no affiliate or
associate (as these terms are defined in the Rules and Regulations) of any of
the foregoing persons or entities, has or has had, either directly or
indirectly, (i) an interest in any person or entity which (A) furnishes or sells
services or products which are furnished or sold or are proposed to be furnished
or sold by the Company or the Subsidiary, or (B) purchases from or sells or
furnishes to the Company or the Subsidiary any goods or services, or (ii) a
beneficial interest in any contract or agreement to which the Company or the
Subsidiary is a party or by which the Company may be bound. Except as set forth
in the Prospectus under "Certain Transactions," there are no existing
agreements, arrangements, understandings or transactions, or proposed
agreements, arrangements, understandings or transactions, between or among the
Company or the Subsidiary, and any officer, director or any person listed in the
"Principal Stockholders" section of the Prospectus or any affiliate or associate
of any of the foregoing persons or entities.
(cc) The minute books of the Company have been made available
to the Underwriter, contain a complete summary of all meetings and actions of
the directors and stockholders of the Company since the time of its
incorporation, and reflect all transactions referred to in such minutes
accurately in all respects.
(dd) Except and to the extent described in the Prospectus, no
holder of any securities of the Company or the Subsidiary or of any options,
warrants or other convertible or exchangeable securities of the Company or the
Subsidiary has the right to include any securities issued by the Company or the
Subsidiary in the Registration Statement or any registration statement to be
filed by the Company or to require the Company to file a registration statement.
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<PAGE>
Except as set forth in the Prospectus, no person or entity holds any
anti-dilution rights with respect to any securities of the Company or the
Subsidiary.
(ee) Any certificate signed by any officer of the Company and
delivered to the Underwriter or to Underwriter's Counsel (as defined in Section
4(d) herein), shall be deemed a representation and warranty by the Company to
the Underwriter as to the matters covered thereby.
(ff) The Company has entered into a warrant agreement,
substantially in the form filed as Exhibit ___ to the Registration Statement
(the "Warrant Agreement"), with Continental Stock Transfer & Trust Company, in
form and substance satisfactory to the Underwriter, with respect to the
Redeemable Warrants and providing for the payment of warrant solicitation fees
contemplated by Section 4(x) hereof. The Warrant Agreement has been duly and
validly authorized by the Company and, assuming due execution by the parties
thereto other than the Company, constitutes a valid and legally binding
agreement of the Company, enforceable against the Company in accordance with its
terms (except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
relating to or affecting the enforcement of creditors' rights and the
application of equitable principles in any action, legal or equitable, and
except as obligations to indemnify or contribute to losses may be limited by
applicable law).
(gg) The Company has entered into a financial advisory and
consulting agreement substantially in the form filed as Exhibit ____ to the
Registration Statement (the "Consulting Agreement") with the Underwriter, with
respect to the rendering of consulting services by the Underwriter to the
Company. The Consulting Agreement provides that the Underwriter shall be
retained by the Company commencing on the consummation of the proposed public
offering and ending 24 months thereafter, at a monthly retainer of $2,000, all
of which is payable on consummation of the proposed public offering. The
Consulting Agreement has been duly and validly authorized by the Company and
assuming due execution by the parties thereto other than the Company,
constitutes a valid and legally binding agreement of the Company, enforceable
against the Company in accordance with its terms (except as such enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other laws of general application relating to or affecting enforcement of
creditors' rights and the application of equitable principles in any action,
legal or equitable, and except as rights to indemnity or contribution may be
limited by applicable law).
(hh) The Company has filed a Form 8-A with the Commission
providing for the registration under the Exchange Act of the Securities and such
Form 8-A has been declared effective by the Commission.
2. Purchase, Sale and Delivery of the Securities.
(a) On the basis of the representations, warranties, covenants
and agreements herein contained, but subject to the terms and conditions herein
set forth, the Company agrees to sell to the Underwriter, and the Underwriter
agrees to purchase from the Company, the Firm Units at a price equal to $____
per Unit [90% of the initial public offering price].
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(b) In addition, on the basis of the representations,
warranties, covenants and agreement, herein contained, but subject to the terms
and conditions herein set forth, the Company hereby grants an option to the
Underwriter to purchase all or any part of the Option Units at a price equal to
$________ per Unit [90% of the initial public offering price]. The option
granted hereby will expire forty-five (45) days after (i) the date the
Registration Statement becomes effective, if the Company has elected not to rely
on Rule 430A under the Rules and Regulations, or (ii) the date of this Agreement
if the Company has elected to rely upon Rule 430A under the Rules and
Regulations, and may be exercised in whole or in part from time to time only for
the purpose of covering over-allotments which may be made in connection with the
offering and distribution of the Firm Units upon notice by the Underwriter to
the Company setting forth the number of Option Units as to which the Underwriter
is then exercising the option and the time and date of payment and delivery for
any such Option Units. Any such time and date of delivery (an "Option Closing
Date") shall be determined by the Underwriter, but shall not be later than seven
(7) full business days after the exercise of said option, nor in any event prior
to the Closing Date, unless otherwise agreed upon by the Underwriter and the
Company. Nothing herein contained shall obligate the Underwriter to exercise the
option granted hereby. No Option Units shall be delivered unless the Firm Units
shall be simultaneously delivered or shall theretofore have been delivered as
herein provided.
(c) Payment of the purchase price for, and delivery of
certificates for, the Firm Units shall be made at the offices of the Underwriter
at 33 Maiden Lane, New York, New York 10038, or at such other place as shall be
agreed upon by the Underwriter and the Company. Such delivery and payment shall
be made at 10:00 a.m. (New York City time) on _________, 1997 or at such other
time and date as shall be agreed upon by the Underwriter and the Company, but
not less than three (3) nor more than seven (7) full business days after the
effective date of the Registration Statement (such time and date of payment and
delivery being herein called the "Closing Date"). In addition, in the event that
any or all of the Option Units are purchased by the Underwriter, payment of the
purchase price for, and delivery of certificates for, such Option Units shall be
made at the above mentioned office of the Underwriter or at such other place as
shall be agreed upon by the Underwriter and the Company. Delivery of the
certificates for the Firm Units and the Option Units, if any, shall be made to
the Underwriter against payment by the Underwriter of the purchase price for the
Firm Units and the Option Units, if any, to the order of the Company by New York
Clearing House funds. Certificates for the Firm Units and the Option Units, if
any, shall be in definitive, fully registered form, shall bear no restrictive
legends and shall be in such denominations and registered in such names as the
Underwriter may request in writing at least two (2) business days prior to the
Closing Date or the relevant Option Closing Date, as the case may be. The
certificates for the Firm Units and the Option Units, if any, shall be made
available to the Underwriter at such offices or such other place as the
Underwriter may designate for inspection, checking and packaging no later than
9:30 a.m. on the last business day prior to the Closing Date or the relevant
Option Closing Date, as the case may be.
(d) On the Closing Date, the Company shall issue and sell to
the Underwriter or its designees the Underwriter's Warrants for an aggregate
purchase price of $.0001 per warrant, which warrants shall entitle the holders
thereof to purchase an aggregate of an additional 200,000 Units. The
Underwriter's Warrants shall be exercisable for a period of four (4) years
commencing one (1) year from the effective date of the Registration Statement at
a
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price equaling one hundred and twenty percent (120%) of the initial public
offering price of the Units. The Underwriter's Warrant Agreement and the form of
the certificates for the Underwriter's Warrant shall be substantially in the
form filed as Exhibit ____ to the Registration Statement. Payment for the
Underwriter's Warrants shall be made on the Closing Date.
3. Public Offering of the Units. As soon after the
Registration Statement becomes effective as the Underwriter deems advisable, the
Underwriter shall make a public offering of the Firm Units and such of the
Option Units as the Underwriter may determine (other than to residents of or in
any jurisdiction in which qualification of the Units is required and has not
become effective) at the price and upon the other terms set forth in the
Prospectus. The Underwriter may from time to time increase or decrease the
public offering price after distribution of the Units has been completed to such
extent as the Underwriter, in its sole discretion, deems advisable. The
Underwriter may enter into one or more agreements as the Underwriter, in its
sole discretion, deems advisable with one or more broker-dealers who shall act
as dealers in connection with such public offering.
4. Covenants and Agreements of the Company. The Company
covenants and agrees with the Underwriter as follows:
(a) The Company shall use its best efforts to cause the
Registration Statement and any amendments thereto to become effective as
promptly as practicable and will not at any time, whether before or after the
effective date of the Registration Statement, file any amendment to the
Registration Statement or supplement to the Prospectus or file any document
under the Act or the Exchange Act before termination of the offering of the
Securities to the public by the Underwriter of which the Underwriter shall not
previously have been advised and furnished with a copy, or to which the
Underwriter shall have objected or which is not in compliance with the Act, the
Exchange Act and the Rules and Regulations.
(b) As soon as the Company is advised or obtains knowledge
thereof, the Company will advise the Underwriter and confirm the same in
writing, (i) when the Registration Statement, as amended, becomes effective,
when any post-effective amendment to the Registration Statement becomes
effective and, if the provisions of Rule 430A promulgated under the Act will be
relied upon, when the Prospectus has been filed in accordance with said Rule
430A, (ii) of the issuance by the Commission of any stop order or of the
initiation, or the threatening, of any proceeding the outcome of which may
result in the suspension of the effectiveness of the Registration Statement or
any order preventing or suspending the use of the Preliminary Prospectus or the
Prospectus, or any amendment or supplement thereto, or the institution of any
proceedings for that purpose, (iii) of the issuance by the Commission or by any
state securities commission of any proceedings for the suspension of the
qualification of any of the Securities for offering or sale in any jurisdiction
or of the initiation, or the threatening, of any proceeding for that purpose,
(iv) of the receipt of any comments from the Commission, and (v) of any request
by the Commission for any amendment to the Registration Statement or any
amendment or supplement to the Prospectus or for additional information. If the
Commission or any state securities regulatory authority shall enter a stop order
or suspend such qualification at any time, the Company will make every effort to
obtain promptly the lifting of such order.
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(c) The Company shall file the Prospectus (in form and
substance satisfactory to the Underwriter) with the Commission, or transmit the
Prospectus by a means reasonably calculated to result in filing the same with
the Commission, pursuant to Rule 424(b)(1) of the Rules and Regulations (or, if
applicable and if consented to by the Underwriter, pursuant to Rule 424(b)(4) of
the Rules and Regulations) within the time period specified in Rule 424(b)(1)
(or, if applicable and if consented to by the Underwriter, Rule 424(b)(4)).
(d) The Company will give the Underwriter notice of its
intention to file or prepare any amendment to the Registration Statement
(including any post-effective amendment) or any amendment or supplement to the
Prospectus (including any revised prospectus which the Company proposes for use
in connection with the offering of any of the Securities which differs from the
corresponding prospectus on file at the Commission at the time the Registration
Statement becomes effective, whether or not such revised prospectus is required
to be filed pursuant to Rule 424(b) of the Rules and Regulations), and will
furnish the Underwriter with copies of any such amendment or supplement a
reasonable amount of time prior to such proposed filing or use, as the case may
be, and will not file any such amendment or supplement to which the Underwriter
or Orrick, Herrington & Sutcliffe LLP, its counsel ("Underwriter's Counsel"),
shall object.
(e) The Company shall endeavor in good faith, in cooperation
with the Underwriter, at or prior to the time the Registration Statement becomes
effective, to qualify the Securities for offering and sale under the securities
laws of such jurisdictions as the Underwriter may reasonably designate to permit
the continuance of sales and dealings therein for as long as may be necessary to
complete the distribution contemplated hereby, and shall make such applications,
file such documents and furnish such information as may be required for such
purpose; provided, however, the Company shall not be required to qualify as a
foreign corporation or file a general or limited consent to service of process
in any such jurisdiction. In each jurisdiction where such qualification shall be
effected, the Company will, unless the Underwriter agrees that such action is
not at the time necessary or advisable, use all reasonable efforts to file and
make such statements or reports at such times as are or may reasonably be
required by the laws of such jurisdiction to continue such qualification.
(f) During the time when a prospectus is required to be
delivered under the Act, the Company shall use all reasonable efforts to comply
with all requirements imposed upon it by the Act, the Exchange Act and the Rules
and Regulations so far as necessary to permit the continuance of sales of or
dealings in the Securities in accordance with the provisions hereof and the
Prospectus, or any amendments or supplements thereto. If, at any time when a
prospectus relating to the Securities is required to be delivered under the Act,
any event shall have occurred as a result of which, in the opinion of counsel
for the Company or Underwriter's Counsel, the Prospectus, as then amended or
supplemented, includes an untrue statement of a material fact or omits to state
a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances in which they were made,
not misleading, or if it is necessary at any time to amend or supplement the
prospectus to comply with the Act, the Company will notify the Underwriter
promptly and prepare and file with the Commission an appropriate amendment or
supplement in accordance with Section 10 of the Act, each such amendment or
supplement to be satisfactory to Underwriter's Counsel, and the Company will
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<PAGE>
furnish to the Underwriter copies of such amendment or supplement as soon as
available and in such quantities as the Underwriter may request.
(g) As soon as practicable, but in any event not later than
forty five (45) days after the end of the 12-month period beginning on the day
after the end of the fiscal quarter of the Company during which the effective
date of the Registration Statement occurs (ninety (90) days in the event that
the end of such fiscal quarter is the end of the Company's fiscal year), the
Company shall make generally available to its security holders, in the manner
specified in Rule 158(b) of the Rules and Regulations, and to the Underwriter,
an earnings statement which will be in the detail required by, and will
otherwise comply with, the provisions of Section 11(a) of the Act and Rule
158(a) of the Rules and Regulations, which statement need not be audited unless
required by the Act, covering a period of at least twelve (12) consecutive
months after the effective date of the Registration Statement.
(h) During a period of seven (7) years after the date hereof,
the Company will furnish to its stockholders, as soon as practicable, annual
reports (including financial statements audited by independent public
accountants) and unaudited quarterly reports of earnings and will deliver to the
Underwriter:
i) concurrently with furnishing such quarterly reports
to its stockholders statements of income of the Company for
such quarter in the form furnished to the Company's
stockholders and certified by the Company's principal
financial and accounting officer;
ii) concurrently with furnishing such annual reports to
its stockholders, a balance sheet of the Company as at the end
of the preceding fiscal year, together with statements of
operations, stockholders' equity and cash flows of the Company
for such fiscal year, accompanied by a copy of the report
thereon of the Company's independent certified public
accountants;
iii) as soon as they are available, copies of all
reports (financial or other) mailed to stockholders;
iv) as soon as they are available, copies of all
reports and financial statements furnished to or filed with
the Commission, the NASD or any securities exchange;
v) every press release and every material news item or
article of interest to the financial community in respect of
the Company, the Subsidiary or their respective affairs which
was released or prepared by or on behalf of the Company or the
Subsidiary; and
vi) any additional information of a public nature
concerning the Company and the Subsidiary (and any future
subsidiaries) or their respective business which the
Underwriter may request.
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During such seven-year period, if the Company has active subsidiaries,
the foregoing financial statements will be on a consolidated basis to the extent
that the accounts of the Company and its subsidiaries are consolidated, and will
be accompanied by similar financial statements for any significant subsidiary
which is not so consolidated.
(i) The Company will maintain a transfer and warrant agent
and, if necessary under the jurisdiction of incorporation of the Company, a
registrar (which may be the same entity as the transfer agent) for the Units,
the Common Stock and the Redeemable Warrants.
(j) The Company will furnish to the Underwriter, without
charge and at such place as the Underwriter may designate, copies of each
Preliminary Prospectus, the Registration Statement and any pre-effective or
post-effective amendments thereto (one of which will be signed and will include
all financial statements and exhibits), the Prospectus, and all amendments and
supplements thereto, including any prospectus prepared after the effective date
of the Registration Statement, in each case as soon as available and in such
quantities as the Underwriter may request.
(k) On or before the effective date of the Registration
Statement, the Company shall provide the Underwriter with originally-executed
copies of duly executed, legally binding and enforceable Lock-Up Agreements
which are in form and substance satisfactory to the Underwriter. On or before
the Closing Date, the Company shall deliver instructions to its transfer agent
authorizing such transfer agent to place appropriate legends on the certificates
representing the securities of the Company subject to the Lock-Up Agreements and
to place appropriate stop transfer orders on the Company's ledgers.
(l) The Company agrees that, for a period of eighteen (18)
months commencing on the effective date of the Registration Statement, and
except as contemplated by Section 4(v) of this Agreement, it and its present and
future subsidiaries will not, without the prior written consent of the
Underwriter (i) issue, sell, contract or offer to sell, grant an option for the
purchase or sale of, assign, transfer, pledge, distribute or otherwise dispose
of, directly or indirectly, any shares of capital stock or any option, right or
warrant with respect to any shares of capital stock or any security convertible,
exchangeable or exercisable for capital stock, except pursuant to stock options
or warrants issued on the date hereof, or (ii) file any registration statement
for the offer or sale of securities issued or to be issued by the Company or any
present or future subsidiaries.
(m) Neither the Company nor any of its officers, directors,
stockholders or affiliates (within the meaning of the Rules and Regulations)
will take, directly or indirectly, any action designed to stabilize or
manipulate the price of any securities of the Company, or which might in the
future reasonably be expected to cause or result in the stabilization or
manipulation of the price of any such securities.
(n) The Company shall apply the net proceeds from the sale of
the Securities offered to the public in the manner set forth under "Use of
Proceeds" in the Prospectus. No portion of the net proceeds will be used,
directly or indirectly, to acquire any securities issued by the Company.
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<PAGE>
(o) The Company shall timely file all such reports, forms or
other documents as may be required (including, but not limited to, any Form SR
required by Rule 463 under the Act) from time to time under the Act, the
Exchange Act, and the Rules and Regulations, and all such reports, forms and
documents will comply as to form and substance with the applicable requirements
under the Act, the Exchange Act and the Rules and Regulations.
(p) The Company shall furnish to the Underwriter as early as
practicable prior to each of the date hereof, the Closing Date and each Option
Closing Date, if any, but no later than two (2) full business days prior
thereto, a copy of the latest available unaudited interim financial statements
of the Company (which in no event shall be as of a date more than thirty (30)
days prior to the date hereof, the Closing Date or the relevant Option Closing
Date, as the case may be) which have been read by the Company's independent
public accountants, as stated in their letters to be furnished pursuant to
Section 6(j) hereof.
(q) The Company shall cause the Units, the Common Stock and
the Redeemable Warrants to be quoted on Nasdaq and, for a period of seven (7)
years from the date hereof, use its best efforts to maintain the Nasdaq
quotation of the Units, the Common Stock and the Redeemable Warrants to the
extent outstanding.
(r) For a period of five (5) years from the Closing Date, the
Company shall at the request of the Underwriter, furnish or cause to be
furnished to the Underwriter and at the Company's sole expense, (i) daily
consolidated transfer sheets relating to the Units, the Common Stock and the
Redeemable Warrants and (ii) a list of holders of all of the Company's
securities.
(s) For a period of five (5) years from the Closing Date, the
Company shall, at the Company's sole expense, (i) promptly provide the
Underwriter, upon any and all requests of the Underwriter, with a "blue sky
trading survey" for secondary sales of the Company's securities, prepared by
counsel to the Company, and (ii) take all necessary and appropriate actions to
further qualify the Company's securities in all jurisdictions of the United
States in order to permit secondary sales of such securities pursuant to the
"blue sky" laws of those jurisdictions, provided that such jurisdictions do not
require the Company to qualify as a foreign corporation.
(t) As soon as practicable, but in no event more than thirty
(30) days after the effective date of the Registration Statement, the Company
agrees to take all necessary and appropriate actions to be included in Standard
and Poor's Corporation Descriptions and Moody's OTC Manual and to continue such
inclusion for a period of not less than seven (7) years.
(u) Without the prior written consent of the Underwriter, the
Company hereby agrees that it will not, for a period of eighteen (18) months
from the effective date of the Registration Statement, adopt, propose to adopt
or otherwise permit to exist any employee, officer, director, consultant or
compensation plan or arrangement (i) permitting the grant, issue, sale or entry
into any agreement to grant, issue or sell any option, warrant or other contract
right (a) at an exercise or sale price per share that is less than the greater
of the initial public offering price of the Units set forth herein or the fair
market value per share of the Common Stock on the date of grant or sale, or (b)
upon payment of less than the full purchase or exercise price for such shares of
Common Stock or other securities of the Company on the date of grant
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<PAGE>
or issuance; or (ii) permitting the existence of stock appreciation rights,
phantom options or similar arrangements; or (iii) permitting the payment for
such securities with any form of consideration other than cash; or (iv)
permitting the maximum number of shares of Common Stock or other securities of
the Company purchasable at any time pursuant to options, warrants or other
contract rights to exceed 300,000.
(v) Until the completion of the distribution of the Units to
the public, and during any period during which a prospectus is required to be
delivered, the Company shall not, without the prior written consent of the
Underwriter, issue, directly or indirectly, any press release or other
communication or hold any press conference with respect to the Company or its
activities or the offering contemplated hereby, other than trade releases issued
in the ordinary course of the Company's business consistent with past practices
with respect to the Company's operations.
(w) The Company agrees that:
i) For a period of three (3) years after the
effective date of the Registration Statement, the Company
shall cause one (1) individual selected by the Underwriter,
subject to the good faith approval of the Company, to be
elected to the Board of Directors of the Company (the
"Board"), if requested by the Underwriter.
ii) In the event the Underwriter elects not to
exercise the right as set forth above, then it may designate
one person to attend all meetings of the Company's Board of
Directors for a period of five years. Such person shall be
entitled to attend all such meetings and to receive all
notices and other correspondence and communications sent by
the Company to members of its Board of Directors, unless in
the opinion of counsel to the Company the release of such
information would result in the waiver of the Company's
attorney-client privilege.
iii) The Company shall reimburse the Underwriter's
designee for his or her out-of-pocket expenses reasonably
incurred in connection with his or her attendance of the Board
meetings.
iv) In the event the Underwriter shall not have
designated such individual at the time of any meeting of the
Board or such person has not been elected or is unavailable to
serve, the Company shall notify the Underwriter of each
meeting of the Board.
(x) Commencing one year from the date hereof, to pay the
Underwriter a warrant solicitation fee equal to five percent (5%) of the
exercise price of the Redeemable Warrants, payable on the date of the exercise
thereof on terms provided in the Warrant Agreement. The Company will not solicit
the exercise of the Redeemable Warrants through any solicitation agent other
than the Underwriter. The Underwriter will not be entitled to any warrant
solicitation fee unless the Underwriter provides bona fide services in
connection with
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<PAGE>
any warrant solicitation and the investor designates, in writing, that the
Underwriter is entitled to such fee.
(y) For a period equal to the lesser of (i) seven (7) years
from the date hereof, and (ii) the sale to the public of the Underwriter's
Securities, the Company will not take any action or actions which may prevent or
disqualify the Company's use of Form SB-2 or S-1 (or other appropriate form) for
the registration under the Act of the Underwriter's Securities.
(z) For a period of twenty four (24) months after the
effective date of the Registration Statement, the Company shall not restate,
amend or alter any term of any written employment, consulting or similar
agreement entered into between the Company and any officer, director or key
employee as of the effective date of the Registration Statement in a manner
which is more favorable to such officer, director or key employee, without the
prior written consent of the Underwriter.
(aa) The Company will use its best efforts to maintain the
effectiveness of the Registration Statement for a period of five years after the
date hereof.
(bb) The Company agrees that, for a period of two (2) years
beginning with the effective date of the Registration Statement, JSC shall have
a right of first refusal for all sales of any securities made by the Company or
any of its present or future affiliates or subsidiaries.
(cc) The Company agrees that, from the effective date of the
Registration Statement, it shall retain the services of a public relations firm,
reasonably acceptable to JSC.
5. Payment of Expenses.
(a) The Company hereby agrees to pay (such payment to be made,
at the discretion of the Underwriter, on the Closing Date and any Option Closing
Date (to the extent not paid on the Closing Date or a previous Option Closing
Date)) all expenses and fees (other than fees of Underwriter's Counsel, except
as set forth in clause (iv) below), incident to the performance of the
obligations of the Company under this Agreement, the Underwriter's Warrant
Agreement and the Warrant Agreement, including, without limitation, (i) the fees
and expenses of accountants and counsel for the Company, (ii) all costs and
expenses incurred in connection with the preparation, duplication, printing,
(including mailing and handling charges) filing, delivery and mailing (including
the payment of postage, overnight delivery or courier charges with respect
thereto) of the Registration Statement and the Prospectus and any amendments and
supplements thereto and the printing, mailing (including the payment of postage,
overnight delivery or courier charges with respect thereto) and delivery of this
Agreement, the Underwriter's Warrant Agreement, the Warrant Agreement, and
agreements with selected dealers, and related documents, including the cost of
all copies thereof and of each Preliminary Prospectus and of the Prospectus and
any amendments thereof or supplements thereto supplied to the Underwriter and
such dealers as the Underwriter may request, in such quantities as the
Underwriter may request, (iii) the printing, engraving, issuance and delivery of
the Securities, (iv) the qualification of the Securities under state or foreign
securities or "blue sky" laws and determination of the status of such securities
under legal investment laws,
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including the costs of printing and mailing the "Preliminary Blue Sky
Memorandum," the "Supplemental Blue Sky Memorandum" and "Legal Investments
Survey," if any, and disbursements, expenses and fees of counsel (such fees not
to exceed $45,000) in connection therewith, (v) advertising costs and expenses,
including, but not limited to costs and expenses in connection with "road
shows," information meetings and presentations, bound volumes and prospectus
memorabilia and "tombstone" advertisement expenses, (vi) costs and expenses in
connection with due diligence investigations, including, but not limited to, the
fees of any independent counsel or consultants, (vii) fees and expenses of a
transfer and warrant agent and registrar for the Securities, (viii) applications
for assignments of a rating of the Securities by qualified rating agencies, (ix)
the fees payable to the Commission and the NASD, and (x) the fees and expenses
incurred in connection with the listing of the Securities on Nasdaq and any
other exchange.
(b) If this Agreement is terminated by the Underwriter in
accordance with the provisions of Section 6 or Section 10(a) hereof, the Company
shall reimburse and indemnify the Underwriter for all of its actual
out-of-pocket expenses, including the fees and disbursements of Underwriter's
Counsel, less any amounts already paid pursuant to Section 5(c) hereof.
(c) The Company further agrees that, in addition to the
expenses payable pursuant to Section 5(a) hereof, it will pay to the Underwriter
on the Closing Date by certified or bank cashier's check, or, at the election of
the Underwriter, by deduction from the proceeds of the offering of the Firm
Units, a non-accountable expense allowance equal to three percent (3%) of the
gross proceeds received by the Company from the sale of the Firm Units, thirty
thousand dollars ($30,000) of which has been paid to date by the Company. In the
event the Underwriter elects to exercise the overallotment option described in
Section 2(b) hereof, the Company further agrees to pay to the Underwriter on
each Option Closing Date, by certified or bank cashier's check, or, at the
Underwriter's election, by deduction from the proceeds of the Option Units
purchased on such Option Closing Date, a non-accountable expense allowance equal
to three percent (3%) of the gross proceeds received by the Company from the
sale of such Option Units.
6. Conditions of the Underwriter's Obligations. The
obligations of the Underwriter hereunder shall be subject to the continuing
accuracy of the representations and warranties of the Company herein as of the
date hereof and as of the Closing Date and each Option Closing Date, if any, as
if they had been made on and as of the Closing Date and each Option Closing
Date, as the case may be; the accuracy on and as of the Closing Date and each
Option Closing Date, if any, of the statements of officers of the Company made
pursuant to the provisions hereof; the performance by the Company on and as of
the Closing Date and each Option Closing Date, if any, of its covenants and
obligations hereunder; and to the following further conditions:
(a) The Registration Statement shall have become effective not
later than 12:00 p.m., New York time, on the date of this Agreement or such
later date and time as shall be consented to in writing by the Underwriter, and,
at the Closing Date and each Option Closing Date, if any, no stop order
suspending the effectiveness of the Registration Statement shall have been
issued and no proceedings for that purpose shall have been instituted or shall
be pending or contemplated by the Commission and any request on the part of the
Commission for
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additional information shall have been complied with to the reasonable
satisfaction of Underwriter's Counsel. If the Company has elected to rely upon
Rule 430A of the Rules and Regulations, the price of the Units and any
price-related information previously omitted from the effective Registration
Statement pursuant to such Rule 430A shall have been transmitted to the
Commission for filing pursuant to Rule 424(b) of the Rules and Regulations
within the prescribed time period, and prior to the Closing Date the Company
shall have provided evidence satisfactory to the Underwriter of such timely
filing, or a post-effective amendment providing such information shall have been
promptly filed and declared effective in accordance with the requirements of
Rule 430A of the Rules and Regulations.
(b) The Underwriter shall not have advised the Company that
the Registration Statement, or any amendment thereto, contains an untrue
statement of fact which, in the Underwriter's opinion, is material, or omits to
state a fact which, in the Underwriter's opinion, is material and is required to
be stated therein or is necessary to make the statements therein, in light of
the circumstances in which they were made not misleading, or that the
Prospectus, or any supplement thereto, contains an untrue statement of fact
which, in the Underwriter's opinion, is material, or omits to state a fact
which, in the Underwriter's opinion, is material and is required to be stated
therein or is necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading.
(c) On or prior to the Closing Date, the Underwriter shall
have received from Underwriter's Counsel such opinion or opinions with respect
to the organization of the Company, the validity of the Securities, the
Registration Statement, the Prospectus and such other related matters as the
Underwriter may request and Underwriter's Counsel shall have received such
papers and information as they may request in order to enable them to pass upon
such matters.
(d) On the Closing Date, the Underwriter shall have received
the favorable opinion of Fishman & Merrick, P.C., counsel to the Company, dated
the Closing Date, addressed to the Underwriter, in form and substance
satisfactory to Underwriter's Counsel, to the effect that:
i) Each of the Company and the Subsidiary (A) has been
duly organized and is validly existing as a corporation in
good standing under the laws of its jurisdiction of
incorporation, (B) is duly qualified and licensed and in good
standing as a foreign corporation in each jurisdiction in
which its ownership or leasing of any properties or the
character of its operations requires such qualification or
licensing, and (C) has all requisite power and authority
(corporate and other) and has obtained any and all necessary
authorizations, approvals, orders, licenses, certificates,
franchises and permits of and from all governmental or
regulatory officials and bodies (including, without
limitation, those having jurisdiction over environmental or
similar matters), to own or lease its properties and conduct
its business as described in the Prospectus; each of the
Company and the Subsidiary is and has been doing business in
compliance with all such authorizations, approvals, orders,
licenses, certificates, franchises and permits obtained by it
from governmental or regulatory officials and agencies and all
federal, state, local and foreign laws, rules and regulations
to which it is subject;
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and, neither the Company nor the Subsidiary has received any
notice of proceedings relating to the revocation or
modification of any such authorization, approval, order,
license, certificate, franchise or permit which, singly or in
the aggregate, if the subject of an unfavorable decision,
ruling or finding, would materially and adversely affect the
condition, financial or otherwise, or the earnings, prospects,
stockholders' equity, value, operations, properties, business
or results of operations of the Company or the Subsidiary. The
disclosure in the Registration Statement concerning the
effects of federal, state, local and foreign laws, rules and
regulations on the Company's and the Subsidiary's business as
currently conducted and as contemplated are correct in all
respects and do not omit to state a material fact required to
be stated therein or necessary to make the statements therein,
in light of the circumstances in which they were made, not
misleading;
ii) neither the Company nor the Subsidiary owns,
directly or indirectly, an interest in any corporation,
partnership, joint venture, trust or other business entity,
other than its wholly owned subsidiary, CTI Balloons, and its
joint venture agreement with P&TF, as described in the
Registration Statement and the Prospectus. The Company is the
registered owner of one hundred percent (100%) of the
outstanding capital stock of the Subsidiary;
iii) the Company has a duly authorized, issued and
outstanding capitalization and as set forth in the Prospectus
under "Capitalization," and except as set forth in the
Prospectus, neither the Company nor the Subsidiary is a party
to or bound by any instrument, agreement or other arrangement
providing for it to issue any capital stock, rights, warrants,
options or other securities, except for this Agreement, the
Underwriter's Warrant Agreement, the Recapitalization
Agreement and the Warrant Agreement and as described in the
Prospectus. The Securities and all other securities issued or
issuable by the Company conform, or when issued and paid for,
will conform, in all respects to the descriptions thereof
contained in the Registration Statement and the Prospectus.
All issued and outstanding securities of each of the Company
and the Subsidiary have been duly authorized and validly
issued and are fully paid and non-assessable; the holders
thereof have no rights of rescission with respect thereto and
are not subject to personal liability by reason of being such
holders; and none of such securities were issued in violation
of the preemptive rights of any holders of any security of the
Company or the Subsidiary or any similar contractual right
granted by the Company or the Subsidiary. The Securities to be
sold by the Company hereunder and under the Underwriter's
Warrant Agreement, the Recapitalization Agreement and the
Warrant Agreement are not and will not be subject to any
preemptive or other similar rights of any stockholder, have
been duly authorized and, when issued, paid for and delivered
in accordance with the terms hereof and thereof, will be
validly issued, fully paid and non-assessable and conform to
the descriptions thereof contained in the Prospectus; the
holders thereof will not be subject to any liability solely as
such holders; all corporate action required to be taken for
the authorization, issue and sale of the Securities has been
duly and validly taken; and the certificates representing the
Securities are in due and proper
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form. The Underwriter's Warrants constitute valid and binding
obligations of the Company to issue and sell, upon exercise
thereof and payment therefor, the number and type of
securities of the Company called for thereby. Upon the
issuance and delivery pursuant to this Agreement, the
Underwriter's Warrant Agreement, the Recapitalization
Agreement and the Warrant Agreement of the Securities to be
sold by the Company hereunder and thereunder, the Underwriter
will acquire good and marketable title to such Securities,
free and clear of any lien, charge, claim, encumbrance,
pledge, security interest, defect or other restriction or
equity of any kind whatsoever asserted against the Company or
any affiliate (within the meaning of the Rules and
Regulations) of the Company. No transfer tax is payable by or
on behalf of the Underwriter in connection with (A) the
issuance by the Company of the Securities, (B) the purchase by
the Underwriter of the Securities from the Company, (C) the
consummation by the Company of any of its obligations under
this Agreement, the Underwriter's Warrant Agreement, the
Recapitalization Agreement or the Warrant Agreement, or (D)
resales of the Securities in connection with the distribution
contemplated hereby;
iv) the Registration Statement is effective under the
Act, and, if applicable, filing of all pricing information has
been timely made in the appropriate form under Rule 430A, and
no stop order suspending the use of the Preliminary
Prospectus, the Registration Statement or the Prospectus or
any part of any thereof or suspending the effectiveness of the
Registration Statement has been issued and no proceedings for
that purpose have been instituted or are pending, threatened
or contemplated under the Act;
v) each of the Preliminary Prospectus, the
Registration Statement, and the Prospectus and any amendments
or supplements thereto (other than the financial statements
and schedules and other financial and statistical data
included therein, as to which no opinion need be rendered)
comply as to form in all material respects with the
requirements of the Act and the Rules and Regulations;
vi) to such counsel's knowledge, (A) there are no
agreements, contracts or other documents required by the Act
to be described in the Registration Statement and the
Prospectus or required to be filed as exhibits to the
Registration Statement (or required to be filed under the
Exchange Act if upon such filing they would be incorporated,
in whole or in part, by reference therein) other than those
described in the Registration Statement and the Prospectus and
filed as exhibits thereto, and the exhibits which have been
filed are correct copies of the documents of which they
purport to be copies; (B) the descriptions in the Registration
Statement and the Prospectus and any supplement or amendment
thereto of agreements, contracts and other documents to which
the Company is a party or by which it is bound are accurate
and fairly represent the information required to be shown by
Form SB-2; (C) except as disclosed in the Registration
Statement and the Prospectus, there is no action, suit,
proceeding, inquiry, arbitration, investigation, litigation or
governmental proceeding (including, without limitation, those
pertaining to environmental or similar matters), domestic
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<PAGE>
or foreign, pending or threatened against (or circumstances
that may give rise to the same), or involving the properties
or business of, the Company which (I) is required to be
disclosed in the Registration Statement which is not so
disclosed (and such proceedings as are summarized in the
Registration Statement are accurately summarized in all
respects), or (II) questions the validity of the capital stock
of the Company or of this Agreement, the Underwriter's Warrant
Agreement, the Warrant Agreement or the Consulting Agreement
or of any action taken or to be taken by the Company pursuant
to or in connection with any of the foregoing; (D) no statute
or regulation or legal or governmental proceeding required to
be described in the Prospectus is not described as required;
and (E) there is no action, suit or proceeding pending or
threatened against or affecting the Company before any court,
arbitrator or governmental body, agency or official (or any
basis thereof known to such counsel) in which there is a
reasonable possibility of an adverse decision which may result
in a material adverse change in the condition, financial or
otherwise, or the earnings, prospects, stockholders' equity,
value, operation, properties, business or results of
operations of the Company taken as a whole, which could
adversely affect the present or prospective ability of the
Company to perform its obligations under this Agreement, the
Underwriter's Warrant Agreement, the Warrant Agreement or the
Consulting Agreement or which in any manner draws into
question the validity or enforceability of this Agreement, the
Underwriter's Warrant Agreement, the Warrant Agreement or the
Consulting Agreement;
vii) the Company has full legal right, power and
authority to enter into each of this Agreement, the
Underwriter's Warrant Agreement, the Recapitalization
Agreement, the Warrant Agreement and the Consulting Agreement
and to consummate the transactions provided for herein and
therein; and each of this Agreement, the Underwriter's Warrant
Agreement, the Recapitalization Agreement, the Warrant
Agreement and the Consulting Agreement has been duly
authorized, executed and delivered by the Company. Each of
this Agreement, the Underwriter's Warrant Agreement, the
Recapitalization Agreement, the Warrant Agreement and the
Consulting Agreement, assuming due authorization, execution
and delivery by each other party thereto, constitutes a legal,
valid and binding agreement of the Company, enforceable
against the Company in accordance with its terms (except as
such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of
general application relating to or affecting the enforcement
of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as
obligations to indemnify or contribute to losses may be
limited by applicable law). None of the Company's execution or
delivery of this Agreement, the Underwriter's Warrant
Agreement, the Recapitalization Agreement, the Warrant
Agreement or the Consulting Agreement, its performance
hereunder and thereunder, its consummation of the transactions
contemplated herein and therein, or the conduct of its
business as described in the Registration Statement and the
Prospectus and any amendments or supplements thereto,
conflicts with or will conflict with or results or will result
in any breach or violation of any of the terms or provisions
25
<PAGE>
of, or constitutes or will constitute a default under, or
result in the creation or imposition of any lien, charge,
claim, encumbrance, pledge, security interest, defect or other
restriction or equity of any kind whatsoever upon, any
property or assets (tangible or intangible) of the Company or
of the Subsidiary pursuant to the terms of (A) the certificate
of incorporation or bylaws of the Company or of the
Subsidiary, (B) any license, contract, indenture, mortgage,
lease, deed of trust, voting trust agreement, stockholders'
agreement, note, loan or credit agreement or any other
agreement or instrument evidencing an obligation for borrowed
money, or any other agreement or instrument to which the
Company or the Subsidiary is a party or by which either is or
may be bound or to which the properties or assets (tangible or
intangible) of either are or may be subject, (C) any statute
applicable to the Company or the Subsidiary or (D) any
judgment, decree, order, rule or regulation applicable to the
Company or the Subsidiary of any arbitrator, court, regulatory
body or administrative agency or other governmental agency or
body (including, without limitation, those having jurisdiction
over environmental or similar matters), domestic or foreign,
having jurisdiction over the Company or the Subsidiary or any
of their activities or properties;
viii) no consent, approval, authorization or order of,
and no filing with, any arbitrator, court, regulatory body,
administrative agency, government agency or other body,
domestic or foreign (other than such as may be required under
"blue sky" laws, as to which no opinion need be rendered), is
required in connection with the issuance of the Securities
pursuant to the Prospectus, the Registration Statement, this
Agreement, the Underwriter's Warrant Agreement, the
Recapitalization Agreement and the Warrant Agreement, or the
performance of this Agreement, the Underwriter's Warrant
Agreement, the Recapitalization Agreement, the Warrant
Agreement and the Consulting Agreement and the transactions
contemplated hereby and thereby;
ix) the properties and business of each of the Company
and the Subsidiary conform to the description thereof
contained in the Registration Statement and the Prospectus;
and each of the Company and the Subsidiary has good and
marketable title to, or valid and enforceable leasehold
estates in, all items of real and personal property stated in
the Prospectus to be owned or leased by it, in each case free
and clear of all liens, charges, claims, encumbrances,
pledges, security interests, defects or other restrictions or
equities of any kind whatsoever, other than those referred to
in the Prospectus and liens for taxes not yet due and payable;
x) neither the Company nor the Subsidiary is in breach
of, or in default under, any term or provision of any license,
contract, indenture, mortgage, lease, deed of trust, voting
trust agreement, stockholders' agreement, note, loan or credit
agreement or any other agreement or instrument evidencing an
obligation for borrowed money, or any other agreement or
instrument to which the Company or the Subsidiary is a party
or by which it is or may be bound or to which its property or
assets (tangible or intangible) are or may be subject; and
26
<PAGE>
each of the Company and the Subsidiary is not in violation of
any term or provision of (A) its certificate of incorporation
or by-laws, (B) any authorization, approval, order, license,
certificate, franchise or permit of any governmental or
regulatory official or body, or (C) any judgement, decree,
order, statute, rule or regulation to which it is subject;
xi) the statements in the Prospectus under "Prospectus
Summary," "Risk Factors," "The Company," "Business,"
"Management," "Principal Stockholders," "Certain
Transactions," "Shares Eligible For Future Sale," and
"Description of Capital Stock" have been reviewed by such
counsel, and insofar as they refer to statements of law,
descriptions of statutes, licenses, rules or regulations or
legal conclusions, are correct in all material respects;
xii) the Units, the Common Stock and the Redeemable
Warrants have been accepted for quotation on Nasdaq;
xiii) each of the Company and the Subsidiary owns or
possesses, free and clear of all liens or encumbrances and
right thereto or therein by third parties, the requisite
licenses or other rights to use all trademarks, service marks,
copyrights, service names, tradenames, patents, patent
applications and licenses necessary to conduct its business
(including without limitation any such licenses or rights
described in the Prospectus as being owned or possessed by the
Company or the Subsidiary) and there is no claim or action by
any person pertaining to, or proceeding, pending or
threatened, which challenges the exclusive rights of the
Company or the Subsidiary with respect to any trademarks,
service marks, copyrights, service names, trade names,
patents, patent applications and licenses used in the conduct
of the Company's or the Subsidiary's business (including,
without limitation, any such licenses or rights described in
the Prospectus as being owned or possessed by the Company or
the Subsidiary);
xiv) the persons listed under the captions "Principal
Stockholders" and in the Prospectus are the respective
"beneficial owners" (as such phrase is defined in Rule 13d-3
under the Exchange Act) of the securities set forth opposite
their respective names thereunder as and to the extent set
forth therein;
xv) except as disclosed in the Prospectus, no person,
corporation, trust, partnership, association or other entity
has the right to include and/or register any securities of the
Company or of the Subsidiary in the Registration Statement,
require the Company to file any registration statement or, if
filed, to include any security in such registration statement;
xvi) there are no claims, payments, issuances,
arrangements or understandings, whether oral or written, for
services in the nature of a finder's or origination fee with
respect to the sale of the Securities hereunder or financial
consulting arrangement or any other arrangements, agreements,
understandings,
27
<PAGE>
payments or issuances that may affect the Underwriter's
compensation, as determined by the NASD; and
xvii) assuming due execution by the parties thereto, the
Lock-Up Agreements are legal, valid and binding obligations of
the parties thereto, enforceable against such parties and any
subsequent holder of the securities subject thereto in
accordance with their terms.
xviii) the Recapitalization Agreement has been duly and
validly authorized, executed and delivered by the Company and
constitutes valid and binding obligations of the Company in
accordance with the terms of the Recapitalization Agreement,
except (i) as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance or similar laws affecting creditors' rights
generally, (ii) as enforceability of any indemnification or
contribution provisions may be limited under applicable laws
or the public policies underlying such laws, and (iii) that
the remedies of specific performance and injunctive and other
forms of equitable relief may be subject to equitable defenses
and to the discretion of the court before which any
proceedings therefor may be brought. Any and all securities
issued or to be issued by the Company pursuant to the
Recapitalization Agreement were or will be issued in
transactions exempt from the registration requirements of the
Act and in accordance with all other applicable state, federal
and local laws, rules, regulations and permits.
Such counsel shall state that such counsel has participated in
conferences with officers and other representatives of the Company and
representatives of the independent public accountants for the Company, at which
conferences such counsel made inquiries of such officers, representatives and
accountants and discussed the contents of the Preliminary Prospectus, the
Registration Statement, the Prospectus and related matters and, although such
counsel is not passing upon and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Preliminary Prospectus, the Registration Statement or the Prospectus, on the
basis of the foregoing, no facts have come to the attention of such counsel
which lead them to believe that either the Registration Statement or any
amendment thereto, at the time such Registration Statement or amendment became
effective, or the Preliminary Prospectus or the Prospectus, or any amendment or
supplement thereto, as of the date of the Preliminary Prospectus and the
Prospectus, and as of the date of such opinion, contained any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading (it being understood that
such counsel need express no opinion with respect to the financial statements
and schedules and other financial and statistical data included in the
Preliminary Prospectus, the Registration Statement or the Prospectus, or any
supplements or amendments thereto).
In rendering such opinion, such counsel may rely (a) as to
matters involving the application of laws other than the laws of the United
States and jurisdictions in which they are admitted, to the extent such counsel
deems proper and to the extent specified in such opinion, if at all, upon an
opinion or opinions (in form and substance satisfactory to Underwriter's
28
<PAGE>
Counsel) of other counsel acceptable to Underwriter's Counsel, familiar with the
applicable laws; and (b) as to matters of fact, to the extent they deem proper,
on certificates and written statements of responsible officers of the Company or
the Subsidiary and certificates or other written statements of officers of
departments of jurisdictions having custody of documents respecting the
corporate existence or good standing of the Company or the Subsidiary, provided
that copies of any such statements or certificates shall be delivered to
Underwriter's Counsel, if requested. The opinion of such counsel for the Company
shall state that the opinion of any such other counsel is in form satisfactory
to such counsel and that the Underwriter and they are justified in relying
thereon. Such opinion shall also state that the Underwriters' Counsel is
entitled to rely thereon. Such opinion shall not state that it is to be governed
or qualified by, or that it is otherwise subject to, any treatise, written
policy or other document relating to legal opinions, including without
limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991)
or any comparable state accord.
At each Option Closing Date, if any, the Underwriter shall
have received the favorable opinion of Fishman & Merrick, P.C., counsel to the
Company, dated the relevant Option Closing Date, addressed to the Underwriter,
and in form and substance satisfactory to Underwriter's Counsel confirming as of
the Option Closing Date, the statements made by Fishman & Merrick, P.C., in its
opinion delivered on the Closing Date.
(e) On the Closing Date, the Underwriter shall have received
the favorable opinion of Tilton, Fallon, Lungmus & Chestnut, patent counsel to
the Company, dated the Closing Date, addressed to the Underwriter, in
substantially the form attached hereto as Exhibit A and in form and substance
satisfactory to Underwriter's Counsel.
At each Option Closing Date, if any, the Underwriter shall
have received the favorable opinion of Tilton, Fallon, Lungmus & Chestnut, dated
the relevant Option Closing Date, addressed to the Underwriter and in form and
substance satisfactory to Underwriter's Counsel confirming, as of the Option
Closing Date, the statements made by Tilton, Fallon, Lungmus & Chestnut in its
opinion delivered on the Closing Date.
(f) On or prior to each of the Closing Date and each Option
Closing Date, if any, Underwriter's Counsel shall have been furnished with such
documents, certificates and opinions as they may reasonably require for the
purpose of enabling them to review or pass upon the matters referred to in
Section 6(c) hereof, or in order to evidence the accuracy, completeness or
satisfaction of any of the representations, warranties or conditions of the
Company herein contained.
(g) Prior to the Closing Date and each Option Closing Date, if
any, (i) there shall have been no material adverse change or development
involving a prospective adverse change in the condition, financial or otherwise,
or the earnings, stockholders' equity, value, operations, properties, business
or results of operations of the Company or the Subsidiary, whether or not in the
ordinary course of business, from the latest dates as of which such matters are
set forth in the Registration Statement and the Prospectus; (ii) there shall
have been no transaction, not in the ordinary course of business, entered into
by the Company or the Subsidiary from the latest date as of which the financial
condition of the Company and the Subsidiary is set forth in the Registration
Statement and the Prospectus; (iii) the Company shall
29
<PAGE>
not be in default under any provision of any instrument relating to any
outstanding indebtedness; (iv) neither the Company nor the Subsidiary shall have
issued any securities (other than the Securities) or declared or paid any
dividend or made any distribution in respect of its capital stock of any class
and there shall not have been any change in the capital stock, debt (long or
short term) or liabilities or obligations of the Company or the Subsidiary
(contingent or otherwise) from the latest dates as of which such matters are set
forth in the Registration Statement and the Prospectus; (v) no material amount
of the assets of the Company or the Subsidiary shall have been pledged or
mortgaged, except as set forth in the Registration Statement and the Prospectus;
(vi) no action, suit, proceeding, inquiry, arbitration, investigation,
litigation or governmental or other proceeding, domestic or foreign, shall be
pending or threatened (or circumstances giving rise to same) against the Company
or the Subsidiary or affecting any of its properties or business before or by
any court or federal, state or foreign commission, board or other administrative
agency wherein an unfavorable decision, ruling or finding may materially and
adversely affect the condition, financial or otherwise, or the earnings,
stockholders' equity, value, operations, properties, business or results of
operations of the Company taken as a whole, except as set forth in the
Registration Statement and Prospectus; and (vii) no stop order shall have been
issued under the Act with respect to the Registration Statement and no
proceedings therefor shall have been initiated, threatened or contemplated by
the Commission.
(h) At the Closing Date and each Option Closing Date, if any,
the Underwriter shall have received a certificate of the Company signed by the
principal executive officer and by the chief financial or chief accounting
officer of the Company, dated the Closing Date or the relevant Option Closing
Date, as the case may be, to the effect that each of such persons has carefully
examined the Registration Statement, the Prospectus and this Agreement, and
that:
i) The representations and warranties of the Company
in this Agreement are true and correct, as if made on and as
of the Closing Date or the Option Closing Date, as the case
may be, and the Company has complied with all agreements and
covenants and satisfied all conditions contained in this
Agreement on its part to be performed or satisfied at or prior
to such Closing Date or Option Closing Date, as the case may
be;
ii) No stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued,
and no proceedings for that purpose have been instituted or
are pending or, to the best of each of such person's
knowledge, are contemplated or threatened under the Act;
iii) The Registration Statement and the Prospectus and,
if any, each amendment and each supplement thereto contain all
statements and information required to be included therein,
and none of the Registration Statement, the Prospectus or any
amendment or supplement thereto includes any untrue statement
of a material fact or omits to state any material fact
required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which
they were made, not misleading and neither the Preliminary
Prospectus nor any supplement thereto included any untrue
statement of a material fact or omitted to state any material
fact required to be stated therein or necessary to make the
30
<PAGE>
statements therein, in light of the circumstances in which
they were made, not misleading; and
iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and the
Prospectus, (A) the Company has not incurred any material
liabilities or obligations, direct or contingent; (B) the
Company has not paid or declared any dividends or other
distributions on its capital stock; (C) the Company has not
entered into any transactions not in the ordinary course of
business; (D) there has not been any change in the capital
stock or long-term debt or any increase in the short-term
borrowings (other than any increase in short-term borrowings
in the ordinary course of business) of the Company (E) the
Company has not sustained any material loss or damage to its
property or assets, whether or not insured; (F) there is no
litigation which is pending or threatened (or circumstances
giving rise to same) against the Company or any affiliate
(within the meaning of the Rules and Regulations) of the
foregoing which is required to be set forth in an amended or
supplemented Prospectus which has not been set forth; and (G)
there has occurred no event required to be set forth in an
amended or supplemented Prospectus which has not been set
forth.
References to the Registration Statement and the Prospectus in this Section 6(h)
are to such documents as amended and supplemented at the date of such
certificate.
(i) By the Closing Date, the Underwriter will have received
clearance from the NASD as to the amount of compensation allowable or payable to
the Underwriter, as described in the Registration Statement.
(j) At the time this Agreement is executed, the Underwriter
shall have received a letter, dated such date, addressed to the Underwriter and
in form and substance satisfactory in all respects (including the non-material
nature of the changes or decreases, if any, referred to in clause (iii) below)
to the Underwriter and Underwriter's Counsel, from Coopers & Lybrand LLP.
i) confirming that they are independent certified
public accountants with respect to the Company within the
meaning of the Act and the Rules and Regulations;
ii) stating that it is their opinion that the financial
statements of the Company included in the Registration
Statement comply as to form in all material respects with the
applicable accounting requirements of the Act and the Rules
and Regulations and that the Underwriter may rely upon the
opinion of Coopers & Lybrand LLP with respect to such
financial statements and supporting schedules included in the
Registration Statement;
iii) stating that, on the basis of a limited review
which included a reading of the latest unaudited interim
consolidated financial statements of the Company and the
Subsidiary, a reading of the latest available minutes of the
stockholders and board of directors and the various committees
of the board of
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directors of the Company and the Subsidiary, consultations
with officers and other employees of the Company and the
Subsidiary responsible for financial and accounting matters
and other specified procedures and inquiries, nothing has come
to their attention which would lead them to believe that (A)
the unaudited consolidated financial statements and supporting
schedules of the Company included in the Registration
Statement do not comply as to form in all material respects
with the applicable accounting requirements of the Act and the
Rules and Regulations or are not fairly presented in
conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the
audited consolidated financial statements of the Company
included in the Registration Statement, or (B) at a specified
date nor more than five (5) days prior to the effective date
of the Registration Statement, there has been any change in
the capital stock or long-term debt of the Company and the
Subsidiary, or any decrease in the stockholders' equity or net
current assets or net assets of the Company and the Subsidiary
as compared with amounts shown in the April 30, 1997 balance
sheet included in the Registration Statement, other than as
set forth in or contemplated by the Registration Statement,
or, if there was any change or decrease, setting forth the
amount of such change or decrease, and (C) during the period
from April 30, 1997 to a specified date not more than five (5)
days prior to the effective date of the Registration
Statement, there was any decrease in net revenues, net
earnings or net earnings per share of Common Stock, in each
case as compared with the corresponding period beginning April
30, 1996, other than as set forth in or contemplated by the
Registration Statement, or, if there was any such decrease,
setting forth the amount of such decrease;
iv) setting forth, at a date not later than five (5)
days prior to the effective date of the Registration
Statement, the amount of liabilities of the Company and the
Subsidiary (including a break-down of commercial paper and
notes payable to banks);
v) stating that they have compared specific dollar
amounts, numbers of shares, percentages of revenues and
earnings, statements and other financial information
pertaining to the Company and the Subsidiary set forth in the
Prospectus, in each case to the extent that such amounts,
numbers, percentages, statements and information may be
derived from the general accounting records, including work
sheets, of the Company and the Subsidiary and excluding any
questions requiring an interpretation by legal counsel, with
the results obtained from the application of specified
readings, inquiries and other appropriate procedures (which
procedures do not constitute an audit in accordance with
generally accepted auditing standards) set forth in the letter
and found them to be in agreement; and
vi) statements as to such other matters incident to the
transaction contemplated hereby as the Underwriter may
request.
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(k) At the Closing Date and each Option Closing Date, if any,
the Underwriter shall have received from Coopers & Lybrand LLP a letter, dated
as of the Closing Date or the relevant Option Closing Date, as the case may be,
to the effect that (i) it reaffirms the statements made in the letter furnished
pursuant to Section 6(j), (ii) if the Company has elected to rely on Rule 430A
of the Rules and Regulations, to the further effect that Coopers & Lybrand LLP
has carried out procedures as specified in clause (v) of Section 6(j) hereof
with respect to certain amounts, percentages and financial information as
specified by the Underwriter and deemed to be a part of the Registration
Statement pursuant to Rule 430A(b) and have found such amounts, percentages and
financial information to be in agreement with the records specified in such
clause (v).
(l) The Company shall have received a letter, dated such date,
addressed to the Company, in form and substance satisfactory in all respects to
the Underwriter, from Coopers & Lybrand LLP stating that they have not during
the immediately preceding five (5) year period brought to the attention of the
Company's management any "weakness," as defined in Statement of Auditing
Standard No. 60 "Communication of Internal Control Structure Related Matters
Noted in an Audit," in any of the Company's internal controls.
(m) On each of Closing Date and Option Closing Date, if any,
there shall have been duly tendered to the Underwriter the appropriate number of
Securities.
(n) No order suspending the sale of the Securities in any
jurisdiction designated by the Underwriter pursuant to Section 4(e) hereof shall
have been issued on either the Closing Date or the Option Closing Date, if any,
and no proceedings for that purpose shall have been instituted or shall be
contemplated.
(o) On or before the effective date of the Registration
Statement, the Company shall have executed and delivered to the Underwriter, the
Underwriter's Warrant Agreement, substantially in the form filed as Exhibit ___
to the Registration Statement. On or before the Closing Date, the Company shall
have executed and delivered to the Underwriter the Underwriter's Warrants in
such denominations and to such designees as shall have been provided to the
Company.
(p) On or before Closing Date, the Units, the Common Stock and
the Redeemable Warrants shall have been duly approved for quotation on Nasdaq,
subject to official notice of issuance.
(q) On or before Closing Date, there shall have been delivered
to the Underwriter all of the Lock-Up Agreements, in form and substance
satisfactory to Underwriter's Counsel.
(r) On or before the Closing Date, the Company shall have (i)
executed and delivered to the Underwriter the Consulting Agreement,
substantially in the form filed as Exhibit ____ to the Registration Statement
and (ii) paid the Underwriter $48,000 representing the retainer fee pursuant to
the Consulting Agreement.
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(s) On or before the effective date of the Registration
Statement, the Company and Continental Stock Transfer & Trust Company shall have
executed and delivered to the Underwriter the Warrant Agreement, substantially
in the form filed as Exhibit ___ to the Registration Statement.
(t) At least two (2) full business days prior to the date
hereof, the Closing Date and each Option Closing Date, if any, the Company shall
have delivered to the Underwriter the unaudited interim consolidated financial
statements required to be so delivered pursuant to Section 4(p) of this
Agreement.
If any condition to the Underwriter's or the Underwriter's
obligations hereunder to be fulfilled prior to or at the Closing Date or at any
Option Closing Date, as the case may be, is not so fulfilled, the Underwriter
may terminate this Agreement or, if the Underwriter so elects, it may waive any
such conditions which have not been fulfilled or extend the time for their
fulfillment.
7. Indemnification
(a) The Company agrees to indemnify and hold harmless each
Underwriter (for purposes of this Section 7, "Underwriter" shall include the
officers, directors, partners, employees, agents and counsel of the Underwriter,
and each person, if any, who controls the Underwriter ("controlling person")
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, from and against any and all losses, claims, damages, expenses or
liabilities, joint or several (and actions, proceedings, investigations,
inquiries and suits in respect thereof), whatsoever (including but not limited
to any and all costs and expenses whatsoever reasonably incurred in
investigating, preparing or defending against such action, proceeding,
investigation, inquiry or suit commenced or threatened, or any claim
whatsoever), as such are incurred, to which the Underwriter or such controlling
person may become subject under the Act, the Exchange Act or any other statute
or at common law or otherwise or under the laws of foreign countries, arising
out of or based upon (A) any untrue statement or alleged untrue statement of a
material fact contained (i) in any Preliminary Prospectus, the Registration
Statement or the Prospectus (as from time to time amended and supplemented);
(ii) in any post-effective amendment or amendments or any new registration
statement and prospectus in which is included securities of the Company issued
or issuable upon exercise of the Securities; or (iii) in any application or
other document or written communication (in this Section 7, collectively
referred to as "applications") executed by the Company or based upon written
information furnished by the Company filed, delivered or used in any
jurisdiction in order to qualify the Securities under the securities laws
thereof or filed with the Commission, any state securities commission or agency,
the NASD, Nasdaq or any securities exchange; (B) the omission or alleged
omission therefrom of a material fact required to be stated therein or necessary
to make the statements therein not misleading (in the case of the Prospectus, in
light of the circumstances in which they were made); or (C) any breach of any
representation, warranty, covenant or agreement of the Company contained herein
or in any certificate by or on behalf of the Company or any of its officers
delivered pursuant hereto, unless, in the case of clause (A) or (B) above, such
statement or omission was made in reliance upon and in conformity with written
information furnished to the Company with respect to any Underwriter by or on
behalf of such Underwriter expressly for use in any Preliminary Prospectus, the
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<PAGE>
Registration Statement or any Prospectus, or any amendment thereof or supplement
thereto, or in any application, as the case may be. The indemnity agreement in
this Section 7(a) shall be in addition to any liability which the Company may
have at common law or otherwise.
(b) The Underwriter agrees to indemnify and hold harmless the
Company, each of its directors, each of its officers who signed the Registration
Statement, and each person, if any, who controls the Company within the meaning
of the Act, to the same extent as the foregoing indemnity from the Company to
the Underwriter but only with respect to statements or omissions, if any, made
in any Preliminary Prospectus, the Registration Statement or the Prospectus or
any amendment thereof or supplement thereto or in any application made in
reliance upon, and in strict conformity with, written information furnished to
the Company with respect to any Underwriter by such Underwriter expressly for
use in such Preliminary Prospectus, the Registration Statement or Prospectus or
any amendment thereof or supplement thereto or in any such application, provided
that such written information or omissions only pertain to disclosures in the
Preliminary Prospectus, the Registration Statement or the Prospectus directly
relating to the transactions effected by the Underwriter in connection with the
offering contemplated hereby. The Company acknowledges that the statements with
respect to the public offering of the Securities set forth under the heading
"Underwriting" and the stabilization legend in the Prospectus have been
furnished by the Underwriter expressly for use therein and constitute the only
information furnished in writing by or on behalf of the Underwriter for
inclusion in any Preliminary Prospectus, the Registration Statement or the
Prospectus. The indemnity agreement in this Section 7(b) shall be in addition to
any liability which the Underwriter may have at common law or otherwise.
(c) Promptly after receipt by an indemnified party under this
Section 7 of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against one or more
indemnifying parties under this Section 7, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but the
failure to so notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 7 (except to the extent that it
has been prejudiced in any material respect by such failure) or from any
liability which it may have otherwise). In case any such action, investigation,
inquiry, suit or proceeding is brought against any indemnified party, and it
notifies an indemnifying party or parties of the commencement thereof, the
indemnifying party or parties will be entitled to participate therein, and to
the extent it or they may elect by written notice delivered to the indemnified
party promptly after receiving the aforesaid notice from such indemnified party,
to assume the defense thereof with counsel reasonably satisfactory to such
indemnified party. Notwithstanding the foregoing, an indemnified party shall
have the right to employ its own counsel in any such case but the fees and
expenses of such counsel shall be at the expense of such indemnified party
unless (i) the employment of such counsel shall have been authorized in writing
by the indemnifying parties in connection with the defense of such action at the
expense of the indemnifying party, (ii) the indemnifying parties shall not have
employed counsel reasonably satisfactory to such indemnified party to have
charge of the defense of such action within a reasonable time after notice of
commencement of the action, or (iii) such indemnified party shall have
reasonably concluded that there may be defenses available to it which are
different from or additional to those available to one or all of the
indemnifying parties (in which event the indemnifying parties shall not have the
right to direct the defense of such action, investigation, inquiry, suit or
proceeding on behalf of the indemnified party or parties),
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<PAGE>
in any of which events such fees and expenses of one additional counsel shall be
borne by the indemnifying parties. In no event shall the indemnifying parties be
liable for fees and expenses of more than one counsel (in addition to any local
counsel) separate from their own counsel for all indemnified parties in
connection with any one action, investigation, inquiry, suit or proceeding or
separate but similar or related actions, investigations, inquiries, suits or
proceedings in the same jurisdiction arising out of the same general allegations
or circumstances. An indemnifying party will not, without the prior written
consent of the indemnified parties, settle, compromise or consent to the entry
of any judgment with respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action), unless such settlement, compromise or consent
(i) includes an unconditional release of each indemnified party from all
liability arising out of such claim, action, suit or proceeding and (ii) does
not include a statement as to or an admission of fault, culpability or a failure
to act by or on behalf of any indemnified party. Anything in this Section 7 to
the contrary notwithstanding, an indemnifying party shall not be liable for any
settlement of any claim or action effected without its written consent;
provided, however, that such consent may not be unreasonably withheld.
(d) In order to provide for just and equitable contribution in
any case in which (i) an indemnified party makes a claim for indemnification
pursuant to this Section 7, but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the expiration
of time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this Section 7 provide for indemnification in such
case, or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or liabilities (or
actions, investigations, inquiries, suits or proceedings in respect thereof) (A)
in such proportion as is appropriate to reflect the relative benefits received
by each of the contributing parties, on the one hand, and the party to be
indemnified, on the other hand, from the offering of the Securities or (B) if
the allocation provided by clause (A) above is not permitted by applicable law,
in such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (A) above but also the relative fault of each of the
contributing parties, on the one hand, and the party to be indemnified, on the
other hand, in connection with the statements or omissions that resulted in such
losses, claims, damages, expenses or liabilities, as well as any other relevant
equitable considerations. In any case where the Company is a contributing party
and the Underwriter is the indemnified party, the relative benefits received by
the Company, on the one hand, and the Underwriter, on the other, shall be deemed
to be in the same proportion as the total net proceeds from the offering of the
Securities (before deducting expenses) bear to the total underwriting discounts
received by the Underwriter hereunder, in each case as set forth in the table on
the cover page of the Prospectus. Relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or by the Underwriter, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission. The amount paid by an
indemnified party as a result of the losses, claims, damages, expenses or
liabilities (or actions, investigations, inquiries, suits or proceedings in
respect thereof) referred to in the first (1st) sentence of this Section 7(d)
shall be deemed to
36
<PAGE>
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action, claim,
investigation, inquiry suit or proceeding. Notwithstanding the provisions of
this Section 7(d), the Underwriter shall not be required to contribute any
amount in excess of the underwriting discount applicable to the Securities
purchased by the Underwriter hereunder. No person guilty of fraudulent
misrepresentation (within the meaning of Section 12(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 7(d), each person, if any, who
controls the Company or the Underwriter within the meaning of the Act, each
officer of the Company who has signed the Registration Statement and each
director of the Company shall have the same rights to contribution as the
Company or the Underwriter, as the case may be, subject in each case to this
Section 7(d). Any party entitled to contribution will, promptly after receipt of
notice of commencement of any action, suit, inquiry, investigation or
proceeding, against such party in respect to which a claim for contribution may
be made against another party or parties under this Section 7(d), notify such
party or parties from whom contribution may be sought, but the omission to so
notify such party or parties shall not relieve the party or parties from whom
contribution may be sought from any obligation it or they may have hereunder or
otherwise than under this Section 7(d), or to the extent that such party or
parties were not adversely affected by such omission. Notwithstanding anything
in this Section 7 to the contrary, no party will be liable for contribution with
respect to the settlement of any action or claim effected without its written
consent. The contribution agreement set forth above shall be in addition to any
liabilities which any indemnifying party may have at common law or otherwise.
8. Representations, Warranties, Covenants and Agreements to
Survive Delivery. All representations, warranties, covenants and agreements of
the Company contained in this Agreement, or contained in certificates of
officers of the Company submitted pursuant hereto, shall be deemed to be
representations, warranties, covenants and agreements at the Closing Date and
each Option Closing Date, if any, and such representations, warranties,
covenants and agreements of the Company, and the respective indemnity and
contribution agreements contained in Section 7 hereof, shall remain operative
and in full force and effect regardless of any investigation made by or on
behalf of any Underwriter, the Company, any controlling person of any
Underwriter or the Company, and shall survive the termination of this Agreement
or the issuance and delivery of the Securities to the Underwriter.
9. Effective Date. This Agreement shall become effective at
10:00 a.m., New York City time, on the next full business day following the date
hereof, or at such earlier time after the Registration Statement becomes
effective as the Underwriter, in its discretion, shall release the Securities
for sale to the public; provided, however, that the provisions of Sections 5, 7
and 10 of this Agreement shall at all times be effective. For purposes of this
Section 9, the Securities to be purchased hereunder shall be deemed to have been
so released upon the earlier of dispatch by the Underwriter of telegrams to
securities dealers releasing such shares for offering or the release by the
Underwriter for publication of the first newspaper advertisement which is
subsequently published relating to the Securities.
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<PAGE>
10. Termination.
(a) Subject to Section 10(b) hereof, the Underwriter shall
have the right to terminate this Agreement: (i) if any domestic or international
event or act or occurrence has materially adversely disrupted, or in the
Underwriter's opinion will in the immediate future materially adversely disrupt,
the financial markets; or (ii) if any material adverse change in the financial
markets shall have occurred; or (iii) if trading generally shall have been
suspended or materially limited on or by, as the case may be, any of the New
York Stock Exchange, the American Stock Exchange, the NASD, the Boston Stock
Exchange, the Commission or any governmental authority having jurisdiction over
such matters; or (iv) if trading of any of the securities of the Company shall
have been suspended, or if any of the securities of the Company shall have been
delisted, on any exchange or in any over-the-counter market; or (v) if the
United States shall have become involved in a war or major hostilities, or if
there shall have been an escalation in an existing war or major hostilities, or
a national emergency shall have been declared in the United States; or (vi) if a
banking moratorium shall have been declared by any state or federal authority;
or (vii) if the Company shall have sustained a material or substantial loss by
fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity
or malicious act which, whether or not such loss shall have been insured, will,
in the Underwriter's opinion, make it inadvisable to proceed with the delivery
of the Securities; or (ix) if there shall have occurred any outbreak or
escalation of hostilities or any calamity or crisis or there shall have been
such a material adverse change in the conditions or prospects of the Company, or
if there shall have been such a material adverse change in the general market,
political or economic conditions, in the United States or elsewhere, as in the
Underwriter's judgment would make it inadvisable to proceed with the offering,
sale and/or delivery of the Securities; or (x) if Howard Schwan shall no longer
serve the Company in his present capacity.
(b) If this Agreement is terminated by the Underwriter in
accordance with the provisions of Section 6 or Section 10(a) hereof the Company
shall promptly reimburse and indemnify the Underwriter for all its actual
out-of-pocket expenses, including the fees and disbursements of Underwriter's
Counsel, less amounts previously paid pursuant to Section 5(c) hereof. In
addition, the Company shall remain liable for all "blue sky" counsel fees (such
fees not to exceed $45,000) and expenses and "blue sky" filing fees.
Notwithstanding any contrary provision contained in this Agreement, any election
hereunder or any termination of this Agreement (including, without limitation,
pursuant to Sections 6 and 10(a) hereof), and whether or not this Agreement is
otherwise carried out, the provisions of Section 5 and Section 7 shall not be in
any way be affected by such election or termination or failure to carry out the
terms of this Agreement or any part hereof.
11. Default by the Company. If the Company shall fail at the
Closing Date or any Option Closing Date, as applicable, to sell and deliver the
number of Securities which it is obligated to sell hereunder on such date, then
this Agreement shall terminate (or, if such default shall occur with respect to
any Option Units to be purchased on an Option Closing Date, the Underwriter may,
at its option, by notice from the Underwriter to the Company, terminate the
Underwriter's obligation to purchase Option Units from the Company on such date)
without any liability on the part of any non-defaulting party other than
pursuant to Section 5, Section 7 and Section 10 hereof. No action taken pursuant
to this Section 11 shall relieve the Company from liability, if any, in respect
of such default.
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<PAGE>
12. Notices. All notices and communications hereunder, except
as herein otherwise specifically provided, shall be in writing and shall be
deemed to have been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriter shall be directed to the
Underwriter at Joseph Stevens & Company, Inc., 33 Maiden Lane, 8th Floor, New
York, NY 10038, Attention: Mr. Joseph Sorbara, with a copy to Orrick, Herrington
& Sutcliffe LLP, 666 Fifth Avenue, New York, New York 10103, Attention: Rubi
Finkelstein, Esq. Notices to the Company shall be directed to the Company at CTI
Industries Corporation, 22160 North Pepper Road, Barrington, Illinois 60010,
Attention: Stephen M. Merrick, with a copy to Fishman & Merrick, P.C., 30 North
LaSalle Street, Suite 3500, Chicago, Illinois 60602, Attention: John M. Klimek,
Esq.
13. Parties. This Agreement shall inure solely to the benefit
of, and shall be binding upon, the Underwriter, the Company and the controlling
persons, directors and officers referred to in Section 7 hereof, and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Agreement or any provisions herein
contained. No purchaser of Units from the Underwriter shall be deemed to be a
successor by reason merely of such purchase.
14. Construction. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of New York,
without giving effect to choice of law or conflict of laws principles.
15. Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original, and all of
which taken together shall be deemed to be one and the same instrument.
16. Entire Agreement; Amendments. This Agreement, the
Underwriter's Warrant Agreement and the Consulting Agreement constitute the
entire agreement of the parties hereto and supersede all prior written or oral
agreements, understandings and negotiations with respect to the subject matter
hereof and thereof. This Agreement may not be amended except in a writing signed
by the Underwriter and the Company.
39
<PAGE>
If the foregoing correctly sets forth the understanding
between the Underwriter and the Company, please so indicate in the space
provided below for that purpose, whereupon this letter shall constitute a
binding agreement between us.
Very truly yours,
CTI INDUSTRIES CORPORATION
By:_____________________________________
Name: Howard W. Schwan
Title: President
Confirmed and accepted as of the date first above written.
JOSEPH STEVENS & COMPANY, INC.
By:____________________________________
Name:
Title:
40
<PAGE>
Exhibit A
[FORM OF INTELLECTUAL PROPERTY OPINION]
___________________, 1997
JOSEPH STEVENS & COMPANY, INC.
33 Maiden Lane, 8th Floor
New York, New York 10038
Re: Public Offering of CTI Industries Corporation
Gentlemen:
We have acted as special counsel to CTI INDUSTRIES
CORPORATION, a Delaware corporation (the "Company"), in connection with the
entering into by the Company of that certain Underwriting Agreement by and
between Joseph Stevens & Company, Inc. ("Joseph Stevens"), as underwriter, and
the Company, dated _______________, 1997 (the "Underwriting Agreement"). This
opinion is provided to you pursuant to Section ____ of the Underwriting
Agreement.
For the purpose of rendering the opinions set forth below we
have reviewed the following (collectively, the "Documents"):
(i) the Underwriting Agreement;
(ii) that certain Registration Statement filed _____, 1997,
together with any and all amendments thereof exhibits thereto
(collectively, the "Registration Statement");
(iii) the company's Prospectus dated ___________ __, 1997 (the
"Prospectus");
(iv) a search of the United States Patent and Trademark Office
records relevant to ownership of any and all:
patents and patent applications (including, without
limitation, the patents and patent applications listed
on Schedule A annexed hereto and hereby incorporated
by reference herein (collectively, the "Patents")),
and trademarks, trademark applications, service marks
and service mark applications (collectively, the
"Marks") (including, without limitation, the
41
<PAGE>
Joseph Stevens & Company, Inc. __________, 1997
Marks listed on Schedule B annexed hereto and hereby
incorporated by reference herein (collectively, the
"Trademarks")),
owned, purportedly owned or licensed by the Company
(including, those patents, patent applications and Marks
licensed, without limitation, pursuant to the licenses listed
on Schedule C annexed hereto and hereby incorporated by
reference herein (collectively, the "Licenses")), conducted by
______________________________ and certified as true and
correct as of _______________________, 1997 (no earlier than 5
days prior to the date of the Closing (as defined in the
Underwriting Agreement));
(v) a search of the United States Copyright Office records
relevant to ownership of any and all copyrighted material
(including, without limitation, the copyright in, or license
permitting the Company's actual use of, the material licensed
or otherwise distributed by the Company and listed on Schedule
D annexed hereto and hereby incorporated by reference herein
(collectively, the "Copyrighted Material")), owned,
purportedly owned or licensed by the Company conducted by
_____________________ and certified as true and correct as of
__________________, 1997 (no earlier than 5 days prior to the
date of the Closing);
(vi) an intellectual property litigation search with respect
to all Patents, Trademarks, Licenses and Copyrighted Material,
listed on Schedules A, B, C and D, respectively;
(vii) a search of the Uniform Commercial Code ("UCC")
recordation offices, in the following jurisdictions --
[________________, _____________ and _______], with respect to
the following two categories of general intangibles:
(a) the intellectual property general intangibles of
the Company, including, without limitation, the
Company's patents, patent applications, inventions,
know how, trademarks, service marks, copyrights,
service and trade names, intellectual property
licenses and other rights, and
(b) the intellectual property general intangibles
licensed to the Company, including, without
limitation, the patents, patent applications,
inventions, know how, trademarks, service marks,
copyrights, service and trade names and other
intellectual property rights licensed to the Company
pursuant to the Licenses (listed on Schedule C),
said search certified to us as complete and accurate by
________________ and current through ________________________,
1997 (no earlier than 5 days prior to the date of the Closing)
and said jurisdictions being the only jurisdictions in
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<PAGE>
Joseph Stevens & Company, Inc. __________, 1997
which filing of UCC financing statements or other documents
may be filed to effectively evidence a security or other
interest in said general intangibles; and
(viii) any and all records, documents, instruments and
agreements in our possession or under our control relating to
the Company.
We have also examined such corporate records, documents,
instruments and agreements, and inquired into such other matters, as we have
deemed necessary or appropriate as a basis for the opinions set forth herein.
Whenever our opinion herein is qualified by the phrase "to the best of our
knowledge" or "to the best of our knowledge, after due inquiry," such language
means that, based upon (i) our inquiries of officers of the Company, (ii) our
review of the Documents, and (iii) our review of such other corporate records,
documents, instruments and agreements described in the first sentence of this
paragraph, we believe that such opinions are factually correct.
To the best of our knowledge, as to all matters of fact
represented to you by the Company, we advise you that nothing has come to our
attention that would cause us to believe that such facts are incorrect,
incomplete or misleading or that reliance thereon is not warranted under the
circumstances. We call to your attention that our opinion is limited to such
facts as they exist on the date hereof and do not take into account any change
of circumstances, fact or law subsequent thereto.
Based upon and subject to the foregoing, we are of the opinion
that:
1. To the best of our knowledge, after due inquiry,
except as described in the Registration Statement, the Company
owns or has the right to use, free and clear of all liens,
encumbrances, pledges, security interests, defects or other
restrictions or equities of any kind whatsoever,
(i) all patents and patent applications (including,
without limitation, the Patents),
(ii) all trademarks and service marks (including,
without limitation, the Trademarks),
(iii) all copyrights (including, without limitation,
the Copyrighted Material),
(iv) all service and trade names,
(v) all intellectual property licenses (including,
without limitation, the Licenses), and
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<PAGE>
Joseph Stevens & Company, Inc. __________, 1997
(vi) all technology
used in, contemplated to be used in or required for, the
conduct of the Company's business.
2. To the best of our knowledge, after due inquiry,
the Company possesses all material intellectual property
licenses or rights used in, or required for, the conduct of
its business (including, the Licenses and without limitation,
any such licenses or rights described in the Registration
Statement as being owned, possessed or licensed by the
Company, as the case may be), such licenses and rights are in
full force and effect, and the Company's products, methods and
services do not infringe any unlicensed intellectual property
of any third parties.
3. To the best of our knowledge, after due inquiry,
there is no claim or action, pending, threatened or potential,
which affects or could affect the rights of the Company with
respect to any trademarks, service marks, copyrights, service
names, trade names, patents, patent applications or licenses
used in, or required for, the conduct of the Company's
business and all trademarks, service marks, copyrights, trade
names, and patents owned or licensed to the Company are valid.
4. To the best of our knowledge, after due inquiry,
there is no intellectual property based claim or action,
pending, threatened or potential, which affects or could
affect the rights of the Company with respect to any products,
services, processes or licenses, including, without
limitation, the Licenses used in the conduct of the Company's
business.
5. To the best of our knowledge, after due inquiry,
except as described in the Registration Statement, the Company
is not under any obligation to pay royalties or fees to any
third party with respect to any material, technology or
intellectual properties developed, employed, licensed or used
by the Company.
6. To the best of our knowledge, after due inquiry,
the statements in the Registration Statement under the
headings, "Risk Factors - Patents, Trademarks and Proprietary
Information" and "Business - Patents, Trademarks and
Proprietary Information", are accurate in all material
respects, fairly represent the information disclosed therein
and do not omit to state any fact necessary to make the
statements made therein complete and accurate.
7. To the best of our knowledge, after due inquiry,
the statements in the Registration Statement and the
Prospectus do not contain any untrue statement of a material
fact with respect to the intellectual property position of the
Company, or omit to state any material fact relating to the
intellectual property position of
44
<PAGE>
Joseph Stevens & Company, Inc. __________, 1997
the Company which is required to be stated in the Registration
Statement and the Prospectus or is necessary to make the
statements therein not misleading.
We call your attention to the fact that the members of this
firm are licensed to practice law in the State of ______________ and before the
United States Patent and Trademark Office as Registered Patent Attorneys.
Accordingly, we express no opinion with respect to the laws, rules and
regulations of any jurisdictions other than the State of ___________ and the
United States of America.
The opinions expressed herein are for the sole benefit of, and
may be relied upon only by, the several Underwriters named in Schedule A to the
Underwriting Agreement and Orrick, Herrington & Sutcliffe LLP.
45
EXHIBIT 3.1
SECOND RESTATED CERTIFICATE OF INCORPORATION OF
CTI INDUSTRIES CORPORATION
CTI Industries Corporation, a corporation organized and existing under
the laws of the State of Delaware, hereby certifies as follows:
1. The name of the corporation is CTI Industries Corporation. The date
of the filing of its original Certificate of Incorporation of the Corporation
with the Secretary of State, under the name Container Merger Company, Inc., was
October 14, 1983.
2. This Restated Certificate of Incorporation restates, integrates and
further amends the Certificate of Incorporation of the Corporation, as amended,
in its entirety and has been adopted in accordance with the provisions of
Sections 242 and 245 of the General Corporation Law of the State of Delaware, as
amended, to read as herein set forth in full:
FIRST: The name of the corporation (hereinafter called the
"Corporation") is:
CTI INDUSTRIES CORPORATION
SECOND: The address, including the street, number, city and county of
the registered office of the corporation in the State of Delaware is 1209 Orange
Street, City of Wilmington, County of New Castle, and the name of the registered
agent of the corporation in the State of Delaware at such address is The
Corporation Trust Company.
THIRD: The nature of the business and of the purposes to be conducted
and promoted by the corporation shall be to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware.
FOURTH:
A. This Corporation is authorized to issue three classes of capital
stock to be designated respectively Common Stock ("Common Stock"), Class B
Common Stock ("Class B Common Stock") and Preferred Stock. The total number of
shares of capital stock that the Corporation is authorized to issue is Fourteen
Million One Hundred Thousand (14,100,000). The total number of shares of Common
Stock this Corporation shall have authority to issue is Eleven Million
(11,000,000). The total number of shares of Class B Common Stock this
Corporation shall have authority to issue is One Million One Hundred Thousand
(1,100,000). The total number of shares of Preferred Stock the Company shall
have the authority to issue is Two Million (2,000,000). The Common Stock shall
have a par value of $.065 per share, the Class B Common Stock shall have a par
value of $.91 per share and the Preferred Stock shall have a par value of $.91
per share. Upon the conversion of the Preferred Stock to shares of Class B
Common Stock as provided in Section 6.02 of Paragraph D of this Article Fourth,
any additional shares of Preferred Stock may be issued from time to time with
such designations, preferences, conversion rights, cumulative, relative,
participating, option or other rights, qualifications, limitations or
restrictions thereof as shall be stated and expressed in the resolution or
resolutions providing for the issuance of such Preferred Stock adopted by the
Boardof Directors pursuant to the authority in this paragraph given.
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B. Upon the effective date of this Second Restated Certificate of
Incorporation (i) a reverse stock split of the Company's Preferred Stock shall
automatically take place whereby current holders of Preferred Stock will receive
1 share of Preferred Stock for every 2.6 shares of Preferred Stock then held and
(ii) a reverse stock split of the Company's Common Stock shall automatically
take place whereby current holders of Common Stock will receive 1 share of
Common Stock for every 2.6 shares of Common Stock then held. The reverse stock
splits provided for above will take effect automatically and immediately without
the need for replacement certificates to be issued by the Company. The Company
shall, however, issue replacement certificates as soon as practicable.
C. The powers, preferences, rights, restrictions, and other matters
relating to the Common Stock and Class B Common Stock are as follows:
1. Dividends. The holders of the Common Stock and Class B
Common Stock shall participate equally and pro rata in dividends, if any,
declared by the Company on a per share basis.
2. Liquidation. In the event of any voluntary or involuntary
liquidation (whether complete or partial), dissolution or winding up of the
Corporation, the holders of Common Stock and Class B Common Stock shall
participate equally, on a per share basis, in the assets of the Corporation
available for distribution to its stockholders, whether from capital, surplus or
earnings.
3. Voting Rights.
3.01 General Voting Rights. Except in circumstances in which
the holders of Common Stock and Class B Common Stock, respectively,
shall be required to vote separately as a class, with respect to all
matters upon which the Corporation's stockholders shall vote or be
entitled to vote, the holders of all Common Stock and Class B Common
Stock shall vote together as a single class with each holder being
entitled to one vote per share on all such matters.
3.02 Election of Directors. For so long as there shall be
issued and outstanding more than 500,000 shares of Class B Common
Stock.
(a) By-Laws; Number of Directors. Notwithstanding the
provisions of Article Seventh hereof, the by-laws of the Corporation
shall provide for the election of seven directors and such provision
may not be amended, modified, altered or repealed except by the
approval of the holders of two-thirds of the outstanding shares of
Class B Common Stock voting separately as a class, provided, however,
that the number of directors shall in no event be reduced below seven
without the additional approval of the holders of two-thirds of the
outstanding shares of Common Stock voting separately as a class.
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(b) Election of Directors.
(i) Four of the seven directors of the
Corporation shall be elected by the
holders of a majority of the
outstanding shares of Class B Common
Stock voting separately as a class;
(ii) The remaining three directors shall
be elected by the holders of a
majority of the outstanding shares
of Common Stock and Class B Common
Stock voting together as a single
class.
3.03 Amendments to Class B Common Stock. After the initial
issuance of Class B Common Stock upon the conversion of the Preferred
Stock, the Corporation shall not (i) issue additional shares of Class B
Common Stock (except for additional issuances upon stock dividends,
stock splits, or recapitalizations with respect to outstanding shares
of Class B Common Stock) or (ii) amend the terms of the Class B Common
Stock in any manner that would adversely affect the rights of the
holders of Common Stock except with the approval of the holders of
two-thirds of the outstanding shares of Common Stock.
3.04 Quorum. At any meeting of the stockholders of the
Corporation, the presence in person or by proxy of a majority in number
of the issued and outstanding shares of Common Stock and Class B Common
Stock, as a single class, shall be sufficient to constitute a quorum.
3.05 Action Without Meeting. Any action required or permitted
to be taken at any meeting of the stockholders of the Corporation, may
be taken without a meeting, if prior to such action a written consent
thereto is signed by the holders of shares of Common Stock and/or Class
B Common Stock necessary to approve such action if such action was
taken at a meeting of stockholders.
4. Transfer.
4.01 No person holding shares of Class B Common Stock of
record (hereinafter called "Class B Holder") may transfer, and the
Corporation shall not register the transfer of, such shares of Class B
Common Stock, whether by sale, assignment, gift, bequest, appointment,
operation of law or otherwise, except to a Permitted Transferee. A
Permitted Transferee shall mean:
(a) Stephen M. Merrick, John H. Schwan, Howard W.
Schwan, Frances Ann Rohlen, and Philip W. Colburn, their respective
spouses, issue, and the spouses of such issue (collectively referred to
as "Family Members");
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(b) The trustee or trustees of a trust or trusts
(including a voting trust) for the primary benefit of any one or more
Family Members (collectively referred to as "Family Trusts");
(c) A corporation or partnership controlled (as
defined below) by one or more Family Members or Family Trusts
(collectively referred to as "Family Entities"); and
(d) The estate of such Class B Holder.
4.02 Notwithstanding anything to the contrary set forth
herein, any Class B Holder may pledge such Holder's shares of Class B Common
Stock to a pledgee pursuant to a bona fide pledge of such shares as collateral
security for indebtedness due to the pledgee, provided that such shares shall
not be transferred to or registered in the name of the pledgee and shall remain
subject to the provisions of this Section 4. In the event of foreclosure or
other similar action by the pledgee, such pledged shares of Class B Common Stock
may only be transferred to a Permitted Transferee of the pledgor or converted
into shares of Common Stock as the pledgee may elect.
4.03 The following events shall result in the conversion of
the applicable shares of Class B Common Stock into shares of Common Stock:
(a) a Class B Holder shall transfer or attempt to
transfer Class B Common Stock to a person or entity not a Permitted
Transferee;
(b) a Class B Holder shall transfer or attempt to
transfer to any person or entity not a Permitted Transferee, including,
without limitation, a pledgee, the right to vote any Class B Common
Stock, whether by agreement, voting trust or otherwise;
(c) a Family Trust holding Class B Common Stock shall
cease to be a trust for the primary benefit of any one or more Family
Members;
(d) a Family Entity holding Class B Common Stock
shall cease to be controlled by one or more Family Members or Family
Trusts. For purposes of this Section 4, "controlled" means: (i) in the
case of a corporation, the ownership, beneficially and of record, of
shares of capital stock representing a majority of the equity ownership
of, and economic interest in, such corporation, as well as a majority
of all votes entitled to vote for the election of directors; and (ii)
in the case of a partnership, the ownership, beneficially and of
record, of partnership interests representing a majority of the equity
as a majority of the partnership interests entitled to participate in
the management of the partnership.
If any of the foregoing events shall occur, all shares of
Class B Common Stock subject to such transfer or attempted transfer or then held
by such Family Trust or Family Entity, whichever applicable, shall, without
further act on anyone's part, be converted into shares of
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Common Stock effective upon the date of such event occurs, and stock
certificates formerly representing such shares of Class B Common Stock shall
thereupon and thereafter be deemed to represent the like number of shares of
Common Stock. The Corporation may, in connection with preparing a list of
shareholders entitled to vote at any meeting of shareholders, or as a condition
to the transfer or the resignation of shares of Class B Common Stock on the
Corporation's books, require the furnishing of such affidavits, documents or
other proof as it deems necessary to establish that any person is a Permitted
Transferee or to ascertain that none of the events described in this
subparagraph 4.03 occurred.
4.04 Shares of Class B Common Stock shall be registered in the
names of the beneficial owners thereof and not in "street" or "nominee" name.
For this purposes, a "beneficial owner" of any shares of Class B Common Stock
shall mean a person who, or any entity which, possesses the power, either singly
or jointly, to direct the voting or disposition of such shares. The Corporation
shall note on the certificates for shares of Class B Common Stock the existence
of the restrictions on transfer imposed by this Section 4.
5. Conversion.
5.01 Conversion Rights and Procedure.
(a) Right of Conversion. Each holder of shares of
Class B Common Stock shall be entitled to exercise all or a portion of
the conversion rights provided herein at any time or from time to time.
(b) Rate of Conversion. Upon exercise of the right of
conversion hereunder with respect to shares of Class B Common Stock,
the holder thereof shall be entitled to receive that number of shares
of Common Stock ("Conversion Shares") equal to the number of shares of
Class B Common Stock tendered subject to adjustment as provided in
Section 4.02.
(c) Method of Conversion. A holder of shares of Class
B Common Stock shall exercise such holder's conversion rights hereunder
by (i) delivering or mailing to the Corporation, by certified or
registered mail, return receipt requested, a written notice stating
such holder's intention to exercise such rights and specifying the
number of shares of Class B Common Stock as to which the conversion
right is exercised and (ii) accompanying such notice with a certificate
or certificates representing such shares duly endorsed in blank or
accompanied with a stock power duly endorsed in blank. The right of
exercise shall be deemed to have been exercised on the date that such
notice shall be delivered to the Corporation or mailed in accordance
with this section ("Exercise Time"). Each share of Class B Common Stock
shall be canceled after it has been converted as provided herein.
(d) Delivery of Certificates. Certificates for
Conversion Shares shall be delivered to the holder named therein within
15 days after the Exercise Time. Unless all of the Class B Common Stock
evidenced by the certificate delivered to the Corporation shall
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<PAGE>
have been converted, the Corporation shall within such 15 day period
prepare a new certificate, substantially identical to that surrendered,
representing the balance of the shares of Class B Common Stock formerly
represented by the certificate which shall not have been converted and
shall within the said 15 day period deliver such certificate to the
person designated as the holder thereof.
(e) The Corporation covenants and agrees that:
(i) At all times during which any shares
of Class B Common Stock are issued
and outstanding, the Corporation
shall reserve and maintain a
sufficient number of authorized and
unissued shares of Common Stock
sufficient to issue shares of Common
Stock upon conversion of all of the
then issued and outstanding Class B
Common Stock, including additional
shares which may become issuable by
reason of an adjustment pursuant to
Section 5.02 hereof. The Corporation
shall not issue any shares of Common
Stock if, after the issuance
thereof, the number of authorized
and unissued shares of Common Stock
would then be insufficient to issue
shares of Common Stock to holders of
the then issued and outstanding
Class B Common Stock if all of such
holders were to exercise their
rights of conversion hereunder;
(ii) The Conversion Shares issuable upon
any conversion of any shares of
Class B Common Stock shall be deemed
to have been issued to the person
exercising such conversion privilege
at the Exercise Time, and the person
exercising such conversion privilege
shall be deemed for all purposes to
have become the record holder of
such Common Stock shares at the
Exercise Time.
(iii) All Conversion Shares which may be
issued upon any conversion of any
shares of Class B Common Stock will,
upon issuance, be fully paid and
non-assessable and free from all
taxes, liens and charges with
respect to the issue thereof.
(f) Notwithstanding the above, the shares of Class B
Common Stock then outstanding shall be automatically converted into
shares of Common Stock upon the conversion terms then in effect on July
23, 2002.
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5.02 Adjustment Provisions.
(a) Subdivision or Combination of Stock. In case at
any time the Company shall in any manner subdivide its outstanding
shares of Common Stock into a greater number of shares or combine such
shares of Common Stock into a smaller number of shares, then the number
of shares of Common Stock into which a share of Class B Common Stock
may be converted shall be adjusted to reflect such subdivision or
combination of shares of Common Stock.
(b) Reorganization, Reclassification, Consolidation,
Merger or Sale. If any reorganization or reclassification of the
capital stock of the Company, or any consolidation or merger of the
Company with another corporation, or the sale of all or substantially
all of the Company's assets to another corporation shall be effected in
such a way that holders of Common Stock shall be entitled to receive
stock, securities, or assets with respect to or in exchange for Common
Stock, then, as a condition of such reorganization, reclassification,
consolidation, merger or sale, lawful and adequate provisions shall be
made whereby the holders of Class B Common Stock shall thereafter have
the right to purchase and receive such shares of stock, securities, or
assets as may be issued or payable with respect to or exchange for a
number of outstanding shares of such Common Stock equal to the number
of shares of such stock immediately theretofore purchasable and
receivable upon the conversion of Class B Common Stock had such
reorganization, reclassification, consolidation, merger or sale not
taken place, and in any such case appropriate provision shall be made
with respect to the rights and interests of the holder of the Class B
Common Stock to the end that the provisions hereof shall thereafter be
applicable, as nearly as may be, in relation to any shares of stock,
securities or assets thereafter deliverable upon the exercise of the
rights represented hereby.
In the event of a merger or consolidation of the Company with or into
another corporation as a result of which a number of shares of common
stock of the surviving corporation greater or lesser than the number of
shares of Common Stock of the Company outstanding immediately prior to
such merger or consolidation are issuable to holders of Common Stock of
the Company, then the number of shares of Common Stock subject to
issuance upon conversion of a share of Class B Common Stock shall be
adjusted in the same manner as though there were a subdivision or
combination of the outstanding shares of Common Stock of the Company.
The Company shall not effect any such consolidation, merger, or sale,
unless prior to the consummation thereof the successor corporation (if
other than the Company) resulting from such consolidation or merger of
the corporation into or for the securities of which the previously
outstanding stock of the Company shall be exchanged in connection with
such consolidation or merger, or the corporation purchasing such
assets, as the case may be, shall assume, by written instrument
executed and mailed or delivered to the holder hereof at the last
address of such holder appearing on the books of the company, the
obligation to deliver to such holder such shares of stock, securities,
or assets as, in accordance with the foregoing provisions, such holder
may be entitled to purchase. The provisions of this Section 5.02(b)
governing the substitution of another corporation for the Company shall
similarly apply to successive instances in which
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the corporation then deemed to be the Company hereunder shall either
sell all or substantially all of its properties and assets to any other
corporation, shall consolidate with or merge into any other
corporation, or shall be the surviving corporation of the merger into
it of any other corporation as a result of which the holders of any of
its stock or other securities shall be deemed to have become the
holders of, or shall become entitled to, the stock or other securities
of any corporation other than the corporation at the time deemed to be
the Company hereunder.
(c) Notice of Adjustment. The Company shall give to
the holder of the Class B Common Stock prompt written notice of every
adjustment of the Conversion terms by first class mail, postage
prepaid, addressed to the address of such holder as shown on the books
of the Company, which notice shall state the adjustment, and shall set
forth in reasonable detail the method of calculation and the facts upon
which such calculation was based.
D. The powers, preferences, rights, restrictions, and other matters
relating to the Preferred Stock are as follows:
1. Dividends
1.01 Preferred Stock Dividends. The holders of shares of
Preferred Stock shall be entitled to receive dividends at the rate of 13% per
annum of the par value, payable out of funds legally available therefore. Such
dividends shall be payable only when, as, and if declared by the Board of
Directors. Such dividends shall accrue from day to day whether or not earned or
declared. If declared, all dividends which shall have accrued shall be payable
on the first day of March, June, September and December for so long as any
shares of the Preferred Stock shall remain outstanding. If at any time the
Corporation shall pay less than the total amount of dividends due on outstanding
Preferred Stock at the time of the payment, such payment shall be distributed
among the holders of the Preferred Stock so that an equal amount shall be paid
with respect to each outstanding share of Preferred Stock.
1.02 Dividends Cumulative. Dividends on each share of the
Preferred Stock shall be cumulative from the date of issuance of such share,
whether or not at the time such dividend shall accrue or become due or at any
other time there shall be profits, surplus or other funds of the Corporation
legally available for the payment of dividends. Dividends shall accrue on each
share of Preferred Stock from and including the date of issuance of such share
to and including the date upon which the holder of such share shall have
converted such share to Common stock in accordance with Section 4 hereof or such
share shall have been purchased and redeemed by the Corporation.
1.03 Restriction on Common Stock Dividends. So long as any
shares of Preferred Stock are outstanding, no dividends whatsoever shall be
declared or paid upon, nor shall any distribution be made upon or with respect
to, any shares of Common Stock.
2. Liquidation.
2.01 Rights Upon Liquidation. In the event of any voluntary or
involuntary liquidation (whether complete or partial), dissolution or winding up
of the Corporation, the holders of Preferred Stock shall be entitled to be paid
out of the assets of the Corporation
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<PAGE>
available for distribution to its stockholders, whether from capital, surplus or
earnings, an amount in cash per share equal to the Liquidating Value. No
distribution shall be made on any Common Stock of the Corporation by reason of
any voluntary or involuntary liquidation (whether complete or partial),
dissolution or winding up of the Corporation unless each holder shall have
received the full amount of the Liquidating Value with respect to all shares of
Preferred Stock held by such holder. The consolidation or merger of the
Corporation into or with any other entity or entities which results in the
exchange of outstanding shares of the Corporation for securities or other
consideration issued or paid or caused to be issued or paid by any such entity
or affiliate thereof, and the sale or transfer by the Corporation of all or
substantially all its assets, shall be deemed to be a liquidation, dissolution
or winding up of the Corporation within the meaning of the provisions of this
Section 2.01.
2.02 Liquidating Value. The Liquidating Value with respect to
each share of Preferred Stock outstanding shall be the sum of (i) the par value
and (ii) all unpaid dividends accrued thereon to the date of final distribution.
2.03 Allocation of Liquidation Payments. If upon any
dissolution, liquidation (whether complete or partial), or winding up of the
Corporation, the assets of the Corporation available for distribution to the
stockholders shall be insufficient to pay to the holders of outstanding
Preferred Stock the full amount to which they shall be entitled pursuant to
Section 2.01 hereof, each holder of Preferred Stock shall be entitled to receive
an amount equal to the product derived by multiplying the total amount available
for distribution by a fraction the numerator of which shall be the number of
shares of Preferred Stock held by such person and the denominator of which the
total number of shares of Preferred Stock then outstanding.
3. Voting Rights.
3.01 General Voting Rights. Except in circumstances in which
the holders of Preferred Stock and Common Stock respectively shall be required
to vote separately as a class, with respect to all matters upon which the
Corporation's stockholders shall vote or be entitled to vote, the holders of all
Preferred Stock and Common Stock shall vote together as a single class with each
holder being entitled to one vote per share on all such matters.
3.02 Election of Directors. For so long as there shall be
issued and outstanding more than 250,000 shares of Preferred Stock:
(a) By-Laws; Number of Directors. Notwithstanding the
provisions of Article Seventh hereof, the by-laws of the Corporation
shall provide for the election of five directors and may not be
amended, modified, altered or repealed except by the approval of the
holders of two-thirds of the outstanding shares of Preferred Stock
voting separately as a class.
(b) Election of Directors.
(i) Four of the five directors of the
Corporation shall be elected by the
holders of a majority of the
outstanding shares of Preferred
Stock voting separately as a class;
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(ii) One director shall be elected by the
holders of a majority of the
outstanding shares of Common Stock
and Preferred Stock voting together
as a single class.
If at any time after December 31, 1996, there shall be outstanding less
than 250,000 shares of Preferred Stock, the foregoing provisions shall
thereafter no longer be in effect and all directors of the Corporation
thereafter shall be elected by the holders of the outstanding Common
Stock and Preferred Stock voting together as a single class.
3.03 Voting in Certain Circumstances. The following actions
shall require the approval of the holders of two-thirds of the outstanding
shares of Common Stock and Preferred Stock voting together as a single class, by
written consent, or in person or by proxy at a special meeting of stockholders
called for such purpose:
(i) Any amendment of the Certificate of
Incorporation of the Corporation;
(ii) Any merger or consolidation of the
Corporation or any subsidiary of the
Corporation with any other corporation;
(iii) Authorization of or the taking of any action
to dissolve, liquidate or wind up the
business of the Corporation; or
(iv) The sale, lease transfer or other
disposition of all or any substantial part
of the corporation's assets in any one or a
series of related transactions.
3.04 Quorum. At any meeting of the stockholders of the
Corporation, the presence in person or by proxy of a majority in number of the
issued and outstanding shares of Common Stock and Preferred Stock, as a single
class, shall be sufficient to constitute a quorum.
4. Conversion Rights.
4.01 Conversion Rights and Procedure.
(a) Right of Conversion. Each holder of shares of
Preferred Stock shall be entitled to exercise all or a portion of the
conversion rights provided herein at any time or from time to time.
(b) Rate of Conversion. Upon exercise of the right of
conversion hereunder with respect to shares of Preferred Stock, the
holder thereof shall be entitled to receive that number of shares of
Common Stock determined by dividing the Conversion Value per share of a
share of Preferred Stock multiplied by the number of shares of
Preferred Stock converted and divided by the Conversion Price of the
Common Stock. The "Conversion Value" per share of each share of
Preferred Stock shall be the sum of the par value of such share and all
accrued and unpaid dividends thereon as of the date of conversion.
Subject to adjustment as provided in Section 4.02, the "Conversion
Price" per
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share of Common Stock shall be Thirty-five Cents ($.35) per share. The
shares of Common Stock to be issued upon conversion of shares of
Preferred Stock as provided herein are referred to herein as
"Conversion Shares."
(c) Method of Conversion. A holder of shares of
Preferred Stock shall exercise such holder's conversion rights
hereunder by (i) delivering or mailing to the Corporation, by certified
or registered mail, return receipt requested, a written notice stating
such holder's intention to exercise such rights and specifying the
number of shares of Preferred Stock as to which the conversion right is
exercised and (ii) accompanying such notice with a certificate or
certificates representing such shares duly endorsed in blank or
accompanied with a stock power duly endorsed in blank. The right of
exercise shall be deemed to have been exercised on the date that such
notice shall be delivered to the Corporation or mailed in accordance
with this section ("Exercise Time").
(d) Delivery of Certificates. Certificates for
Conversion Shares shall be delivered to the holder named therein within
15 days after the Exercise Time. Unless all of the Preferred Stock
evidenced by the certificate delivered to the Corporation shall have
been converted or redeemed, the Corporation shall within such 15 day
period prepare a new certificate, substantially identical to that
surrendered, representing the balance of the shares of Preferred Stock
formerly represented by the certificate which shall not have been
converted or redeemed and shall within the said 15 day period deliver
such certificate to the person designated as the holder thereof.
(e) The Corporation covenants and agrees that:
(i) At all times during which any shares
of Preferred Stock are issued and
outstanding, the Corporation shall
reserve and maintain a sufficient
number of authorized and unissued
shares of Common Stock sufficient to
issue shares of Common Stock upon
conversion of all of the then issued
and outstanding Preferred Stock,
including additional shares which
may become issuable by reason of an
adjustment in the conversion rate
pursuant to Section 4.02 hereof. The
Corporation shall not issue any
shares of Common Stock if, after the
issuance thereof, the number of
authorized and unissued shares of
Common Stock would then be
insufficient to issue shares of
Common Stock to holders of the then
issued and outstanding Preferred
Stock if all of such holders were to
exercise their rights of conversion
hereunder;
(ii) The Conversion Shares issuable upon
any conversion of any shares of
Preferred Stock shall be deemed to
have been issued to the person
exercising such conversion privilege
at the Exercise Time, and the person
exercising such conversion privilege
shall be deemed for all purposes to
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have become the record holder of
such Common Stock shares at the
Exercise Time.
(iii) All Conversion Shares which may be
issued upon any conversion of any
shares of Preferred Stock will, upon
issuance, be fully paid and
non-assessable and free from all
taxes, liens and charges with
respect to the issue thereof.
4.02 Anti-dilution Provisions.
(a) Anti-dilution; Initial Conversion Price. In order
to prevent dilution of the rights granted hereunder, the Conversion
Price per share of Common Stock and the number of shares of Common
Stock which a holder of Preferred Stock shall be entitled to receive
upon exercise of the conversion rights herein shall be subject to
adjustment from time to time in accordance with this Section 4.02. For
purposes of this section the initial Conversion Price of each share of
Common Stock shall be Thirty-five Cents ($.35). The Conversion Price
per share of Common Stock shall be the initial Conversion Price, as
adjusted from time to time pursuant to the provisions of this Section
4.02.
(b) Adjustment of Conversion Price; Resulting
Adjustment of Number of Shares of Common Stock Upon Conversion. The
initial Conversion Price per share of Common Stock shall be subject to
adjustment from time to time as hereinafter provided (such price or
such price as last adjusted pursuant to the terms hereof, as the case
may be, is herein called the "Conversion Price"). Upon each adjustment
of the Conversion Price, the holder of shares of Preferred Stock shall
be entitled to receive upon exercise of the conversion rights provided
herein, at the Conversion Price resulting from such adjustment, the
number of shares of Common Stock obtained by multiplying the number of
shares of Preferred Stock converted by the Conversion Value per share
of Preferred Stock and dividing the product thereof by the Conversion
Price resulting from such adjustment.
(c) Adjustment of Conversion Price Upon Issuance of
Common Stock. If and whenever after the date hereof the Corporation
shall issue or sell any shares of its common Stock for a consideration
per share less than the Conversion Price in effect immediately prior to
the time of such issue or sale (except if such issue or sale shall be
made pursuant to the exercise of Executive options, as defined below),
then, forthwith upon such issue or sale, the Conversion Price shall be
reduced to the price, calculated to the nearest cent, determined by
dividing (a) the sum of (i) the number of shares of Common Stock
outstanding immediately prior to such issue or sale multiplied by the
then existing Conversion Price and (ii) the consideration, if any,
received by the Company upon such issue or sale, by (b) the total
number of shares of Common Stock outstanding immediately after such
issue or sale. No adjustment of the Conversion Price, however, shall be
made in an amount less than $0.01 per share, but any such lesser
adjustment shall be carried forward and shall be made at the time and
together with the next subsequent adjustment which together with all
adjustment so carried forward shall amount to $0.01 per share or more.
The provisions of this subparagraph (c) shall not apply with respect to
Executive Options. "Executive Options" shall mean and include options
to purchase Common Stock of the Corporation which may be granted from
time to time by act of the
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Board of Directors of the Corporation to executives or employees of the
Corporation not exceeding, in the aggregate 500,000 shares.
For the purposes of this paragraph (c), the following paragraphs 4.02
(d) to 4.02(m), inclusive, subject to the exception set forth above, shall also
be applicable:
(d) Issuance of Rights or Options. In case at any
time the Company shall in any manner grant (whether directly or by
assumption in a merger or otherwise) any rights to subscribe for or to
purchase, or any options for the purchase of, Common Stock or any stock
or securities convertible into or exchangeable for Common Stock, (such
rights or options being herein called "Options" and such convertible or
exchangeable stock or securities being herein called "Convertible
Securities"), whether or not such Options or the right to convert or
exchange any such Convertible Securities are immediately exercisable,
and the price per share for which Common Stock is issuable upon the
exercise of such Options or upon conversion or exchange of such
Convertible Securities (determined as provided in the following
sentence) shall be less than the Conversion Price in effect immediately
prior to the time of granting such Options, then the total maximum
number of shares of Common Stock issuable upon the exercise of all such
Options or upon conversion or exchange of the total maximum amount of
such Convertible Securities shall be deemed to have been issued for
such price per share as of the date of the granting of such Options and
thereafter shall be deemed to be outstanding. The price per share for
which Common Stock is issuable, as referred to in the preceding
sentence, shall be determined by dividing (a) the sum of (i) the total
amount, if any, received or receivable by the Company as consideration
for the granting of such Options, plus (ii) the minimum aggregate
amount of additional consideration payable to the Company upon the
exercise of all such Options, plus (iii) in the case of all such
Options that relate to Convertible Securities, the minimum aggregate
amount of additional consideration, if any, payable upon the issue or
sale of all such Convertible Securities [to the extent not counted
under the immediately preceding clause (ii)] and upon the conversion or
exchange of all such Convertible Securities into Common Stock, by (b)
the total maximum number of shares of Common Stock issuable upon the
exercise of such Options or upon the conversion or exchange of all such
Convertible Securities. The consideration received or receivable by the
Company shall in each case be determined in accordance with paragraph
4.02(h) below. Except as otherwise provided in paragraph 4.02(f) below,
no adjustment of the Conversion Price shall be made upon the actual
issue of such Common Stock or of such Convertible Securities upon
exercise of such Options or upon the actual issue of such Common Stock
upon conversion or exchange of such Convertible Securities.
(e) Issuance of Convertible Securities. In case the
Company shall in any manner issue (whether directly or by assumption in
a merger or otherwise) or sell any Convertible Securities, whether or
not the rights to exchange or convert thereunder are immediately
exercisable, and the price per share for which Common Stock is issuable
upon such conversion or exchange (determined as provided in the
following sentence) shall be less than the Conversion Price in effect
immediately prior to the time of such issue or sale, then the total
maximum number of shares of Common Stock issuable upon conversion or
exchange of all such convertible securities shall be deemed to have
been issued for such price per share as of the date of the issue or
sale of such Convertible Securities and
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thereafter shall be deemed to be outstanding, provided that (a) except
as otherwise provided in paragraph 4.02(f) below, no adjustment of the
Conversion Price shall be made upon the actual issue of such Common
Stock upon conversion or exchange of such Convertible Securities, and
(b) if any such issue or sale of such Convertible Securities is made
upon exercise of any Options for which adjustment of the Conversion
Price have been or are to be made pursuant to other provisions of this
paragraph 4, no further adjustment of the Conversion Price shall be
made by reason of such issue or sale. The price per share for which
Common Stock is issuable, as referred to in the preceding sentence,
shall be determined by dividing (i) the sum of (A) the total amount
received or receivable by the Company as consideration for the issue or
sale of such Convertible Securities, plus (B) the minimum aggregate
amount of additional consideration, if any, payable upon the conversion
or exchange of such Convertible Securities into Common Stock, by (ii)
the total maximum number of shares of Common Stock issuable upon the
conversion or exchange of such Convertible Securities. The
consideration received or receivable by the Company shall in each case
be determined in accordance with paragraph 4.02(h) below.
(f) Change in Option Price or Conversion Rate. Upon
the happening of any of the following events, namely, if the purchase
price provided for in any Option referred to in paragraph 4.02 (d)
above and still outstanding, the additional consideration, if any,
payable upon the conversion or exchange of any Convertible Securities
referred to in paragraph 4.02(d) or 4.02(e) above and still
outstanding, or the rate at which any such Convertible Securities are
convertible into or exchangeable for Common Stock shall change at any
time (other than under or by reason of provisions designed to protect
against dilution), the Conversion Price in effect at the time of such
event shall forthwith be readjusted to the Conversion Price which would
have been in effect at such time had such Options or Convertible
Securities provide for such changed purchase price, additional
consideration, or conversion rate, as the case may be, at the time
initially granted, issued, or sold. On the expiration of any Option
referred to in paragraph 4.02(d) above prior to the exercise thereof or
the termination of right to convert or exchange any Convertible
Securities referred to in paragraph 4.02(d) or 4.02(e) above prior to
the exercise of such right, the Conversion Price then in effect
hereunder shall forthwith be increased to the Conversion Price which
would have been in effect at the time of such expiration or termination
had such Option or Convertible Securities, to the extent outstanding
immediately prior to such expiration or termination, never been issued,
and the Common Stock issuable thereunder shall no longer be deemed to
be outstanding for the purposes of any calculation under paragraph
4.02(d) or 4.02(e) above.
(g) Determination of Consideration Upon Dividend or
Other Distribution. In case the Company shall declare a dividend or
make any other distribution upon any stock of the Company payable in
Common Stock, Options or Convertible Securities, any Common Stock,
Options, or Convertible Securities, as the case may be, issuable in
payment of such dividend or distribution shall be deemed to have been
issued or sold without consideration.
(h) Consideration for Stock. In case any shares of
Common Stock, Options or Convertible Securities shall be issued or sold
for cash, the consideration
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received therefor shall be deemed to be the amount received by the
Company therefor, without deduction therefrom of any expenses incurred
or any reasonable underwriting commissions or concessions paid or
allowed by the Company (or deducted from amounts received by the
Company) in connection therewith. In case any shares of Common Stock,
Options or Convertible Securities shall be issued or sold for a
consideration other than cash, the amount of the consideration other
than cash received by the Company shall be deemed to be the fair value
of such consideration as determined reasonably and in good faith by the
Board of Directors of the Company, without deduction of any expenses
incurred or any reasonable underwriting commissions or concessions paid
or allowed by the Company (or deducted from amounts received by the
Company) in connection therewith. The amount of consideration deemed to
be received by the Company pursuant to the foregoing provisions of this
paragraph 4.02(h) upon any issuance and/or sale, pursuant to an
established compensation plan of the Company, to directors, officers or
employees of the Company or any subsidiary of the Company in connection
with their employment of shares of Common Stock, Options or convertible
Securities, shall be increased by the amount of any tax benefit
realized by the Company as a result of such issuance and/or sale, the
amount of such tax benefit being the amount by which the federal and/or
state income or other tax liability of the Company shall be reduced by
reason of any deduction or credit in respect of such issuance and/or
sale. In case any Common Stock, Options or Convertible Securities shall
be issued in connection with any merger or consolidation in which the
Company is the surviving Corporation (other than any consolidation or
merger in which the previously outstanding shares of Common Stock of
the Company shall be changed into or exchanged for the stock or other
securities of another corporation), the amount of consideration
received therefor shall be deemed to be the fair value as determined
reasonably in good faith by the Board of Directors of the Company of
such portion of the assets and business of the non-surviving
corporation as such Board may determine to be attributable to such
shares of Common Stock, Options or convertible Securities, as the case
may be. In the event of any consolidation or merger of the Company in
which the Company is not the surviving corporation or in which the
previously outstanding shares of Common Stock of the Company shall be
changed into or exchanged for the stock or other securities of another
corporation, or in the event of any sale or all or substantially all of
the assets of the Company for stock or other securities of any
corporation, the Company shall be deemed to have issued a number of
shares of its Common Stock for all outstanding stock or securities of
the other corporation of the nature received in exchange for the
Company's Common Stock computed on the basis of the actual exchange
ratio on which the transaction was predicated and for a consideration
equal to the fair market value on the date of such transaction of all
such stock or securities of the other corporation, and if such
calculation results in adjustment of the Conversion Price, the
determination of the number of shares of Common Stock issuable upon
conversion of the Preferred Stock immediately prior to such merger,
consolidation or sale, for purposes of paragraph 4.02(l) below, shall
be made after giving effect to such adjustment of the Conversion Price.
In case any shares of Common Stock shall be issued (or issuable)
pursuant to any Options for the purchase of the same, the consideration
deemed to be received (or receivable) therefor shall be deemed to be
the total amount, if any, received (or total minimum amount receivable)
by the Company as consideration for the granting of such Options, plus
the aggregate amount of additional consideration paid (or minimum
amount payable) to the Company upon the exercise of such Options. In
case
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any shares of Common Stock shall be issued (or issuable) upon the
conversion or exchange of any Convertible Securities, the consideration
deemed to be the total amount received (or receivable) therefore shall
be deemed to be the total amount received (or total minimum amount
receivable) by the Company as consideration for the granting of any
Options to subscribe to or purchase such Convertible Securities, plus
the total amount of additional consideration paid (or minimum amount
payable) to the Company as consideration for issue or sale of such
Convertible Securities, plus the total amount of additional
consideration, if any, paid (or minimum amount payable) to the Company
upon the conversion or exchange thereof.
(i) Record Date. In case the Company shall take a
record of the holders of its Common stock for the purpose of entitling
them to receive a dividend or other distribution payable in Common
Stock, Options or Convertible Securities, then such record date shall
be deemed to be the date of the issue or sale of the shares of Common
Stock deemed to have been issued or sold upon the declaration of such
dividend or the making of such other distribution.
(j) Treasury Shares. The number of shares of Common
Stock outstanding at any given time shall not include shares owned or
held by or for the account of the Company, and the disposition of any
such shares shall be considered an issue or sale of Common Stock for
the purposes of this Section 4.02.
(k) Subdivision or Combination of Stock. In case at
any time the Company shall in any manner subdivide its outstanding
shares of Common Stock into a greater number of shares or combine such
shares of Common Stock into a smaller number of shares, then the
Conversion Price in effect immediately subsequent to such subdivision
or combination shall be equal to the product of (a) the Conversion
Price in effect immediately prior to such subdivision or combination
multiplied by (b) a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately prior to such
subdivision or combination and the denominator of which is the number
of shares of Common Stock outstanding immediately thereafter.
(l) Reorganization, Reclassification, Consolidation,
Merger or Sale. If any reorganization or reclassification of the
capital stock of the Company, or any consolidation or merger of the
Company with another corporation, or the sale of all or substantially
all of the Company's assets to another corporation shall be effected in
such a way that holders of Common Stock shall be entitled to receive
stock, securities, or assets with respect to or in exchange for Common
Stock, then, as a condition of such reorganization, reclassification,
consolidation, merger or sale, lawful and adequate provisions shall be
made whereby the holder thereof shall thereafter have the right to
purchase and receive such shares of stock, securities, or assets as may
be issued or payable with respect to or exchange for a number of
outstanding shares of such Common Stock equal to the number of shares
of such stock immediately theretofore purchasable and receivable upon
the exercise of the rights represented hereby had such reorganization,
reclassification, consolidation, merger or sale not taken place, and in
any such case appropriate provision shall be made with respect to the
rights and interests of the holder of the Preferred to the end that the
provisions hereof (including, without limitation, provision
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for adjustment of the Conversion Price and of the number of shares
purchasable and receivable upon the Conversion of the Preferred) shall
thereafter be applicable, as nearly as may be, in relation to any
shares of stock, securities or assets thereafter deliverable upon the
exercise of the rights represented hereby (including an immediate
adjustment, by reason of such consolidation or merger, of the
Conversion Price to the value of the Common Stock reflected by terms of
such consolidation or merger if the value so reflected is less than the
Conversion Price in effect immediately prior to such consolidation or
merger).
In the event of a merger or consolidation of the
Company with or into another corporation as a result of which a number
of shares of common stock of the surviving corporation greater or
lesser than the number of shares of Common Stock of the Company
outstanding immediately prior to such merger or consolidation are
issuable to holders of Common Stock of the Company, then the Conversion
Price in effect immediately prior to such merger or consolidation shall
be adjusted in the same manner as though there were a subdivision or
combination of the outstanding shares of Common Stock of the Company.
The Company shall not effect any such consolidation, merger, or sale,
unless prior to the consummation thereof the successor corporation (if
other than the Company) resulting from such consolidation or merger of
the corporation into or for the securities of which the previously
outstanding stock of the Company shall be exchanged in connection with
such consolidation or merger, or the corporation purchasing such
assets, as the case may be, shall assume, by written instrument
executed and mailed or delivered to the holder hereof at the last
address of such holder appearing on the books of the company, the
obligation to deliver to such holder such shares of stock, securities,
or assets as, in accordance with the foregoing provisions, such holder
may be entitled to purchase. If a purchase, tender, or exchange offer
is made to and accepted by the holders of more than 50% of the
outstanding shares of the Common Stock of the Company, the Company
shall not effect any consolidation, merger, or sale with the Person
having made such offer or with any Affiliate of such Person unless,
prior to the consummation of such consolidation, merger, or sale, the
holder of the Preferred shall have been given a reasonable opportunity
to then elect to receive either the stock, securities, or assets then
issuable upon the Conversion of the Preferred. As used herein, the term
"Person" shall mean and include an individual, a partnership, a
corporation, a trust, a joint venture, an unincorporated organization,
and a government or any department or agency thereof, and an
"Affiliate" of any Person shall mean any Person directly or indirectly
controlling, controlled by, or under direct or indirect common control
with, such other Person. A Person shall be deemed to control a
corporation if such Person possesses, directly or indirectly, the power
to direct or cause the direction of the management and policies of such
corporation, whether through the ownership of voting securities by
contract, or otherwise. The provisions of this Section 4.02(l)
governing the substitution of another corporation for the Company shall
similarly apply to successive instances in which the corporation then
deemed to be the Company hereunder shall either sell all or
substantially all of its properties and assets to any other
corporation, shall consolidate with or merge into any other
corporation, or shall be the surviving corporation of the merger into
it of any other corporation as a result of which the holders of any of
its stock or other securities shall be deemed to have become the
holders of, or shall become entitled to, the stock or
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other securities of any corporation other than the corporation at the
time deemed to be the Company hereunder.
(m) Notice of Adjustment. The Company shall give to
the holder of the Preferred Stock prompt written notice of every
adjustment of the Conversion price by first class mail, postage
prepaid, addressed to the address of such holder as shown on the books
of the Company, which notice shall state the Conversion Price resulting
from such adjustment and the increase or decrease, if any, in the
number of shares purchasable at such price upon the conversion of the
Preferred Stock, and shall set forth in reasonable detail the method of
calculation and the facts upon which such calculation was based.
5. Redemption.
5.01 Right to Redeem. From and after January 1, 2000, the
Corporation shall have the right to redeem all or any part of the then
outstanding shares of Preferred Stock at any time or from time to time expressed
by resolution of its Board of Directors, in the manner prescribed in this
Section 5, provided that in (i) any single redemption, the Corporation shall
redeem not less than 100,000 shares of Preferred Stock and (ii) the Corporation
shall not be entitled to redeem shares of Preferred Stock unless at or prior to
the Redemption Date the Corporation shall have paid to all holders of Preferred
Stock all dividends on the Preferred Stock accrued to the last day of the
calendar quarter immediately preceding the Redemption Date.
5.02 Redemption Notice. Before making any redemption of
Preferred Stock hereunder, the Corporation shall mail by certified or registered
mail, return receipt requested, to each record holder of any Preferred Stock at
the address shown on the Corporation's records, a written notice ('Redemption
Notice") stating: (i) the number of shares of Preferred Stock held by record by
such holder which the Corporation proposes to redeem, (ii) the date (herein
called the "Redemption Date") on which the Corporation proposes to pay the
Redemption Price for the shares to be redeemed, (iii) the Redemption Price which
is to be paid for each share repurchased; and (iv) the place at which the shares
to be redeemed may be surrendered in exchange for the Redemption Price for such
shares. Upon the mailing of a Redemption Notice, subject to the right of the
holder to convert the shares to be redeemed to Common Stock as provided herein,
the Corporation shall have the right, and shall become obligated, to redeem the
Preferred Stock specified in such notice on the date specified in such notice as
the Redemption Date. Each Redemption Notice shall be mailed at least 35 days
before the Redemption Date, provided that if the Corporation fails to pay the
Redemption Price on such date, the Redemption Date shall be the date on which
the Corporation actually pays the Redemption Price.
5.03 Allocation of Redeemed Shares. With respect to any
redemption, the Corporation shall designate, by resolution of its Board of
Directors, the aggregate number of shares of Preferred Stock to be redeemed. The
number of shares of Preferred Stock to be redeemed from each holder thereof in
any redemption shall be determined by multiplying the aggregate number of shares
of Preferred Stock to be redeemed by a fraction, the numerator of which shall be
the total number of shares of Preferred Stock held by such holder and the
denominator of which shall be the total number of shares of Preferred Stock then
outstanding.
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5.04 Right of Holder to Convert. Notwithstanding the provision
of this Section 5, a holder of shares of Preferred Stock shall have the right to
convert the shares of Preferred Stock as to which a Redemption Notice shall have
been give to such holder by converting such shares to Common Stock at any time
prior to the Redemption Date in accordance with the provisions of Section 4
hereof. Any conversion of shares of Preferred Stock made by a holder after the
date of a Redemption Notice and prior to the Redemption Date shall be deemed to
be conversion of the shares to be redeemed pursuant to the Redemption Notice
and, thereafter, (i) with respect to such shares, the Corporation shall not have
the right or obligation to redeem such shares and (ii) the aggregate number of
shares to be redeemed by the Corporation shall be reduced by the number of
shares converted to Common Stock by such holder.
5.05 Redemption Price.
(a) For each share of Preferred Stock which shall be
redeemed by the Corporation at any time, the Corporation shall be
obligated to pay to the holder of such share an amount (herein called
the "Redemption Price") equal to the par value of such share. The
Corporation shall be obligated to pay on any Redemption Date both the
Redemption Price for each share redeemed and all dividends which shall
have accrued (computed on a daily basis) on each share redeemed to and
including the Redemption Date and which shall not previously have been
paid. Such payments which the Corporation shall be obligated to make on
any redemption Date shall be deemed to become "due" for all purposes of
this Section regardless of whether the Corporation shall be able or
legally permitted to make such payments on the Redemption Date.
(b) Each holder of Preferred Stock shall be entitled
to receive on or at any time after the Redemption Date the full
Redemption Price, plus accrued dividends, for each share of Preferred
Stock held by such holder which the Corporation shall be obligated to
redeem on such Redemption Date upon surrender by such holder at the
Corporation's principal office of the certificate representing such
share duly endorsed in blank or accompanied by appropriate form of
assignment duly endorsed in blank. After payment by the Corporation of
the full Redemption price for any share of Preferred Stock redeemed,
plus accrued dividends thereon, all rights of the holder of such share
shall (whether or note the certificate representing such share shall
have been surrendered for cancellation) cease and terminate with
respect to such share.
6. Required Conversion.
6.01 Public Offering. Notwithstanding anything contained
herein to the contrary, upon the Closing by the Company of a public offering of
its securities for gross proceeds equal to or greater than $5,000,000 all shares
of Preferred Stock then outstanding shall, without further act on anyone's part,
be converted into an aggregate of 1,098,901 shares of Class B Common Stock
effective upon such Closing, and stock certificates formerly representing such
shares of Preferred Stock shall thereafter be deemed to represent such number of
shares of Class B Common Stock.
6.02 Effect of Conversion. Upon the conversion of all shares
of Preferred Stock to shares of Class B Common Stock, any additional shares of
Preferred Stock issued shall not be
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subject to the foregoing provisions, but may be issued from time to time with
such designations, preferences, conversion rights, cumulative, relative,
participating, option or other rights, qualifications, limitations or
restrictions thereof as shall be stated and expressed in the resolution or
resolutions providing for the issuance of such Preferred Stock adopted by the
Board of Directors pursuant to the authority in this paragraph given.
FIFTH: The books of the Corporation may be kept (subject to any
provision contained in the statutes) outside the State of Delaware at such place
or places as may be designated from time to time by the board of directors or in
the by-laws of the Corporation.
SIXTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its jurisdiction within the State of Delaware may, on the
application in a summary way of this Corporation or of any creditor or
stockholder thereof or on the application of any receiver or receivers appointed
for this Corporation under the provisions of Section 291 of Title 8 of the
Delaware Code or on the application of trustees in dissolution or of any
receiver or receivers appointed for this Corporation under the provisions of
Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths in value of the
creditors or class of creditors, and/or of the stockholders of this Corporation,
as the case may be, agree to any compromise or arrangement and to any
reorganization of this Corporation as compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation as the case may
be, and also on this Corporation.
SEVENTH: For the management of the business and for the conduct of the
affairs of the Corporation and in further definition, limitation and regulation
of the powers of the Corporation and of its directors and stockholders, it is
further provided:
(a) The number of directors of the Corporation shall
be as specified in the by-laws of the Corporation, but such number may
from time to time be increased or decreased in such manner as shall be
provided in the by-laws of the Corporation. The number of directors
shall not be less than the minimum prescribed by law. The election of
directors need not be by ballot. Directors need not be stockholders.
(b) In furtherance and not in limitation of the
powers conferred by the laws of the State of Delaware, the board of
directors is expressly authorized and empowered to make, alter, amend
and repeal by-laws, subject to the power of the stockholders to alter
or repeal by-laws made by the board of directors.
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(c) Any director or any officers elected or appointed
by the stockholders or by the board of directors may be removed at any
time in such manner as shall be provided in the by-laws of the
Corporation.
(d) In the absence of fraud, no contract or other
transaction between the Corporation and any other corporation and no
act of the Corporation, shall in any way be affected or invalidated by
the fact that any of the directors of the Corporation are peculiarly or
otherwise interested in, or are directors or officers of, such other
corporation; and in the absence of fraud, any director, individually,
or any firm of which any director may be a member, may be a party to,
or may be peculiarly or otherwise interested in, any contract or
transaction of the Corporation, provided in any case, that the fact
that he or such firm is so interested shall be disclosed or shall have
been known to the Board of Directors or the majority thereof; and any
director of the Corporation, who is also a director or officer of any
such other corporation, or who is also interested may be counted in
determining the existence of quorum at any seating of the Board of
Directors of the Corporation which shall authorize any such contract,
act or transaction, may vote thereat to authorize any such contract,
act or transaction, with like force and effect as if he were not such
director or officer of such other corporation, or not so interested.
EIGHTH:
(a) The Corporation shall have power to indemnify any
person who was or is party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action
by or in the right of the Corporation) by the reason of the fact that
he is or was a director, officer, employee or agent of the Corporation,
or is or was serving at the request of the Corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action,
suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of
the Corporation and, with respect to any criminal action or
proceedings, had no reasonable cause to believe his conduct was
unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner
which he reasonably believed to be in or not opposed to the best
interests of the Corporation, and with respect to any criminal action
or proceeding, had reasonable cause to believe that his conduct was
unlawful.
(b) The Corporation shall have power to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of
the corporation to procure a judgment in its favor by reason of the
fact that he is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as
a director, officer,
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employee or agent of another corporation, partnership, joint venture,
trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense
of and in a manner he reasonably believes to be in or not opposed to
the best interests of the Corporation and except that no
indemnification shall be made in respect of any claim, issue or matter
he reasonably believes to be in or not opposed to the best interest of
the Corporation and except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable for negligence or misconduct in the
performance of this duty to the Corporation unless and only to the
extent that the Court of Chancery or the court in which such action or
suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the
case, such person is fairly and reasonably entitled to indemnity for
such expenses which the Court of Chancery or such other court shall
deem proper.
(c) No director of the Corporation shall be liable to
the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability for (1) any breach
of the director's duty of loyalty to the Corporation or its
stockholders; (2) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (3) acts under
Section 174 of the Delaware General Corporation law; or (4) any
transaction from which the director derived an improper personal
benefit.
(d) Expenses incurred in defending a civil or
criminal action, suit or proceeding may be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding as
authorized by the board of directors in the specific case upon receipt
of an undertaking by or on behalf of the director or officer, to repay
such amount unless it shall ultimately be determined that he is
entitled to be indemnified by the Corporation as authorized in this
Article Eighth. Such expenses incurred by other employees or agents may
be so paid upon such terms and conditions, if any, as the board of
directors deems appropriate.
(e) Any indemnification under paragraphs (a), (b) and
(c) (unless ordered by a court) shall be made by the Corporation only
as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper
in the circumstances because he has met the applicable standard of
conduct set forth in paragraphs (a), (b) and (c). Such determination
shall be made (1) by the board of directors by a majority vote of a
quorum consisting of directors who were not parties to such action,
suit or proceeding, or (2), if such a quorum is not obtainable, or,
even if obtainable and a quorum of disinterested directors so directs,
by independent legal counsel in a written opinion, or (3) by the
stockholders.
(f) The indemnification provided by this Article
Eighth shall not be deemed exclusive of any other rights to which those
indemnified may be entitled under any by-laws, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action
in his official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has ceased
to be a director, officer, employee
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or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
(g) The Corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of the Corporation or is or was serving at
the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as
such, whether or not the Corporation would have the power to indemnify
him against such liability under the provisions of this Article Eighth.
(h) For the purpose of this Article Eighth, reference
to "the Corporation" shall include all constituent corporations
absorbed in a consolidation or merger as well as the resulting or
surviving corporation so that any person who is or was a director,
officer, employee or agent of such a constituent corporation or is or
was serving at the request of such constituent corporation,
partnership, joint venture, trust or other enterprise shall stand in
the same position under the provisions of this section with respect to
the resulting or surviving corporation in the same capacity.
NINTH: From time to time any of the provision of this Restated
Certificate of Incorporation may be amended, altered or repealed, and other
provisions authorized by the laws of the State of Delaware at the time in force
may be added or inserted in the manner and at the time prescribed by said laws,
and all rights at any time conferred upon the stockholders of the Corporation by
this Certificate are granted subject to the provisions of this Article Ninth.
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IN WITNESS WHEREOF, CTI Industries Corporation has caused the
Certificate to be signed by Howard W. Schwan, being the President of the
Corporation this 22nd day of July, 1997.
By: /s/ Howard W. Schwan
--------------------
Howard W. Schwan, President
ATTEST:
/s/ Stephen M. Merrick
-------------------
Secretary
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STATE OF ILLINOIS )
) ss
COUNT OF COOK )
BE IT REMEMBERED, that personally appeared before me, the undersigned,
a Notary Public authorized to take acknowledgment of deed by the laws of the
place where the foregoing Restated Certificate of Incorporation was signed
Howard W. Schwan, the President who signed the foregoing Restated Certificate of
Incorporation, known to me personally to be such, and I having make known to him
the contents of said Restated Certificate of Incorporation, he acknowledged that
the same to be his act and deed, and that the facts therein stated are truly set
forth.
GIVEN UNDER my hand and seal this 22nd day of July, 1997.
/s/ Cheryl J. Stevens
------------------
Notary Public
25
EXHIBIT 3.2
AMENDED AND RESTATED
BY - LAWS
OF
CTI INDUSTRIES CORPORATION
ARTICLE I - OFFICES
SECTION 1. REGISTERED OFFICE. The registered office shall be
established and maintained at 1209 Orange Street, City of Wilmington, County of
New Castle in the State of Delaware.
Section 2. OTHER OFFICES. The corporation may have other offices,
either within or without the State of Delaware, at such place or places as the
Board of Directors may from time to time appoint or the business of corporation
may require.
ARTICLE II - MEETING OF STOCKHOLDERS
SECTION 1. ANNUAL MEETINGS. Annual meetings of stockholders for the
election of directors and for such other business as may be stated in the notice
of meeting, shall be held at such place, either within or without the State of
Delaware, and at such time and date as the Board of Directors, by resolution,
shall determine and as set forth in the notice of the meeting. In the event the
Board of Directors fails to so determine the time, date and place of meeting,
the annual meeting of stockholders shall be held at the registered office of the
corporation in Delaware on the 2nd Tuesday in April at 10:00 a.m.
If the date of the annual meeting shall fall upon a legal holiday, the
meeting shall be held on the next succeeding business day. At each annual
meeting, the stockholders entitled to vote shall elect a Board of Directors and
may transact such other corporate business as shall be stated in the notice of
the meeting.
SECTION 2. OTHER MEETINGS. Meetings of stockholders for any purpose
other than the election of directors may be held at such time and place, within
or without the State of Delaware, as shall be stated in the notice of the
meeting.
SECTION 3. VOTING. Each Stockholder entitled to vote in accordance with
the terms and provisions of the Certificate of Incorporation and these By-Laws
shall be entitled to one vote, in person or by proxy, for each share of stock
entitled to vote held
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by such stockholder, but no proxy shall be voted after three years from its date
unless such proxy provides for a longer period. Upon the demand of any
stockholder, the vote for directors and upon any question before the meeting
shall be by ballot. All elections for directors shall be decided by plurality
vote; all other questions shall be decided by majority vote except as otherwise
provided by the Certificate of Incorporation or the laws of the State of
Delaware.
SECTION 4. FIXING OF RECORD DATE. For the purpose of determining the
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or to receive payment of any dividend, or other distribution
or allotment of any rights, or to exercise any rights in respect of any change,
conversion or exchange of shares or for the purpose of any other lawful action,
the Board of Directors of the corporation may fix in advance a record date which
shall not be more than sixty days and, not less than ten days, or in the case of
a merger or consolidation, not less than twenty days, before the date of such
meeting. If no record date is fixed, the record date for the determination of
shareholders entitled to notice of or to vote at a meeting of shareholders shall
be the date on which notice of the meeting is mailed, and the record date for
the determination of shareholders for any other purpose shall be the date on
which the Board of Directors adopts the resolution relating thereto. A
determination of shareholders of record entitled to notice of or to vote at a
meeting of shareholders shall apply to any adjournment of the meeting.
SECTION 5. QUORUM. Except as otherwise required by law, by the
Certificate of Incorporation or by these By-Laws, the presence, in person or by
proxy, of stockholders holding a majority of the stock of the corporation
entitled to vote shall constitute a quorum at all meetings of the stockholders.
In case a quorum shall not be present at any meeting, a majority in interest of
the stockholders entitled to vote thereat, present in person or by proxy, shall
have power to adjourn the meeting from time to time for a period not to exceed
thirty days from the originally scheduled date of the meeting, without notice
other than announcement at the meeting, until the requisite amount of stock
entitled to vote shall be present. At any such adjourned meeting at which the
requisite amount of stock entitled to vote shall be represented, any business
may be transacted which might have been transacted at the meeting as originally
noticed; but only those stockholders entitled to vote at the meeting as
originally noticed shall be entitled to vote at any adjournment or adjournments
thereof.
SECTION 6. SPECIAL MEETINGS. Special meetings of the stockholders, for
any purpose, unless otherwise prescribed by statute or by the Certificate of
Incorporation, may be called by
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the president and shall be called by the president or secretary at a request in
writing of a majority of the directors or stockholders entitled to vote. Such
request shall state the purpose of the proposed meeting.
SECTION 7. NOTICE OF MEETINGS. Written notice, stating the place, date
and time of the meeting, and the general nature of the business to be
considered, shall be given to each stockholder entitled to vote thereat at this
address as it appears on the records of the corporation, not less than ten or
more than sixty days before the date of the meeting, either personally or by
mail, by or at the direction of the president, or the secretary, or the officer
or persons calling the meeting, to each shareholder of record entitled to vote
at such meeting. If mailed, such notice shall be deemed to be delivered when
deposited in the United States mail, addressed to the shareholder at this
address as it appears on the records of the corporation, with postage thereon
prepaid. When a meeting is adjourned to another time or place, notice need not
be given of the adjourned meeting of the time and place thereof are announced at
the meeting at which the adjournment is taken.
Whenever any notice whatever is required to be given under the
provision of any law, or under the provisions of the Certificate of
Incorporation of the Corporation or these By-Laws, a waiver thereof in writing
signed by the person or persons entitled to said notice, whether before or after
the time stated therein, shall be deemed proper notice.
SECTION 8. BUSINESS TRANSACTED. No business other than that stated in
the notice shall be transacted at any meeting without the unanimous consent of
all the stockholders entitled to vote thereat.
ARTICLE III - DIRECTORS
SECTION 1. NUMBER AND TERM. The number of directors shall be five (5).
The directors shall be elected at the annual meeting of the stockholders and
each director shall be elected to serve until his successor shall be elected and
shall qualify. Each director shall be elected for a term of one year and until
his successor is elected and qualified, except as otherwise provided herein or
required by law.
SECTION 2. REGULAR MEETINGS. Regular meetings of the Board of Directors
shall be held at such place or places, on such date or dates, and at such time
or times as shall have been established by the Board of Directors and publicized
among all directors. A notice of such regular meeting shall not be required.
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SECTION 3. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by the President or any two directors and shall be held at such
place, on such date and at such time as they or he shall fix. Notice of the
place, date and time of each such special meeting shall be given each director
by whom it is not waived, by mailing written notice not less than three days
before the meeting or, by telegraphing the same not less than 18 hours before
the meeting, to each director at his business address. If mailed, such notice
shall be deemed to be delivered, when deposited in the United States mail so
addressed, with postage thereon prepaid. If notice be given by telegram, such
notice shall be deemed to be delivered when the telegram is delivered to the
telegram company. The attendance of a director at any meeting shall constitute a
waive of notice of such meeting, except where a director attends a meeting for
the express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of any regular or special meeting of the Board of
Directors need be specified in the notice of waiver of notice of such meeting.
SECTION 4. QUORUM. At any meeting of the Board of Directors not less
than four shall constitute a quorum for all purposes. If a quorum shall fail to
attend any meeting, a majority of these present may adjourn the meeting to
another place, date or time without further notice or waiver thereof.
SECTION 5. PARTICIPATION AND MEETINGS BY CONFERENCE TELEPHONE. Members
of the Board of Directors, or of any committee thereof, may participate in a
meeting of such board or committee by means of conference telephone or similar
communications equipment that enable all persons participating in a meeting to
hear each other. Such participation shall constitute presence in person at such
meeting for all purposes.
SECTION 6. CONDUCT OF BUSINESS. The act of a majority of the directors
present at a meeting at which a quorum is present shall be the act of the Board
of Directors, except as otherwise provided herein or provided by law; provided,
however, that the following actions shall require the affirmative vote or
consent of four directors (i) any amendment to these by-laws, (ii) any change in
the person appointed as, or the compensation, authority or position of, the
Chief Executive Officer or the President, (iii) the issuance by the Corporation
of any securities or (iv) the approval or recommendation to shareholders of any
amendment to the Certificate of Incorporation of the Corporation. At any meeting
of the Board of Directors, business shall be transacted in such order and manner
it as the board may, from time to time determine.
SECTION 7. RESIGNATIONS. Any director, member of a committee or other
officer may resign at any time. Such
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resignation shall be made in writing, and shall take effect at the time
specified therein and if no time be specified, at the time of its receipt by the
President or Secretary. The acceptance of a resignation shall not be necessary
to make it effective.
SECTION 8. VACANCIES. If the office of any director, member of a
committee or other officer becomes vacant, the remaining directors in office
though less than a quorum by a majority vote, may appoint any qualified person
to fill such vacancy, who shall hold office for the unexpired term and until his
successor shall be duly chosen.
SECTION 9. REMOVAL. Any director or directors may be removed either for
or without cause at any time by the affirmative vote of the holders of a
majority of all the shares of stock outstanding and entitled to vote, at a
special meeting of the stockholders called for this purpose, or by written
consent as provided by law, and the vacancies thus created may be filled, at the
meeting held for the purpose of removal, or by written consent as provided by
law, by the affirmative vote of a majority in interest of the stockholders
entitled to vote; provided, however, that any director elected by the vote of
holder of Preferred Stock may be removed by the affirmative vote of the holders
of two-thirds of the outstanding Preferred Stock and any vacancy created by the
removal of such a director may be filled by the affirmative vote of the holders
of the outstanding Preferred Stock.
SECTION 10. INCREASE OF NUMBER. The number of directors may be
increased or decreased by amendment of these By-laws by the affirmative vote of
a majority of the directors, though less than a quorum, or, by the affirmative
vote of a majority in interest of the stockholders, at the annual meeting or at
a special meeting called for that purpose, and by like vote the additional
directors may be chosen at such meeting to hold office until the next annual
election and until their successors are elected and qualify.
SECTION 11. COMPENSATION. Directors shall not receive any stated salary
for their services as directors or as member of committees, but by resolution of
the board a fixed fee and expenses of attendance may be allowed for attendance
at each meeting. Nothing herein contained shall be construed to preclude any
director from serving the corporation in any other capacity as an officer, agent
or otherwise, and receiving compensation therefor.
SECTION 12. ACTION WITHOUT MEETING. Any action required or permitted to
be taken at any meeting of the Board of Directors, or of any committee thereof,
may be taken without a meeting, if prior to such action a written consent
thereto is
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signed by all members of the board, or of such committee as the case may be, and
such written consent is filed with the minutes of proceedings of the board or
committee.
SECTION 13. PRESUMPTION OF ASSENT. A director of the corporation who is
present at a meeting of the Board of Directors at which action on any corporate
matter is taken shall be conclusively presumed to have assented to the action
taken unless his dissent shall be entered in the minutes of the meeting or
unless he shall file his written dissent to such action with the person acting
as the secretary of the meeting before the adjournment thereof or shall forward
such dissent by registered mail to the secretary of the corporation immediately
after the adjournment of the meeting. Such right to dissent shall not apply to a
director who voted in favor of such action.
ARTICLE IV - OFFICERS
SECTION 1. OFFICERS. The officers of the corporation shall consist of a
Chief Executive Officer, a President, a Treasurer, and a Secretary, and shall be
elected by the Board of Directors and shall hold office until their successors
are elected and qualified. In addition, the Board of Directors may elect one or
more Vice-Presidents and such Assistant Secretaries and Assistant Treasurers at
it may deem proper. None of the officers of the corporation need be directors.
The officers shall be elected at the first meeting of the Board of Directors
after each annual meeting. More than two offices may be held by the same person.
SECTION 2. OTHER OFFICERS AND AGENTS. The Board of Directors may
appoint such officers and agents as it may deem advisable, who shall hold their
officers for such terms and shall exercise such power and perform such duties as
shall be determined from time to time by the Board of Directors.
SECTION 3. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall
be the chief execute officer of the corporation and shall have the general
powers and duties of supervision and management usually vested in the chief
executive officer of a corporation. Except as limited or authorized in some
other manner by the Board of Directors, he shall have power to bind the
corporation and to sign all contracts and other instruments of the corporation.
He shall have general supervision and direction of all of the officers and
agents of the corporation and, except as provided by law, in these By-Laws or by
resolution of the Board of Directors, he shall appoint and remove, employ and
discharge, prescribe the duties and fix the compensation of all employees or
agents of the Corporation.
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SECTION 4. PRESIDENT. The President shall be the chief operating
officer of the corporation and shall have the general powers and duties to
perform or supervise all matters covering the operation of the corporation's
business and shall have such other powers and duties as may be designated by the
Board of Directors from time to time. Except as limited by the Board of
Directors, he shall have authority and power to bind the
Corporation and sign contracts and other instruments for the Corporation. He
shall preside over the day to day activities of the corporation and shall have
general supervision, direction and control for the business of the corporation.
In the absence or disability of the Chief Executive Officer, he shall perform
the duties and have the powers of the Chief Executive Officer.
SECTION 5. VICE-PRESIDENT. Each Vice-President shall have such powers
and shall perform such duties as shall be assigned to him by the directors.
SECTION 6. TREASURER. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate account of
receipts and disbursements in books belonging to the corporation. He shall
deposit all moneys and other valuables in the name and to the credit of the
corporation in such depositories as may be designated by the Board of Directors.
The Treasurer shall disburse the funds of the corporation as may be
ordered by the Board of Directors, or the President, taking proper vouchers for
such disbursements. He shall render to the President and Board of Directors at
the regular meetings of the Board of Directors, or whenever they may request it,
an account of al his transactions as Treasurer and of the financial condition of
the corporation. If required by the Board of Directors, he shall give the
corporation a bond for the faithful discharge of his duties in such amount and
with such surety as the board shall prescribe.
SECTION 7. SECRETARY. The Secretary shall give, or cause to be given
notice of all meetings of stockholders and directors, and all other notices
required by law or by these ByLaws, and in case of his absence or refusal or
neglect so to do, any such notice may be given by any person thereunto directed
by the President, or by the directors, or stockholders, upon whose requisition
the meeting is called as provided in these By-laws. He shall record all the
proceedings of the meetings of the corporation and of directors in a book to be
kept for that purpose. He shall keep in safe custody the seal of the
corporation, and when authorized by the Board of Directors, affix the same to
any instrument requiring it, and when so affixed, it shall be attested by his
signature or by the signature of any assistant secretary.
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SECTION 8. ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. Assistant
Treasurers and Assistant Secretaries, if any, shall be elected and shall have
such powers and shall perform such duties as shall be assigned to them,
respectively, by the directors.
SECTION 9. SALARIES. The salaries of the officers shall be fixed from
time to time by the Board of Directors and no officer shall be prevented form
receiving such salary by reason of the fact that he is also a director of the
corporation.
ARTICLE V.
SECTION 1. CERTIFICATES OF STOCK. Every holder of stock in the
corporation shall be entitled to have a certificate, signed by, or in the name
of the corporation by, the Board of Directors, or the president or a
vice-president and the treasurer or an assistant treasurer, or the secretary of
the corporation, certifying the number of shares owned by him in the
corporation. If the corporation shall be authorized to issue more than one class
of stock or more than one series of any class, the designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations, or restrictions of such
preferences and/or rights shall be set forth in full or summarized on the face
or back of the certificate which the corporation shall issue to represent such
class or series of stock provided that, except as otherwise provided in Section
202 of the General Corporation Law of Delaware, in lieu of the foregoing
requirements, there may be set forth on the face or back of the certificate
which the corporation shall issue to represent such class or series of stock, a
statement that the corporation will furnish without charge to each stockholder
who so requests the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights. Where a certificate is countersigned (1) by a transfer agent
other than the corporation or its employee, or (2) by a registrar other than the
corporation or its employee, the signatures of such officers may be facsimiles.
SECTION 2. LOST CERTIFICATES. New certificates of stock may be issued
in the place of any certificate therefore issued by the corporation, alleged to
have been lost or destroyed, and the directors may, in their discretion, require
the owner of the lost or destroyed certificate or his legal representatives, to
give the corporation a bond, in such sum as they may direct, not exceeding
double the value of the stock, to indemnify the corporation against it on
account of the alleged loss of any such new certificate.
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SECTION 3. TRANSFER OF SHARES. The shares of stock of the corporation
shall be transferable only upon its books by the holders thereof in person or by
their duly authorized attorneys or legal representatives, and upon such transfer
the old certificates shall be surrendered to the corporation by the delivery
thereof to the person in charge of the stock and transfer books and ledgers, or
to such other persons as the
directors may designate, by who they shall be canceled, and new certificates
shall thereupon be issued. A record shall be made of such transfer and whenever
a transfer shall be made for collateral security, and not absolutely, it shall
be so expressed in the entry of the transfer.
SECTION 4. DIVIDENDS. Subject to the provisions of the Certificate of
Incorporation the Board of Directors may, out of funds legally available
therefore at any regular or special meeting, declare dividends upon the capital
stock of the corporation as and when they deem expedient. Before declaring any
dividends there may be set apart out of any funds of the corporation available
for dividends, such sum or sums as the directors from time to time in their
discretion deem proper working capital or as a reserve fund to meet
contingencies or for equalizing dividends or for such other purposes as the
directors shall deem conductive to the interests of the corporation.
SECTION 5. SEAL. The corporate seal shall be circular in form and shall
contain the name of the corporation, the year of its creation and the words
"CORPORATE SEAL DELAWARE." Said seal may be used by causing it or facsimile
thereof to be impressed or affixed or otherwise reproduced.
ARTICLE VI - FISCAL YEAR
SECTION 1. FISCAL YEAR. The fiscal year of the corporation shall be
determined by resolution of the Board of Directors.
ARTICLE VII - NOTICES
SECTION 1. NOTICES. Whenever notice is required to be give to any
stockholder, directors, officer or agent, such requirement shall not be
construed to mean personal notice. Such notice may in any instance be
effectively give by depositing a writing in a post office or letter box in a
prepaid, sealed wrapper, or by dispatching a prepaid telegram, addressed to such
stockholder, directors, officer or agent at his or her address as the same
appears on the books of the corporation. The time when such notice is dispatch
shall be the time of the given of the notice.
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SECTION 2. WAIVERS. A written waiver of any notice, signed by a
stockholder, director, officer, or agent, whether before or after the time of
the event for which notice is to be given, shall be deemed equivalent to the
notice required to be given to such stockholder, directors, officer or agent.
Neither the business nor the purpose of any meeting need to be specified in such
a waiver.
ARTICLE VIII - AMENDMENTS
Subject to the provisions of the Restated Certificate of Incorporation
under which the power to alter, amend or modify these By-Laws is restricted to
the holders of Preferred Stock, these By-Laws may be altered and repealed and
By-Laws may be made at any annual meeting of the stockholders or at any special
meeting thereof if notice thereof is contained in the notice of such special
meeting by the affirmative vote of a majority of the stock issued and
outstanding or entitled to vote thereat, or by the regular meeting of the Board
of Directors, at any regular meeting of the Board of Directors, or at any
special meeting of the Board of Directors, if notice thereof is contained in the
notice of such special meeting.
ARTICLE IX
INDEMNIFICATION OF OFFICERS
DIRECTORS, EMPLOYEES AND AGENTS
SECTION 1. The corporation shall have power to indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed
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to be in or not opposed to the best interests of the corporation, and with
respect to any criminal action or proceeding, had reasonable cause to believe
that his conduct was unlawful.
SECTION 2. The corporation shall have power to indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that his is or was a director,
officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation,
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnify for such expenses
which the Court of Chancery or such other court shall deem proper.
SECTION 3. No director of the corporation shall be liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability for (a) any breach of the director's
duty of loyalty to the corporation or its stockholders; (b) acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law; (c) acts under Section 174 of the Delaware General Corporation Law; or
(d) any transaction from which the director derived an improper personal
benefit.
SECTION 4. Expenses incurred in defending a civil or criminal action,
suit or proceeding may be paid by the corporation in advance of the final
disposition of such action, suit or proceeding as authorized by the Board of
Directors in the specific case upon receipt of an undertaking by or on behalf of
the director or officer, to repay such amount unless it shall ultimately be
determined that he is not entitled to be indemnified by the corporation as
authorized in this Article Ninth. Such expenses (including attorneys' fees)
incurred by other employees or agents may be so paid upon such terms and
conditions, if any, as the Board of Directors deems appropriate.
SECTION 5. Any indemnification under Section 5 (1), (2) and (3) (unless
ordered by a Court) shall be made by the corporation only as authorized in the
specific case upon a
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determination that indemnification of the director, officer, employee or agent
is proper in the circumstances because he has met the applicable standard of
conduct set forth in Sections (1), (2) and (3). Such determination shall be made
(a) by the Board of Directors by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding, or (b) if
such a quorum is not obtainable, or, even if obtainable and a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, or (c) by the stockholders.
SECTION 6. The indemnification provided by this Article Ninth shall not
be deemed exclusive of any other rights to which those seeking indemnification
or advancement of expenses may be entitled under any by-laws, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such a person.
SECTION 7. The corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such, whether or not the corporation would have the power to indemnify him
against such liability under the provisions of this Article Ninth.
SECTION 8. For the purposes of this Article Ninth, reference to "the
corporation" shall include all constituent corporations absorbed in a
consolidation or merger as well as the resulting or surviving corporation so
that any person who is or was a director, officer, employee or agent of such a
constituent corporation or is or was serving at the request of such constituent
corporation, partnership, joint venture, trust or other enterprise shall stand
in the same position under the provisions of this section with respect to the
resulting or surviving corporation in the same capacity.
EXHIBIT 4.2
CTI IINDUSTRIES CORPORATION
AND
JOSEPH STEVENS & COMPANY, INC.
-----------------
UNDERWRITER'S
WARRANT AGREEMENT
________, 1997
<PAGE>
UNDERWRITER'S WARRANT AGREEMENT dated as of _______ ____, 1997
by and between CTI INDUSTRIES CORPORATION, a Delaware corporation (the
"Company"), and JOSEPH STEVENS & COMPANY, INC. ("Joseph Stevens") (Joseph
Stevens is hereinafter referred to variously as the "Holder" or the
"Underwriter").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to the Underwriter or
its designee(s) warrants ("Warrants") to purchase up to 133,333 Units (as
defined in Section 1 hereof, each Unit consisting of one (1) share of common
stock, $____ par value per share, of the Company ("Common Stock") and one (1)
redeemable Common Stock purchase warrant, each to purchase one additional share
of Common Stock ("Redeemable Warrants")); and
WHEREAS, the Underwriter has agreed pursuant to the
underwriting agreement (the "Underwriting Agreement") dated as of the date
hereof by and between the Underwriter and the Company to act as the underwriter
in connection with the proposed public offering of 1,333,333 Units at a public
offering price of $____ per Unit; and
WHEREAS, the Warrants to be issued pursuant to this Agreement
will be issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to the Underwriter in consideration for, and as part
of the Underwriter's compensation in connection with the Underwriting Agreement;
NOW, THEREFORE, in consideration of the premises, the payment
by the Underwriter to the Company of thirteen dollars and thirty-three cents
($13.33) the agreements herein set forth and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
<PAGE>
1. Grant. The Underwriter (or its designee(s)) is hereby
granted the right to purchase, at any time from __________, 1998 [one year from
the date hereof] until 5:00 p.m., New York time, on __________, 2002, [5 years
from the date hereof] up to 133,333 Units at an initial exercise price (subject
to adjustment as provided in Section 8 hereof) of $__________ [120% of the IPO
price per Unit] per Unit subject to the terms and conditions of this Agreement.
A "Unit" consists of one (1) share of Common Stock and one (1) Redeemable
Warrant. Each Redeemable Warrant is exercisable to purchase one additional share
of Common Stock at an initial exercise price of $__________ [150% of the IPO
price per Unit] per share, commencing on the date of issuance (the "Initial
Exercise Date") and ending, at 5:00 p.m. New York time on __________, 2002 [60
months from the date hereof] (the "Redeemable Warrant Expiration Date") at which
time the Redeemable Warrants shall expire. Except as set forth herein, the Units
issuable upon exercise of the Warrants are in all respects identical to the
Units being purchased by the Underwriters for resale to the public pursuant to
the terms and provisions of the Underwriting Agreement.
2. Warrant Certificates. The warrant certificates (the
"Warrant Certificates") delivered and to be delivered pursuant to this Agreement
shall be in the form set forth in Exhibit A attached hereto and made a part
hereof, with such appropriate insertions, omissions, substitutions and other
variations as required or permitted by this Agreement.
3. Exercise of Warrant.
3.1 Method of Exercise. The Warrants are initially exercisable
at an initial exercise price per Unit set forth in Section 6 hereof payable by
certified or official bank check in New York Clearing House funds, subject to
adjustment as provided in Section 8 hereof. Upon surrender of a Warrant
Certificate, together with the annexed Form of Election to
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Purchase duly executed and payment of the Exercise Price (as hereinafter
defined) for the Units purchased at the Company's principal offices in
Barrington, Illinois, (located at 22160 North Pepper Road, Barrington, Illinois
60010) the registered holder of a Warrant Certificate ("Holder" or "Holders")
shall be entitled to receive a certificate or certificates for the shares of
Common Stock so purchased and a certificate or certificates for the Redeemable
Warrants so purchased. The purchase rights represented by each Warrant
Certificate are exercisable at the option of the Holder thereof, in whole or in
part (but not as to fractional shares of the Common Stock and Redeemable
Warrants underlying the Warrants). In the event the Company redeems all of the
outstanding Redeemable Warrants, the Redeemable Warrants underlying the Warrants
may only be exercised if such exercise is simultaneous with the exercise of the
Warrants. Warrants may be exercised to purchase all or part of the Units
represented thereby. In the case of the purchase of less than all the Units
purchasable under any Warrant Certificate, the Company shall cancel said Warrant
Certificate upon the surrender thereof and shall execute and deliver a new
Warrant Certificate of like tenor for the balance of the Units purchasable
thereunder.
3.2 Exercise by Surrender of Warrant. In addition to the
method of payment set forth in Section 3.1 and in lieu of any cash payment
required thereunder, the Holder(s) of the Warrants shall have the right at any
time and from time to time to exercise the Warrants in full or in part by
surrendering the Warrant Certificate in the manner specified in Section 3.1 in
exchange for the number of Units equal to the product of (x) the number of Units
as to which the Warrants are being exercised, multiplied by (y) a fraction, the
numerator of which is the Market Price (as defined in Section 3.3 hereof) of the
Units minus the Exercise Price of the Units and the denominator of which is the
Market Price per Unit. Solely for the purposes of
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this Section 3.2, Market Price shall be calculated either (i) on the date on
which the form of election attached hereto is deemed to have been sent to the
Company pursuant to Section 14 hereof ("Notice Date") or (ii) as the average of
the Market Price for each of the five trading days immediately preceding the
Notice Date, whichever of (i) or (ii) results in a greater Market Price.
3.3 Definition of Market Price.
(a) As used herein, the phrase "Market Price of the Units,"
the Common Stock or the Redeemable Warrants, respectively, at any date shall be
deemed to be the last reported sale price, or, in case no such reported sale
takes place on such day, the average of the last reported sale prices for the
last three (3) trading days, in either case as officially reported by the
principal securities exchange on which the Units, the Common Stock or the
Redeemable Warrants, as the case may be, are listed or admitted to trading or by
the Nasdaq National Market ("Nasdaq/NM") or the Nasdaq Small Cap Market ("Nasdaq
Small Cap"), or, if the Units, the Common Stock or the Redeemable Warrants, as
the case may be, are not listed or admitted to trading on any national
securities exchange or quoted by the National Association of Securities Dealers
Automated Quotation System ("Nasdaq"), the average closing bid price as
furnished by the National Association of Securities Dealers, Inc. ("NASD")
through Nasdaq or similar organization if Nasdaq is no longer reporting such
information.
(b) If the Market Price of the Units cannot be determined
pursuant to Section 3.3(a), the Market Price of the Units at any date shall be
deemed to be the sum of the Market Price of the Common Stock and the Market
Price of the Redeemable Warrants.
(c) If the Market Price of the Common Stock cannot be
determined pursuant to Section 3.3(a) above, the Market Price of the Common
Stock shall be determined in good
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faith (using customary valuation methods) by resolution of the members of the
Board of Directors of the Company, based on the best information available to
it.
(d) If the Market Price of the Redeemable Warrants cannot be
determined pursuant to Section 3.3(a) above, the Market Price of a Redeemable
Warrant shall equal the difference between the Market Price of the Common Stock
and the Exercise Price of the Redeemable Warrant.
4. Issuance of Certificates. Upon the exercise of the
Warrants, the issuance of certificates for shares of Common Stock and Redeemable
Warrants or other securities, properties or rights underlying such Warrants, and
upon the exercise of the Redeemable Warrants, the issuance of certificates for
shares of Common Stock or other securities, properties or rights underlying such
Redeemable Warrants shall be made forthwith (and in any event such issuance
shall be made within five (5) business days thereafter) without charge to the
Holder thereof including, without limitation, any tax which may be payable in
respect of the issuance thereof, and such certificates shall (subject to the
provisions of Sections 5 and 7 hereof) be issued in the name of, or in such
names as may be directed by, the Holder thereof.
The Warrant Certificates and the certificates representing the
shares of Common Stock and the Redeemable Warrants underlying the Warrants and
the shares of Common Stock underlying each Redeemable Warrant or other
securities, property or rights shall be executed on behalf of the Company by the
manual or facsimile signature of the then present Chairman or Vice Chairman of
the Board of Directors or President or Vice President of the Company under its
corporate seal reproduced thereon, attested to by the manual or facsimile
signature of the then present Secretary or Assistant Secretary or Treasurer or
Assistant Treasurer of the Company.
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Warrant Certificates shall be dated the date of execution by the Company upon
initial issuance, division, exchange, substitution or transfer.
5. Restriction On Transfer of Warrants. The Holder of a
Warrant Certificate, by its acceptance thereof, covenants and agrees that the
Warrants are being acquired as an investment and not with a view to the
distribution thereof; that the Warrants may not be sold, transferred, assigned,
hypothecated or otherwise disposed of, in whole or in part, for a period of one
(1) year from the date hereof, except to officers or partners of the
Underwriter.
6. Exercise Price.
6.1 Initial and Adjusted Exercise Price. Except as otherwise
provided in Section 8 hereof, the initial exercise price of each Warrant shall
be $____ per Unit [120% of the IPO price per Unit]. The adjusted exercise price
shall be the price which shall result from time to time from any and all
adjustments of the initial exercise price in accordance with the provisions of
Section 8 hereof.
6.2 Exercise Price. The term "Exercise Price" herein shall
mean the initial exercise price or the adjusted exercise price, depending upon
the context. 7. Registration Rights.
7.1 Registration Under the Securities Act of 1933. The
Warrants, the shares of Common Stock and the Redeemable Warrants underlying the
Warrants and the shares of Common Stock issuable upon exercise of the Redeemable
Warrants underlying the Warrants and the other securities issuable upon exercise
of the Warrants (collectively, the "Warrant Securities") have been registered
under the Securities Act of 1933, as amended (the "Act") pursuant to the
Company's Registration Statement on Form SB-2 (Registration No. __________) (the
"Registration Statement"). All the representations and warranties of the Company
contained
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in the Underwriting Agreement relating to the Registration Statement, the
Preliminary Prospectus and Prospectus (as such terms are defined in the
Underwriting Agreement) and made as of the dates provided therein, are hereby
incorporated by reference. The Company agrees and covenants promptly to file
post effective amendments to such Registration Statement as may be necessary to
maintain the effectiveness of the Registration Statement as long as any Warrants
are outstanding. In the event that, for any reason, whatsoever, the Company
shall fail to maintain the effectiveness of the Registration Statement, upon
exercise, in part or in whole, of the Warrants, certificates representing the
shares of Common Stock and the Redeemable Warrants underlying the Warrants, and
upon exercise, in whole or in part of the Redeemable Warrants, certificates
representing the shares of Common Stock underlying the Redeemable Warrants and
the other securities issuable upon exercise of the Warrants shall bear the
following legend:
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended
("Act"), and may not be offered, sold, pledged, hypothecated,
assigned or transferred except pursuant to (i) an effective
registration statement under the Act, (ii) to the extent
applicable, Rule 144 under the Act (or any similar rule under
such Act relating to the disposition of securities), or (iii)
an opinion of counsel, if such opinion shall be reasonably
satisfactory to counsel to the issuer, that an exemption from
registration under such Act is available.
7.2 Piggyback Registration. If, at any time commencing after
the date hereof and expiring seven (7) years thereafter, the Company proposes to
register any of its securities under the Act (other than pursuant to Form S-8,
S-4 or a comparable registration statement) the Company will give written notice
by registered mail, at least thirty (30) days prior to the filing of each such
registration statement, to the Underwriter and to all other Holders of the
Warrants and/or the Warrant Securities of its intention to do so. If the
Underwriter or other Holders of the Warrants and/or Warrant Securities notifies
the Company within twenty (20) days after
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receipt of any such notice of its or their desire to include any such securities
in such proposed registration statement, the Company shall afford the
Underwriter and such Holders of the Warrants and/or Warrant Securities the
opportunity to have any such Warrant Securities registered under such
registration statement.
Notwithstanding the provisions of this Section 7.2, the
Company shall have the right at any time after it shall have given written
notice pursuant to this Section 7.2 (irrespective of whether a written request
for inclusion of any such securities shall have been made) to elect not to file
any such proposed registration statement, or to withdraw the same after the
filing but prior to the effective date thereof.
7.3 Demand Registration.
(a) At any time commencing after the date hereof and expiring
five (5) years thereafter, the Holders of the Warrants and/or Warrant Securities
representing a "Majority" (as hereinafter defined) of such securities (assuming
the exercise of all of the Warrants and the Redeemable Warrants underlying the
Warrants) shall have the right (which right is in addition to the registration
rights under Section 7.2 hereof), exercisable by written notice to the Company,
to have the Company prepare and file with the Securities and Exchange Commission
(the "Commission"), on one occasion, a registration statement and such other
documents, including a prospectus, as may be necessary in the opinion of both
counsel for the Company and counsel for the Underwriter and Holders, in order to
comply with the provisions of the Act, so as to permit a public offering and
sale of their respective Warrant Securities for nine (9) consecutive months by
such Holders and any other Holders of the Warrants and/or Warrant Securities who
notify the Company within ten (10) days after receiving notice from the Company
of such request.
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(b) The Company covenants and agrees to give written notice of
any registration request under this Section 7.3 by any Holder or Holders to all
other registered Holders of the Warrants and the Warrant Securities within ten
(10) days from the date of the receipt of any such registration request.
(c) Notwithstanding anything to the contrary contained herein,
if the Company shall not have filed a registration statement for the Warrant
Securities within the time period specified in Section 7.4(a) hereof pursuant to
the written notice specified in Section 7.3(a) of a Majority of the Holders of
the Warrants and/or Warrant Securities, the Company shall have the option, upon
the written notice of election of a Majority of the Holders of the Warrants
and/or Warrant Securities to repurchase (i) any and all Warrant Securities at
the higher of the Market Price per share of Common Stock on (x) the date of the
notice sent pursuant to Section 7.3(a) or (y) the expiration of the period
specified in Section 7.4(a) and (ii) any and all Warrants at such Market Price
less the Exercise Price of such Warrant. Such repurchase shall be in immediately
available funds and shall close within two (2) days after the later of (i) the
expiration of the period specified in Section 7.4(a) or (ii) the delivery of the
written notice of election specified in this Section 7.3(c).
(d) In addition to the registration rights under Section 7.2
and subsection (a) of this Section 7.3, at any time commencing after the date
hereof and expiring five (5) years thereafter, any Holder of Warrants and/or
Warrant Securities shall have the right, exercisable by written request to the
Company, to have the Company prepare and file, on one occasion, with the
Commission a registration statement so as to permit a public offering and sale
for nine (9) consecutive months by any such Holder of its Warrant Securities
provided, however, that the provisions of Section 7.4(b) hereof shall not apply
to any such registration request and
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registration and all costs incident thereto shall be at the expense of the
Holder or Holders making such request.
7.4 Covenants of the Company With Respect to Registration.
In connection with any registration under Section 7.2 or 7.3 hereof, the Company
covenants and agrees as follows:
(a) The Company shall use its best efforts to file a
registration statement within thirty (30) days of receipt of any demand
therefor, shall use its best efforts to have any registration statement
declared effective at the earliest possible time, and shall furnish
each Holder desiring to sell Warrant Securities such number of
prospectuses as shall reasonably be requested.
(b) The Company shall pay all costs (excluding fees and
expenses of Holder(s)' counsel and any underwriting or selling
commissions), fees and expenses in connection with all registration
statements filed pursuant to Sections 7.2 and 7.3(a) hereof including,
without limitation, the Company's legal and accounting fees, printing
expenses, blue sky fees and expenses. The Holder(s) will pay all costs,
fees and expenses in connection with any registration statement filed
pursuant to Section 7.3(d). If the Company shall fail to comply with
the provisions of Section 7.4(a), the Company shall, in addition to any
other equitable or other relief available to the Holder(s), be liable
for any or all incidental or special damages sustained by the Holder(s)
requesting registration of their Warrant Securities, excluding
consequential damages.
(c) The Company will take all necessary action which may be
required in qualifying or registering the Warrant Securities included
in a registration statement for offering and sale under the securities
or blue sky laws of such states as reasonably are
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requested by the Holder(s), provided that the Company shall not be
obligated to execute or file any general consent to service of process
or to qualify as a foreign corporation to do business under the laws of
any such jurisdiction.
(d) The Company shall indemnify the Holder(s) of the Warrant
Securities to be sold pursuant to any registration statement and each
person, if any, who controls such Holders within the meaning of Section
15 of the Act or Section 20(a) of the Securities Exchange Act of 1934,
as amended ("Exchange Act"), against all loss, claim, damage, expense
or liability (including all expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever) to
which any of them may become subject under the Act, the Exchange Act or
otherwise, arising from such registration statement but only to the
same extent and with the same effect as the provisions pursuant to
which the Company has agreed to indemnify the Underwriters contained in
Section 7 of the Underwriting Agreement. The Company further agree(s)
that upon demand by an indemnified person, at any time or from time to
time, it will promptly reimburse such indemnified person for any loss,
claim, damage, liability, cost or expense actually and reasonably paid
by the indemnified person as to which the Company has indemnified such
person pursuant hereto. Notwithstanding the foregoing provisions of
this Section 7.4(d) any such payment or reimbursement by the Company of
fees, expenses or disbursements incurred by an indemnified person in
any proceeding in which a final judgment by a court of competent
jurisdiction (after all appeals or the expiration of time to appeal) is
entered against the Company or such indemnified person as a direct
result of the Holder(s) or such person's gross negligence or willful
misfeasance will be promptly repaid to the Company.
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(e) The Holder(s) of the Warrant Securities to be sold
pursuant to a registration statement, and their successors and assigns,
shall severally, and not jointly, indemnify the Company, its officers
and directors and each person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, against all loss, claim, damage or expense or liability (including
all expenses reasonably incurred in investigating, preparing or
defending against any claim whatsoever) to which they may become
subject under the Act, the Exchange Act or otherwise, arising from
information furnished by or on behalf of such Holders, or their
successors or assigns, for specific inclusion in such registration
statement to the same extent and with the same effect as the provisions
contained in Section 7 of the Underwriting Agreement pursuant to which
the Underwriters have agreed to indemnify the Company. The Holder(s)
further agree(s) that upon demand by an indemnified person, at any time
or from time to time, they will promptly reimburse such indemnified
person for any loss, claim, damage, liability, cost or expense actually
and reasonably paid by the indemnified person as to which the Holder(s)
have indemnified such person pursuant hereto. Notwithstanding the
foregoing provisions of this Section 7.4(e) any such payment or
reimbursement by the Holder(s) of fees, expenses or disbursements
incurred by an indemnified person in any proceeding in which a final
judgment by a court of competent jurisdiction (after all appeals or the
expiration of time to appeal) is entered against the Company or such
indemnified person as a direct result of the Company or such person's
gross negligence or willful misfeasance will be promptly repaid to the
Holder(s).
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(f) Nothing contained in this Agreement shall be construed as
requiring the Holder(s) to exercise their Warrants prior to the initial
filing of any registration statement or the effectiveness thereof.
(g) The Company shall not permit the inclusion of any
securities other than the Warrant Securities to be included in any
registration statement filed pursuant to Section 7.3 hereof, or permit
any other registration statement to be or remain effective during the
effectiveness of a registration statement filed pursuant to Section 7.3
hereof, without the prior written consent of the Holders of the
Warrants and Warrant Securities representing a Majority of such
securities (assuming the exercise of all of the Warrants and the
Redeemable Warrants underlying the Warrants).
(h) The Company shall furnish to each Holder participating in
the offering and to each underwriter, if any, a signed counterpart,
addressed to such Holder or underwriter, of (i) an opinion of counsel
to the Company, dated the effective date of such registration statement
(and, if such registration includes an underwritten public offering, an
opinion dated the date of the closing under the underwriting
agreement), and (ii) a "cold comfort" letter dated the effective date
of such registration statement (and, if such registration includes an
underwritten public offering, a letter dated the date of the closing
under the underwriting agreement) signed by the independent public
accountants who have issued a report on the Company's financial
statements included in such registration statement, in each case
covering substantially the same matters with respect to such
registration statement (and the prospectus included therein) and, in
the case of such accountants' letter, with respect to events subsequent
to the date of such financial
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statements, as are customarily covered in opinions of issuer's counsel
and in accountants' letters delivered to underwriters in underwritten
public offerings of securities.
(i) The Company shall as soon as practicable after the
effective date of the registration statement, and in any event within
15 months thereafter, make "generally available to its security
holders" (within the meaning of Rule 158 under the Act) an earnings
statement (which need not be audited) complying with Section 11(a) of
the Act and covering a period of at least 12 consecutive months
beginning after the effective date of the registration statement.
(j) The Company shall deliver promptly to each Holder
participating in the offering requesting the correspondence and
memoranda described below and to the managing underwriter, if any,
copies of all correspondence between the Commission and the Company,
its counsel or auditors and all memoranda relating to discussions with
the Commission or its staff with respect to the registration statement
and permit each Holder and underwriter to do such investigation, upon
reasonable advance notice, with respect to information contained in or
omitted from the registration statement as it deems reasonably
necessary to comply with applicable securities laws or rules of the
NASD. Such investigation shall include access to books, records and
properties and opportunities to discuss the business of the Company
with its officers and independent auditors, all to such reasonable
extent and at such reasonable times and as often as any such Holder or
underwriter shall reasonably request.
(k) The Company shall enter into an underwriting agreement
with the managing underwriter selected for such underwriting by Holders
holding a Majority of the Warrant Securities requested to be included
in such underwriting, which may be the
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Underwriter. Such agreement shall be satisfactory in form and substance
to the Company, each Holder and such managing underwriter, and shall
contain such representations, warranties and covenants by the Company
and such other terms as are customarily contained in agreements of that
type used by the managing underwriter. The Holders shall be parties to
any underwriting agreement relating to an underwritten sale of their
Warrant Securities and may, at their option, require that any or all of
the representations, warranties and covenants of the Company to or for
the benefit of such underwriters shall also be made to and for the
benefit of such Holders. Such Holders shall not be required to make any
representations or warranties to or agreements with the Company or the
underwriters except as they may relate to such Holders and their
intended methods of distribution.
(l) In addition to the Warrant Securities, upon the written
request therefor by any Holder(s), the Company shall include in the
registration statement any other securities of the Company held by such
Holder(s) as of the date of filing of such registration statement,
including without limitation, restricted shares of Common Stock,
options, warrants or any other securities convertible into shares of
Common Stock.
(m) For purposes of this Agreement, the term "Majority" in
reference to the Holders of Warrants or Warrant Securities shall mean
in excess of fifty percent (50%) of the then outstanding Warrants or
Warrant Securities that (i) are not held by the Company, an affiliate,
officer, creditor, employee or agent thereof or any of their respective
affiliates, members of their family, persons acting as nominees or in
conjunction therewith and (ii) have not been resold to the public
pursuant to a registration statement filed with the Commission under
the Act.
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8. Adjustments to Exercise Price and Number of Securities.
8.1 Subdivision and Combination. In case the Company shall
at any time subdivide or combine the outstanding shares of Common Stock, the
Exercise Price shall forthwith be proportionately decreased in the case of
subdivision or increased in the case of combination.
8.2 Stock Dividends and Distributions. In case the Company
shall pay dividend in, or make a distribution of, shares of Common Stock or of
the Company's capital stock convertible into Common Stock, the Exercise Price
shall forthwith be proportionately decreased. An adjustment made pursuant to
this Section 8.2 shall be made as of the record date for the subject stock
dividend or distribution.
8.3 Adjustment in Number of Securities. Upon each adjustment
of the Exercise Price pursuant to the provisions of this Section 8, the number
of Warrant Securities issuable upon the exercise at the adjusted Exercise Price
of each Warrant shall be adjusted to the nearest whole number by multiplying a
number equal to the Exercise Price in effect immediately prior to such
adjustment by the number of Warrant Securities issuable upon exercise of the
Warrants immediately prior to such adjustment and dividing the product so
obtained by the adjusted Exercise Price.
8.4 Definition of Common Stock. For the purpose of this
Agreement, the term "Common Stock" shall mean (i) the class of stock designated
as Common Stock in the Certificate of Incorporation of the Company as may be
amended or restated as of the date hereof, or (ii) any other class of stock
resulting from successive changes or reclassifications of such Common Stock
consisting solely of changes in par value, or from par value to no par value, or
from no par value to par value.
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8.5 Merger or Consolidation or Sale.
(a) In case of any consolidation of the Company with, or
merger of the Company with, or merger of the Company into, another corporation
(other than a consolidation or merger which does not result in any
reclassification or change of the outstanding Common Stock), the corporation
formed by such consolidation or merger shall execute and deliver to the Holder a
supplemental warrant agreement providing that the holder of each Warrant then
outstanding or to be outstanding shall have the right thereafter (until the
expiration of such Warrant) to receive, upon exercise of such Warrant, the kind
and amount of shares of stock and other securities and property receivable upon
such consolidation, merger, sale or transfer by a holder of the number of shares
of Common Stock of the Company for which such Warrant might have been exercised
immediately prior to such consolidation, merger, sale or transfer. Such
supplemental warrant agreement shall provide for adjustments which shall be
identical to the adjustments provided in this Section 8. The above provision of
this subsection shall similarly apply to successive consolidations or mergers.
(b) In the event of (i) the sale by the Company of all or
substantially all of its assets, or (ii) the engagement by the Company or any of
its affiliates in a "Rule 13e-3 transaction" as defined in paragraph (a)(3) of
Rule 13e-3 of the General Rules and Regulations under the Securities Exchange
Act of 1934, as amended, or (iii) a distribution to the Company's stockholders
of any cash, assets, property, rights, evidences of indebtedness, securities or
any other thing of value, or any combination thereof, the Holders of the
unexercised Warrants shall receive notice of such sale, transaction or
distribution twenty (20) days prior to the date of such sale or the record date
for such transaction or distribution, as applicable, and, if they exercise such
Warrants prior to such date, they shall be entitled, in addition to the shares
of Common
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Stock issuable upon the exercise thereof, to receive such property, cash,
assets, rights, evidence of indebtedness, securities or any other thing of
value, or any combination thereof, on the payment date of such sale, transaction
or distribution.
8.6 No Adjustment of Exercise Price in Certain Cases. No
adjustment of the Exercise Price shall be made if the amount of said adjustment
shall be less than ten cents (10(cent)) per Warrant Security, provided, however,
that in such case any adjustment that would otherwise be required then to be
made shall be carried forward and shall be made at the time of and together with
the next subsequent adjustment which, together with any adjustment so carried
forward, shall amount to at least ten cents (10(cent)) per Warrant Security.
8.7 Adjustment of Redeemable Warrants' Exercise Price. With
respect to any of the Redeemable Warrants whether or not the Redeemable Warrants
have been exercised (or are exercisable) and whether or not the Redeemable
Warrants are issued and outstanding, the Redeemable Warrant exercise price and
the number of shares of Common Stock underlying such Redeemable Warrants shall
be automatically adjusted in accordance with Section 8 of the Warrant Agreement
between the Company and Continental Stock Transfer & Trust Company dated
__________, 1997 (the "Redeemable Warrant Agreement"), upon the occurrence of
any of the events described therein. Thereafter, the underlying Redeemable
Warrants shall be exercisable at such adjusted Redeemable Warrant exercise price
for such adjusted number of underlying shares of Common Stock or other
securities, properties or rights.
9. Exchange and Replacement of Warrant Certificates. Each
Warrant Certificate is exchangeable without expense, upon the surrender thereof
by the registered Holder at the principal executive office of the Company, for a
new Warrant Certificate of like tenor and
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date representing in the aggregate the right to purchase the same number of
Units in such denominations as shall be designated by the Holder thereof at the
time of such surrender.
Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of any Warrant
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it, and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
the Warrants, if mutilated, the Company will make and deliver a new Warrant
Certificate of like tenor, in lieu thereof.
10. Elimination of Fractional Interests. The Company shall not
be required to issue certificates representing fractions of shares of Common
Stock or Redeemable Warrants upon the exercise of the Warrants, or fractions of
shares of Common Stock upon the exercise of the Redeemable Warrants underlying
the Warrants, it being the intent of the parties that all fractional interests
shall be eliminated by rounding any fraction up to the nearest whole number of
shares of Common Stock or Redeemable Warrants, as the case may be, or other
securities, properties or rights.
11. Reservation and Listing of Securities. The Company shall
at all times reserve and keep available out of its authorized shares of Common
Stock, solely for the purpose of issuance upon the exercise of the Warrants and
the Redeemable Warrants, such number of shares of Common Stock or other
securities, properties or rights as shall be issuable upon the exercise thereof.
The Company covenants and agrees that, upon exercise of the Warrants and payment
of the Exercise Price therefor, all shares of Common Stock and other securities
issuable upon such exercise shall be duly and validly issued, fully paid,
non-assessable and not subject to the preemptive rights of any stockholder. The
Company further covenants and agrees that
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upon exercise of the Redeemable Warrants underlying the Warrants and payment of
the respective Redeemable Warrant exercise price therefor, all shares of Common
Stock and other securities issuable upon such exercises shall be duly and
validly issued, fully paid, non-assessable and not subject to the preemptive
rights of any stockholder. As long as the Warrants shall be outstanding, the
Company shall use its best efforts to cause all shares of Common Stock issuable
upon the exercise of the Warrants and the Redeemable Warrants and all Redeemable
Warrants underlying the Warrants to be listed (subject to official notice of
issuance) on all securities exchanges on which the Common Stock or the
Redeemable Warrants issued to the public in connection herewith may then be
listed and/or quoted on Nasdaq National Market or Nasdaq Small Cap Market.
12. Notices to Warrant Holders. Nothing contained in this
Agreement shall be construed as conferring upon the Holders the right to vote or
to consent or to receive notice as a stockholder in respect of any meetings of
stockholders for the election of directors or any other matter, or as having any
rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Warrants and their exercise, any of the following
events shall occur:
(a) the Company shall take a record of the holders of its
shares of Common Stock for the purpose of entitling them to receive a
dividend or distribution payable otherwise than in cash, or a cash
dividend or distribution payable otherwise than out of current or
retained earnings, as indicated by the accounting treatment of such
dividend or distribution on the books of the Company; or
(b) the Company shall offer to all the holders of its Common
Stock any additional shares of capital stock of the Company or
securities convertible into or
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<PAGE>
exchangeable for shares of capital stock of the Company, or any option,
right or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of
all or substantially all of its property, assets and business as an
entirety shall be proposed;
then, in any one or more of said events, the Company shall give written notice
of such event at least twenty (20) days prior to the date fixed as a record date
or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall specify
such record date or the date of closing the transfer books, as the case may be.
Failure to give such notice or any defect therein shall not affect the validity
of any action taken in connection with the declaration or payment of any such
dividend, or the issuance of any convertible or exchangeable securities, or
subscription rights, options or warrants, or any proposed dissolution,
liquidation, winding up or sale.
13. Redeemable Warrants. The form of the certificate
representing Redeemable Warrants (and the form of election to purchase shares of
Common Stock upon the exercise of Redeemable Warrants and the form of assignment
printed on the reverse thereof) shall be substantially as set forth in Exhibit
"A" to the Redeemable Warrant Agreement. Each Redeemable Warrant issuable upon
exercise of the Warrants shall evidence the right to initially purchase one
fully paid and non-assessable share of Common Stock at an initial purchase price
of $__________ [150% of the IPO price per Unit] per share commencing on the
Initial Exercise Date and ending at 5:00 p.m. New York time on the Redeemable
Warrant Expiration Date at
21
<PAGE>
which time the Redeemable Warrants shall expire. The exercise price of the
Redeemable Warrants and the number of shares of Common Stock issuable upon the
exercise of the Redeemable Warrants are subject to adjustment, whether or not
the Warrants have been exercised and the Redeemable Warrants have been issued,
in the manner and upon the occurrence of the events set forth in Section 8 of
the Redeemable Warrant Agreement, which is hereby incorporated herein by
reference and made a part hereof as if set forth in its entirety herein. Subject
to the provisions of this Agreement and upon issuance of the Redeemable Warrants
underlying the Warrants, each registered holder of such Redeemable Warrants
shall have the right to purchase from the Company (and the Company shall issue
to such registered holders) up to the number of fully paid and non-assessable
shares of Common Stock (subject to adjustment as provided herein and in the
Redeemable Warrant Agreement), free and clear of all preemptive rights of
stockholders, provided that such registered holder complies with the terms
governing exercise of the Redeemable Warrants set forth in the Redeemable
Warrant Agreement, and pays the applicable exercise price, determined in
accordance with the terms of the Redeemable Warrant Agreement. Upon exercise of
the Redeemable Warrants, the Company shall forthwith issue to the registered
holder of any such Redeemable Warrant in his name or in such name as may be
directed by him, certificates for the number of shares of Common Stock so
purchased. Except as otherwise provided herein, the Redeemable Warrants
underlying the Warrants shall be governed in all respects by the terms of the
Redeemable Warrant Agreement. The Redeemable Warrants shall be transferable in
the manner provided in the Redeemable Warrant Agreement, and upon any such
transfer, a new Redeemable Warrant Certificate shall be issued promptly to the
transferee. The Company covenants to, and agrees with, the Holder(s) that
without the prior written consent of the Holder(s), the Redeemable Warrant
Agreement will
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<PAGE>
not be modified, amended, cancelled, altered or superseded, and that the Company
will send to each Holder, irrespective of whether or not the Warrants have been
exercised, any and all notices required by the Redeemable Warrant Agreement to
be sent to holders of Redeemable Warrants.
14. Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
duly made when delivered, or mailed by registered or certified mail, return
receipt requested:
(a) If to the registered Holder of the Warrants, to the
address of such Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 3
hereof or to such other address as the Company may designate by notice
to the Holders.
(c) If to the Underwriter, to Joseph Stevens & Company,
Inc., 33 Maiden Lane, New York, New York, 10038, Attention: Joseph
Sorbara.
15. Supplements and Amendments. The Company and the
Underwriter may from time to time supplement or amend this Agreement without the
approval of any Holders of Warrant Certificates (other than the Underwriter) in
order to cure any ambiguity, to correct or supplement any provision contained
herein which may be defective or inconsistent with any provisions herein, or to
make any other provisions in regard to matters or questions arising hereunder
which the Company and the Underwriter may deem necessary or desirable and which
the Company and the Underwriter deem shall not adversely affect the interests of
the Holders of Warrant Certificates.
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<PAGE>
16. Successors. All the covenants and provisions of this
Agreement shall be binding upon and inure to the benefit of the Company, the
Holders and their respective successors and assigns hereunder.
17. Termination. This Agreement shall terminate at the close
of business on __________, 2004 [7 years from the date hereof]. Notwithstanding
the foregoing, the indemnification provisions of Section 7 shall survive such
termination until the close of business on __________, 2009 [12 years from the
date hereof.]
18. Governing Law, Submission to Jurisdiction. This Agreement
and each Warrant Certificate issued hereunder shall be deemed to be a contract
made under the laws of the State of New York and for all purposes shall be
construed in accordance with the laws of said State without giving effect to the
rules of said State governing the conflicts of laws.
The Company, the Underwriter and the Holders hereby agree that
any action, proceeding or claim against it arising out of, or relating in any
way to, this Agreement shall be brought and enforced in the courts of the State
of New York or of the United States of America for the Southern District of New
York, and irrevocably submits to such jurisdiction, which jurisdiction shall be
exclusive. The Company, the Underwriter and the Holders hereby irrevocably waive
any objection to such exclusive jurisdiction or inconvenient forum. Any such
process or summons to be served upon any of the Company, the Underwriter and the
Holders (at the option of the party bringing such action, proceeding or claim)
may be served by transmitting a copy thereof, by registered or certified mail,
return receipt requested, postage prepaid, addressed to it at the address as set
forth in Section 14 hereof. Such mailing shall be deemed personal service and
shall be legal and binding upon the party so served in any action, proceeding or
claim. The Company, the Underwriter and the Holders agree that the prevailing
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<PAGE>
party(ies) in any such action or proceeding shall be entitled to recover from
the other party(ies) all of its/their reasonable legal costs and expenses
relating to such action or proceeding and/or incurred in connection with the
preparation therefor.
19. Entire Agreement; Modification. This Agreement (including
the Underwriting Agreement to the extent portions thereof are referred to
herein) and the Redeemable Warrant Agreement contain the entire understanding
between the parties hereto with respect to the subject matter hereof and may not
be modified or amended except by a writing duly signed by the party against whom
enforcement of the modification or amendment is sought.
20. Severability. If any provision of this Agreement shall be
held to be invalid or unenforceable, such invalidity or unenforceability shall
not affect any other provision of this Agreement.
21. Captions. The caption headings of the Sections of this
Agreement are for convenience of reference only and are not intended, nor should
they be construed as, a part of this Agreement and shall be given no substantive
effect.
22. Benefits of this Agreement. Nothing in this Agreement
shall be construed to give to any person or corporation other than the Company
and the Underwriter and any other registered Holder(s) of the Warrant
Certificates or Warrant Securities any legal or equitable right, remedy or claim
under this Agreement; and this Agreement shall be for the sole and exclusive
benefit of the Company and the Underwriter and any other Holder(s) of the
Warrant Certificates or Warrant Securities.
23. Counterparts. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and such counterparts shall to either constitute but one and
the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.
CTI INDUSTRIES CORPORATION
By:_________________________
Howard W. Schwan
President
Officer
Attest:
_________________
Secretary
JOSEPH STEVENS & COMPANY, INC.
By: ___________________________
Name:
Title:
<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
(ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE
UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION
OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE
ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:00 P.M., NEW YORK TIME, ________, 2002
No. W- ____ Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that __________, or
registered assigns, is the registered holder of __________ Warrants to purchase
initially, at any time from ____________, 1998 [one year from the effective date
of the Registration Statement] until 5:00 p.m. New York time on ____________,
2002 [five years from the effective date of the Registration Statement]
("Expiration Date"), up to ______________ Units, each Unit consisting of one (1)
fully-paid and non-assessable share of common stock, ____ par value ("Common
Stock") of CTI INDUSTRIES CORPORATION, a Delaware corporation (the "Company"),
and one (1) redeemable warrant ("Redeemable Warrants") (each Redeemable Warrant
entitling the holder to purchase one fully-paid and non-assessable share of
Common Stock), at the initial exercise price, subject to adjustment in certain
events (the "Exercise Price"), of $_____________ [120% of the public offering
price per Unit] per Unit upon surrender of this Warrant Certificate and payment
of the Exercise Price at an office or agency of the Company, or by surrender of
this Warrant Certificate in lieu of cash payment, but subject to the conditions
set forth herein and in the warrant agreement dated as of _________________,
1997 between the Company and Joseph Stevens & Company, Inc. (the "Warrant
Agreement"). Payment of the Exercise Price shall be made by certified or
official bank check in New York Clearing House funds payable to the order of the
Company or by surrender of this Warrant Certificate.
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<PAGE>
No Warrant may be exercised after 5:00 p.m., New York time, on
the Expiration Date, at which time all Warrants evidenced hereby, unless
exercised prior thereto, hereby shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of
a duly authorized issue of Warrants issued pursuant to the Warrant Agreement,
which Warrant Agreement is hereby incorporated by reference in and made a part
of this instrument and is hereby referred to for a description of the rights,
limitation of rights, obligations, duties and immunities thereunder of the
Company and the holders (the words "holders" or "holder" meaning the registered
holders or registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of
certain events the Exercise Price and the type and/or number of the Company's
securities issuable thereupon may, subject to certain conditions, be adjusted.
In such event, the Company will, at the request of the holder, issue a new
Warrant Certificate evidencing the adjustment in the Exercise Price and the
number and/or type of securities issuable upon the exercise of the Warrants;
provided, however, that the failure of the Company to issue such new Warrant
Certificates shall not in any way change, alter, or otherwise impair, the rights
of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Warrant Agreement, without any charge except for any tax or
other governmental charge imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced
by this Certificate, the Company shall forthwith issue to the holder hereof a
new Warrant Certificate representing such Warrant.
The Company may deem and treat the registered holder(s) hereof
as the absolute owner(s) of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof, and of any distribution to the holder(s) hereof, and for
all other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined
in the Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated as of , 1997
CTI INDUSTRIES CORPORATION
[SEAL] By:__________________________
Howard W. Schwan
President Officer
Attest:
________________________
Secretary
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<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.1]
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to purchase _____________ Units
and herewith tenders in payment for such securities a certified or official bank
check payable in New York Clearing House Funds to the order of CTI Industries
Corporation in the amount of $__________, all in accordance with the terms of
Section 3.1 of the Underwriter's Warrant Agreement dated as of ___________, 1997
between CTI Industries Corporation and Joseph Stevens & Company, Inc. The
undersigned requests that certificates for such securities be registered in the
name of _______________ whose address is __________________________ and that
such certificates be delivered to ______________________________ whose address
is ____________________________.
Dated:
Signature ___________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the Warrant
Certificate.)
______________________________________
(Insert Social Security or Other
Identifying Number of Holder)
4
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.2]
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to purchase ____________ Units
all in accordance with the terms of Section 3.2 of the Underwriter's Warrant
Agreement dated as of ______________, 1997 between CTI Industries Corporation
and Joseph Stevens & Company, Inc. The undersigned requests that certificates
for such securities be registered in the name of __________________ whose
address is _______________________ and that such certificates be delivered to
_____________________ whose address is ____________________________________.
Dated:
Signature ___________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the Warrant
Certificate.)
_____________________________________
(Insert Social Security or Other
Identifying Number of Holder)
5
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED _____________ hereby sells, assigns and transfers unto
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ________________ Attorney, to
transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated: ______________________
Signature: _________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the Warrant
Certificate.)
_____________________________________
(Insert Social Security or Other
Identifying Number of Holder)
EXHIBIT 4.3
CTI INDUSTRIES CORPORATION
AND
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
----------------
WARRANT AGREEMENT
Dated as of ______________, 1997
- -
<PAGE>
WARRANT AGREEMENT, dated this ___ day of ________ 1997 [the effective
date of the Registration Statement], by and between CTI INDUSTRIES CORPORATION,
a Delaware corporation (the "Company"), and CONTINENTAL STOCK TRANSFER & TRUST
COMPANY.
WITNESSETH:
WHEREAS, in connection with (i) the offering (the "Offering") to the
public of 1,333,333 units (the "Units"), each Unit consisting of one share of
the Company's common stock, ____ par value per share (the "Common Stock"), and
one redeemable warrant (the "Warrants"), such redeemable warrant entitling the
holder thereof to purchase one share of Common Stock, (ii) the over-allotment
option granted to Joseph Stevens & Company, Inc. (the "Underwriter"), in the
public offering referred to above, to purchase up to an additional 199,999 Units
(the "Over-Allotment Option") and (iii) the sale to the Underwiter of warrants
(the "Underwriter's Warrants") to purchase up to 133,333 Units.
WHEREAS, the Company desires to provide for the issuance of
certificates representing the Warrants; and
WHEREAS, the Company desires the Warrant Agent (as defined in Section
1(r) hereof) to act on behalf of the Company, and the Warrant Agent is willing
to so act, in connection with the issuance, registration, transfer and exchange
of certificates representing the Warrants and the exercise of the Warrants.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth and for the purpose of defining the terms and
provisions of the Warrants and the certificates representing the Warrants and
the respective rights and obligations thereunder of the Company, the
Underwriter, the holders of certificates representing the Warrants and the
Warrant Agent, the parties hereto agree as follows:
<PAGE>
SECTION 1. Definitions. As used herein, the following terms
shall have the followingmeanings, unless the context shall otherwise require:
(a) "Act" shall mean the Securities Act of 1933, as amended.
(b) "Commission" shall mean the Securities and Exchange
Commission.
(c) "Common Stock" shall have the meaning set forth in Section
8(d) hereof.
(d) "Company" shall have the meaning assigned to such term in
the first (1st) paragraph of this Agreement.
(e) "Corporate Office" shall mean the office of the Warrant
Agent at which at any particular time its principal business in New York, New
York shall be administered, which office is located on the date hereof at 2
Broadway, New York, New York 10004.
(f) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
(g) "Exercise Date" shall mean, subject to the provisions of
Section 5(b) hereof, as to any Warrant, the date on which the Warrant Agent
shall have received both (i) the Warrant Certificate representing such Warrant,
with the exercise form thereon duly executed by the Registered Holder (as
defined in Section 1(m) hereof) thereof or his attorney duly authorized in
writing, and (ii) payment in cash or by check made payable to the Warrant Agent
for the account of the Company of an amount in lawful money of the United States
of America equal to the applicable Purchase Price (as defined in Section 1(k)
hereof).
(h) "Initial Warrant Exercise Date" shall mean __________,
1997 [the effective date of the Registration Statement].
(i) "Initial Warrant Redemption Date" shall mean __________,
1998 [the date twelve (12) months after the effective date of the Registration
Statement].
(j) "NASD" shall mean the National Association of Securities
Dealers, Inc.
2
<PAGE>
(k) "Purchase Price" shall mean, subject to modification and
adjustment as provided in Section 8 hereof, $__________ per Share [150% of the
IPO price per Unit].
(l) "Redemption Date" shall mean the date (which may not occur
before the Initial Warrant Redemption Date) fixed for the redemption of the
Warrants in accordance with the terms hereof.
(m) "Registered Holder" shall mean the person in whose name
any certificate representing the Warrants shall be registered on the books
maintained by the Warrant Agent pursuant to Section 6(b) hereof.
(n) "Underwriter's Warrant Agreement" shall mean the agreement
dated as of __________, 1997 between the Company and the Underwriter relating to
and governing the terms and provisions of the Underwriter's Warrants.
(o) "Subsidiary" or "Subsidiaries" shall mean any corporation
or corporations, as the case may be, of which stock having ordinary power to
elect a majority of the board of directors of such corporation or corporations
(regardless of whether or not at the time the stock of any other class or
classes of such corporation shall have or may have voting power by reason of the
happening of any contingency) is at the time directly or indirectly owned by the
Company or by one or more Subsidiaries, or by the Company and one or more
Subsidiaries.
(p) "Transfer Agent" shall mean Continental Stock Transfer &
Trust Company, of New York, New York or its authorized successor.
(q) "Underwriting Agreement" shall mean the underwriting
agreement dated _______________, 1997 [the effective date of the Registration
Statement] between the Company and the Underwriter relating to the purchase for
resale to the public of ________ Units (without giving effect to the
Over-Allotment Option).
3
<PAGE>
(r) "Warrant Agent" shall mean Continental Stock Transfer &
Trust Company of New York, New York or its authorized successor.
(s) "Warrant Certificate" shall mean a certificate
representing each of the Warrants substantially in the form annexed hereto as
Exhibit A.
(t) "Warrant Expiration Date" shall mean, unless the Warrants
are redeemed as provided in Section 9 hereof prior to such date, 5:00 p.m. (New
York time) on __________, 2002 [the 60 month anniversary of issuance] or, if
such date shall in the State of New York be a holiday or a day on which banks
are authorized to close, then 5:00 p.m. (New York time) on the next following
day which in the State of New York is not a holiday or a day on which banks are
authorized to close, subject to the Company's right, prior to the Warrant
Expiration Date, with the consent of the Underwriter, to extend such Warrant
Expiration Date on five (5) business days prior written notice to the Registered
Holders.
SECTION 2. Warrants and Issuance of Warrant Certificates.
(a) One Warrant shall initially entitle the Registered Holder
of the Warrant Certificate representing such Warrant to purchase at the Purchase
Price therefor from the Initial Warrant Exercise Date until the Warrant
Expiration Date one (1) share of Common Stock upon the exercise thereof, subject
to modification and adjustment as provided in Section 8 hereof.
(b) Upon execution of this Agreement, Warrant Certificates
representing 133,333 Warrants to purchase up to an aggregate of 1,333,333 shares
of Common Stock (subject to modification and adjustment as provided in Section 8
hereof), shall be executed by the Company and delivered to the Warrant Agent
(c) Upon exercise of the Over-Allotment Option, in whole or in
part, Warrant Certificates representing up to 199,999 Warrants to purchase up to
an aggregate of
4
<PAGE>
199,999 shares of Common Stock (subject to modification and adjustment as
provided in Section 8 hereof) shall be executed by the Company and delivered to
the Warrant Agent.
(d) Upon exercise of the Underwriter's Warrants as provided
therein, Warrant Certificates representing 133,333 Warrants to purchase up to an
aggregate of 133,333 shares of Common Stock (subject to modification and
adjustment as provided in Section 8 hereof and in the Underwriter's Warrant
Agreement), shall be countersigned, issued and delivered by the Warrant Agent
upon written order of the Company signed by its Chairman of the Board, President
or a Vice President and by its Treasurer or an Assistant Treasurer or its
Secretary or an Assistant Secretary.
(e) From time to time, up to the Warrant Expiration Date, the
Warrant Agent shall countersign and deliver Warrant Certificates in required
denominations of one or whole number multiples thereof to the person entitled
thereto in connection with any transfer or exchange permitted under this
Agreement. No Warrant Certificates shall be issued except (i) Warrant
Certificates initially issued hereunder, (ii) Warrant Certificates issued upon
any transfer or exchange of Warrants, (iii) Warrant Certificates issued in
replacement of lost, stolen, destroyed or mutilated Warrant Certificates
pursuant to Section 7 hereof, and (iv) Warrant Certificates issued pursuant to
the Underwriter's Warrant Agreement (including Warrants in excess of the 133,333
Underwriter's Warrants issued as a result of the antidilution provisions
contained in the Underwriter's Warrant Agreement) and (v) at the option of the
Company, Warrant Certificates in such form as may be approved by its Board of
Directors, to reflect any adjustment or change in the Purchase Price, the number
of shares of Common Stock purchasable upon the exercise of a Warrant or the
redemption price therefor.
5
<PAGE>
SECTION 3. Form and Execution of Warrant Certificates.
(a) The Warrant Certificates shall be substantially in the
form annexed hereto as Exhibit A (the provisions of which are hereby
incorporated herein) and may have such letters, numbers or other marks of
identification or designation and such legends, summaries or endorsements
printed, lithographed or engraved thereon as the Company may deem appropriate
and as are not inconsistent with the provisions of this Agreement, or as may be
required to comply with any law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange on which the
Warrants may be listed, or to conform to usage. The Warrant Certificates shall
be dated the date of issuance thereof (whether upon initial issuance, transfer,
exchange or in lieu of mutilated, lost, stolen or destroyed Warrant
Certificates).
(b) Warrant Certificates shall be executed on behalf of the
Company by its Chairman of the Board, President or any Vice President and by its
Treasurer or an Assistant Treasurer or its Secretary or an Assistant Secretary,
by manual signatures or by facsimile signatures printed thereon, and shall have
imprinted thereon a facsimile of the Company's seal. Warrant Certificates shall
be manually countersigned by the Warrant Agent and shall not be valid for any
purpose unless so countersigned. In case any officer of the Company who shall
have signed any of the Warrant Certificates shall cease to be such officer of
the Company before the date of issuance of the Warrant Certificates or before
countersignature by the Warrant Agent and issue and delivery thereof, such
Warrant Certificates, nevertheless, may be countersigned by the Warrant Agent
and issued and delivered with the same force and effect as though the officer of
the Company who signed such Warrant Certificates had not ceased to hold such
office.
6
<PAGE>
SECTION 4. Exercise.
(a) Warrants in denominations of one or whole number multiples
thereof may be exercised commencing at any time on or after the Initial Warrant
Exercise Date, but not after the Warrant Expiration Date, upon the terms and
subject to the conditions set forth herein (including the provisions set forth
in Sections 5 and 9 hereof) and in the applicable Warrant Certificate. A Warrant
shall be deemed to have been exercised immediately prior to the close of
business on the Exercise Date, provided that the Warrant Certificate
representing such Warrant, with the exercise form thereon duly executed by the
Registered Holder thereof or his attorney duly authorized in writing, together
with payment in cash or by check made payable to the Warrant Agent for the
account of the Company of an amount in lawful money of the United States of
America equal to the applicable Purchase Price, have been received by the
Warrant Agent. The person entitled to receive the securities deliverable upon
such exercise shall be treated for all purposes as the holder of such securities
as of the close of business on the Exercise Date. As soon as practicable on or
after the Exercise Date and in any event within five (5) business days after
such date, the Warrant Agent, on behalf of the Company, shall cause to be issued
to the person or persons entitled to receive the same a Common Stock certificate
or certificates for the shares of Common Stock deliverable upon such exercise,
and the Warrant Agent shall deliver the same to the person or persons entitled
thereto. Upon the exercise of any Warrants, the Warrant Agent shall promptly
notify the Company in writing of such fact and of the number of securities
delivered upon such exercise and, subject to Section 4(b) hereof, shall cause
all payments in cash or by check made payable to the order of the Company in
respect of the Purchase Price to be deposited promptly in the Company's bank
account or delivered to the Company.
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<PAGE>
(b) At any time upon the exercise of any Warrants after one
year and one day from the date hereof, the Warrant Agent shall, on a daily
basis, within two business days after such exercise, notify the Underwriter, its
successors or assigns of the exercise of any such Warrants and shall, on a
weekly basis (subject to collection of funds constituting the tendered Purchase
Price, but in no event later than five business days after the last day of the
calendar week in which such funds were tendered), for services rendered by the
Underwriter to the Registered Holders of the Warrants then being exercised,
remit to the Underwriter an amount equal to five percent (5%) of the Purchase
Price of such Warrants then being exercised unless the Underwriter shall have
notified the Warrant Agent that the payment of such amount with respect to such
Warrant is violative of the General Rules and Regulations promulgated under the
Exchange Act, or the rules and regulations of the NASD or applicable state
securities or "blue sky" laws, or the Warrants are those underlying the
Underwriter's Warrants in which event, the Warrant Agent shall have to pay such
amount to the Company; provided, that, the Warrant Agent shall not be obligated
to pay any amounts pursuant to this Section 4(b) during any week that such
amounts payable are less than $1,000 and the Warrant Agent's obligation to make
such payments shall be suspended until the amount payable aggregates $1,000, and
provided further, that, in any event, any such payment (regardless of amount)
shall be made not less frequently than monthly.
(c) The Company shall not be obligated to issue any fractional
share interests or fractional warrant interests upon the exercise of any Warrant
or Warrants, nor shall it be obligated to issue scrip or pay cash in lieu of
fractional interests. Any fractional interest shall be eliminated by rounding
any fraction up to the next full share or Warrant, as the case may be, or other
securities, properties or rights.
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SECTION 5. Reservation of Shares, Listing, Payment of Taxes, etc.
(a)The Company covenants that it will at all times reserve and
keep available out of its authorized Common Stock, solely for the purpose of
issuance upon the exercise of Warrants, such number of shares of Common Stock as
shall then be issuable upon the exercise of all outstanding Warrants. The
Company covenants that, upon exercise of the Warrants and payment of the
Purchase Price for the shares of Common Stock underlying the Warrants, all
shares of Common Stock which shall be issuable upon such exercise shall be duly
and validly issued, fully paid, non-assessable, free from all preemptive or
similar rights, and free from all taxes, liens and charges with respect to the
issuance thereof, and that upon issuance such shares shall be listed or quoted
on each securities exchange, if any, on which the other shares of outstanding
Common Stock are then listed or quoted, or if not then so listed or quoted on
each place (whether the Nasdaq Stock Market, Inc., the NASD OTC Electronic
Bulletin Board, the National Quotation Bureau "pink sheets" or otherwise) on
which the other shares of outstanding Common Stock are listed or quoted.
(b) The Company covenants that if any securities reserved for
the purpose of exercise of Warrants hereunder require registration with, or
approval of, any governmental authority under any federal securities law before
such securities may be validly issued or delivered upon such exercise, then the
Company will file a registration statement under the federal securities laws or
a post-effective amendment to a registration statement, use its best efforts to
cause the same to become effective, keep such registration statement current
while any of the Warrants are outstanding and deliver a prospectus which
complies with Section 10(a)(3) of the Act, to the Registered Holder exercising
the Warrant (except, if in the opinion of counsel to the Company, such
registration is not required under the federal securities law or if the Company
receives a letter from the staff of the Commission stating that it would not
take any
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enforcement action if such registration is not effected). The Company will use
its best efforts to obtain appropriate approvals or registrations under the
state "blue sky" securities laws of all states in which Registered Holders
reside. Warrants may not be exercised by, nor may shares of Common Stock be
issued to, any Registered Holder in any state in which such exercise would be
unlawful.
(c) The Company shall pay all documentary, stamp or similar
taxes and other governmental charges that may be imposed with respect to the
issuance of Warrants, or the issuance or delivery of any shares of Common Stock
upon exercise of the Warrants; provided, however, that if shares of Common Stock
are to be delivered in a name other than the name of the Registered Holder of
the Warrant Certificate representing any Warrant being exercised, then no such
delivery shall be made unless the person requesting the same has paid to the
Warrant Agent the amount of transfer taxes or charges incident thereto, if any.
(d) The Warrant Agent is hereby irrevocably authorized as the
Transfer Agent to requisition from time to time certificates representing shares
of Common Stock or other securities required upon exercise of the Warrants, and
the Company will comply with all such requisitions.
SECTION 6. Exchange and Registration of Transfer.
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants or may be
transferred in whole or in part. Warrant Certificates to be so exchanged shall
be surrendered to the Warrant Agent at its Corporate Office, and the Company
shall execute and the Warrant Agent shall countersign, issue and deliver in
exchange therefor the Warrant Certificate or Certificates which the Registered
Holder making the exchange shall be entitled to receive.
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(b) The Warrant Agent shall keep, at such office, books in
which, subject to such reasonable regulations as it may prescribe, it shall
register Warrant Certificates and the transfer thereof. Upon due presentment for
registration of transfer of any Warrant Certificate at such office, the Company
shall execute and the Warrant Agent shall issue and deliver to the transferee or
transferees a new Warrant Certificate or Certificates representing an equal
aggregate number of Warrants.
(c) With respect to any Warrant Certificates presented for
registration of transfer, or for exchange or exercise, the subscription or
assignment form, as the case may be, on the reverse thereof shall be duly
endorsed or be accompanied by a written instrument or instruments of
subscription or assignment, in form satisfactory to the Company and the Warrant
Agent, duly executed by the Registered Holder thereof or his attorney duly
authorized in writing.
(d) No service charge shall be made for any exchange or
registration of transfer of Warrant Certificates. However, the Company may
require payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in connection therewith.
(e) All Warrant Certificates surrendered for exercise or for
exchange shall be promptly cancelled by the Warrant Agent.
(f) Prior to due presentment for registration or transfer
thereof, the Company and the Warrant Agent may deem and treat the Registered
Holder of any Warrant Certificate as the absolute owner thereof of each Warrant
represented thereby (notwithstanding any notations of ownership or writing
thereon made by anyone other than the Company or the Warrant Agent) for all
purposes and shall not be affected by any notice to the contrary.
SECTION 7. Loss or Mutilation. Upon receipt by the Company and the
Warrant Agent of evidence satisfactory to them of the ownership of and the loss,
theft, destruction or
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mutilation of any Warrant Certificate and (in the case of loss, theft or
destruction) of indemnity satisfactory to them, and (in case of mutilation) upon
surrender and cancellation thereof, the Company shall execute and the Warrant
Agent shall countersign and deliver in lieu thereof a new Warrant Certificate
representing an equal number of Warrants. Applicants for a substitute Warrant
Certificate shall also comply with such other reasonable regulations and pay
such other reasonable charges as the Warrant Agent may prescribe.
SECTION 8. Adjustments to Purchase Price and Number of Securities.
(a) Subdivision and Combination. In case the Company shall at
any time subdivide or combine the outstanding shares of Common Stock, the
Purchase Price shall forthwith be proportionately decreased in the case of
subdivision or increased in the case of combination.
(b) Stock Dividends and Distributions. In case the Company
shall pay dividend in, or make a distribution of, shares of Common Stock or of
the Company's capital stock convertible into Common Stock, the Purchase Price
shall forthwith be proportionately decreased. An adjustment made pursuant to
this Section 8(b) shall be made as of the record date for the subject stock
dividend or distribution.
(c) Adjustment in Number of Securities. Upon each adjustment
of the Purchase Price pursuant to the provisions of this Section 8, the number
of Warrant Securities issuable upon the exercise at the adjusted Purchase Price
of each Warrant shall be adjusted to the nearest whole number by multiplying a
number equal to the Purchase Price in effect immediately prior to such
adjustment by the number of Warrant Securities issuable upon exercise of the
Warrants immediately prior to such adjustment and dividing the product so
obtained by the adjusted Purchase Price.
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(d) Definition of Common Stock. For the purpose of this
Agreement, the term "Common Stock" shall mean (i) the class of stock designated
as Common Stock in the Certificate of Incorporation of the Company as may be
amended or restated as of the date hereof, or (ii) any other class of stock
resulting from successive changes or reclassifications of such Common Stock
consisting solely of changes in par value, or from par value to no par value, or
from no par value to par value. In the event the Company shall after the date
hereof issue Common Stock with greater or superior voting rights than the shares
of Common Stock outstanding as of the date hereof, each Holder, at its option,
may receive upon exercise of any Warrant either shares of Common Stock or a like
number of such securities with greater or superior voting rights.
(e) Merger or Consolidation or Sale.
(i) In case of any consolidation of the Company with, or
merger of the Company with, or merger of the Company into, another corporation
(other than a consolidation or merger which does not result in any
reclassification or change of the outstanding Common Stock), the corporation
formed by such consolidation or surviving such merger shall execute and deliver
to the Holder a supplemental warrant agreement providing that the holder of each
Warrant then outstanding or to be outstanding shall have the right thereafter
(until the expiration of such Warrant) to receive, upon exercise of such
Warrant, the kind and amount of shares of stock and other securities and
property receivable upon such consolidation, merger, sale or transfer by a
Holder of the number of shares of Common Stock of the Company for which such
Warrant might have been exercised immediately prior to such consolidation,
merger, sale or transfer. Such supplemental warrant agreement shall provide for
adjustments which shall be identical to the adjustments provided in this Section
8. The above provision of this subsection shall similarly apply to successive
consolidations or mergers.
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(ii) In the event of (A) the sale by the Company of all or
substantially all of its assets, or (B) the engagement by the Company or any of
its affiliates in a "Rule 13e-3 transaction" as defined in paragraph (a)(3) of
Rule 13e-3 of the General Rules and Regulations under the Exchange Act or (C) a
distribution to the Company's stockholders of any cash, assets, property,
rights, evidences of indebtedness, securities or any other thing of value, or
any combination thereof, the Holders of the unexercised Warrants shall receive
notice of such sale, transaction or distribution twenty (20) days prior to the
date of such sale or the record date for such transaction or distribution, as
applicable, and, if they exercise such Warrants prior to such date, they shall
be entitled, in addition to the shares of Common Stock issuable upon the
exercise thereof, to receive such property, cash, assets, rights, evidence of
indebtedness, securities or any other thing of value, or any combination
thereof, on the payment date of such sale, transaction or distribution.
(f) No Adjustment of Exercise Price in Certain Cases. No
adjustment of the Exercise Price shall be made if the amount of said adjustment
shall be less than ten cents (10(cent)) per share of Common Stock, provided,
however, that in such case any adjustment that would otherwise be required then
to be made shall be carried forward and shall be made at the time of and
together with the next subsequent adjustment which, together with any adjustment
so carried forward, shall amount to at least ten cents (10(cent)) per share of
Common Stock.
SECTION 9. Redemption.
(a) Commencing on the Initial Warrant Redemption Date, the
Company may (but only with the prior written consent of the Underwriter), on
thirty (30) days' prior written notice, redeem all of the Warrants, in whole and
not in part, at a redemption price of five cents ($.05) per Warrant; provided,
however, that before any such call for redemption of Warrants can take place,
the (i) average closing bid price for the Common Stock, as reported by the
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National Association of Securities Dealers Automated Quotation System, or (ii)
if not so quoted, as reported by any other recognized quotation system on which
the Common Stock is quoted, shall have for any twenty (20) trading days within a
period of thirty (30) consecutive trading days ending on the fifth (5th) trading
day prior to the date on which the notice contemplated by Sections 9(b) and 9(c)
hereof is given, equalled or exceeded 150% of the then exercise price per share
of Common Stock (subject to adjustment in the event of any stock splits or other
similar events as provided in Section 8 hereof).
(b) In case the Company shall exercise its right to redeem all
of the Warrants, it shall give or cause to be given notice to the Registered
Holders of the Warrants, by mailing to such Registered Holders a notice of
redemption, first class, postage prepaid, at their last address as shall appear
on the records of the Warrant Agent. Any notice mailed in the manner provided
herein shall be conclusively presumed to have been duly given whether or not the
Registered Holder receives such notice. Not less than five (5) business days
prior to the mailing to the Registered Holders of the Warrants of the notice of
redemption, the Company shall deliver or cause to be delivered to the
Underwriter or its successors or assigns a similar notice telephonically and
confirmed in writing, together with a list of the Registered Holders (including
their respective addresses and number of Warrants beneficially owned by them) to
whom such notice of redemption has been or will be given.
(c) The notice of redemption shall specify (i) the redemption
price, (ii) the date fixed for redemption, which shall in no event be less than
thirty (30) days after the date of mailing of such notice, (iii) the place where
the Warrant Certificates shall be delivered and the redemption price shall be
paid, and (iv) that the Underwriter is the Company's exclusive warrant
solicitation agent and shall receive the commission contemplated by Section 4(b)
hereof and (v) that the right to exercise the Warrant shall terminate at 5:00
p.m. (New York time) on the
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business day immediately preceding the date fixed for redemption. The date fixed
for the redemption of the Warrants shall be the "Redemption Date" for purposes
of this Agreement. No failure to mail such notice nor any defect therein or in
the mailing thereof shall affect the validity of the proceedings for such
redemption except as to a holder (A) to whom notice was not mailed or (B) whose
notice was defective. An affidavit of the Warrant Agent or the Secretary or
Assistant Secretary of the Company that notice of redemption has been mailed
shall, in the absence of fraud, be prima facie evidence of the facts stated
therein.
(d) Any right to exercise a Warrant shall terminate at 5:00
p.m. (New York time) on the business day immediately preceding the Redemption
Date. The redemption price payable to the Registered Holders shall be mailed to
such persons at their addresses of record.
(e) The Company shall indemnify the Underwriter and each
person, if any, who controls the Underwriter within the meaning of Section 15 of
the Act or Section 20(a) of the Exchange Act against all loss, claim, damage,
expense or liability (including all expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever) to which any
of them may become subject under the Act, the Exchange Act or otherwise, arising
from the registration statement or prospectus referred to in Section 5(b) hereof
to the same extent and with the same effect (including the provisions regarding
contribution) as the provisions pursuant to which the company has agreed to
indemnify the Underwriter contained in Section 7 of the Underwriting Agreement.
(f) Five business days prior to the Redemption Date, the
Company shall furnish to the Underwriter (i) opinions of counsel to the Company,
dated such date and addressed to the Underwriter, and (ii) a "cold comfort"
letter dated such date addressed to the Underwriter, signed by the independent
public accountants who have issued a report on the Company's financial
statements included in such registration statement, in each case covering
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substantially the same matters with respect to such registration statement (and
the prospectus included therein) and, in the case of such accountants' letter,
with respect to events subsequent to the date of such financial statements, as
are customarily covered in opinions of issuer's counsel and in accountants'
letters delivered to underwriters in underwritten public offerings of
securities, including, without limitation, those matters covered in Sections
6(d), 6(e) and 6(j) of the Underwriting Agreement.
(g) The Company shall as soon as practicable after the
Redemption Date, and in any event within 15 months thereafter, make "generally
available to its security holders" (within the meaning of Rule 158 under the
Act) an earnings statement (which need not be audited) complying with Section
11(a) of the Act and covering a period of at least 12 consecutive months
beginning after the Redemption Date.
(h) The Company shall deliver within five business days prior
to the Redemption Date copies of all correspondence between the Commission and
the Company, its counsel or auditors and all memoranda relating to discussions
with the Commission or its staff with respect to such registration statement and
permit the Underwriter to do such investigation, upon reasonable advance notice,
with respect to information contained in or omitted from the registration
statement as it deems reasonably necessary to comply with applicable securities
laws or rules of the NASD. Such investigation shall include access to books,
records and properties and opportunities to discuss the business of the Company
with its officers and independent auditors, all to such reasonable extent and at
such reasonable times and as often as the Underwriter shall reasonably request.
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SECTION 10. Concerning the Warrant Agent.
(a) The Warrant Agent acts hereunder as agent and in a
ministerial capacity for the Company and the Underwriter, and its duties shall
be determined solely by the provisions hereof. The Warrant Agent shall not, by
issuing and delivering Warrant Certificates or by any other act hereunder, be
deemed to make any representations as to the validity or value or authorization
of the Warrant Certificates or the Warrants represented thereby or of any
securities or other property delivered upon exercise of any Warrant or whether
any stock issued upon exercise of any Warrant is fully paid and non-assessable.
(b) The Warrant Agent shall not at any time be under any duty
or responsibility to any holder of Warrant Certificates to make or cause to be
made any adjustment of the Purchase Price provided in this Agreement, or to
determine whether any fact exists which may require any such adjustment, or with
respect to the nature or extent of any such adjustment, when made, or with
respect to the method employed in making the same. It shall not (i) be liable
for any recital or statement of fact contained herein or for any action taken,
suffered or omitted by it in reliance on any Warrant Certificate or other
document or instrument believed by it in good faith to be genuine and to have
been signed or presented by the proper party or parties, (ii) be responsible for
any failure on the part of the Company to comply with any of its covenants and
obligations contained in this Agreement or in any Warrant Certificate, or (iii)
be liable for any act or omission in connection with this Agreement except for
its own gross negligence or willful misconduct.
(c) The Warrant Agent may at any time consult with counsel
satisfactory to it (who may be counsel for the Company or the Underwriter) and
shall incur no liability or responsibility for any action taken, suffered or
omitted by it in good faith in accordance with the opinion or advice of such
counsel.
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(d) Any notice, statement, instruction, request, direction,
order or demand of the Company shall be sufficiently evidenced by an instrument
signed by the Chairman of the Board of Directors, President or any Vice
President (unless other evidence in respect thereof is herein specifically
prescribed). The Warrant Agent shall not be liable for any action taken,
suffered or omitted by it in accordance with such notice, statement,
instruction, request, direction, order or demand.
(e) The Company agrees to pay the Warrant Agent reasonable
compensation for its services hereunder and to reimburse it for its reasonable
expenses hereunder; the Company further agrees to indemnify the Warrant Agent
and hold it harmless against any and all losses, expenses and liabilities,
including judgments, costs and counsel fees, for anything done or omitted by the
Warrant Agent in the execution of its duties and powers hereunder except losses,
expenses and liabilities arising as a result of the Warrant Agent's gross
negligence or willful misconduct.
(f) The Warrant Agent may resign its duties and be discharged
from all further duties and liabilities hereunder (except liabilities arising as
a result of the Warrant Agent's own gross negligence or willful misconduct),
after giving thirty (30) days' prior written notice to the Company. At least
fifteen (15) days prior to the date such resignation is to become effective, the
Warrant Agent shall cause a copy of such notice of resignation to be mailed to
the Registered Holder of each Warrant Certificate at the Company's expense. Upon
such resignation the Company shall appoint in writing a new warrant agent. If
the Company shall fail to make such appointment within a period of thirty (30)
days after it has been notified in writing of such resignation by the resigning
Warrant Agent, then the Registered Holder of any Warrant Certificate may apply
to any court of competent jurisdiction for the appointment of a new warrant
agent. Any new warrant agent, whether appointed by the Company or by such a
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court, shall be a bank or trust company having a capital and surplus, as shown
by its last published report to its stockholders, of not less than ten million
dollars ($10,000,000) or a stock transfer company doing business in New York,
New York. After acceptance in writing of such appointment by the new warrant
agent is received by the Company, such new warrant agent shall be vested with
the same powers, rights, duties and responsibilities as if it had been
originally named herein as the warrant agent, without any further assurance,
conveyance, act or deed; but if for any reason it shall be necessary or
expedient to execute and deliver any further assurance, conveyance, act or deed,
the same shall be done at the expense of the Company and shall be legally and
validly executed and delivered by the resigning Warrant Agent. Not later than
the effective date of any such appointment, the Company shall file notice
thereof with the resigning Warrant Agent and shall forthwith cause a copy of
such notice to be mailed to the Registered Holder of each Warrant Certificate.
(g) Any corporation into which the Warrant Agent or any new
warrant agent may be converted or merged, any corporation resulting from any
consolidation to which the Warrant Agent or any new warrant agent shall be a
party, or any corporation succeeding to the corporate trust business of the
Warrant Agent or any new warrant agent shall be a successor warrant agent under
this Agreement without any further act, provided that such corporation is
eligible for appointment as successor to the Warrant Agent under the provisions
of the preceding paragraph. Any such successor warrant agent shall promptly
cause notice of its succession as warrant agent to be mailed to the Company and
to the Registered Holders of each Warrant Certificate.
(h) The Warrant Agent, its subsidiaries and affiliates, and
any of its or their officers or directors, may buy and hold or sell Warrants or
other securities of the Company and otherwise deal with the Company in the same
manner and to the same extent and with like effect
20
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as though it were not Warrant Agent. Nothing herein shall preclude the Warrant
Agent from acting in any other capacity for the Company or for any other legal
entity.
(i) The Warrant Agent shall retain for a period of two (2)
years from the date of exercise any Warrant Certificate received by it upon such
exercise.
SECTION 11. Modification of Agreement.
The Warrant Agent and the Company may by supplemental agreement make
any changes or corrections in this Agreement (a) that they shall deem
appropriate to cure any ambiguity or to correct any defective or inconsistent
provision or manifest mistake or error herein contained, or (b) that they may
deem necessary or desirable and which shall not adversely affect the interests
of the holders of Warrant Certificates; provided, however, that this Agreement
shall not otherwise be modified, supplemented or altered in any respect except
with the consent in writing of the Registered Holders holding not less than
sixty-six and two-thirds percent (66- 2/3%) of the Warrants then outstanding;
provided, further, that no change in the number or nature of the securities
purchasable upon the exercise of any Warrant, and no change that increases the
Purchase Price of any Warrant, other than such changes as are specifically set
forth in this Agreement as originally executed, shall be made without the
consent in writing of each Registered Holders affected by such change. In
addition, this Agreement may not be modified, amended or supplemented without
the prior written consent of the Underwriter or its successors or assigns, other
than to cure any ambiguity or to correct any defective or inconsistent provision
or manifest mistake or error herein contained or to make any such change that
the Warrant Agent and the Company deem necessary or desirable and which shall
not adversely affect the interests of the Underwriter or its successors or
assigns.
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SECTION 12. Notices.
All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been made when delivered or
mailed first-class postage prepaid or delivered to a telegraph office for
transmission, if to the Registered Holder of a Warrant Certificate, at the
address of such holder as shown on the registry books maintained by the Warrant
Agent; if to the Company at CTI Industries Corporation, 22160 North Pepper Road,
Barrington, Illinois, Attention: Stephen Merrick, President, or at such other
address as may have been furnished to the Warrant Agent in writing by the
Company; and if to the Warrant Agent, at its Corporate Office. Copies of any
notice delivered pursuant to this Agreement shall be delivered to Joseph Stevens
& Company, Inc., 33 Maiden Lane, 8th Floor, New York, NY 10038, Attention:
Joseph Sorbara, Chief Executive Officer or at such other address as may have
been furnished to the Company and the Warrant Agent in writing.
SECTION 13. Governing Law.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York without giving effect to conflicts of laws
rules or principals.
SECTION 14. Binding Effect.
This Agreement shall be binding upon and inure to the benefit of the
Company, the Warrant Agent and their respective successors and assigns and the
holders from time to time of Warrant Certificates or any of them. Except as
hereinafter stated, nothing in this Agreement is intended or shall be construed
to confer upon any other person any right, remedy or claim or to impose upon any
other person any duty, liability or obligation. The Underwriter is, and shall at
all times irrevocably be deemed to be, a third-party beneficiary of this
Agreement, with full power, authority and standing to enforce the rights granted
to it hereunder.
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SECTION 15. Counterparts.
This Agreement may be executed in several counterparts, which taken
together shall constitute a single document.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
CTI INDUSTRIES CORPORATION CONTINENTAL STOCK TRANSFER &
TRUST COMPANY, INC.
As Warrant Agent
By:________________________________ By:____________________________
Name: Name:
Title: Title:
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EXHIBIT A
No. W ___________ VOID AFTER ____________________, 2002
_________ WARRANTS
REDEEMABLE WARRANT CERTIFICATE TO
PURCHASE SHARES OF COMMON STOCK
CTI INDUSTRIES CORPORATION
CUSIP _________
THIS CERTIFIES THAT, FOR VALUE RECEIVED
or registered assigns (the "Registered Holder") is the owner of the number of
Redeemable Warrants (the "Warrants") specified above. One Warrant initially
entitles the Registered Holder to purchase, subject to the terms and conditions
set forth in this Certificate and the Warrant Agreement (as hereinafter
defined), one fully paid and non-assessable share of Common Stock, $____ par
value per share, of CTI Industries Corporation., a Delaware corporation (the
"Company"), at any time from _____________, 1997 [the effective date of the
Registration Statement] and prior to the Expiration Date (as hereinafter
defined) upon the presentation and surrender of this Warrant Certificate with
the Subscription Form on the reverse hereof duly executed, at the corporate
office of Continental Stock Transfer & Trust Company, 2 Broadway, New York, New
York 10004 as Warrant Agent, or its successor (the "Warrant Agent"), accompanied
by payment of $__________ [150% of the initial public offering price per Unit]
subject to adjustment (the "Purchase Price"), in lawful money of the United
States of America in cash or by check made payable to the Warrant Agent for the
account of the Company.
This Warrant Certificate is, and each Warrant represented hereby are,
issued pursuant to and are subject in all respects to the terms and conditions
set forth in the Warrant Agreement (the "Warrant Agreement"), dated __________,
1997 [the effective date of the Registration Statement], by and between the
Company and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price and the number of shares of Common Stock subject
to purchase upon the exercise of each Warrant represented hereby are subject to
modification or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional interests will be issued. In the case of
the exercise of less than all of the Warrants represented hereby, the Company
shall cancel this Warrant Certificate upon the surrender hereof and shall
execute and deliver a new Warrant Certificate or Warrant Certificates of like
tenor, which the Warrant Agent shall countersign, for the balance of such
Warrants.
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The term "Expiration Date" shall mean 5:00 p.m. (New York time) on
__________, 2002 [the 60 month anniversary of the issuance of the Warrant]. If
such date shall in the State of New York be a holiday or a day on which banks
are authorized to close, then the Expiration Date shall mean 5:00 p.m. (New York
time) on the next day which in the State of New York is not a holiday or a day
on which banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant
to the exercise of this Warrant unless a registration statement under the
Securities Act of 1933, as amended (the "Act"), with respect to such securities
is effective or an exemption thereunder is available. The Company has covenanted
and agreed that it will file a registration statement under the Federal
securities laws, use its best efforts to cause the same to become effective, to
keep such registration statement current, if required under the Act, while any
of the Warrants are outstanding, and deliver a prospectus which complies with
Section 10(a)(3) of the Act to the Registered Holder exercising this Warrant.
This Warrant shall not be exercisable by a Registered Holder in any state where
such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by
the Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment and payment of any tax or other
charge imposed in connection therewith or incident thereto, for registration of
transfer of this Warrant Certificate at such office, a new Warrant Certificate
or Warrant Certificates representing an equal aggregate number of Warrants will
be issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a stockholder of the Company,
including, without limitation, the right to vote or to receive dividends or
other distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided in the Warrant Agreement.
Subject to the provisions of the Warrant Agreement, this Warrant may be
redeemed at the option of the Company, in whole and not in part, at a redemption
price of $.05 per Warrant, at any time commencing __________, 1998 [twelve (12)
months from issuance] provided that the average closing bid price for the
Company's Common Stock, as reported by the National Association of Securities
Dealers Automated Quotation System (or, if not so quoted, as reported by any
other recognized quotation system on which the price of the Common Stock is
quoted), shall have, for any twenty (20) trading days within a period of thirty
(30) consecutive trading days ending on the fifth (5th) trading day prior to the
date on which the Notice of Redemption (as defined below) is given, equalled or
exceeded 150% of the then exercise price per share (subject to adjustment in the
event of any stock splits or other similar events). Notice of redemption (the
"Notice of Redemption") shall be given not later than the thirtieth (30th) day
before the date fixed for redemption, all as provided in the Warrant Agreement.
On and after the date fixed for redemption, the Registered Holder shall have no
rights with respect to this Warrant except to receive the $.05 per Warrant upon
surrender of this Certificate.
Prior to due presentment for registration of transfer hereof, the
Company and the Warrant Agent may deem and treat the Registered Holder as the
absolute owner hereof and of each
A-2
<PAGE>
Warrant represented hereby (notwithstanding any notations of ownership or
writing hereon made by anyone other than a duly authorized officer of the
Company or the Warrant Agent) for all purposes and shall not be affected by any
notice to the contrary, except as provided in the Warrant Agreement.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New York without giving effect to
conflicts of laws.
This Warrant Certificate is not valid unless countersigned by the
Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
Dated: ___________, 1997
CTI INDUSTRIES CORPORATION
[SEAL]
By: ________________________________
Name:
Title:
ATTEST:
By: ________________________________
Name:
COUNTERSIGNED: Title:
CONTINENTAL STOCK TRANSFER & TRUST
COMPANY, as Warrant Agent
By: _________________________
Authorized Officer
A-3
<PAGE>
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrant
The undersigned Registered Holder hereby irrevocably elects to exercise
_____ Warrants represented by this Warrant Certificate, and to purchase the
securities issuable upon the exercise of such Warrants, and requests that
certificates for such securities shall be issued in name of
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
-------------------------------
-------------------------------
(please print or type name and address)
and be delivered to
-------------------------------
-------------------------------
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
A-4
<PAGE>
IMPORTANT: PLEASE COMPLETE THE FOLLOWING:
1. If the exercise of this Warrant was
solicited by Joseph Stevens & Company,
Inc. please check the
following box
2. The exercise of this Warrant was
solicited by
--------------------------
3. If the exercise of this Warrant was
not solicited, please check the
following box
Dated: ______________________ X_________________________________
_________________________________
_________________________________
Address
_________________________________
Social Security or Taxpayer
Identification Number
_________________________________
Signature Guaranteed
_________________________________
A-5
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, __________________________, hereby sells, assigns
and transfers unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER
----------------------------------
----------------------------------
----------------------------------
(please print or type name and address)
________________________ of the Warrants represented by this Warrant
Certificate, and hereby irrevocably constitutes and appoints
____________________ Attorney to transfer this Warrant Certificate on the books
of the Company, with full power of substitution in the premises.
Dated: _______________________ X__________________________
__________________________
Signature Guaranteed
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER AND MUST BE
GUARANTEED BY A COMMERCIAL BANK OR TRUST COMPANY OR A MEMBER FIRM OF THE
AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE,
MIDWEST STOCK EXCHANGE OR BOSTON STOCK EXCHANGE.
A-6
EXHIBIT 5.1
July 24, 1997
CTI Industries Corporation
22160 North Pepper Road
Barrington, Illinois 60010
Attention: President
Re: CTI Industries Corporation
Registration Statement on Form SB-2
Ladies and Gentlemen:
CTI Industries Corporation (the "Company") has filed with the United
States Securities and Exchange Commission (the "Commission"), a Registration
Statement on Form SB-2 (Commission Registration No. _________), with respect to
which this opinion is to be an exhibit, relating to the proposed sale:
1. By the Company of 1,333,333 previously unissued units
("Units"), consisting of up to 1,333,333 previously unissued shares of
its common stock, $.065 par value ("Common Stock") and 1,333,333
previously unissued five year redeemable warrants ("Warrants") and
1,333,333 previously unissued shares of Common Stock underlying these
Warrants ("Underlying Common Stock");
2. By the Company of 199,999 previously unissued Units
("Over-Allotment Units"), consisting of 199,999 previously unissued
shares of Common Stock ("Over- Allotment Common Stock"), 199,999
previously unissued Warrants ("Over-Allotment Warrants") and 199,999
previously unissued shares of Common Stock underlying the Over-
Allotment Warrants ("Over-Allotment Underlying Common Stock");
<PAGE>
CTI Industries Corporation
July 24, 1997
Page 2
3. Of 133,333 previously unissued underwriter's purchase
options ("Underwriter's Purchase Options"), consisting of 133,333
previously unissued Units ("Underwriter's Units"), consisting of
133,333 previously unissued shares of Common Stock ("Underwriter's
Common Stock"), 133,333 previously unissued Warrants ("Underwriter's
Warrants") and 133,333 previously unissued shares of Common Stock
underlying the Underwriter's Warrants ("Underwriter's Underlying Common
Stock").
The Registration Statement, as amended, is herein referred to as the
"Registration Statement".
We have acted as securities counsel for the Company in connection with
the transactions that are the subject matter of the Registration Statement and
are familiar with the various corporate proceedings relating thereto. In
connection with the Registration Statement, we have examined such corporate
records of the Company and such other instruments, documents and certificates as
we have deemed necessary as a basis for this opinion. For purposes of this
opinion, we have assumed (i) the accuracy and completeness of all data supplied
by the Company, its officers, directors or agents, (ii) that the transactions
set forth in the Registration Statement are consummated as set forth therein,
(iii) that the Commission shall have issued an order under the Securities Act of
1933, as amended, declaring effective the Registration Statement, and (iv) that
all requisite authorizations, approvals, consents or exemptions under the
securities laws of the various states and other jurisdictions of the United
States of America shall have been obtained.
Based upon the foregoing, we are of the opinion that the Units, the
Common Stock, the Warrants, the Underlying Common Stock, the Over-Allotment
Units, the Over-Allotment Common Stock, the Over-Allotment Warrants, the
Over-Allotment Underlying Common Stock, the Underwriter's Purchase Options, the
Underwriter's Units, the Underwriter's Common Stock, the Underwriter's Warrants
and the Underwriter's Underlying Common Stock to be sold in accordance with the
Registration Statement, are duly authorized and upon issuance, delivery and sale
thereof, for the consideration specified in the Registration Statement, will be
legally issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and as a part of, or as an exhibit to, any document that
may be filed with respect to the proposed transactions under the securities laws
of the various states and other jurisdictions of the United States. We also
consent to be named in the Registration Statement and in the Prospectus which
constitutes a part thereof as the counsel that will pass upon certain legal
matters for the Company in connection with the sale of the Company's securities.
Very truly yours,
/s/ Fishman Merrick Miller Genelly Springer Klimek & Anderson, P.C.
-------------------------------------------------------------------
Fishman Merrick Miller Genelly Springer Klimek & Anderson, P.C.
EXHIBIT 10.1
CTI INDUSTRIES CORPORATION
1997 STOCK OPTION PLAN
1. PURPOSE OF THE PLAN
The purposes of the CTI Industries Corporation 1997 Stock Option Plan
(the "Plan") are to enable the Company to attract and retain the services of
officers and other key employees with managerial, professional or supervisory
responsibilities, to retain able consultants and advisors and to motivate such
persons to use their best efforts on behalf of the Company.
2. GENERAL PROVISIONS
2.1 Definitions
As used in the Plan:
(a) "Board of Directors" means the Board of Directors of the
Company.
(b) "Code" means the Internal Revenue Code of 1986, including any
and all amendments thereto.
(c) "Committee" means the committee appointed by the Board of
Directors from time to time to administer the Plan pursuant to
Section 2.2.
(d) "Common Stock" means the Company's Common Stock, $.075 par
value.
(e) "Fair Market Value" means, with respect to a specific date,
the value of the Common Stock as determined in good faith by
the Committee on the basis of such quotations and other
considerations as the Committee deems appropriate.
(f) "Incentive Stock Option" means an option granted under the
Plan which is intended to qualify as an incentive stock option
under Section 422 of the Code.
(g) "Non-Qualified Stock Option" means an option granted under the
Plan which is not an Incentive Stock Option.
(h) "Participant" means a person to whom a Stock Option has been
granted under the Plan.
(i) "Stock Option" means an Incentive Stock Option or a
Non-Qualified Stock Option granted under the Plan.
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(j) "Subsidiary" means any corporation (other than the Company) in
an unbroken chain of corporations beginning with the Company
if, at the time of the granting of the Stock Option, each of
the corporations other than the last corporation in the
unbroken chain owns 50% or more of the total voting power of
all classes of stock in one of the other corporations in such
chain.
2.2 Administration of the Plan
(a) The Plan shall be administered by the Committee which shall at
all times consist of two (2) or more persons, each of whom
shall be a member of the Board of Directors. The Board of
Directors may from time to time remove members from, or add
members to, the Committee. Vacancies on the Committee,
howsoever caused, shall be filled by the Board of Directors.
The Committee shall select one of its members as Chairman, and
shall hold meetings at such times and places as it may
determine.
(b) The Committee shall have the full power, subject to and within
the limits of the Plan, to: (i) interpret and administer the
Plan, and Stock Options granted under it; (ii) make and
interpret rules and regulations for the administration of the
Plan and to make changes in and revoke such rules and
regulations (and in the exercise of this power, shall
generally determine all questions of policy and expediency
that may arise and may correct any defect, omission, or
inconsistency in the Plan or any agreement evidencing the
grant of any Stock Option in a manner and to the extent it
shall deem necessary to make the Plan fully effective); (iii)
determine those persons to whom Stock Options shall be granted
and the number of Stock Options to be granted to any person;
(iv) determine the terms of Stock Options granted under the
Plan, consistent with the provision of the Plan; and (v)
generally, exercise such powers and perform such acts in
connection with the Plan as are deemed necessary or expedient
to promote the best interests of the Company. The
interpretation and construction by the Committee of any
provision of the Plan or of any Stock Option shall be final,
binding and conclusive.
(c) The Committee may act only by a majority of its members then
in office; however, the Committee may authorize any one (1) or
more of its members or any officer of the Company to execute
and deliver documents on behalf of the Committee.
(d) No member of the Committee shall be liable for any action
taken or omitted to be taken or for any determination made by
him or her in good faith with respect to the Plan, and the
Company shall indemnify and hold harmless each member of the
Committee against any cost or expense (including counsel fees)
or liability (including any sum paid in settlement of a claim
with the approval of
2
<PAGE>
the Committee) arising out of any act or omission in
connection with the administration or interpretation of the
Plan, unless arising out of such person's own fraud or bad
faith.
2.3 Effective Date
The Plan shall become effective upon its adoption by the Board of
Directors, and Stock Options may be granted upon such adoption and from time to
time thereafter, subject, however, to approval of the Plan by affirmative vote
of the holders of a majority of the shares of the Common Stock, within 12 months
after the adoption of the Plan by the Board of Directors. If the Plan is not
approved, this Plan and all Stock Options previously granted thereunder shall
become null and void.
2.4 Duration
If approved by the shareholders of the Company, as provided in Section
2.3, unless sooner terminated by the Board of Directors, the Plan shall remain
in effect for a period of ten (10) years following its adoption by the Board of
Directors.
2.5 Shares Subject to the Plan
The maximum number of shares of Common Stock which may be subject to
Stock Options granted under the Plan shall be 300,000. The Stock Options shall
be subject to adjustment in accordance with Section 4.1, as appropriate, and
shares to be issued upon exercise of Stock Options may be either authorized and
unissued shares of Common Stock or authorized and issued shares of Common Stock
purchased or acquired by the Company for any purpose. If a Stock Option or
portion thereof shall expire or is terminated, cancelled or surrendered for any
reason without being exercised in full, the unpurchased shares of Common Stock
which were subject to such Stock Option or portion thereof shall be available
for future grants of Stock Options under the Plan.
2.6 Amendments
The Plan may be suspended, terminated or reinstated, in whole or in
part, at any time by the Board of Directors. The Board of Directors may from
time to time make such amendments to the Plan as it may deem advisable,
including, with respect to Incentive Stock Options, amendments deemed necessary
or desirable to comply with Section 422 of the Code and any regulations issued
thereunder; provided, however, that without the approval of the Company's
shareholders no amendment shall be made which:
(a) Increases the maximum number of shares of Common Stock which
may be subject to Stock Options granted under the Plan (other
than as provided in Section 4.1, as appropriate); or
(b) Extends the term of the Plan; or
3
<PAGE>
(c) Increases the period during which a Stock Option may be
exercised beyond ten (10) years from the date of grant; or
(d) Otherwise materially increases the benefits accruing to
Participants under the Plan; or
(e) Materially modifies the requirements as to eligibility for
participation in the Plan.
Except as otherwise provided herein, termination or amendment of the Plan shall
not, without the consent of a Participant, affect such Participant's rights
under any Stock Options previously granted to such Participant.
2.7 Participants and Grants
Stock Options may be granted by the Committee to (i) officers and other
salaried employees of the Company and its Subsidiaries with managerial,
professional or supervisory responsibilities and (ii) consultants and advisors
who render bona fide services to the Company and its Subsidiaries, in each case,
where the Committee determines that such officer, employee, consultant or
advisor has the capacity to make a substantial contribution to the success of
the Company. The Committee may grant Stock Options to purchase such number of
shares of Common Stock (subject to the limitations of Section 2.5) as the
Committee may, in its sole discretion, determine. In granting Stock Options
under the Plan, the Committee, on an individual basis, may vary the number of
Incentive Stock Options or Non-Qualified Stock Options as between Participants
and may grant Incentive Stock Options and/or Non-Qualified Stock Options to a
Participant in such amounts as the Committee may determine in its sole
discretion.
3. STOCK OPTIONS
3.1 General
All Stock Options granted under the Plan shall be evidenced by written
agreements executed by the Company and the Participant to whom granted, which
agreement shall state the number of shares of Common Stock which may be
purchased upon the exercise thereof and shall contain such investment
representations and other terms and conditions as the Committee may from time to
time determine, or, in the case of Incentive Stock Options, as may be required
by Section 422 of the Code, or any other applicable law.
3.2 Price
Subject to the provisions of Section 3.6(d) and 4.1, the purchase price
per share of Common Stock subject to a Stock Option shall, in no case, be less
than one hundred percent (100%)
4
<PAGE>
of the Fair Market Value of a share of Common Stock on the date the Stock Option
is granted; provided, however, that the Board of Directors may authorize the
grant a Non-Qualified Stock Option with a purchase price per share less than the
Fair Market Value if the amount of the difference between the option purchase
price and the Fair Market Value is designated in the resolution authorizing the
option.
3.3 Period
The duration or term of each Stock Option granted under the Plan shall
be for such period as the Committee shall determine but in no event more than
ten (10) years from the date of grant thereof.
3.4 Exercise
Subject to Section 4.4, Stock Options may be exercisable immediately
upon granting of the Stock Option or at such other time or times as the
Committee shall specify when granting the Stock Option. Once exercisable, a
Stock Option shall be exercisable, in whole or in part, by delivery of a written
notice of exercise to the Secretary of the Company at the principal office of
the Company specifying the number of shares of Common Stock as to which the
Stock Option is then being exercised together with payment of the full purchase
price for the shares being purchased upon such exercise. Until the shares of
Common Stock as to which a Stock Option is exercised are issued, the Participant
shall have none of the rights of a shareholder of the Company with respect to
such shares.
3.5 Payment
The purchase price for shares of Common Stock as to which a Stock
Option has been exercised and any amount required to be withheld, as
contemplated by Section 4.3, may be paid:
(a) In United States dollars in cash, or by check, bank draft or
money order payable in United States dollars to the order of
the Company; or
(b) By the delivery by the Participant to the Company of whole
shares of Common Stock having an aggregate Fair Market Value
on the date of payment equal to the aggregate of the purchase
price of Common Stock as to which the Stock Option is then
being exercised or by the withholding of whole shares of
Common Stock having such Fair Market Value upon the exercise
of such Stock Option; or
(c) By a combination of both (a) and (b) above.
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<PAGE>
The Committee may, in its discretion, impose limitations, conditions and
prohibitions on the use by a Participant of shares of Common Stock to pay the
purchase price payable by such Participant upon the exercise of a Stock Option.
3.6 Special Rules for Incentive Stock Options
Notwithstanding any other provision of the Plan, the following
provisions shall apply to Incentive Stock Options granted under the Plan:
(a) Incentive Stock Options shall only be granted to Participants
who are employees of the Company or its Subsidiaries.
(b) To the extent that the aggregate Fair Market Value of Common
Stock, with respect to which Incentive Stock Options are
exercisable for the first time by a Participant during any
calendar year under this Plan and any other Plan of the
Company or a Subsidiary, exceeds $100,000, such Stock Options
shall be treated as Non-Qualified Stock Options.
(c) Any Participant who disposes of shares of Common Stock
acquired upon the exercise of an Incentive Stock Option by
sale or exchange either within two (2) years after the date of
the grant of the Incentive Stock Option under which the shares
were acquired or within one (1) year of the acquisition of
such shares, shall promptly notify the Secretary of the
Company at the principal office of the Company of such
disposition, the amount realized, the purchase price per share
paid upon the exercise and the date of disposition.
(d) No Incentive Stock Option shall be granted to a Participant
who, at the time of the grant, owns stock representing more
than ten percent (10%) of the total combined voting power of
all classes of stock either of the Company or any parent or
Subsidiary of the Company, unless the purchase price of the
shares of Common Stock purchasable upon exercise of such
Incentive Stock Option is at least one hundred ten percent
(110%) of the Fair Market Value (at the time the Incentive
Stock Option is granted) of the Common Stock and the Incentive
Stock Option is not exercisable more than five (5) years from
the date it is granted.
3.7 Termination of Employment
(a) In the event a Participant's employment by, or relationship
with, the Company shall terminate for any reason other than
those reasons specified in Sections 3.7(b), (c), (d) or (e)
hereof while such Participant holds Stock Options granted
under the Plan, then all rights of any kind under any
outstanding Option held by such Participant which shall not
have previously lapsed or terminated shall expire immediately.
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<PAGE>
(b) If a Participant's employment by, or relationship with, the
Company or its Subsidiaries shall terminate as a result of
such Participant's total disability, each Stock Option held by
such Participant (which has not previously lapsed or
terminated) shall be exercisable by such Participant for a
period of six months after termination but only to the extent
the Option is otherwise exercisable during that period.
Notwithstanding the foregoing, the Committee may in the event
of such disability accelerate the date after which a Stock
Option is exercisable, in whole or in part, which change shall
be in the Committee's sole discretion and be final, binding
and conclusive. For purposes of this paragraph, "total
disability" shall mean permanent mental or physical disability
as determined by the Committee.
(c) In the event of the death of a Participant, each Stock Option
held by such Participant (which has not previously lapsed or
terminated) shall be exercisable by the executor or
administrator of the Participant's estate or by the person or
persons to whom the deceased Participant's rights thereunder
shall have passed by will or by the laws of descent or
distribution, for a period of six (6) months after such
Participant's death but only to the extent the Option is
otherwise exercisable during that period. Notwithstanding the
foregoing, the Committee may in the event of such death
accelerate the date after which a Stock Option is exercisable,
in whole or in part, which change shall be in the Committee's
sole discretion and be final, binding and conclusive.
(d) If a Participant's employment by the Company shall terminate
by reason of such Participant's retirement in accordance with
Company policies, each Stock Option held by such Participant
at the date of termination (which has not previously lapsed or
terminated) shall be exercisable for a period of three (3)
months after termination, but only to the extent the Option is
otherwise exercisable during that period.
(e) In the event the Company terminates the employment of a
Participant who at the time of such termination was an officer
of the Company and had been continuously employed by the
Company during the two (2) year period immediately preceding
such termination, for any reason except "good cause"
(hereafter defined) and except upon such Participant's death,
total disability or retirement in accordance with Company
policies, each Stock Option held by such Participant (which
has not previously lapsed or terminated and which has been
held by such Participant for more than six (6) months prior to
such termination) shall be exercisable for a period of three
(3) months after such termination, but only to the extent the
Option is otherwise exercisable during that period. A
termination for "good cause" shall be deemed to have occurred
only if the Participant in question (i) is terminated by
written notice for dishonesty, because of his conviction of a
felony, or because of his violation of any material provision
of any employment or other agreement with the Company or any
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<PAGE>
of its Subsidiaries, or (ii) shall voluntarily resign or
terminate his employment with the company or any of its
Subsidiaries under or followed by such circumstances as would
constitute a breach of any material provision of any
employment or other agreement between him and the Company or
any of its Subsidiaries, or (iii) shall have committed an act
of dishonesty not discovered by the Company or any of its
Subsidiaries prior to the cessation of his employment with the
Company or any of its Subsidiaries, but which would have
resulted in his discharge if discovered prior to such
date, or (iv) shall, either before or after cessation of his
employment with the Company or any of its Subsidiaries,
without the written consent of the company or any of its
Subsidiaries, use (except for the benefit of the Company or
any of its Subsidiaries) or disclose to any other person any
confidential information relating to the business or any trade
secrets of the Company or any of its Subsidiaries obtained as
a result of or in connection with such employment.
3.8 Effect of Leaves of Absence
It shall not be considered a termination of employment when a
Participant is on military or sick leave or such other type leave of absence
which is considered as continuing intact the employment relationship of the
Participant with the Company or any of its Subsidiaries. In case of such leave
of absence, the employment relationship shall be deemed to have continued until
the later of (i) the date when such leave shall have lasted ninety (90) days in
duration, or (ii) the date as of which the Participant's right to employment
shall have no longer been guaranteed either by statute or contract.
4. MISCELLANEOUS PROVISIONS
4.1 Adjustments Upon Changes in Capitalization
(a) In the event of changes to the outstanding shares of Common
Stock of the Company through reorganization, merger,
consolidation, recapitalization, reclassification, stock
split-up, stock dividend, stock consolidation or otherwise, or
in the event of a sale of all or substantially all of the
assets of the Company, an appropriate and proportionate
adjustment shall be made in the number and kind of shares as
to which Stock Options may be granted. A corresponding
adjustment changing the number or kind of shares and/or the
purchase price per share of unexercised Stock Options or
portions thereof which shall have been granted prior to any
such change shall likewise be made.
(b) Notwithstanding the foregoing, in the case of a
reorganization, merger or consolidation, or sale of all or
substantially all of the assets of the Company, in lieu of
adjustments as aforesaid, the Committee may in its discretion
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<PAGE>
accelerate the date after which a Stock Option may or may not
be exercised or the stated expiration date thereof.
Adjustments or changes under this Section shall be made by the
Committee, whose determination as to what adjustments or
changes shall be made, and the extent thereof, shall be final,
binding and conclusive.
4.2 Non-Transferability
No Stock Option shall be transferable except by will or the laws of
descent and distribution, nor shall any Stock Option be exercisable during the
Participant's lifetime by any person other than the Participant or his guardian
or legal representative.
4.3 Withholding
The Company's obligations under this Plan shall be subject to
applicable federal, state and local tax withholding requirements. Federal, state
and local withholding tax due at the time of a grant or upon the exercise of any
Stock Option may, in the discretion of the Committee, be paid in shares of
Common Stock already owned by the Participant or through the withholding of
shares otherwise issuable to such Participant, upon such terms and conditions as
the Committee shall determine. If the Participant shall fail to pay, or make
arrangements satisfactory to the Committee for the payment, to the Company of
all such federal, state and local taxes required to be withheld by the Company,
then the Company shall, to the extent permitted by law, have the right to deduct
from any payment of any kind otherwise due to such Participant an amount equal
to any federal, state or local taxes of any kind required to be withheld by the
Company.
4.4 Compliance with Law and Approval of Regulatory Bodies
No Stock Option shall be exercisable and no shares will be delivered
under the Plan except in compliance with all applicable federal and state laws
and regulations including, without limitation, compliance with all federal and
state securities laws and withholding tax requirements. Any share certificate
issued to evidence shares for which a Stock Option is exercised may bear legends
and statements the Committee shall deem advisable to assure compliance with
federal and state laws and regulations. No Stock Option shall be exercisable and
no shares will be delivered under the Plan, until the Company has obtained
consent or approval from regulatory bodies, federal or state, having
jurisdiction over such matters as the Committee may deem advisable. In the case
of the exercise of a Stock Option by a person or estate acquiring the right to
exercise the Stock Option as a result of the death of the Participant, the
Committee may require reasonable evidence as to the ownership of the Stock
Option and may require consents and releases of taxing authorities that it may
deem advisable.
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4.5 No Right to Employment
Neither the adoption of the Plan nor its operation, nor any document
describing or referring to the Plan, or any part thereof, nor the granting of
any Stock Options hereunder, shall confer upon any Participant under the Plan
any right to continue in the employ of the Company or any Subsidiary, or shall
in any way affect the right and power of the Company or any Subsidiary to
terminate the employment of any Participant at any time with or without
assigning a reason therefore, to the same extent as might have been done if the
Plan had not been adopted.
4.6 Exclusion from Pension Computations
By acceptance of a grant of a Stock Option under the Plan, the
recipient shall be deemed to agree that any income realized upon the receipt or
exercise thereof or upon the disposition of the shares received upon exercise
will not be taken into account as "base remuneration", "wages", "salary" or
"compensation" in determining the amount of any contribution to or payment or
any other benefit under any pension, retirement, incentive, profit-sharing or
deferred compensation plan of the Company or any Subsidiary.
4.7 Abandonment of Options
A Participant may at any time abandon a Stock Option prior to its
expiration date. The abandonment shall be evidenced in writing, in such form as
the Committee may from time to time prescribe. A Participant shall have no
further rights with respect to any Stock Option so abandoned.
4.8 Interpretation of the Plan
Headings are given to the Sections of the Plan solely as a convenience
to facilitate reference, such headings, numbering and paragraphing shall not in
any case be deemed in any way material or relevant to the construction of the
Plan or any provision hereof. The use of the masculine gender shall also include
within its meaning the feminine. The use of the singular shall also include
within its meaning the plural and vice versa.
4.9 Use of Proceeds
Funds received by the Company upon the exercise of Stock Options shall
be used for the general corporate purposes of the Company.
4.10 Construction of Plan
The place of administration of the Plan shall be in the State of
Illinois, and the validity, construction, interpretation, administration and
effect of the Plan and of its rules and regulations, and rights relating to the
Plan, shall be determined solely in accordance with the laws of the State of
Illinois.
BOARD OF DIRECTORS APPROVAL _____________________________
SHAREHOLDER APPROVAL _____________________________
10
EXHBIT 10.2
E M P L O Y M E N T A G R E E M E N T
THIS AGREEMENT, made and entered into this 29th day of April, 1996
effective for the term provided herein, by and between CTI Industries
Corporation, a Delaware corporation (the "Company") and John C. Davis
(hereinafter referred to as the "Executive").
WHEREAS, the Executive is a founder of the Company and is, and since
the inception of the Company has been, an executive officer of the Company;
WHEREAS, the Company desires to be assured of the continued association
and services of the Executive and the Executive is willing to provide such
continued services as Executive Vice President- Sales of the Company on the
terms provided herein;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
1. Employment, Duties and Authority.
1.1 The Company agrees to continue Executive in its employ,
and Executive agrees to remain in the employ of the Company, for the
period stated in paragraph 3 hereof and upon the other terms and
conditions herein provided.
1.2 During the period of his employment hereunder, Executive
agrees to serve as Executive Vice President-Sales, and to be
responsible for the marketing and sale of the Company's products,
reporting directly to the President of the Company.
1.3 During the term of Executive's employment hereunder,
Executive shall devote his full energies, interest, abilities and
productive time to the performance of his duties and responsibilities
hereunder and will perform such duties and responsibilities faithfully
and with reasonable care for the welfare of the Company.
2. Compensation and Benefits.
2.1 Salary. The Company shall pay to Executive during the
initial term of employment hereunder a salary at an annual rate of
$150,000. The salary shall be paid by the Company to Executive in 26
equal bi-weekly installments, less amounts which the Company may be
required to withhold from such payments by applicable federal, state or
local laws or regulations. The annual rate of salary shall be subject
to review and adjustment by the Board of Directors from time to time
but, during the initial term shall not be less than $150,000.
2.2 Benefits; Expense Reimbursement.
2.2.1 The Executive shall be entitled to, and shall
receive, all other benefits of employment available
to other executives of the Company generally,
including, without limitation, participation in any
hospital, surgical, medical or other group health
plans or accident benefits, life insurance benefits,
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pension or profit-sharing plans, bonus plans or
vacation plans as shall be instituted by the Company,
in its sole discretion.
2.2.2 During the term hereof, the Company shall
reimburse Executive for all reasonable and necessary expenses
incurred by Executive in the performance of his duties
hereunder, including without limitation, travel (including all
automobile expenses), meals, lodging, office supplies or
equipment subject to such reasonable limitations, restrictions
and reporting standards as the Board of Directors of the
Company may from time to time establish. Executive shall
provide to the Company promptly after incurring any such
expenses a detailed report thereof and such information
relating thereto as the Company shall from time to time
require. Such information shall be sufficient to support the
deductibility of all such expenses by the Company for federal
income tax purposes.
3. Term.
The employment of Executive hereunder shall be for a term commencing on
February 1, 1996 and expiring on January 31, 1998. Upon the expiration of the
initial term or any renewal term of Executive's employment hereunder, the term
of such employment automatically shall be renewed for an additional term of one
year commencing on February 1 and expiring on the succeeding January 31 unless
Executive or the Company shall give notice of the termination of Executive's
employment and this Agreement by written notice to the other more than 60 days
prior to the date of expiration of the initial or any renewal term. In the event
that such notice of termination shall be given timely this Agreement shall
terminate on the date of expiration of such initial or renewal term.
4. Termination.
4.1 The Company shall be entitled to terminate this Agreement
prior to the expiration of its term or any renewal term on the
occurrence of an event of default with respect to Executive as provided
herein.
4.2 For purposes of this Agreement, an event of default with
respect to Executive shall include:
4.2.1 Any failure by Executive to perform his duties,
responsibilities or obligations hereunder in a faithful and
diligent manner or with reasonable care and (if such failure
can be cured) the failure by Executive to cure such failure
within 10 days after written notice thereof shall have been
given to Executive by the Company; or
4.2.2 Commission by Executive of any material act of
dishonesty as an employee of the Company or of disloyalty to
the Company, or any wrongful or unauthorized appropriation,
taking or misuse of funds, property or business opportunities
of the Company.
4.3 Executive shall be entitled to terminate his employment
with the Company under this Agreement prior to the expiration of its
term upon the occurrence of an event of default with respect to the
Company.
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4.4 For purposes of this Agreement an event of default with
respect to the Company shall include:
4.4.1 Any failure by the Company to perform its
obligations to Executive under this Agreement and (if such
failure can be cured) the failure by the Company to cure such
failure within 10 days after written notice thereof shall have
been given to the Company by Executive;
4.4.2 The Company shall:
(a) admit in writing its inability to pay
its debts generally as they become
due,
(b) file a petition for relief under any
chapter of Title 11 of the United States Code or a
petition to take advantage of any insolvency
provision under the laws of the United States of
America or any state thereof,
(c) make a assignment for the benefit of its
creditors,
(d) consent to the appointment of a receiver
of itself or of the whole or any substantial part of
its property,
(e) suffer the entry of an order for relief
under any chapter of Title 11 of the United Sates
Code, or
(f) file a petition or answer seeking
reorganization under the Federal Bankruptcy Laws or
any other applicable law or statute of the United
States of America or any state thereof.
4.5 In the event of termination of this Agreement and
Executive's employment hereunder by the Company pursuant to paragraph
4.1 hereof, all rights and obligations of the Company and Executive
hereunder shall terminate on the date of such termination, subject to
the following:
4.5.1 Executive shall be entitled to receive (subject
to any rights of setoff or counterclaim by the Company) all
salary and benefits which shall have accrued prior to the date
of such termination and the obligation of the Company for the
payment of salary or benefits shall terminate as at the date
of such termination;
4.5.2 All rights of the Company or Executive which
shall have accrued hereunder prior to the date of such
termination, and all provisions of this Agreement provided
herein to survive termination of employment of Executive
hereunder, shall survive such termination and the Company and
Executive shall continue to be bound by such provisions in
accordance with the terms thereof;
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4.6 In the event of termination of the Agreement by Executive
in accordance with paragraph 4.3 hereof, all rights and obligations of
the Company and Executive hereunder shall terminate on the date of such
termination, subject to the following:
4.6.1 Executive shall be entitled to receive all
salary and benefits which shall have accrued prior to the date
of such termination and the Company's obligation for the
payment of salary and benefits shall terminate as of the date
of such termination;
4.6.2 All rights of the Company or Executive which
shall have accrued hereunder prior to the date of such
termination and the obligations of Executive pursuant to
paragraphs 5, 6 and 7 provided herein to survive termination
of employment of Executive hereunder shall survive such
termination and the Executive shall continue to be bound by
such provisions in accordance with their terms.
4.7 In the event of the death of Executive during the term or
any renewal term hereof, all rights and obligations of the Company and
Executive hereunder shall terminate on the date of such termination,
subject to the following:
4.7.1 Executive's personal representative, shall be
entitled to receive all salary and benefits which shall have
accrued prior to the date of such termination and the
Company's obligations for the payment of salary and benefits
shall terminate as of the date of such termination;
4.7.2 All rights of the Company or Executive which
shall have accrued hereunder prior to the date of such
termination and the obligations of Executive pursuant to
paragraphs 5, 6 and 7 provided herein to survive termination
of employment of Executive hereunder shall survive such
termination and the Executive shall continue to be bound by
such provisions in accordance with their terms. The
obligations of paragraphs 5, 6 and 7 shall be binding upon the
heirs, legatees or personal or legal representatives of
Executive.
5. Confidential Information.
5.1 "Confidential Information" means information disclosed by
the Company to Executive, or developed or obtained by Executive during
his employment by the Company, either before the date or during the
term of this Agreement, provided that such information is not generally
known in the business and industry in which the Company is or may
subsequently become engaged, relating to or concerning the business,
projects, products, processes, formulas, know-how, techniques, designs
or methods of the Company, whether relating to research, development,
manufacture, purchasing, accounting, engineering, marketing,
merchandising, selling or otherwise. Without limitation, Confidential
Information shall include all know-how, technical information,
inventions, ideas, concepts, processes and designs relating to products
of the Company, whether now existing or hereafter developed, and all
prices, customer names, customer lists, marketing and other
relationships, whether contractual or not, between the Company, its
suppliers, customers, employees, agents, consultants and independent
contractors.
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5.2 Executive agrees that, during the term hereof or while
Executive shall receive compensation hereunder and after termination of
his employment with the Company for so long as the Confidential
Information shall not be generally known or generally disclosed (except
by Executive or by means of wrongful use or disclosure), Executive
shall not use any Confidential Information, except on behalf of the
Company during the term hereof, or disclose any Confidential
Information to any person, firm, partnership, company, corporation or
other entity, except as authorized by the Board of Directors of the
Company.
6. Inventions.
6.1 "Inventions" shall mean discoveries, concepts, ideas,
designs, methods, formulas, know-how, techniques or any improvements
thereon, whether patentable or not, made, conceived or developed, in
whole or in part, by Executive.
6.2 Executive covenants and agrees to communicate and fully
disclose to the Board of Directors of the Company any and all
Inventions made or conceived by him during the term hereof or while
receiving any compensation or payment from the Company and further
agrees that any and all such Inventions which he may conceive or make,
during the term hereof or while receiving any compensation or payments
from the Company, shall be at all times and for all purposes regarded
as acquired and held by him in a fiduciary capacity and solely for the
benefit of the Company and shall be the sole and exclusive property of
the Company. The provisions of this subparagraph shall not apply to an
invention for which no equipment, supplies, facilities or trade secret
information of the Company was used and which was developed entirely on
the Executive's own time, unless (a) the invention relates (i) to the
business of the Company, or (ii) to the Company's actual or
demonstrably anticipated research or development, or (b) the invention
relates from any work performed by Executive for the Company.
6.3 Executive also covenants and agrees that he will assist
the Company in every proper way upon request to obtain for its benefit
patents for any and all inventions referred to in paragraph 6.2 hereof
in any and all countries. All such patents and patent applications are
to be, and remain, the exclusive property of the Company for the full
term thereof and to that end, the Executive covenants and agrees that
he will, whenever so requested by the Company or its duly authorized
agent, make, execute and deliver to the Company, its successors,
assigns or nominees, without charge to the Company except for out of
pocket expenses, any all applications, applications for divisions,
renewals, reissues, specifications, oaths, assignments and all other
instruments which the Company shall deem necessary or appropriate in
order to apply for and obtain patents of the United States or foreign
countries for any and all Inventions referred to in paragraph 6.2
hereof or in order to assign and convey to the Company, its successors,
assigns or nominees, the sole and exclusive right, title and interest
in and to such Inventions, applications or patents. Executive likewise
covenants and agrees that his obligations to execute any such
instruments or papers shall continue after the expiration or
termination of this Agreement with respect to any and all such
Inventions, and such obligations shall be binding upon his heirs,
executors, assigns, administrators or other legal representatives.
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7. Writings and Working Papers.
Executive covenants and agrees that any and all books, textbooks,
letters, pamphlets, drafts, memoranda or other writings of any kind written by
him for or on behalf of the Company or in the performance of Executive's duties
hereunder, Confidential Information referred to in paragraph 5 hereof and all
notes, records and drawings made or kept by him of work performed in connection
with his employment by the Company shall be and are the sole and exclusive
property of the Company and the Company shall be entitled to any and all
copyrights thereon or other rights relating thereto. Executive agrees to execute
any and all documents or papers of any nature which the Company or its
successors, assigns or nominees deem necessary or appropriate to acquire,
enhance, protect, perfect, assign, sell or transfer its rights under this
paragraph. Executive also agrees that upon request he will place all such notes,
records and drawings in the Company's possession and will not take with him
without the written consent of a duly authorized officer of the Company any
notes, records, drawings, blueprints or other reproductions relating or
pertaining to or connected with his employment of the business, books,
textbooks, pamphlets, documents work or investigations of the Company. The
obligations of this paragraph shall survive the term of employment hereunder or
the termination or expiration of the term or any renewal term hereof.
8. Specific Enforcement.
Executive is obligated under this Agreement to render service of a
special, unique, unusual, extraordinary and intellectual character, thereby
giving this Agreement peculiar value so that the loss of such service or
violation by Executive of this Agreement could not reasonably or adequately be
compensated in damages in an action at law. Therefore, in addition to other
remedies provided by law, the Company shall have the right during the term or
any renewal term of this Agreement (or thereafter with respect to obligations
continuing after the expiration or termination of this Agreement) to compel
specific performance hereof by Executive or to obtain injunctive relief against
violations hereof by Executive, and if the Company prevails in any proceeding
therefor, it will also be entitled to recover all costs and expenses incurred by
the Company in connection therewith, including attorneys' fees.
9. Assignment.
The rights and duties of a party hereunder shall not be assignable by
that party, except that the Company may assign this Agreement and all rights and
obligations hereunder to, and may require the assumption thereof by, any
corporation or any other business entity which succeeds to all or substantially
all the business of the Company through merger, consolidation or corporate
reorganization or by acquisition of all or substantially all of the assets of
the Company.
10. Binding Effect.
This Agreement shall be binding upon the parties hereto and their
respective successors in interest, heirs and personal representatives and, to
the extent permitted herein, the assigns of the Company.
11. Severability.
If any provision of this Agreement or any part hereof or application
hereof to any person or circumstance shall be finally determined by a court of
competent jurisdiction to be invalid or
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unenforceable to any extent, the remainder of this Agreement, or the remainder
of such provision or the application of such provision to persons or
circumstances other than those as to which it has been held invalid or
unenforceable, shall not be affected thereby and each provision of this
Agreement shall remain in full force and effect to the fullest extent permitted
by law. The parties also agree that, if any portion of this Agreement, or any
part hereof or application hereof, to any person or circumstance shall be
finally determined by a court of competent jurisdiction to be invalid or
unenforceable to any extent, any court may so modify the objectionable provision
so as to make it valid, reasonable and enforceable.
12. Notices.
All notices, or other communications required or permitted to be given
hereunder shall be in writing and shall be delivered personally or mailed,
certified mail, return receipt requested, postage prepaid, to the parties as
follows:
If to the Company: CTI Industries Corporation
22160 N. Pepper Road
Barrington, Illinois 60010
If to Executive: John C. Davis
----------------------------
----------------------------
Any notice mailed in accordance with the terms hereof shall be deemed received
on the third day following the date of mailing. Either party may change the
address to which notices to such party may be given hereunder by serving a
proper notice of such change of address to the other party.
13. Entire Agreement.
This Agreement constitutes the entire agreement between the parties
hereto with respect to the subject matter hereof and supersedes all prior
written or oral negotiations, representations, agreements, commitments,
contracts or understandings with respect thereto. No modification, alteration or
amendment to this Agreement may be made unless the same shall be in writing and
signed by both of the parties hereto.
14. Waivers.
No failure by either party to exercise any of such party's rights
hereunder or to insist upon strict compliance with respect to any obligation
hereunder, and no custom or practice of the parties at variance with the terms
hereof, shall constitute a waiver by either party to demand exact compliance
with the terms hereof. Waiver by either party of any particular default by the
other party shall not affect or impair such party's rights in respect to any
subsequent default of the same or a different nature, nor shall any delay or
omission of either party to exercise any rights arising from any default by the
other party affect or impair such party's rights as to such default or any
subsequent default.
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15. Governing Law; Jurisdiction.
15.1 For purposes of construction, interpretation and
enforcement, this Agreement shall be deemed to have been entered into
under the laws of the State of Illinois and its validity, effect,
performance, interpretation, construction and enforcement shall be
governed by and subject to the laws of the State of Illinois.
15.2 Any and all suits for any and every breach of this
Agreement may be instituted and maintained in any court of competent
jurisdiction in the State of Illinois and the parties hereto consent to
the jurisdiction and venue in such court and the service of process by
certified mail to the addresses for the parties provided for notices
herein.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
CTI INDUSTRIES CORPORATION
By: s/s Stephen M. Merrick
----------------------
Authorized Officer
Attest:
- ------------------------------
Secretary
EXECUTIVE:
/s/ John C. Davis
----------------
8
EXHIBIT 10.3
STOCK REDEMPTION AGREEMENT
THIS AGREEMENT is entered into this 1st day of March, 1996, by and
between John C. Davis, an individual residing at ______________________
("Seller") and CTI Industries Corporation, a Delaware corporation, having its
principal place of business at 22160 North Pepper Road, Barrington, Illinois
(the "Company).
WHEREAS, Seller (as Trustee under the John C. Davis Trust) is the owner
of 1,348,797 shares of the common stock of the Company (such shares hereinafter
referred to as the "Shares");
WHEREAS, Seller desires to sell and Company desires to purchase and
redeem certain of the Shares on the terms and conditions provided herein; and
WHEREAS, Seller desires to grant to the Company a series of options to
purchase and redeem the remaining Shares on the terms and conditions provided
herein;
WHEREAS, the Company desires to grant to Seller a series of options to
sell to the Company certain of the Shares on the terms and conditions provided
herein; and
WHEREAS, the Company and Seller are parties to an Employment Agreement
of even date (the "Employment Agreement").
NOW, THEREFORE, in consideration of the premises and of the terms,
covenants and conditions hereinafter contained, the parties hereto agree as
follows:
1. Sale and Purchase of Shares. Subject to and on the terms and
conditions hereof, in reliance on the representations and warranties herein and
for the consideration herein, Seller agrees to sell to the Company, and the
Company agrees to purchase and redeem from Seller, 266,667 Shares at the price
of Seventy-Five Cents ($.75) as follows:
1.1 On the 10th day of each month commencing March 10, 1996,
and continuing through February 10, 1998, the Company shall pay to
Seller for the redemption of Shares the amount of $8,333.33. Payments
shall be made by Company check mailed to Seller on or before the dates
due at the address of Seller provided herein.
1.2 Upon making each payment provided for in paragraph 1.1
above, the Company shall be deemed to have purchased that number of
Shares arrived at by dividing the payment amount by the Purchase Price,
as defined in paragraph 4.1, at the time of the payment.
1.3 After the Company shall have purchased a total of 266,667
Shares pursuant to the terms of this paragraph 1 and paragraph 2, it
shall have no further obligations to make payments under this paragraph
1.
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2. Company's Option. Subject to and on the terms and conditions hereof,
Seller hereby grants to the Company the option to purchase up to 866,666 Shares
(less that number of Shares purchased pursuant to paragraph 1) for a period
commencing on the date of this Agreement and terminating January 31, 1998 as
follows:
2.1 The exercise price of the option shall be the Purchase
Price, as defined in paragraph 4.1, at the time of the exercise of the
option.
2.2 The Company shall exercise the option by giving written
notice of the exercise to Seller, specifying the number of Shares being
redeemed, together with a check in the amount of the exercise price.
The option may be exercised in whole or part until termination but can
be exercised no more often than once a month during its term.
2.3 After the Company shall have purchased a total of 866,666
Shares pursuant to the terms of paragraph 1 and paragraph 2, it shall
have no further option to purchase Shares under this paragraph 2.
3. Seller's Option. Subject to the terms and conditions hereof, the
Company hereby grants Seller the option to sell to the Company up to 866,666
Shares (less Shares purchased by the Company pursuant to paragraphs 1 and 2) for
a period commencing on February 1, 1998 and terminating January 31, 2001, as
follows:
3.1 Seller shall exercise its option to have the Company
purchase Shares during any fiscal quarter (commencing November 1,
February 1, May 1, and August 1) during the option period by providing
written notice of such exercise to the Company within ten (10) days of
the end of such fiscal quarter.
3.2 The Company shall make payments to Seller for the
redemption of Shares within thirty (30) days of the end of each
calendar quarter for which the option has been exercised. Such payments
shall be equal to one-half of the Company's Net Profit After Taxes for
that quarter (as defined in paragraph 4.3) to the extent that Net
Profits After Taxes exceeds $250,000 for such quarter. For example, if
Net Profits After Taxes is $300,000 for a fiscal quarter for which the
option has been exercised, the payment would equal $25,000 (.5 x
($300,000-$250,000)). Notwithstanding the above, the maximum payments
the Company shall be obligated to make for redemption of Shares under
this paragraph in any fiscal year shall be $150,000. In the event the
Company shall pay to Seller under this paragraph an amount in excess of
this amount, the Company may apply such excess to amounts it would be
obligated to pay in future quarters for which the option has been
exercised.
3.3 The Company shall be deemed to have redeemed that number
of Shares arrived at by dividing the amount of each payment by the
Purchase Price, as defined in paragraph 4.1, at the time of the
payment.
3.4 After the Company shall have redeemed pursuant to the
terms of paragraph 1, paragraph 2 and paragraph 3, a total of 866,666
Shares, the Company shall have no further obligations to purchase
Shares under this paragraph 3.
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4. Certain Definitions.
4.1 "Purchase Price" shall mean for any Shares purchased and
redeemed by the Company from the date of this Agreement to October 31,
1977, the sum of $.75 per share and shall mean for all periods after
November 1, 1977, an amount equal to the greater of (i) $.75 per share
or (ii) 140% of the Book Value Per Share determined on a fiscal
quarterly basis.
4.2 "Book Value Per Share" shall mean the Company's
stockholder's equity as indicated on the Company's financial statements
at the end of any fiscal quarter divided by the Company's then
outstanding shares on a fully diluted basis. The determination of Book
Value Per Share as calculated by the Company's internal accountants
shall be final and binding on the parties for purposes of this
paragraph. The Book Value Per Share as of the end of any fiscal quarter
shall be used in calculating the Purchase Price for redemptions made
during the following fiscal quarter.
4.3 "Net Profits After Taxes" shall mean the Company's Net
Income as indicated on the Company's financial statements, after
accruing for taxes and extraordinary items. The determination of Net
Profit After Taxes as calculated by the Company's internal accountants
shall be final and binding on the parties for purposes of this
paragraph.
5. Delivery of Certificates. Upon payment of any amounts to Seller by
the Company for the purchase and redemption of Shares, pursuant to paragraphs 1,
2 or 3, Seller shall deliver certificates to the Company representing the Shares
so purchased and such Shares shall be cancelled and shall become authorized but
unissued shares of the common stock of the Company. In the event Seller delivers
certificates for a number of Shares in excess of the Shares to be redeemed, the
Company shall return to Seller a certificate representing the balance of the
Shares.
6. Restrictions on Repurchase. In the event that, at any time, the
purchase and redemption of any of the Shares is prohibited by, or would violate,
any applicable law or regulation, or any contract or instrument to which the
Company is a party or by which it is obund, the obligation of the Company to
purchase and redeem Shares hereunder, and to make payment therefor, shall be
postponed and such purchase and payment shall not be made at such time but, at
such time as such purchase, redemption and payment may be made, the Company, and
Davis, shall be obligated to consummate such purchase and redemption and the
Company shall make all payemnts therefor to Davis. With respect to any periodic
payments provided for herein which are postponed by reason of this paragraph,
such payments shall commence on the same periodic basis at such time as the
purchase, redemption and payments are premitted to be made in accordance with
the provisions hereof.
The parties acknowledge that Certificates for all of the Shares are
presently held by Bnak of America as security for the obligations of Davis to
such Bank and that (i) this Agreement is subject to the rights of such Bank and
(ii) no purchase or redemption of the Shares may be made unless nad until the
Shares are released by the Bank.
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7. Term and Termination.
7.1 This Agreement shall be for a term commencing on the date
hereof, and expiring February 1, 2001, subject to any obligations of
the parties to pay for or deliver Shares hereunder.
7.2 The Company shall be entitled to terminate this Agreement
prior to the expiration of its term by written notice to Seller upon
the occurrence of an Event of Default with respect to Seller. For
purposes of this Agreement, an Event of Default with respect to Seller
shall mean and include any violation by Seller of any of his
obligations herein and (if such violation can be cured) the failure by
Seller to cure such violation within 15 days after written notice
thereof, specifying the violation, shall have been given to Seller by
the Company, or the occurrence of any uncured event of default under
the Employment Agreement.
7.3 Seller shall be entitled to terminate this Agreement prior
to the expiration of its term by written notice to the Company upon the
occurrence of an Event of Default with respect to the Company. An Event
of Default with respect to the Company shall mean and include any
violation by the Company of any of its obligations herein and the
failure by the Company to cure such violation within 15 days after
written notice thereof shall have been given to the Company by Seller.
The nonpayment by the Company of the disputed portion of any amount
claimed to be due Seller hereunder shall not constitute an Event of
Default, if the Company shall contest the obligation of the Company to
make such payment in good faith, until 10 days after a final award of
an arbitrator shall have been entered determining that such amount is
due and such amount then remains unpaid.
7.4 In the event of termination of this Agreement by the
Company pursuant to paragraph 7.2 hereof:
7.4.1 Seller shall be entitled to receive (subject to
any rights of setoff or counterclaim by the Company) all
amounts due for Shares purchased prior to the date of such
termination. Except as provided in the foregoing sentence, all
obligations of the Company hereunder, shall terminate and be
of no further force or effect on the date of termination of
the Agreement by the Company pursuant to paragraph 7.2;
7.4.2 All rights of the Company which shall have
accrued hereunder prior to the date of such termination, and
all provisions of this Agreement provided herein to survive
expiration or termination of this Agreement, shall survive
such termination;
7.4.3 The Company's option to purchase Shares under
paragraph 2 shall survive such termination; and
7.4.4 Seller shall deliver to the Company
certificates for all Shares purchased by the Company pursuant
to paragraphs 1, 2 or 3 hereof to the date of such
termination.
7.5 In the event of termination of this Agreement by Seller in
accordance with paragraph 7.3 hereof:
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7.5.1 Seller shall be entitled to receive all amounts
due for Shares purchased prior to the date of termination and
the obligation and rights of the Seller to sell further Shares
shall cease and terminate as of the date of such termination;
and
7.5.2 All rights of Seller which shall have accrued
hereunder prior to the date of such termination shall survive
such termination.
7.6 This Agreement shall not terminate upon the death or
incapacity of Seller, but shall be binding on Seller's representatives.
8. Representations, Warranties and Acknowledgments of Seller. Seller
represents and warrants to the Company that the following are true and correct
as of the date hereof, and acknowledges, as follows:
8.1 Seller is the sole owner of, and has good and marketable
title to, the Shares free and clear of any and all contracts, options,
commitments, agreements, liens, claims or encumbrances whether or not
of record, subject only to the pledge of the Shares to Bank of America
as described herein.
8.2 Seller has the full right, power and authority to sell and
transfer the Shares in accordance with the terms hereof subject only to
the pledge of the Shares to Bank of America as provided herein.
8.3 Seller acknowledges that he was a founder of the Company
and is an officer of the Company and is fully aware of the financial
condition of the Company and the status of the Company's past, current
and prospective operations.
8.5 Seller acknowledges that (i) there is not now, and has
never been, an active trading market for the common stock of the
Company, (ii) there is no established market price or value for the
common stock of the Company, (iii) neither the Company nor any other
person associated with the Company has made any representation or
statement to Seller concerning the condition of the Company, financial
or otherwise, or the value of the common stock of the Company, (iv)
Seller is not relying on any information in connection with this
transaction other than his personal knowledge of the Company and deems
such information to be sufficient for Seller's purposes in this
transaction, (v) Seller has determined that the price and terms for the
purchase of the Shares hereunder are fair and appropriate and (vi) in
the event that a trading market does develop for common stock of the
Company the market price for such shares may exceed the price per share
for the Shares being purchased hereunder.
9. Further Assurances. Seller and the Company shall take such other and
further actions, execute such other and further documents as shall be reasonably
necessary or appropriate to effect and consummate the sale contemplated herein.
10. Voting of Shares. For so long as the Shares have not been redeemed
by the Company pursuant to the terms of this Agreement, Seller shall vote such
Shares for and in his name place and stead. After the Company has made payment
for any Shares pursuant to the terms of this Agreement, such Shares shall be
deemed to be redeemed and become treasury shares of the Company not subject to
be voted.
5
<PAGE>
11. Arbitration.
11.1 Any and all claims or controversies under, with respect
to, or relating to this Agreement shall be settled and adjudicated by
arbitration under the rules of the American Arbitration Association.
The parties hereto shall be bound by the decision or award of the
arbitrator(s) with respect to any such claim or controversy and the
prevailing party shall be entitled to obtain a judgment on any such
decision or award in any court of competent jurisdiction.
11.2 In any arbitration hereunder: (i) the parties shall have
the full right of discovery prior to hearing with respect to any party,
or any entity with respect to which a party is a shareholder, owner,
officer, employee, consultant or agent, to the full extent and on the
same terms as provided in the Federal Rules of Civil Procedure; and
(ii) the hearing shall be held within 90 days after the date of the
notice of arbitration and the decision of the arbitration shall be
issued within 30 days after the date of the hearing.
11.3 Notwithstanding any other provisions of this Agreement,
if either party shall give notice of violation of this Agreement to the
other party pursuant to paragraph 7 hereof and the other party shall,
by notice to such party given within 15 days after the effective date
of such notice of violation, contest the occurrence of a violation:
11.3.1 The matter shall be submitted to arbitration
in accordance with this paragraph 11;
11.3.2 The party giving the notice of violation shall
not be entitled to terminate this Agreement until a final
decision of an arbitrator has been issued finding that a
violation as claimed did occur;
11.3.3 Pending the decision of the arbitrator, the
parties shall be bound to continue to perform the Agreement in
accordance with its terms;
11.3.4 In the event that either party shall have
given notice of the violation of this Agreement and the
arbitrator shall determine that a violation by the other party
did occur and was not cured, the non-breaching party shall
have the option to (i) enforce the provisions of this
Agreement against the breaching party in accordance with the
decision of the arbitrator or (ii) elect to terminate this
Agreement effective fifteen days after the date of the notice
of the violation, in which case the parties shall transfer
such Shares and make such payments to the other to place the
parties in the position they would have been in if this
Agreement had been terminated on such date.
12. Notices. All notices or other communications required or permitted
to be given hereunder shall be in writing and shall be delivered or personally
mailed, certified mail, return receipt requested, postage pre-paid, to the
parties as follows:
6
<PAGE>
If to Seller, to: John C. Davis
------------------------
------------------------
------------------------
If to Company, to: Stephen M. Merrick
CTI Industries Corporation
22160 North Pepper Road
Barrington, Illinois 60010
Any notice mailed in accordance with the terms hereof shall be deemed received
on the third day following date of mailing.
13. Entire Agreement. This Agreement constitutes together with the
Consulting Agreement the entire agreement among the parties hereto with respect
to the subject matter hereof and supersedes all prior written or oral
warranties, representations, inducements, understandings, commitments,
agreements or contracts. This Agreement may not be modified except by a writing
signed by all of the parties.
14. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective, heirs, personal
representatives, successors and assigns.
15. Governing Law. This Agreement shall be governed by and construed
and enforced in all respects in accordance with the laws of the State of
Illinois.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the day and year first above written.
CTI INDUSTRIES CORPORATION
By:/s/ Stephen M. Merrick
-----------------------
Stephen M. Merrick, President
SELLER:
/s/ John C. Davis
---------------
JOHN C. DAVIS
7
EXHIBIT 10.4
AGREEMENT
THIS AGREEMENT is made and entered into this 27th day of June, 1997 by
and among CTI Industries Corporation, a Delaware corporation (the "Company") and
John C. Davis ("Davis").
WHEREAS, the Company and Davis have entered into an Employment
Agreement dated April 29, 1996 ("Employment Agreement") and a Stock Redemption
Agreement dated March 1, 1996 ("Redemption Agreement").
WHEREAS, the parties desire to enter into an agreement amending and
extending the Employment Agreement and the Redemption Agreement.
NOW, THEREFORE, in consideration of the premises and of the terms,
covenants and conditions hereinafter contained, the parties hereto agree as
follows:
1. Amendment to Employment Agreement. The Employment Agreement is
hereby amended as follows:
1.1 The term of the Employment Agreement is extended to
January 31, 2000.
1.2 Commencing February 1, 1998, the annual rate of salary
payable to Executive under the Employment Agreement shall be $120,000.
1.3 Commencing on the date on which the present lease for the
automobile now provided to Davis expires (on or about December 31,
1997), the Company shall provide to Davis for the remaining term of the
Employment Agreement an automobile allowance of $500 per month.
1.4 Effective on February 1, 1998 and for the remaining term
of the Employment Agreement, the Company shall reimburse Davis for the
regular monthly dues (excluding any periodic charges) for one country
club (not to exceed $450); provided that such dues shall not be payable
during any fiscal quarter of the Company if the sales revenues of the
Company during the preceding fiscal quarter shall be less than the
sales forecast approved by management of the Company.
1.5 Davis contemplates that he will commence activities as an
independent consultant and sales agent at some point prior to January
31, 2000 and may provide such services to, and receive compensation
from, companies other than the Company. The Company consents to such
activities on the part of Davis provided that (i) such activities shall
not interfere with the performance by Davis of his duties under the
Employment Agreement and (ii) Davis shall not perform services for any
company which is engaged in the manufacture, marketing or sale of any
product which is manufactured, marketed or
<PAGE>
sold by the Company.
1.6 Except as amended by the foregoing, the Employment
Agreement shall remain in full force and effect in accordance with its
terms.
2. Amendment to Redemption Agreement. The Redemption Agreement is
hereby amended as follows:
2.1 For the period from March 1, 1998 through February 28,
2000, the Company shall have the option and right to purchase up to
866,666 shares (less the number of shares purchased and redeemed
pursuant to paragraph 1 of the Redemption Agreement) of Common Stock of
the Company from Davis at the price of $.75 per share. The option may
be exercised at any time or from time to time with respect to all, or
any portion, of the shares subject to the option by written notice to
Davis.
2.2 For the period from March 1, 1998 through February 28,
2000, the Company shall have the obligation to purchase and redeem from
Davis, and Davis shall have the obligation to sell and deliver to the
Company, up to 866,666 shares (less the number of shares purchased and
redeemed pursuant to paragraph 1 of the Redemption Agreement and
paragraph 2.1 of this Agreement) at the price of $.75 per share on the
terms provided in this paragraph:
2.2.1 For such period, the Company shall have the
obligation to pay to Davis, as the purchase price for shares
of Common Stock to be purchased and redeemed from him:
(A) An amount equal to two percent (2%)
of the profits of the Company,
before provision for income tax,
determined on a fiscal quarterly
basis (commencing with the first
fiscal quarter of 1988 - the period
from November 1, 1997 to February
28, 1998) and on the basis of
generally accepted accounting
principles consistently applied,
and,
(B) An amount equal to two percent (2%)
(but not exceeding the sum of
$8,000) of the amount by which
revenues of the Company from the
sale of mylar and latex balloons and
associated items and accessories
exceed the sum of $1,300,000.
2.2.2 The amount to be paid pursuant to paragraph
2.2.1(A) shall be determined and paid on a fiscal quarterly
basis within 45 days after the end of each such quarter. The
amount to be paid pursuant to paragraph 2.2.1(B) shall be
determined on a monthly basis and paid within 30 days after
the last day of the
2
<PAGE>
month for which the payment is due.
2.2.3 Notwithstanding the other provisions of this
Agreement, for any period in which any amount would otherwise
be due to Davis hereunder, if at such time, all of the shares
subject to purchase and redemption by the Company hereunder
shall have been purchased and redeemed, no amount shall be due
from the Company to Davis hereunder for such period.
2.2.4 The provisions of this paragraph 2 of this
Agreement shall supersede in their entirety the provisions of
paragraphs 2 and 3 of the Redemption Agreement. Except as
provided herein, the Redemption Agreement shall remain in full
force and effect in accordance with its terms.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
CTI INDUSTRIES CORPORATION
By: /s/ Stephen M. Merrick
----------------------------
DAVIS:
/s/ John C. Davis
----------------------------
3
EXHIBIT 10.6
The securities represented by this Warrant have not
been registered under the Securities Act of 1933, and
thus may not be transferred unless registered under
that Act or unless an exemption from registration is
available.
Warrant dated December 3, 1996, to
purchase 200,000 Shares of Common Stock
on or before December 31, 2002.
STOCK PURCHASE WARRANT
TO PURCHASE COMMON STOCK OF
CTI INDUSTRIES CORPORATION
This certifies that, for value received, _____________, or his assigns,
is entitled to subscribe for and purchase from CTI INDUSTRIES CORPORATION, a
Delaware corporation (hereinafter called the "Company"), at a price of
Thirty-five cents ($.35) per share (subject to adjustment as set forth in
paragraph 3 below) and at any time after the date hereof to and including
December 31, 2002, 200,000 (subject to adjustment as set forth in paragraph 3
below) fully paid and non-assessable shares of the Company's common stock, par
value $.075 per share (hereinafter referred to as the "Common Stock").
This Warrant is subject to the following provisions, terms and
conditions:
1. Exercise; Issuance of Certificates; Payment for Shares. The rights
represented by this Warrant may be exercised by the holder hereof at any time
within the period specified above, in whole or in part (but not as to a
fractional share of Common Stock), by the surrender of this Warrant (properly
endorsed if required) at the principal office of the Company (or such other
office of the Company as it may designate by notice in writing to the holder
hereof at the address of such holder appearing on the books of the Company) (a)
specifying the number of shares of Common Stock being purchased and (b)
accompanied by a check payable to the Company for the purchase price for such
shares. The Company agrees that the shares so purchased shall be deemed to be
issued to the holder hereof as the record owner of such shares as of the close
of business on the date on which this Warrant shall have been surrendered and
payment made for such shares as aforesaid. Certificates for the shares so
purchased shall be delivered to the holder hereof within a reasonable time, not
exceeding ten days, after the rights represented by this Warrant shall have been
so exercised, and, unless this Warrant has expired, a new Warrant of like tenor,
representing the right to purchase the number of shares, if any, with respect to
which this Warrant shall not then have been exercised, shall also be delivered
to the holder hereof within such time.
2. Shares to be Fully Paid; Reservation of Shares. The Company
covenants and agrees:
1
<PAGE>
(a) that all shares of Common Stock which may be issued upon
exercise of the rights represented by this Warrant will, upon issuance,
be fully paid and nonassessable and free from all taxes, liens and
charges with respect to the issue thereof;
(b) without limiting the generality of the foregoing, that the
Company will from time to time take all such action as may be required
to assure that the par value, if any, per share of Common Stock is at
all times equal to or less than the then effective Warrant Purchase
Price (as hereinafter defined) per share of Common Stock issuable
pursuant to this Warrant;
(c) that, during the period within which the rights
represented by this Warrant may be exercised, the Company will at all
times have authorized, and reserved for the purpose of issue or
transfer upon exercise of the rights evidenced by this Warrant, a
sufficient number of shares of Common Stock to provide for the full
exercise of the rights represented by this Warrant;
(d) that the Company will take all such action as may be
necessary to assure that the Common Stock issuable upon the exercise
hereof may be so issued without violation of any applicable law or
regulation; and
(e) that the Company will not take any action which would
result in any adjustment of the Warrant Purchase Price if (I) the total
number of shares of Common Stock issuable after such action upon
exercise of this Warrant, together with all shares of Common Stock then
outstanding and all shares of Common Stock then issuable upon exercise
of all Options (as hereinafter defined) and upon conversion of all
Convertible Securities (as hereinafter defined) then outstanding, would
exceed (ii) the total number of shares of Common Stock then authorized
by the Company's Articles of Incorporation (all such issued and
issuable Common Stock being called the "Potentially Outstanding Common
Stock").
In the event any stock or securities of the Company other than Common Stock are
issuable upon the exercise hereof, the Company will take or refrain from taking
any action referred to in clauses (a) through (e) of this paragraph 2 as though
such clauses apply, equally, to such other stock or securities then issuable
upon the exercise hereof.
3. Warrant Purchase Price. The provisions set forth in paragraphs 1 and
2 above are, however, subject to the following:
3.1 Adjustment of Warrant Purchase Price; Resulting Adjustment
of Number of Purchasable Shares. The initial Warrant Purchase Price of
Thirty-five Cents ($.35) per share of Common Stock shall be subject to
adjustment from time to time as hereinafter provided (such price or
such price as last adjusted pursuant to the terms hereof, as the case
may be, is herein called the "Warrant Purchase Price"). Upon each
adjustment of the Warrant Purchase Price, the holder of this Warrant
shall thereafter be entitled to purchase, at the Warrant Purchase Price
resulting from such adjustment, the number of shares of
2
<PAGE>
Common Stock obtained by multiplying the Warrant Purchase Price in
effect immediately prior to such adjustment by the number of shares of
Common Stock purchasable pursuant hereto immediately prior to such
adjustment and dividing the product thereof by the Warrant Purchase
Price resulting from such adjustment.
3.2 Adjustment of Warrant Purchase Price Upon Issuance of
Stock. If and whenever after the date hereof the Company shall issue or
sell any shares of its Common Stock for a consideration per share less
than the Warrant Purchase Price in effect immediately prior to the time
of such issue or sale (except if such issue or sale shall be made
pursuant to the exercise of Options or Convertible Securities, as
defined below, outstanding on the date hereof), then, forthwith upon
such issue or sale, the Warrant Purchase Price shall be reduced to the
price, calculated to the nearest cent, determined by dividing (a) the
sum of (I) the number of shares of Common Stock outstanding immediately
prior to such issue or sale multiplied by the then existing Warrant
Purchase Price and (ii) the consideration, if any, received by the
Company upon such issue or sale, by (b) the total number of shares of
Common Stock outstanding immediately after such issue or sale. No
adjustment of the Warrant Purchase Price, however, shall be made in an
amount less than $0.01 per share, but any such lesser adjustment shall
be carried forward and shall be made at the time and together with the
next subsequent adjustment which together with all adjustments so
carried forward shall amount to $0.01 per share or more.
For purposes of this paragraph 3.2, the following paragraphs
3.3 to 3.15, inclusive, subject to the exception set forth above, shall
also be applicable:
3.3 Issuance of Rights or Options. In case at any time the
Company shall in any manner grant (whether directly or by assumption in
a merger or otherwise) any rights to subscribe for or to purchase, or
any options for the purchase of, Common Stock or any stock or
securities convertible into or exchangeable for Common Stock (such
rights or options being herein called "Options" and such convertible or
exchangeable stock or securities being herein called "Convertible
Securities"), whether or not such Options or the right to convert or
exchange any such Convertible Securities are immediately exercisable,
and the price per share for which Common Stock is issuable upon the
exercise of such Options or upon conversion or exchange of such
Convertible Securities (determined as provided in the following
sentence) shall be less than the Warrant Purchase Price in effect
immediately prior to the time of granting of such Options, then the
maximum number of shares of Common Stock issuable upon the exercise of
all such Option or upon conversion or exchange of the total maximum
amount of such Convertible Securities shall be deemed to have been
issued for such price per share as of the date of the granting of such
Options and thereafter shall be deemed to be outstanding. The price per
share for which Common Stock is issuable, as referred to in the
preceding sentence, shall be determined by dividing (a) the sum of (I)
the total amount, if any, received or receivable by the Company as
consideration for the granting of such Options, plus (ii) the minimum
aggregate amount of additional consideration payable to the Company
upon the exercise of all such Options, plus (iii) in the case of all
such Options that relate to Convertible Securities, the minimum
aggregate amount of
3
<PAGE>
additional consideration, if any, payable upon the issue or sale of all
such Convertible Securities (to the extent not counted under the
immediately preceding clause (ii) and upon the conversion or exchange
of all such Convertible Securities into Common Stock, by (b) the total
maximum number of shares of Common Stock issuable upon the exercise of
such Options or upon the conversion or exchange of all such Convertible
Securities. The consideration received or receivable by the Company
shall in each case be determined in accordance with paragraph 3.7
below. Except a otherwise provided in paragraph 3.5 below, no
adjustment of the Warrant Purchase Price shall be made upon the actual
issue of such Common Stock or of such Convertible Securities upon
exercise of such Options or upon the actual issue of such Common Stock
upon conversion or exchange of such Convertible Securities.
3.4 Issuance of Convertible Securities. In case the Company
shall in any manner issue (whether directly or by assumption in a
merger or otherwise) or sell any Convertible Securities, whether or not
the rights to exchange or convert thereunder are immediately
exercisable, and the price per share for which Common Stock is issuable
upon such conversion or exchange (determined as provided in the
following sentence) shall be less than the Warrant Purchase Price in
effect immediately prior to the time of such issue or sale, then the
total maximum number of shares of Common Stock issuable upon conversion
or exchange of all such Convertible Securities shall be deemed to have
been issued for such price per share as of the date of the issue or
sale of such Convertible Securities and thereafter shall be deemed to
be outstanding, provided that (a) except as otherwise provided in
paragraph 3.5 below, no adjustment of the Warrant Purchase Price shall
be made upon the actual issue of such Common Stock upon conversion or
exchange of such Convertible Securities, and (b) if any such issue or
sale of such Convertible Securities is made upon exercise of any
Options for which adjustments of the Warrant Purchase Price have been
or are to be made pursuant to other provisions of this paragraph 3, no
further adjustment of the Warrant Purchase Price shall be made by
reason of such issue or sale. The price per share for which Common
Stock is issuable, as referred to in the preceding sentence, shall be
determined by dividing (I) the sum of (A) the total amount received or
receivable by the Company as consideration for the issue or sale of
such Convertible Securities, plus (B) the minimum aggregate amount of
additional consideration, if any, payable upon the conversion or
exchange of such Convertible Securities into Common Stock, by (ii) the
total maximum number of shares of Common Stock issuable upon the
conversion or exchange of such Convertible Securities. The
consideration received or receivable by the Company shall in each case
be determined in accordance with paragraph 3.7 below.
3.5 Change in Option Price or Conversion Rate. Upon the
happening of any of the following events, namely, if the purchase price
provided for in any Option referred to in paragraph 3.3 above and still
outstanding, the additional consideration, if any, payable upon the
conversion or exchange of any Convertible Securities referred to in
paragraph 3.3 or 3.4 above and still outstanding, or the rate at which
any such Convertible Securities are convertible into or exchangeable
for Common Stock shall change at any time (other than under or by
reason of provisions designed to protect against dilution), the Warrant
4
<PAGE>
Purchase Price in effect at the time of such event shall forthwith be
readjusted to the Warrant Purchase Price which would have been in
effect at such time had such Options or Convertible Securities provided
for such changed purchase price, additional consideration, or
conversion rate, as the case may be, at the time initially granted,
issued, or sold. On the expiration of any Option referred to in
paragraph 3.3 above prior to the exercise thereof or the termination of
any right to convert or exchange any Convertible Securities referred to
in paragraph 3.3 or 3.4 above prior to the exercise of such right, the
Warrant Purchase Price then in effect hereunder shall forthwith be
increased to the Warrant Purchase Price which would have been in effect
at the time of such expiration or termination had such Option or
Convertible Securities, to the extent outstanding immediately prior to
such expiration or termination, never been issued, and the Common Stock
issuable thereunder shall no longer be deemed to be outstanding for the
purposes of any calculation under paragraph 3.3 or 3.4 above.
3.6 Determination of Consideration Upon Dividend or Other
Distribution. In case the Company shall declare a dividend or make any
other distribution upon any stock of the Company payable in Common
Stock, Options or Convertible Securities, any Common Stock, Options or
Convertible Securities, as the case may be, issuable in payment of such
dividend or distribution shall be deemed to have been issued or sold
without consideration.
3.7 Consideration for Stock. In case any shares of Common
Stock, Options or Convertible Securities shall be issued or sold for
cash, the consideration received therefor shall be deemed to be the
amount received by the Company therefor, without deduction therefrom of
any expenses incurred or any reasonable underwriting commissions or
concessions paid or allowed by the Company (or deducted from amounts
received by the Company) in connection therewith. In case any shares of
Common Stock, Options or Convertible Securities shall be issued or sold
for a consideration other than cash, the amount of the consideration
other than cash received by the Company shall be deemed to be the fair
value of such consideration as determined reasonably and in good faith
by the Board of Directors of the Company, without deduction of any
expenses incurred or any reasonable underwriting commissions or
concessions paid or allowed by the Company (or deducted from amounts
received by the Company) in connection therewith. The amount of
consideration deemed to be received by the Company pursuant to issuance
and/or sale, pursuant to an established compensation plan of the
Company, to directors, officers or employees of the Company or any
subsidiary of the Company in connection with their employment of shares
of Common stock, Options or Convertible Securities, shall be increased
by the amount of any tax benefit realized by the Company as a result of
such issuance and/or sale, the amount of such tax benefit being the
amount by which the federal and/or state income or other tax liability
of the Company shall be reduced by reason of any deduction or credit in
respect of such issuance and/or sale. In case any Common Stock, Options
or Convertible Securities shall be issued in connection with any merger
or consolidation in which the Company is the surviving corporation
(other than any consolidation or merger in which the previously
outstanding shares of Common Stock of the Company shall be changed into
or exchanged for the stock or other securities
5
<PAGE>
of another corporation), the amount of consideration received therefor
shall be deemed to be the fair value as determined reasonably and in
good faith by the Board of Directors of the Company of such portion of
the assets and business of the non-surviving corporation as such Board
may determined to be attributable to such shares of Common Stock,
Options or Convertible Securities, as the case may be. In the event of
any consolidation or merger of the Company in which the Company is not
the surviving corporation or in which the previously outstanding shares
of Common Stock of the Company shall be changed into or exchanged for
the stock or other securities of another corporation, or in the event
of any sale of all or substantially all of the assets of the Company
for stock or other securities of any corporation, the Company shall be
deemed to have issued a number of shares of its Common Stock computed
on the basis of the actual exchange ratio on which the transaction was
predicated and for a consideration equal to the fair market value on
the date of such transaction of all such stock or securities of the
other corporation, and if such calculation results in adjustment of the
Warrant Purchase Price, the determination of the number of shares of
Common Stock issuable upon exercise of the Warrants immediately prior
to such merger, consolidation or sale, for purposes of paragraph 3.13
below, shall be made after giving effect to such adjustment of the
Warrant Purchase Price. In case any shares of Common Stock shall be
issued (or issuable) pursuant to any Options for the purchase of the
same, the consideration deemed to be received (or receivable) therefor
shall be deemed to be the total amount, if any, received (or total
minimum amount receivable) by the Company as consideration for the
granting of such Options, plus the aggregate amount of additional
consideration paid (or minimum amount payable) to the Company upon the
exercise of such Options. In case any shares of Common Stock shall be
issued (or issuable) upon the conversion or exchange of any Convertible
Securities, the consideration deemed to be received (or receivable)
therefor shall be deemed to be the total amount received (or total
minimum amount receivable) by the Company as consideration for the
granting of any Options to subscribe to or purchase such Convertible
Securities, plus the total amount of additional consideration paid (or
minimum amount payable) to the Company as consideration for the issue
or sale of such Convertible Securities, plus the total amount of
additional consideration, if any, paid (or minimum amount payable) to
the Company upon the conversion or exchange thereof.
3.8 Record Date. In case the Company shall take a record of
the holders of its Common Stock for the purpose of entitling them to
receive a dividend or other distribution payable in Common Stock,
Options or Convertible Securities, then such record date shall be
deemed to be the date of the issue or sale of the shares of Common
stock deemed to have been issued or sold upon the declaration of such
dividend or the making of such other distribution.
3.9 Treasury Shares. The number of shares of Common Stock
outstanding at any given time shall not include shares owned or held by
or for the account of the Company, and the disposition of any such
shares shall be considered an issue or sale of Common stock for the
purposes of this paragraph 3.
6
<PAGE>
3.10 Liquidating Dividends. The Company will not declare
a dividend upon Common Stock payable otherwise than out of consolidated
earnings or consolidated earned surplus, determined in accordance with
generally accepted accounting principles, including the making of
appropriate deductions for minority interests, if any, in subsidiaries,
and otherwise than in Common Stock, unless the holder of this Warrant
shall have consented to such dividend in writing.
3.11 Subdivision or Combination of Stock. In case at any time
the Company shall in any manner subdivide its outstanding shares of
Common stock into a greater number of shares or combine such shares of
Common Stock into a smaller number of shares, then the Warrant Purchase
Price in effect immediately subsequent to such subdivision or
combination shall be equal tot he product of (a) the Warrant Purchase
Price in effect immediately prior to such subdivision or combination
multiplied by (b) a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately prior to such
subdivision or combination and the denominator of which is the number
of shares of Common Stock outstanding immediately thereafter.
3.12 Reorganization, Reclassification, Consolidation, Merger
or Sale. If any reorganization or reclassification of the capital stock
of the Company, or any consolidation or merger of the Company with
another corporation, or the sale of all or substantially all of the
Company's assets to another corporation shall be effected in such a way
that holders of Common Stock shall be entitled to receive stock,
securities or assets with respect to or in exchange for Common Stock,
then, as a condition of such reorganization, reclassification,
consolidation, merger or sale, lawful and adequate provisions shall be
made whereby the holder hereof shall thereafter have the right to
purchase and receive, upon the basis and upon the terms and conditions
specified in this Warrant and in lieu of the shares of Common Stock of
the Company immediately theretofore purchasable and receivable upon the
exercise of the rights represented hereby, such shares of stock,
securities, or assets as may be issued or payable with respect to or in
exchange for a number of outstanding shares of such stock equal to the
number of shares of such stock immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby had such
reorganization, reclassification, consolidation, merger or sale not
taken place, and in any such case appropriate provision shall be made
with respect to the rights and interests of the holder of this Warrant
to the end that the provisions hereof (including, without limitation,
provisions for adjustment of the Warrant Purchase Price and of the
number of shares purchasable and receivable upon the exercise of this
Warrant) shall thereafter be applicable, as nearly as may be, in
relation to any shares of stock, securities or assets thereafter
deliverable upon the exercise of the rights represented hereby
(including an immediate adjustment, by reason of such consolidation or
merger, of the Warrant Purchase Price to the value for the Common Stock
reflected by the terms of such consolidation or merger if the value so
reflected is less than the Warrant Purchase Price in effect immediately
prior to such consolidation or merger). In the event of a merger or
consolidation of the Company with or into another corporation as a
result of which the number of shares of common stock of the surviving
corporation greater or lesser than the number of shares of Common Stock
of the Company outstanding
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immediately prior to such merger or consolidation are issuable to
holders of Common Stock of the Company, then the Warrant Purchase Price
in effect immediately prior to such merger or consolidation shall be
adjusted in the same manner as though there were a subdivision or
combination of the outstanding shares of Common Stock of the Company.
The Company shall not effect any such consolidation, merger, or sale,
unless prior to the consummation thereof the successor corporation (if
other than the Company) resulting from such consolidation or merger of
the corporation into or for the securities of which the previously
outstanding stock of the Company shall be exchanged in connection with
such consolidation or merger, or the corporation purchasing such
assets, as the case may be, shall assume, by written instrument
executed and mailed or delivered to the holder hereof at the last
address of such holder appearing on the books of the Company, the
obligation to deliver to such holder such shares of stock, securities,
or assets as, in accordance with the foregoing provisions, such holder
may be entitled to purchase. If a purchase, tender, or exchange offer
is made to and accepted by the holders of more than 50% of the
outstanding shares of Common Stock of the Company, the Company shall
not effect any consolidation, merger, or sale with the Person having
made such offer or with any Affiliate of such Person unless, prior to
the consummation of such consolidation, merger, or sale, the holder of
this Warrant shall have been given a reasonable opportunity to then
elect to receive either the stock, securities, or assets then issuable
upon the exercise of this Warrant. As used herein, the term "Person"
shall mean and include an individual, a partnership, a corporation, a
trust, a joint venture, an unincorporated organization, and a
government or any department or agency thereof, and an "Affiliate" of
any controlling, controlled by, or under direct or indirect common
control with, such other Person. A Person shall be deemed to control a
corporation if such Person possesses, directly or indirectly, the power
to direct or cause the direction of the management and policies of such
corporation, whether through the ownership of voting securities, by
contract, or otherwise. The provisions of this paragraph 3.3 governing
the substitution of another corporation for the Company shall similarly
apply to successive instances in which the corporation then deemed to
be the Company hereunder shall either sell all or substantially all of
its properties and assets to any other corporation, shall consolidate
with or merge into any other corporation, or shall be the surviving
corporation of the merger into it of any other corporation as a result
of which the holders of any of its stock or other securities shall be
deemed to have become the holders of, or shall become entitled to, the
stock or other securities of any corporation other than the corporation
at the time deemed to be the Company hereunder.
3.13 Duty to Make Fair Adjustments in Certain Cases. If any
event occurs as to which, in the opinion of the Board of Directors of
the Company, the other provisions of this paragraph 3 are not strictly
applicable or, if strictly applicable, would not fairly protect the
purchase rights of this Warrant in accordance with the essential intent
and principles hereof, the Board of Directors shall make such
adjustments in the Warrant Purchase Price as it deems necessary to
protect such purchase rights as aforesaid, but in no event shall any
such adjustment have the effect of increasing the Warrant Purchase
Price as otherwise determined pursuant to this paragraph 3.
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3.14 Notice of Adjustment. The Company shall give to the
holder of this Warrant prompt written notice of every adjustment of the
Warrant Purchase Price, by first class mail, postage prepaid, addressed
to the address of such holder as shown on the books of the Company,
which notice shall state the Warrant Purchase Price resulting from such
adjustment and the increase or decrease, if any, in the number of
shares purchasable at such price upon the exercise of this Warrant, and
shall set forth in reasonable detail the method of calculation and the
facts upon which such calculation was based.
3.15 Other Notices. In case at any time:
(a) the Company shall declare any cash dividend upon
its Common Stock payable at a rate in excess of the rate of
the last cash dividend theretofore paid;
(b) the Company shall declare any dividend upon its
Common Stock payable in stock or make any special dividend or
other distribution (other than regular cash dividends) to the
holders of its Common Stock;
(c) the Company shall offer for subscription to the
holders of any of its Common Stock any additional shares of
stock of any class or other rights;
(d) there shall be any capital reorganization of the
Company or any reclassification of its capital stock or any
consolidation or merger of the Company with, or sale of all or
substantially all of its assets to, another corporation; or
(e) there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the Company;
then, in any one or more of such cases, the Company shall give, by
first class mail, postage prepaid, addressed to the holder of this
Warrant at the address of such holder as shown on the books of the
Company, (i) at least 20 days' prior written notice of the date on
which the books of the Company shall close or a record shall be taken
for such dividend, distribution or subscription rights or for
determining rights to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation
or winding up, and (ii) in the case of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation
or winding up, at least 20 days prior written notice of the date when
the same shall take place. Any notice required by clause (i) shall also
specify, in the case of any such dividend, distribution or subscription
rights, the date on which the holders of Common Stock shall be entitled
thereto, and any notice required by clause (ii) shall also specify the
date on which the holders of Common Stock shall be entitled to exchange
their Common Stock for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up, as the case may be.
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<PAGE>
4. Issue Tax. The issuance of certificates for shares of Common Stock
upon the exercise of this Warrant shall be made without charge to the holder of
this Warrant for any issuance tax in respect thereof.
5. Closing of Books. The Company will at no time close its transfer
books against the transfer of this Warrant or of any shares of Common Stock
issued or issuable upon the exercise of this Warrant in any manner which
interferes with the timely exercise of this Warrant.
6. No Voting Rights. This Warrant shall not entitle the holder hereof
to any voting rights or other rights as a stockholder of the Company.
7. Warrants Transferable. Subject to the restrictions referred to in
the legend set forth on the face of this Warrant, this Warrant and all rights
hereunder are transferable to any person, in whole or in part, without charge to
the holder hereof, at the office of the Company referred to in paragraph 1
above, by the holder hereof in person or by duly authorized attorney, upon
surrender of this Warrant properly endorsed. Each taker and holder of this
Warrant, by taking or holding the same, consents and agrees that this Warrant,
when endorsed in blank, shall be deemed negotiable, and that the holder hereof,
when this Warrant shall have been so endorsed, may be treated by the Company and
all other persons dealing with this Warrant as the absolute owner hereof for any
purpose and as the person entitled to exercise the rights represented by this
Warrant, or to the transfer hereof on the books of the Company, any notice to
the contrary notwithstanding. Until such transfer on such books, however, the
Company may treat the registered holder hereof as the owner for all purposes.
8. Warrant Exchangeable for Different Denominations. This Warrant is
exchangeable, upon its surrender by the holder hereof at the office of the
Company referred to in paragraph 1 above, for new Warrants of like tenor
representing in the aggregate the right to subscribe for and purchase the number
of Shares which may be subscribed for and purchased hereunder, each of such new
Warrants to represent the right to subscribe for and purchase such number of
shares as shall be designated by said holder hereof at the time of such
surrender.
9. Descriptive Headings and Governing Law. The descriptive headings of
the several paragraphs of this Warrant are inserted for convenience of reference
only and do not constitute a part of this Warrant. This Warrant is being
delivered and is intended to be performed in the State of Illinois and shall be
construed and enforced in accordance with, and the rights of the parties shall
be governed by, the laws of such State.
10. Certain Covenants of the Company. So long as this Warrant remains
outstanding, in whole or in part, the Company will, unless the holder of this
Warrant otherwise consents in writing:
(a) within 60 days after the end of each of the first three
quarterly fiscal periods in each fiscal year of the Company, deliver to
the holder of this Warrant (i) a consolidated balance sheet of the
Company and its subsidiaries, if any, as at the end of such period, and
(ii) consolidated statements of income and of surplus of the Company
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and its subsidiaries, if any, for such period and (in the case of the
second and third such quarterly periods) for the period from the
beginning of the current fiscal year to the end of such quarterly
period, setting forth in each case in comparative form the consolidated
figures for the corresponding periods of the previous fiscal year, all
in reasonable detail and certified as prepared in accordance with
generally accepted accounting principles consistently applied, subject
to exchanges resulting from year-end audit adjustments, by the
principal financial officer of the Company; and
(b) within 90 days after the end of each fiscal year of the
Company, deliver to the holder of this Warrant (i) a consolidated
balance sheet of the Company and its subsidiaries, if any, as at the
end of such year, and (ii) consolidated statements of income and of
surplus of the Company and its subsidiaries, if any, for such year,
setting forth in each case in comparative form the consolidated figures
for the previous fiscal year, all in reasonable detail and accompanied
by an opinion thereon of independent public accountants, which opinion
shall state that such financial statements have been prepared in
accordance with generally accepted accounting principles consistently
applied and that the audit by such accountants in connection with such
financial statements has been made in accordance with generally
accepted auditing standards; and
(c) as soon as practicable, notify the holder of this Warrant
in writing of any potentially material adverse development concerning
the Company; and permit such holder of his representative to examine
the books and records of the company at any time during regular
business hours and make copies of any portions thereof desired to be
copied by such holder or his representative.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officers under its corporate seal and this Warrant to be
dated this ______ day of ____________, 1997.
CTI INDUSTRIES CORPORATION
By:_____________________________________
President
(CORPORATE SEAL)
Attest:
- --------------------------
Secretary
11
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SUBSCRIPTION AGREEMENT
Dated: ______________, 199__
To: CTI Industries Corporation
22160 N. Pepper Road
Barrington, Illinois
The undersigned, pursuant to the provisions set forth in the within
Warrant, hereby agrees to subscribe for and purchase shares of the Common Stock
covered by such Warrant, and makes payment herewith in full therefor at the
price per share provided by such Warrant.
Signature___________________________
Address_____________________________
____________________________________
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
all of the rights of the undersigned under the within Warrant, with respect to
the number of shares of Common stock set forth below, unto:
Name of Assignee Address Number of Shares
Dated: __________________, 199__
Signature___________________________
Witness_____________________________
12
EXHIBIT 10.7
SUBSCRIPTION AGREEMENT
THIS AGREEMENT the 8th day of March, 1996 by and among CTI Industries
Corporation, a Delaware corporation, (the "Company") and ______________, an
Illinois _____________ ("Investors").
WHEREAS, the Company is engaged in the business of designing,
developing, manufacturing, marketing or selling metallized balloons, latex
balloons, laminated film, printed film and other products and items;
WHEREAS, the Company has authorized up to 4,000,000 shares of Preferred
Stock of the Company, par value Thirty-Five Cents ($.35) per share;
WHEREAS, the Company is willing to sell, issue and deliver shares of
Preferred Stock and the Investor is willing to purchase shares of Preferred
Stock of the Company on the terms provided herein.
NOW, THEREFORE, in consideration of the premises and of the terms,
covenants, and conditions hereinafter contained, the parties hereto agree as
follows:
1. Subscription. Subject to and on the terms and conditions hereof,
Investor hereby subscribes for, and agrees to purchase, and the Company agrees
to sell, issue and deliver 2,571,428.5 shares of Preferred Stock of the Company,
par value $.35 per share, at the price of Thirty-Five Cents ($.35) per share or
an aggregate purchase price of $900,000.
2. Payment. In consideration of the issuance of the shares of Preferred
Stock and subject to the terms and conditions hereof, the Investor shall pay to
the Company on the date hereof the sum of $700,000 and, on or before March 31,
1996 the sum of $200,000. Upon receipt of payment, the Company shall issue and
deliver to Investor duly executed certificates representing the number of shares
of Preferred Stock then being purchased.
3. Representations and Warranties of the Company. The Company
represents and warrants to Investor that each of the following is true and
correct as of the date hereof:
3.1 The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware
which is presently the only state where the nature of its business and
assets require such qualification.
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3.2 The Company is authorized to issue up to 12,000,000 shares
of capital stock, of which 8,000,000 shares are designated as Common
Stock, par value $.075 per share and 4,000,000 shares shall be
designated as Preferred Stock, par value $.35 per share.
3.3 Attached hereto is a true and accurate copy of the
Restated Certificate of Incorporation of the Company providing the
rights, preferences and qualifications with respect to the Preferred
Stock of the Company.
3.4 There are presently issued and outstanding 2,833,188
shares of Common Stock of the Company.
3.5 Except as provided in paragraph 3.4 (i) there are no
contracts, options or other agreements or understandings pursuant to
which the Company is or may be obligated to issue Common Stock,
Preferred Stock or any other security of the Company, (ii) there are no
obligations of the Company outstanding which may be converted into
securities of the Company and (iii) there are no securities of the
Company issued or outstanding.
3.6 All shares of Common Stock of the Company issued and
outstanding are duly authorized and validly issued, fully paid and
nonassessable.
3.7 No holder of any outstanding and issued Common Stock or
any other security of the Company has any preemptive right or right of
first refusal with respect to the issuance by the Company of its stock.
3.8 This Agreement and the issuance of the shares of Preferred
Stock hereunder have been duly authorized and this Agreement, when
executed and delivered, shall constitute a valid and binding obligation
of the Company enforceable in accordance with its terms. All shares of
Preferred Stock to be issued hereunder, when issued in accordance with
the terms hereof, shall be duly authorized, validly issued, fully paid
and non-assessable.
4. Representations, Acknowledgements and Agreements of Investor. The
Investor hereby represents and warrants to the Company and acknowledges and
agrees as follows:
4.1 Investor or its representative has reviewed this Agreement
and the Exhibits hereto and has full and complete knowledge concerning
the business, prospects and condition, financial and otherwise, of the
Company.
4.2 Investor acknowledges that investment in the Preferred
Stock of the Company is speculative and involves a high degree of risk
of loss.
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<PAGE>
4.3 Investor acknowledges and understands that the shares of
Preferred Stock purchased by Investor hereunder have not been
registered under the Securities Act of 1933, as amended ("Act"), or
under the laws of any State, in reliance upon exemptions therefrom
provided in such laws and further understands that such securities, or
the sale thereof, have not been approved or disapproved by the
Securities & Exchange Commission or by any other federal or state
agency.
4.4 Investor represents, warrants and agrees that Investor is
acquiring the shares of Preferred Stock hereunder solely for its own
account, for investment, and not with a view to the distribution or
resale thereof. Investor further represents that Investor's financial
condition is such that Investor is not under any present necessity or
constraint to dispose of such securities to satisfy any existing or
contemplated debt or undertaking. Investor (i) has not offered or sold
such securities within the meaning of the Act, (ii) does not have in
mind the sale of such securities either currently or after the passage
of a fixed or determinable period of time or upon the occurrence or
non-occurrence of any predetermined event or circumstance, (iii) has no
present or contemplated agreement, undertaking, arrangement,
obligation, indebtedness or commitment providing for or which is likely
to compel a disposition of the securities and (iv) is not aware of any
circumstances presently in existence which are likely in the future to
promote a disposition of the securities.
4.5 Investor confirms its understanding, and agrees,
as follows:
4.5.1 Certificates for the shares of Preferred Stock
purchased hereunder will bear substantially the following
legend:
"The Securities represented by this Certificate were
acquired on __________________, without registration
under the Securities Act of 1933, as amended. No
transfer or sale of these Securities or interest
therein may be made except under an effective
registration statement under said Act covering such
security unless the Company has received an opinion
of counsel satisfactory to it that such transfer or
sale does not require registration under said Act."
4.5.2 Investor shall be bound by the terms of the
foregoing legend and agrees that an appropriate transfer
restrictions will be noted on the Company's records.
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4.6 Investor and each member of Investor, is an "Accredited
Investor" as defined in Rule 501(a) of Regulation D promulgated under
the Act and shall provide such information and execute such
certificates to the Company as shall be reasonably requested by the
Company or its counsel to assure that Investor, and each member of
Investor, does meet the requirements of such provisions.
5. Entire Agreement. This Agreement and the documents referred to
herein constitute the entire agreement among the parties hereto with respect to
the subject matter hereof and supersedes all prior written or oral warranties,
representations, agreements, commitments or understandings.
6. Benefit. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, personal
representatives, successors and assigns.
7. Notices. Any notice required or permitted under this Agreement shall
be given in writing and shall be given by personal delivery or by depositing the
same with the United States Post Office, by registered or certified mail,
postage prepaid and addressed:
If to the Company: President
CTI Industries Corporation
22160 N. Pepper Road
Barrington, IL 60010
If to Investor: CTI Investors, LLC
c/o Stephen M. Merrick
30 N. LaSalle Street
Suite 3500
Chicago, IL 60602
Any notice mailed in accordance with the provisions of this Agreement shall be
deemed given or effective on the third day following the date of mailing. Any
party to this Agreement may change the address to which notices to such party
shall be given by proper notice given hereunder.
8. Severability. If any provision of this Agreement or any part hereof
or application hereof to any person or circumstance shall be finally determined
by a court of competent jurisdiction to be invalid or unenforceable to any
extent, the remainder of this Agreement, or the remainder of such provision or
the application of such provision to persons or circumstances other than those
as to which it has been held invalid or unenforceable, shall not be affected
thereby and each provision of this Agreement shall remain in full force and
effect to the fullest extent permitted by law. The parties also agree that, if
any portion of this Agreement, or any part hereof or application hereof, to any
person or circumstance shall be finally determined by a court of competent
jurisdiction to be invalid or
4
<PAGE>
unenforceable to any extent, any court may so modify the objectionable provision
so as to make it valid, reasonable and enforceable.
9. Waivers. No failure by any party to exercise any of such party's
rights hereunder or to insist upon strict compliance with respect to any
obligation hereunder, and no custom or practice of the parties at variance with
the terms hereof, shall constitute a waiver by any party to demand exact
compliance with the terms hereof. Waiver by any party of any particular default
by any other party shall not affect or impair such party's rights in respect to
any subsequent default of the same or of a different nature, nor shall any delay
or omission of any party to exercise any right arising from any default by any
other party affect or impair such party's rights as to such default or any
subsequent default.
10. Governing Law. This Agreement shall be governed by and shall be
interpreted and enforced in accordance with, the laws of the State of Illinois.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
CTI INDUSTRIES CORPORATION
By: _____________________________
Authorized Officer
INVESTOR:
By: _____________________________
Authorized Representative
5
EXHIBIT 10.8
SUBSCRIPTION AGREEMENT
THIS AGREEMENT is made and entered into this 20th day of June, 1997 by
and among CTI Industries Corporation, a Delaware corporation, having its
principal place of business at 22160 N. Pepper Road, Barrington, Illinois 60010
(the "Company") and the individual whose name and signature is set forth on the
signature page hereof ("Investor").
WHEREAS, the Company is offering to a limited number of accredited
Investors the purchase of unsecured subordinated promissory notes of the Company
in the aggregate principal amount of up to $950,000 and warrants to purchase
common stock of the Company at the price per share of $1.20 per share for an
aggregate purchase price in the principal amount of the unsecured subordinated
promissory notes.
NOW, THEREFORE, in consideration of the premises and of the terms,
covenants and conditions hereinafter contained, the parties hereto agree as
follows:
1. Subscription.
1.1 The undersigned Investor hereby subscribes for the purchase of (i)
a 10% Unsecured Subordinated Promissory Note of the Company, in the form
attached hereto as Exhibit A, (sometimes hereinafter referred to as the "Note"),
in the principal amount set forth on the signature page of this agreement and
(ii) a Warrant, in the form attached hereto as Exhibit B, to purchase Common
Stock of the Company at the purchase price per share of $1.20 for that number of
shares determined by dividing the principal amount of the Note issued hereunder
by the Warrant purchase price per share. The purchase price for the Note and the
Warrant issued hereunder shall be the principal amount of the Note to be issued
hereunder. With this Subscription Agreement, the Investor tenders to the Company
a check, payable to the Company, in the amount of the purchase price.
1.2 The Investor acknowledges that this Agreement shall not be binding
upon the Company unless and until the Company accepts this subscription and
executes this Agreement and that the Company reserves the right, in the sole
discretion of the Company, to accept or reject this subscription.
2. Representations and Warranties of the Company. The Company represents
and warrants to Investor as follows:
2.1 The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware and is qualified to do
business and in good standing in the State of Illinois. Illinois and Delaware
are the only states where the nature of the
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<PAGE>
assets and business of the Company require such qualification. CTI Balloons Ltd.
is a corporation duly organized and validly existing under the laws of the
United Kingdom and has its principal place of business in Rugby, United Kingdom.
The Company owns all of the issued and outstanding capital stock of CTI
Balloons, Ltd.
2.2 The Company is authorized to issue 8,000,000 shares of Common
Stock, par value $.075 per share, and 4,000,000 shares of Preferred Stock, par
value $.35 per share. There are presently issued and outstanding 3,467,322
shares of Common Stock or warrants to purchase Common Stock and 2,857,143 shares
of Preferred Stock.
2.3 The Board of Directors of the Company has proposed the adoption of,
and has submitted to the shareholders for approval, the 1997 CTI Industries
Corporation Stock Option Plan pursuant to which the Company may issue options to
purchase up to 300,000 shares of Common Stock of the Company.
2.4 The Company has entered into a letter of intent with Joseph Stevens
& Company, Inc., a copy of which has been provided to the Investor, pursuant to
which the Company may offer, in a public offering, shares of Common Stock and
warrants to purchase common stock of the Company. In connection with such
proposed public offering and in the event of its completion and consummation:
2.4.1 Joseph Stevens & Company, Inc. would receive options to purchase
shares of Common Stock of the Company as provided herein;
2.4.2 It is contemplated that the outstanding shares of
Preferred Stock of the Company will be converted to shares of Class B
Common Stock which will have certain voting rights but which will not
have dividend or other rights or preferences in relation to the Common
Stock of the Company;
2.4.3 It is contemplated that there will be a reverse split of
the outstanding Common Stock of the Company in the amount of
approximately one share for each 2.6 shares outstanding.
There can be no assurance that the contemplated public offering of the Common
Stock of the Company will be completed on the terms provided in such letter of
intent or on any other terms.
2.5 Except as provided in paragraphs 2.2, 2.3 and 2.4 hereof, (i) there
are no contracts, options or other agreements or understandings pursuant to
which the Company is or may be obligated to issue Common Stock or any other
security, (ii) there are no obligations of the Company outstanding which may be
converted into securities and (iii) there are no securities of the Company
issued or outstanding. All shares of Common Stock and Preferred Stock of the
Company presently issued and outstanding are duly authorized and validly issued,
fully paid and non-assessable. No holder of outstanding shares of the Common
Stock or Preferred Stock of the Company has any preemptive right or right of
first refusal with respect to the issuance by the Company of any of its stock.
2
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2.6 Investor has been provided with copies of the audited statement of
income and balance sheet of the Company as of October 31, 1996 and for the year
then ended and the unaudited statement of income and balance sheet of the
Company as of April 30, 1997 and for the six months then ended. Such financial
statements fairly present the financial condition of the Company as of the dates
thereof and the results of operation of the Company for the periods then ended.
2.7 This Agreement, the offering contemplated herein, the Note and the
Warrant have been duly authorized by the Board of Directors of the Company and
this Agreement, the Note and the Warrant, when executed and delivered on behalf
of the Company, shall constitute valid and binding obligations of the Company,
enforceable in accordance with their terms. The execution and performance of
this Agreement and the Note and Warrant to be issued hereunder will not violate,
with or without the giving of notice or the passage of time, any applicable law
or regulation and will not conflict with, or result in the breach of, any of the
terms, conditions or provisions of, or constitute a default under, any corporate
charter, bylaw, agreement or other instrument to which the Company is a party or
by which it, or any of its property, is bound.
2.8 Except as set forth in the audit letter of counsel to the Company
dated May 14, 1997, a copy of which has been provided to Investor, there are no
actions, suits, proceedings or investigations pending, threatened against or
affecting the Company, at law or in equity, or before any federal, state, or
municipal agency or any instrumentality which involves the likelihood of any
judgment of liability, not fully covered by insurance, against the Company or
which may result in any material adverse change in the business, operations,
properties, assets or condition, financial or otherwise, of the Company.
3. Representations, Warranties and Acknowledgments of Investor. The Investor
represents and warrants to the Company, and acknowledges and agrees, as follows:
3.1 Investor has been associated with the Company for a number of years
and has full and detailed knowledge and information concerning the business,
condition and prospects of the Company. Investor has reviewed this Agreement and
all documents referred to herein and, in entering into this transaction, is not
relying on information other than that contained in this Agreement or referred
to herein or in any statement or document provided to Investor and executed by
an officer of the Company.
3.2 Investor has had a reasonable opportunity to ask questions of and
receive answers from the Company concerning the Company and the offering by it
if the Notes and Warrants herein and all such questions, if any, have been
answered to the full satisfaction of the undersigned.
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3.3 The Investor has such knowledge and experience in financial and
business matters that the undersigned is capable of evaluating the merits and
risks involved in an investment in the Note and Warrant which are a highly
speculative investment involving a high degree of risk and that the Investor
could lose his or her entire investment.
3.4 The Investor understands that (a) the Note, the Warrant and any
shares of Common Stock of the Company issued by reason of the exercise of the
Warrant (hereinafter sometimes referred to as the "Securities"), have not been
registered under the Securities Act of 1933, as amended (the "Act") or the
securities law of any state, based on exemptions from such registration
requirements for non-public offerings and (b) the Securities are and will be
"restricted securities" as said term is defined in Rule 144 of the Rules
promulgated under the Act; (c) in the event that the Company does proceed with a
public offering of its Common Stock as provided in paragraph 2.4 hereof, the
Investor will be required to execute an agreement with the underwriter pursuant
to which the Investor will not be permitted to sell any shares of Common Stock
received upon the exercise of the Warrant for a period of 18 months from the
effective date of the public offering; (d) the Securities may not be sold or
otherwise transferred unless they have first been registered under the Act and
all applicable state securities laws, or unless exemptions from such
registration provisions are available with respect to such resale or transfer;
(e) the Company is under no obligation to register any of the Securities or to
take any action to make any exemption from any such registration provisions
available; (f) the Securities will bear a legend to the effect that the transfer
of the securities represented thereby is subject to the provisions hereof; and
(g) stop transfer instructions will be placed on the records of the Company or
with the transfer agent for the Note, the Warrant and any shares of Common Stock
of the Company issued by reason of the exercise of the Warrant.
3.5 The Investor is acquiring the Note and Warrant, and any shares of
Common Stock received by reason of exercise of the Warrant, solely for the
account of Investor, for investment purposes only, and not with a view to the
resale or distribution thereof. Investor further represents that his or her
financial condition is such that he or she is not under any present necessity or
constraint to dispose of such securities to satisfy any existing or contemplated
debt or undertaking. Investor (I) has not offered or sold any of the Securities
within the meaning of the Act, (ii) does not have in mind the sale of any of the
Securities either currently or after the passage of a fixed or determinable
period of time or upon the occurrence or non-occurrence of any predetermined
event or circumstance, (iii) has no present or contemplated agreement,
undertaking, arrangement, obligation, indebtedness or commitment providing for
or which is likely to compel a disposition of any of the Securities and (iv) is
not aware of any circumstance presently in existence which is likely in the
future to promote a disposition of the Securities.
3.6 The Investor will not sell or otherwise transfer any of the
Securities, or any interest therein, unless and until (a) such Securities first
shall have been registered under the Act and all applicable state securities
laws or (b) the Investor first shall have delivered to the Company a written
opinion of counsel, which counsel and opinion (in form and substance) shall be
reasonably satisfactory to the Company, to the effect that the proposed sale or
transfer is exempt from the registration provisions of the Act and all
applicable state securities laws.
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<PAGE>
3.7 The Investor (a) is a natural person, is at least 21 years of age
and is under no legal disability to contract, (b) is a resident of the State
specified on the signature page hereof and has no present intention of changing
his residence from such State, and (c) has full power and authority to execute
and deliver this Agreement and to perform the obligations of the Investor
hereunder. This Agreement is a legally binding obligation of the Investor in
accordance with its terms.
3.8 The Investor is an "accredited investor" as such term is defined in
Regulation D of the Rules and Regulations promulgated under the Act.
3.9 Investor acknowledges and understands that:
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND ARE
BEING OFFERED AND SOLD IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION
REQUIREMENTS OF SAID ACT AND SUCH LAWS. THE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES
COMMISSION OR ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING
AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OF THIS OFFERING OR THE ACCURACY
ADEQUACY OF THE INFORMATION PROVIDED HEREIN. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
4. Indemnity. The Investor agrees to indemnify the Company, and each of its
officers, directors, employees and agents, and hold them harmless from and
against any and all losses, damages, liabilities, costs and expenses which any
of them may sustain or incur in connection with the breach by Investor of any
representation, warranty or covenant made by the Investor herein.
5. Notices. All notices or other communications required or permitted to be
given hereunder shall be in writing and shall be (i) delivered personally, (ii)
mailed, postage prepaid, or (iii) telecopied and a copy mailed to the parties,
as follows:
If to the Company Mr. Stephen M. Merrick
Chief Executive Officer
CTI Industries Corporation
22160 North Pepper Road
Barrington, IL 60010
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<PAGE>
If to Investor: At the address shown on the
signature page hereof
Any notice mailed or telecopied in accordance with the provisions hereof shall
be deemed received on the third day following the date of mailing or
transmission. Either party hereto may change the address to which notices to
such party may be given hereunder by serving a proper notice of such change of
address to the other party.
6. Entire Agreement. This Agreement and the Note and Warrant constitutes the
entire agreement among the parties hereto with respect to the subject matter
hereof and supersedes all prior written or oral negotiations, representations,
understandings, commitments, contracts or agreements with respect to the subject
matter hereof. This Agreement and the Note and Warrant may not be modified
except by written instrument signed by the parties hereto.
7. Severability. Whenever possible, each paragraph of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law. If
any paragraph of this Agreement shall be unenforceable or invalid under
applicable law, such paragraph shall be ineffective only to the extent and
duration of such unenforceability or invalidity and the remaining substance of
such paragraph and the remaining paragraphs of this Agreement shall in such
event continue to be binding and in full force and effect.
8. Waivers. No failure by any party to exercise any of such party's rights
hereunder or to insist upon strict compliance with respect to any obligation
hereunder, and no custom or practice of the parties at variance with the terms
hereof, shall constitute a waiver by any party to demand exact compliance with
the terms hereof. Waiver by and party of any particular default by any other
party shall not affect or impair such party's rights in respect to any
subsequent default of the same or of a different nature, nor shall any delay or
omission of any party to exercise any right arising from any default by any
other party affect or impair such party's rights as to such default or any
subsequent default.
9. Benefit and Assignment. This Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and their respective heirs, personal
representatives and successors in interest. This Agreement and any rights or
obligations hereunder may not be assigned by any party hereto.
10. Governing Law; Actions. This Agreement shall be governed by and shall be
interpreted and enforced in accordance with, the laws of the State of Illinois.
The Investor (a) agrees that any legal suit, action or proceeding arising out of
or related to this Agreement shall be instituted exclusively in Illinois Circuit
Courts, County of Cook, or in the United States District Court for the Northern
District of Illinois, each and any of which shall apply Illinois law, without
reference to its conflicts of laws rules and principles, (b) waives any
objection Investor may have now or hereafter to the venue of any such suit,
action or proceeding, and (c) irrevocably consents to the
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<PAGE>
jurisdiction of the Illinois Circuit Courts, County of Cook, and the United
States District Court for the Northern District of Illinois in any such suit,
action or proceeding. The Investor further agrees to accept and acknowledge
service of any and all process which may be served in any such suit, action or
proceeding in the Illinois Circuit Courts, County of Cook or the United States
District Court for the Northern District of Illinois.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, Investor has executed this Subscription Agreement
this ____ day of June, 1997.
INVESTOR:
________________________________________
(Signature)
________________________________________
(Print Name)
________________________________________
________________________________________
(Address)
Social Security #____________________
Principal Amount of Note
Subscribed For:
________________________________________
ACCEPTANCE OF SUBSCRIPTION:
CTI INDUSTRIES CORPORATION
By:________________________________________
________________________________________
Title
Date:______________________________________
8
<PAGE>
EXHIBIT A TO
EXHIBIT 10.8
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. NO INTEREST IN THIS NOTE MAY BE OFFERED OR SOLD EXCEPT
PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR (ii) AN EXEMPTION FROM
REGISTRATION UNDER SAID ACT AND WHERE THE HOLDER HAS FURNISHED TO THE
COMPANY AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY
THAT AN EXEMPTION FROM REGISTRATION UNDER SAID ACT IS AVAILABLE.
CTI INDUSTRIES CORPORATION
10% UNSECURED SUBORDINATED
PROMISSORY NOTE
$__________________________ As of June , 1997
Chicago, Illinois
FOR VALUE RECEIVED, the undersigned, CTI Industries Corporation, a
Delaware corporation (the "Payor"), having its executive office and principal
place of business 22160 N. Pepper Road, Barrington, IL 60010, hereby promises to
________________________________________ (the "Payee"), having an address at
________________________________________ on June 30, 1999 (the "Maturity Date"),
at the Payee's address set forth hereinabove or, at such other place as the
Payee shall hereafter specify in writing, the principal sum of
___________________________________, ($__________), in legal tender of the
United States of America. This Note may be prepaid, in whole or in part, at the
option of the Company at any time without premium or penalty.
This Note is part of an issue of notes (the "Notes") being issued in
the principal amount of up to aggregate of $950,000 together with warrants to
purchase Common Stock of the Company.
This Note is unsecured and shall rank pari passu with all other Notes.
1. Interest and Payment
1.1 The unpaid principal amount hereof outstanding from time
to time shall bear simple interest from the date hereof at the rate of
10% per annum until the first to occur of
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the Maturity Date or the date on which the entire principal balance
hereof shall have been paid.
1.2 Interest shall accrue and be payable on a calendar
quarterly basis on each September 30, December 31, March 31, and June
30 during which any portion of the principal amount of this Note shall
be outstanding.
1.3 If payment of the principal amount hereof and interest
accrued thereon, is not made on or before the Maturity Date, interest
shall thereafter accrue and be payable at an interest rate equal to the
lessor of (i) the prime rate plus 8% or (ii) the maximum rate permitted
by law. For purposes of this Note, "prime rate" shall mean the prime
rate, as adjusted from time to time, as established and reported by the
First National Bank of Chicago, in Chicago, Illinois, from time to time
or, if such rate is no longer reported by such bank, then the rate
established by any comparable bank as its prime rate, from time to
time.
2. Replacement of Note.
2.1. In case this Note is mutilated, destroyed, lost or
stolen, the Payor shall, at its sole expense, execute, register and
deliver, a new Note, in exchange and substitution for this Note, if
mutilated, or in lieu of and substitution for this Note, if destroyed,
lost or stolen. In the case of destruction, loss or theft, the Payee
shall furnish to the Payor indemnity reasonably satisfactory to the
Payor, and in any such case, and in the case of mutilation, the Payee
shall also furnish to the Payor evidence to its reasonable satisfaction
of the mutilation, destruction, loss or theft of this Note and of the
ownership thereof. Any replacement Note so issued shall be in the same
outstanding principal amount as this Note and dated the date to which
interest shall have been paid on this Note, or if no interest shall
have yet been paid, dated the date of this Note.
2.2. Every Note issued pursuant to the provisions of Section
2.1 hereof in substitution for this Note shall constitute an additional
contractual obligation of the Payor, whether or not this Note shall be
found at any time, or be enforceable by anyone.
3. Events of Default. If any of the following conditions, events or
acts shall occur, this Note shall become immediately due and payable:
3.1. The dissolution of the Payor or any vote in favor thereof
by the Board of Directors and stockholders of the Company; or
3.2. The Payor's insolvency, assignment for the benefit of
creditors, application for or appointment of a receiver, filing of a
voluntary or involuntary petition under any provision of the Federal
Bankruptcy Code or amendments thereto or any other federal or state
statute affording relief to debtors; or there shall be commenced
against the Payor any such proceeding or filed against the Payor any
such application or petition which proceeding, application or petition
is not dismissed or withdrawn within sixty (60) days of commencement or
filing as the case may be; or
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<PAGE>
3.3. The failure by the Payor to make any payment of any
amount of principal on, or accrued interest under, this Note, or any of
the Notes as and when the same shall become due and payable; or
3.4. The sale by the Payor of all or substantially all of its
assets (other than the sale of inventory in the ordinary course of
business), or the merger or consolidation by the Payor with or into
another corporation, except for mergers or consolidations where the
Payor is the surviving entity or where the surviving entity expressly
accepts and assumes all of the obligations of the Payor under all of
the Notes; or
3.5. The commencement of a proceeding to foreclose the
security interest or lien in any property or assets to satisfy the
security interest or lien therein of any secured creditor of the Payor
whose debt is in excess of $100,000; or
3.6. The entry of a final judgment for the payment of money in
excess of $100,000 by a court of competent jurisdiction against the
Payor, which judgment the Payor shall not discharge (or provide for
such discharge) in accordance with its terms within sixty (60) days of
the date of entry thereof, or procure a stay of execution thereof
within sixty (60) days from the date of entry thereof and, within such
sixty (60) day period, or such longer period during which execution of
such judgment shall have been stayed, appeal therefrom and cause the
execution thereof to be stayed during such appeal; or
3.7. Any attachment or levy, or the issuance of any note of
eviction against the assets or properties of the Payor involving an
amount in excess of $100,000 which attachment, levy or issuance is not
dismissed, bonded, or otherwise terminated within sixty (60) days of
the effectiveness of such attachment, levy or issuance; or
3.8. The default in the due observance or performance of any
material covenant, condition or agreement on the part of the Payor to
be observed or performed pursuant to the terms of this Note and such
default shall continue uncured for thirty (30) days after written
notice thereof, specifying such default, shall have been given to the
Payor by the holder of the Note; then, in any such event and at any
time thereafter (and, in the case of an event described in Subsection
3.5 or a default in payment of accrued interest and/or principal as
described in Subsection 3.3, upon 30 days written notice), while such
event is continuing, the Payee shall have the right to declare an event
of default hereunder ("Event of Default"), provided that upon the
occurrence of an event described in Subsections 3.1 or 3.2 such event
shall be deemed to be an Event of Default hereunder whether or not the
Payee makes such a declaration (an "Automatic Default"), and the
indebtedness evidenced by this Note shall immediately upon such
declaration or Automatic Default become due and payable, both as to
principal and interest, without presentment, demand, protest or other
notice of any kind, all of which are hereby expressly waived,
notwithstanding anything contained herein to the contrary.
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<PAGE>
4. If any one or more defaults shall occur and be continuing, the Payee
may proceed to protect and enforce such Payee's rights either by suit in equity
or by action at law, or both, whether for the specific performance of any
covenant, condition or agreement contained in this Note or in any agreement or
document referred to herein or in aid of the exercise of any power granted in
this Note or in any agreement or document referred to herein, or proceed to
enforce the payment of this Note or to enforce any other legal or equitable
right of the Payee of this Note. No right or remedy herein or in any other
agreement or instrument conferred upon the holder of this Note is intended to be
exclusive of any other right or remedy, and each and every such right or remedy
shall be cumulative and shall be in addition to every other right and remedy
given hereunder or now or hereafter existing at law or in equity or by statute
or otherwise.
5. Unconditional Obligation; Fees; Waivers; Other.
5.1. The obligations to make the payments provided for in this
Note are absolute and unconditional and not subject to any defense,
set-off, counterclaim, rescission, recoupment or adjustment whatsoever.
5.2. No forbearance, indulgence, delay or failure to exercise
any right or remedy with respect to this Note shall operate as a
waiver, nor as an acquiescence in any default, nor shall any single or
partial exercise of any right or remedy preclude any other or further
exercise thereof or the exercise of any other right or remedy.
5.3. This Note may not be modified except by a writing duly
executed by the Payor and the Payee.
5.4. The Payor hereby expressly waives demand and presentment
for payment, notice of nonpayment, notice of dishonor, protest, notice
of protest, bringing of suit, and dili gence in taking any action to
collect amounts called for hereunder, and shall be directly and
primarily liable for the payment of all sums owing and to be owing
hereon, regardless of and without any notice, diligence, act or
omission with respect to the collection of any amount called for
hereunder or in connection with any right, lien, interest or property
at any and all times which the Payee had or is existing as security for
any amount called for hereunder.
5.5. The Payor shall bear all of its expenses, including
attorneys' fees incurred in connection with the preparation of this
Note.
6. Subordination. The payment of principal and interest on this Note
shall be subordinate in payment and right of payment to the payment or provision
for payment in full of all other indebtedness existing as of now or hereafter
incurred by the Payor.
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<PAGE>
7. Restrictions on Transfer. By its acceptance of this Note, the Payee
acknowledges that this Note is subject to the provisions of Payee's Subscription
Agreement submitted to the Payor subscribing for this Note, this Note has not
been registered under the securities laws of the United States of America or any
state thereof and Payee represents that this Note has been acquired for
investment and no interest in this Note may be offered for sale, sold, delivered
after sale, transferred, pledged, or hypothecated in the absence of registration
and qualification of this Note under applicable federal and state securities
laws or an opinion of counsel reasonably satisfactory to the Payor that such
registration and qualification are not required. In addition, this Note may only
be transferred to a person deemed to be an "accredited investor" as such term is
defined under Rule 501(a) of Regulation D promulgated under the Securities Act
of 1933, as amended.
8. Miscellaneous.
8.1. The headings of the various paragraphs of this Note are
for convenience of reference only and shall in no way modify any of the
terms or provisions of this Note.
8.2. All notices required or permitted to be given hereunder
shall be in writing and shall be deemed to have been duly given when
personally delivered, delivered by Federal Express or other national
overnight courier, three days after mailing if sent by registered or
certified mail, return receipt requested, postage prepaid, or on the
date of delivery if delivered by telecopy, receipt confirmed, provided
that a confirmation copy is sent on the next business day by registered
or certified mail, return receipt requested and postage prepaid, to the
address of the intended recipient set forth in the preamble to this
Note or at such other address as the intended recipient shall have
hereafter given to the other party hereto pursuant to the provisions
hereof.
8.3. This Note and the obligations of the Payor and the rights
of the Payee shall be governed by and construed in accordance with the
laws of the State of Illinois, without regard to its conflicts of laws
rules or principles, with respect to contracts made and to be fully
performed therein.
8.4. Any legal suit, action or proceeding arising out of or
relating to this Note will be instituted exclusively in the Circuit
Court of Cook County, Illinois, or in the United States District Court
for the Northern District of Illinois, each and any of which shall
apply Illinois law without reference to its conflicts of laws
principles or rules. The Payor and the Payee (by accepting this Note)
each waives any objection which the Payor or the Payee may have now or
hereafter to the venue of any such suit, action or proceeding, and
irrevocably consents to the jurisdiction of the Illinois Circuit
Courts, County of Cook and the United States District Court for the
Northern District of Illinois in any such suit, action or proceeding.
The Payor and Payee (by accepting this Note) each further agree to
accept and acknowledge service of any and all process which may be
served in any such suit, action or proceeding in the Illinois Circuit
Courts, County of Cook or in the United States District Court for the
Northern District of Illinois
.
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<PAGE>
8.5. This Note shall bind the Payor and its successors and
assigns.
8.6 Except in the ordinary course of business (which includes,
but is not limited to, borrowing monies), Payor will not borrow any
additional amounts without the written consent of a majority of the
holders of Notes; such majority to be determined not by reference to
the number of holders of the Notes but by reference to the then
outstanding principal amount of the Notes.
CTI INDUSTRIES CORPORATION
By: ___________________________
Howard W. Schwan, President
ATTEST:
_______________________ , Secretary
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<PAGE>
EXHIBIT B TO
EXHIBIT 10.8
The securities represented by this Warrant have not
been registered under the Securities Act of 1933, and
thus may not be transferred unless registered under
that Act or unless an exemption from registration is
available.
Warrant dated June 30, 1997, to purchase _________
Shares of Common Stock on or before June 30, 2002.
STOCK PURCHASE WARRANT
TO PURCHASE COMMON STOCK OF
CTI INDUSTRIES CORPORATION
This certifies that, for value received, , or his assigns, is entitled
to subscribe for and purchase from CTI INDUSTRIES CORPORATION, a Delaware
corporation (hereinafter called the "Company"), at a price of One Dollar Twenty
cents ($1.20) per share (subject to adjustment as set forth in paragraph 3
below) and at any time after the date hereof to and including June 30, 2002,
(subject to adjustment as set forth in paragraph 3 below) fully paid and
non-assessable shares of the Company's common stock, par value $.075 per share
(hereinafter referred to as the "Common Stock").
This Warrant is subject to the following provisions, terms and
conditions:
1. Exercise; Issuance of Certificates; Payment for Shares. The rights
represented by this Warrant may be exercised by the holder hereof at any time
within the period specified above, in whole or in part (but not as to a
fractional share of Common Stock), by the surrender of this Warrant (properly
endorsed if required) at the principal office of the Company (or such other
office of the Company as it may designate by notice in writing to the holder
hereof at the address of such holder appearing on the books of the Company) (a)
specifying the number of shares of Common Stock being purchased and (b)
accompanied by a check payable to the Company for the purchase price for such
shares. The Company agrees that the shares so purchased shall be deemed to be
issued to the holder hereof as the record owner of such shares as of the close
of business on the date on which this Warrant shall have been surrendered and
payment made for such shares as aforesaid. Certificates for the shares so
purchased shall be delivered to the holder hereof within a reasonable time, not
exceeding ten days, after the rights represented by this Warrant shall have been
so exercised, and, unless this Warrant has expired, a new Warrant of like tenor,
representing the right to purchase the number of shares, if any, with respect to
which this Warrant shall not then have been exercised, shall also be delivered
to the holder hereof within such time.
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2. Shares to be Fully Paid; Reservation of Shares. The Company
covenants and agrees:
(a) that all shares of Common Stock which may be issued upon
exercise of the rights represented by this Warrant will, upon issuance,
be fully paid and nonassessable and free from all taxes, liens and
charges with respect to the issue thereof;
(b) without limiting the generality of the foregoing, that the
Company will from time to time take all such action as may be required
to assure that the par value, if any, per share of Common Stock is at
all times equal to or less than the then effective Warrant Purchase
Price (as hereinafter defined) per share of Common Stock issuable
pursuant to this Warrant;
(c) that, during the period within which the rights
represented by this Warrant may be exercised, the Company will at all
times have authorized, and reserved for the purpose of issue or
transfer upon exercise of the rights evidenced by this Warrant, a
sufficient number of shares of Common Stock to provide for the full
exercise of the rights represented by this Warrant;
(d) that the Company will take all such action as may be
necessary to assure that the Common Stock issuable upon the exercise
hereof may be so issued without violation of any applicable law or
regulation; and
(e) that the Company will not take any action which would
result in any adjustment of the Warrant Purchase Price if (I) the total
number of shares of Common Stock issuable after such action upon
exercise of this Warrant, together with all shares of Common Stock then
outstanding and all shares of Common Stock then issuable upon exercise
of all Options (as hereinafter defined) and upon conversion of all
Convertible Securities (as hereinafter defined) then outstanding, would
exceed (ii) the total number of shares of Common Stock then authorized
by the Company's Articles of Incorporation (all such issued and
issuable Common Stock being called the "Potentially Outstanding Common
Stock").
In the event any stock or securities of the Company other than Common Stock are
issuable upon the exercise hereof, the Company will take or refrain from taking
any action referred to in clauses (a) through (e) of this paragraph 2 as though
such clauses apply, equally, to such other stock or securities then issuable
upon the exercise hereof.
3. Warrant Purchase Price. The provisions set forth in paragraphs
1 and 2 above are, however, subject to the following:
3.1 Adjustment of Warrant Purchase Price; Resulting Adjustment
of Number of Purchasable Shares. The initial Warrant Purchase Price of
One Dollar Twenty Cents ($1.20) per share of Common Stock shall be
subject to adjustment from time to time as hereinafter provided (such
price or such price as last adjusted pursuant to the terms
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<PAGE>
hereof, as the case may be, is herein called the "Warrant Purchase
Price"). Upon each adjustment of the Warrant Purchase Price, the holder
of this Warrant shall thereafter be entitled to purchase, at the
Warrant Purchase Price resulting from such adjustment, the number of
shares of Common Stock obtained by multiplying the Warrant Purchase
Price in effect immediately prior to such adjustment by the number of
shares of Common Stock purchasable pursuant hereto immediately prior to
such adjustment and dividing the product thereof by the Warrant
Purchase Price resulting from such adjustment.
3.2 Adjustment of Warrant Purchase Price Upon Issuance of
Stock. If and whenever after the date hereof the Company shall issue or
sell any shares of its Common Stock for a consideration per share less
than the Warrant Purchase Price in effect immediately prior to the time
of such issue or sale (except if such issue or sale shall be made
pursuant to the exercise of Options or Convertible Securities, as
defined below, outstanding on the date hereof), then, forthwith upon
such issue or sale, the Warrant Purchase Price shall be reduced to the
price, calculated to the nearest cent, determined by dividing (a) the
sum of (I) the number of shares of Common Stock outstanding immediately
prior to such issue or sale multiplied by the then existing Warrant
Purchase Price and (ii) the consideration, if any, received by the
Company upon such issue or sale, by (b) the total number of shares of
Common Stock outstanding immediately after such issue or sale. No
adjustment of the Warrant Purchase Price, however, shall be made in an
amount less than $0.01 per share, but any such lesser adjustment shall
be carried forward and shall be made at the time and together with the
next subsequent adjustment which together with all adjustments so
carried forward shall amount to $0.01 per share or more.
For purposes of this paragraph 3.2, the following paragraphs
3.3 to 3.15, inclusive, subject to the exception set forth above, shall
also be applicable:
3.3 Issuance of Rights or Options. In case at any time the
Company shall in any manner grant (whether directly or by assumption in
a merger or otherwise) any rights to subscribe for or to purchase, or
any options for the purchase of, Common Stock or any stock or
securities convertible into or exchangeable for Common Stock (such
rights or options being herein called "Options" and such convertible or
exchangeable stock or securities being herein called "Convertible
Securities"), whether or not such Options or the right to convert or
exchange any such Convertible Securities are immediately exercisable,
and the price per share for which Common Stock is issuable upon the
exercise of such Options or upon conversion or exchange of such
Convertible Securities (determined as provided in the following
sentence) shall be less than the Warrant Purchase Price in effect
immediately prior to the time of granting of such Options, then the
maximum number of shares of Common Stock issuable upon the exercise of
all such Option or upon conversion or exchange of the total maximum
amount of such Convertible Securities shall be deemed to have been
issued for such price per share as of the date of the granting of such
Options and thereafter shall be deemed to be outstanding. The price per
share for which Common Stock is issuable, as referred to in the
preceding sentence, shall be determined by dividing (a) the sum of (I)
the total amount, if any, received or receivable by the Company as
consideration for the granting of such Options, plus (ii) the minimum
aggregate amount of
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additional consideration payable to the Company upon the exercise of
all such Options, plus (iii) in the case of all such Options that
relate to Convertible Securities, the minimum aggregate amount of
additional consideration, if any, payable upon the issue or sale of all
such Convertible Securities (to the extent not counted under the
immediately preceding clause (ii) and upon the conversion or exchange
of all such Convertible Securities into Common Stock, by (b) the total
maximum number of shares of Common Stock issuable upon the exercise of
such Options or upon the conversion or exchange of all such Convertible
Securities. The consideration received or receivable by the Company
shall in each case be determined in accordance with paragraph 3.7
below. Except a otherwise provided in paragraph 3.5 below, no
adjustment of the Warrant Purchase Price shall be made upon the actual
issue of such Common Stock or of such Convertible Securities upon
exercise of such Options or upon the actual issue of such Common Stock
upon conversion or exchange of such Convertible Securities.
3.4 Issuance of Convertible Securities. In case the Company
shall in any manner issue (whether directly or by assumption in a
merger or otherwise) or sell any Convertible Securities, whether or not
the rights to exchange or convert thereunder are immediately
exercisable, and the price per share for which Common Stock is issuable
upon such conversion or exchange (determined as provided in the
following sentence) shall be less than the Warrant Purchase Price in
effect immediately prior to the time of such issue or sale, then the
total maximum number of shares of Common Stock issuable upon conversion
or exchange of all such Convertible Securities shall be deemed to have
been issued for such price per share as of the date of the issue or
sale of such Convertible Securities and thereafter shall be deemed to
be outstanding, provided that (a) except as otherwise provided in
paragraph 3.5 below, no adjustment of the Warrant Purchase Price shall
be made upon the actual issue of such Common Stock upon conversion or
exchange of such Convertible Securities, and (b) if any such issue or
sale of such Convertible Securities is made upon exercise of any
Options for which adjustments of the Warrant Purchase Price have been
or are to be made pursuant to other provisions of this paragraph 3, no
further adjustment of the Warrant Purchase Price shall be made by
reason of such issue or sale. The price per share for which Common
Stock is issuable, as referred to in the preceding sentence, shall be
determined by dividing (I) the sum of (A) the total amount received or
receivable by the Company as consideration for the issue or sale of
such Convertible Securities, plus (B) the minimum aggregate amount of
additional consideration, if any, payable upon the conversion or
exchange of such Convertible Securities into Common Stock, by (ii) the
total maximum number of shares of Common Stock issuable upon the
conversion or exchange of such Convertible Securities. The
consideration received or receivable by the Company shall in each case
be determined in accordance with paragraph 3.7 below.
3.5 Change in Option Price or Conversion Rate. Upon the
happening of any of the following events, namely, if the purchase price
provided for in any Option referred to in paragraph 3.3 above and still
outstanding, the additional consideration, if any, payable upon the
conversion or exchange of any Convertible Securities referred to in
paragraph 3.3 or 3.4 above and still outstanding, or the rate at which
any such Convertible Securities
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are convertible into or exchangeable for Common Stock shall change at
any time (other than under or by reason of provisions designed to
protect against dilution), the Warrant Purchase Price in effect at the
time of such event shall forthwith be readjusted to the Warrant
Purchase Price which would have been in effect at such time had such
Options or Convertible Securities provided for such changed purchase
price, additional consideration, or conversion rate, as the case may
be, at the time initially granted, issued, or sold. On the expiration
of any Option referred to in paragraph 3.3 above prior to the exercise
thereof or the termination of any right to convert or exchange any
Convertible Securities referred to in paragraph 3.3 or 3.4 above prior
to the exercise of such right, the Warrant Purchase Price then in
effect hereunder shall forthwith be increased to the Warrant Purchase
Price which would have been in effect at the time of such expiration or
termination had such Option or Convertible Securities, to the extent
outstanding immediately prior to such expiration or termination, never
been issued, and the Common Stock issuable thereunder shall no longer
be deemed to be outstanding for the purposes of any calculation under
paragraph 3.3 or 3.4 above.
3.6 Determination of Consideration Upon Dividend or Other
Distribution. In case the Company shall declare a dividend or make any
other distribution upon any stock of the Company payable in Common
Stock, Options or Convertible Securities, any Common Stock, Options or
Convertible Securities, as the case may be, issuable in payment of such
dividend or distribution shall be deemed to have been issued or sold
without consideration.
3.7 Consideration for Stock. In case any shares of Common
Stock, Options or Convertible Securities shall be issued or sold for
cash, the consideration received therefor shall be deemed to be the
amount received by the Company therefor, without deduction therefrom of
any expenses incurred or any reasonable underwriting commissions or
concessions paid or allowed by the Company (or deducted from amounts
received by the Company) in connection therewith. In case any shares of
Common Stock, Options or Convertible Securities shall be issued or sold
for a consideration other than cash, the amount of the consideration
other than cash received by the Company shall be deemed to be the fair
value of such consideration as determined reasonably and in good faith
by the Board of Directors of the Company, without deduction of any
expenses incurred or any reasonable underwriting commissions or
concessions paid or allowed by the Company (or deducted from amounts
received by the Company) in connection therewith. The amount of
consideration deemed to be received by the Company pursuant to issuance
and/or sale, pursuant to an established compensation plan of the
Company, to directors, officers or employees of the Company or any
subsidiary of the Company in connection with their employment of shares
of Common stock, Options or Convertible Securities, shall be increased
by the amount of any tax benefit realized by the Company as a result of
such issuance and/or sale, the amount of such tax benefit being the
amount by which the federal and/or state income or other tax liability
of the Company shall be reduced by reason of any deduction or credit in
respect of such issuance and/or sale. In case any Common Stock, Options
or Convertible Securities shall be issued in connection with any merger
or consolidation in which the Company is the surviving corporation
(other than any
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consolidation or merger in which the previously outstanding shares of
Common Stock of the Company shall be changed into or exchanged for the
stock or other securities of another corporation), the amount of
consideration received therefor shall be deemed to be the fair value as
determined reasonably and in good faith by the Board of Directors of
the Company of such portion of the assets and business of the
non-surviving corporation as such Board may determined to be
attributable to such shares of Common Stock, Options or Convertible
Securities, as the case may be. In the event of any consolidation or
merger of the Company in which the Company is not the surviving
corporation or in which the previously outstanding shares of Common
Stock of the Company shall be changed into or exchanged for the stock
or other securities of another corporation, or in the event of any sale
of all or substantially all of the assets of the Company for stock or
other securities of any corporation, the Company shall be deemed to
have issued a number of shares of its Common Stock computed on the
basis of the actual exchange ratio on which the transaction was
predicated and for a consideration equal to the fair market value on
the date of such transaction of all such stock or securities of the
other corporation, and if such calculation results in adjustment of the
Warrant Purchase Price, the determination of the number of shares of
Common Stock issuable upon exercise of the Warrants immediately prior
to such merger, consolidation or sale, for purposes of paragraph 3.13
below, shall be made after giving effect to such adjustment of the
Warrant Purchase Price. In case any shares of Common Stock shall be
issued (or issuable) pursuant to any Options for the purchase of the
same, the consideration deemed to be received (or receivable) therefor
shall be deemed to be the total amount, if any, received (or total
minimum amount receivable) by the Company as consideration for the
granting of such Options, plus the aggregate amount of additional
consideration paid (or minimum amount payable) to the Company upon the
exercise of such Options. In case any shares of Common Stock shall be
issued (or issuable) upon the conversion or exchange of any Convertible
Securities, the consideration deemed to be received (or receivable)
therefor shall be deemed to be the total amount received (or total
minimum amount receivable) by the Company as consideration for the
granting of any Options to subscribe to or purchase such Convertible
Securities, plus the total amount of additional consideration paid (or
minimum amount payable) to the Company as consideration for the issue
or sale of such Convertible Securities, plus the total amount of
additional consideration, if any, paid (or minimum amount payable) to
the Company upon the conversion or exchange thereof.
3.8 Record Date. In case the Company shall take a record of
the holders of its Common Stock for the purpose of entitling them to
receive a dividend or other distribution payable in Common Stock,
Options or Convertible Securities, then such record date shall be
deemed to be the date of the issue or sale of the shares of Common
stock deemed to have been issued or sold upon the declaration of such
dividend or the making of such other distribution.
3.9 Treasury Shares. The number of shares of Common Stock
outstanding at any given time shall not include shares owned or held by
or for the account of the Company, and the disposition of any such
shares shall be considered an issue or sale of Common stock for the
purposes of this paragraph 3.
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3.10 Liquidating Dividends. The Company will not declare a
dividend upon Common Stock payable otherwise than out of consolidated
earnings or consolidated earned surplus, determined in accordance with
generally accepted accounting principles, including the making of
appropriate deductions for minority interests, if any, in subsidiaries,
and otherwise than in Common Stock, unless the holder of this Warrant
shall have consented to such dividend in writing.
3.11 Subdivision or Combination of Stock. In case at any time
the Company shall in any manner subdivide its outstanding shares of
Common stock into a greater number of shares or combine such shares of
Common Stock into a smaller number of shares, then the Warrant Purchase
Price in effect immediately subsequent to such subdivision or
combination shall be equal tot he product of (a) the Warrant Purchase
Price in effect immediately prior to such subdivision or combination
multiplied by (b) a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately prior to such
subdivision or combination and the denominator of which is the number
of shares of Common Stock outstanding immediately thereafter.
3.12 Reorganization, Reclassification, Consolidation, Merger
or Sale. If any reorganization or reclassification of the capital stock
of the Company, or any consolidation or merger of the Company with
another corporation, or the sale of all or substantially all of the
Company's assets to another corporation shall be effected in such a way
that holders of Common Stock shall be entitled to receive stock,
securities or assets with respect to or in exchange for Common Stock,
then, as a condition of such reorganization, reclassification,
consolidation, merger or sale, lawful and adequate provisions shall be
made whereby the holder hereof shall thereafter have the right to
purchase and receive, upon the basis and upon the terms and conditions
specified in this Warrant and in lieu of the shares of Common Stock of
the Company immediately theretofore purchasable and receivable upon the
exercise of the rights represented hereby, such shares of stock,
securities, or assets as may be issued or payable with respect to or in
exchange for a number of outstanding shares of such stock equal to the
number of shares of such stock immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby had such
reorganization, reclassification, consolidation, merger or sale not
taken place, and in any such case appropriate provision shall be made
with respect to the rights and interests of the holder of this Warrant
to the end that the provisions hereof (including, without limitation,
provisions for adjustment of the Warrant Purchase Price and of the
number of shares purchasable and receivable upon the exercise of this
Warrant) shall thereafter be applicable, as nearly as may be, in
relation to any shares of stock, securities or assets thereafter
deliverable upon the exercise of the rights represented hereby
(including an immediate adjustment, by reason of such consolidation or
merger, of the Warrant Purchase Price to the value for the Common Stock
reflected by the terms of such consolidation or merger if the value so
reflected is less than the Warrant Purchase Price in effect immediately
prior to such consolidation or merger). In the event of a merger or
consolidation of the Company with or into another corporation as a
result of which the number of shares of common stock of the surviving
corporation greater or lesser than the number of shares of Common Stock
of the Company outstanding
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immediately prior to such merger or consolidation are issuable to
holders of Common Stock of the Company, then the Warrant Purchase Price
in effect immediately prior to such merger or consolidation shall be
adjusted in the same manner as though there were a subdivision or
combination of the outstanding shares of Common Stock of the Company.
The Company shall not effect any such consolidation, merger, or sale,
unless prior to the consummation thereof the successor corporation (if
other than the Company) resulting from such consolidation or merger of
the corporation into or for the securities of which the previously
outstanding stock of the Company shall be exchanged in connection with
such consolidation or merger, or the corporation purchasing such
assets, as the case may be, shall assume, by written instrument
executed and mailed or delivered to the holder hereof at the last
address of such holder appearing on the books of the Company, the
obligation to deliver to such holder such shares of stock, securities,
or assets as, in accordance with the foregoing provisions, such holder
may be entitled to purchase. If a purchase, tender, or exchange offer
is made to and accepted by the holders of more than 50% of the
outstanding shares of Common Stock of the Company, the Company shall
not effect any consolidation, merger, or sale with the Person having
made such offer or with any Affiliate of such Person unless, prior to
the consummation of such consolidation, merger, or sale, the holder of
this Warrant shall have been given a reasonable opportunity to then
elect to receive either the stock, securities, or assets then issuable
upon the exercise of this Warrant. As used herein, the term "Person"
shall mean and include an individual, a partnership, a corporation, a
trust, a joint venture, an unincorporated organization, and a
government or any department or agency thereof, and an "Affiliate" of
any controlling, controlled by, or under direct or indirect common
control with, such other Person. A Person shall be deemed to control a
corporation if such Person possesses, directly or indirectly, the power
to direct or cause the direction of the management and policies of such
corporation, whether through the ownership of voting securities, by
contract, or otherwise. The provisions of this paragraph 3.3 governing
the substitution of another corporation for the Company shall similarly
apply to successive instances in which the corporation then deemed to
be the Company hereunder shall either sell all or substantially all of
its properties and assets to any other corporation, shall consolidate
with or merge into any other corporation, or shall be the surviving
corporation of the merger into it of any other corporation as a result
of which the holders of any of its stock or other securities shall be
deemed to have become the holders of, or shall become entitled to, the
stock or other securities of any corporation other than the corporation
at the time deemed to be the Company hereunder.
3.13 Duty to Make Fair Adjustments in Certain Cases. If any
event occurs as to which, in the opinion of the Board of Directors of
the Company, the other provisions of this paragraph 3 are not strictly
applicable or, if strictly applicable, would not fairly protect the
purchase rights of this Warrant in accordance with the essential intent
and principles hereof, the Board of Directors shall make such
adjustments in the Warrant Purchase Price as it deems necessary to
protect such purchase rights as aforesaid, but in no event shall any
such adjustment have the effect of increasing the Warrant Purchase
Price as otherwise determined pursuant to this paragraph 3.
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3.14 Notice of Adjustment. The Company shall give to the
holder of this Warrant prompt written notice of every adjustment of the
Warrant Purchase Price, by first class mail, postage prepaid, addressed
to the address of such holder as shown on the books of the Company,
which notice shall state the Warrant Purchase Price resulting from such
adjustment and the increase or decrease, if any, in the number of
shares purchasable at such price upon the exercise of this Warrant, and
shall set forth in reasonable detail the method of calculation and the
facts upon which such calculation was based.
3.15 Other Notices. In case at any time:
(a) the Company shall declare any cash dividend upon
its Common Stock payable at a rate in excess of the rate of
the last cash dividend theretofore paid;
(b) the Company shall declare any dividend upon its
Common Stock payable in stock or make any special dividend or
other distribution (other than regular cash dividends) to the
holders of its Common Stock;
(c) the Company shall offer for subscription to the
holders of any of its Common Stock any additional shares of
stock of any class or other rights;
(d) there shall be any capital reorganization of the
Company or any reclassification of its capital stock or any
consolidation or merger of the Company with, or sale of all or
substantially all of its assets to, another corporation; or
(e) there shall be a voluntary or involuntary
dissolution, liquidation or winding up of the Company;
then, in any one or more of such cases, the Company shall give, by
first class mail, postage prepaid, addressed to the holder of this
Warrant at the address of such holder as shown on the books of the
Company, (i) at least 20 days' prior written notice of the date on
which the books of the Company shall close or a record shall be taken
for such dividend, distribution or subscription rights or for
determining rights to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation
or winding up, and (ii) in the case of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation
or winding up, at least 20 days prior written notice of the date when
the same shall take place. Any notice required by clause (i) shall also
specify, in the case of any such dividend, distribution or subscription
rights, the date on which the holders of Common Stock shall be entitled
thereto, and any notice required by clause (ii) shall also specify the
date on which the holders of Common Stock shall be entitled to exchange
their Common Stock for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up, as the case may be.
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4. Issue Tax. The issuance of certificates for shares of Common Stock
upon the exercise of this Warrant shall be made without charge to the holder of
this Warrant for any issuance tax in respect thereof.
5. Closing of Books. The Company will at no time close its transfer
books against the transfer of this Warrant or of any shares of Common Stock
issued or issuable upon the exercise of this Warrant in any manner which
interferes with the timely exercise of this Warrant.
6. No Voting Rights. This Warrant shall not entitle the holder hereof
to any voting rights or other rights as a stockholder of the Company.
7. Warrants Transferable. Subject to the restrictions referred to in
the legend set forth on the face of this Warrant, this Warrant and all rights
hereunder are transferable to any person, in whole or in part, without charge to
the holder hereof, at the office of the Company referred to in paragraph 1
above, by the holder hereof in person or by duly authorized attorney, upon
surrender of this Warrant properly endorsed. Each taker and holder of this
Warrant, by taking or holding the same, consents and agrees that this Warrant,
when endorsed in blank, shall be deemed negotiable, and that the holder hereof,
when this Warrant shall have been so endorsed, may be treated by the Company and
all other persons dealing with this Warrant as the absolute owner hereof for any
purpose and as the person entitled to exercise the rights represented by this
Warrant, or to the transfer hereof on the books of the Company, any notice to
the contrary notwithstanding. Until such transfer on such books, however, the
Company may treat the registered holder hereof as the owner for all purposes.
8. Warrant Exchangeable for Different Denominations. This Warrant is
exchangeable, upon its surrender by the holder hereof at the office of the
Company referred to in paragraph 1 above, for new Warrants of like tenor
representing in the aggregate the right to subscribe for and purchase the number
of Shares which may be subscribed for and purchased hereunder, each of such new
Warrants to represent the right to subscribe for and purchase such number of
shares as shall be designated by said holder hereof at the time of such
surrender.
9. Descriptive Headings and Governing Law. The descriptive headings of
the several paragraphs of this Warrant are inserted for convenience of reference
only and do not constitute a part of this Warrant. This Warrant is being
delivered and is intended to be performed in the State of Illinois and shall be
construed and enforced in accordance with, and the rights of the parties shall
be governed by, the laws of such State.
10. Certain Covenants of the Company. So long as this Warrant remains
outstanding, in whole or in part, the Company will, unless the holder of this
Warrant otherwise consents in writing:
(a) within 60 days after the end of each of the first three
quarterly fiscal periods in each fiscal year of the Company, deliver to
the holder of this Warrant (i) a consolidated balance sheet of the
Company and its subsidiaries, if any, as at the end of such period, and
(ii) consolidated statements of income and of surplus of the Company
and its subsidiaries, if any, for such period and (in the case of the
second and third such
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quarterly periods) for the period from the beginning of the current
fiscal year to the end of such quarterly period, setting forth in each
case in comparative form the consolidated figures for the corresponding
periods of the previous fiscal year, all in reasonable detail and
certified as prepared in accordance with generally accepted accounting
principles consistently applied, subject to exchanges resulting from
year-end audit adjustments, by the principal financial officer of the
Company; and
(b) within 90 days after the end of each fiscal year of the
Company, deliver to the holder of this Warrant (i) a consolidated
balance sheet of the Company and its subsidiaries, if any, as at the
end of such year, and (ii) consolidated statements of income and of
surplus of the Company and its subsidiaries, if any, for such year,
setting forth in each case in comparative form the consolidated figures
for the previous fiscal year, all in reasonable detail and accompanied
by an opinion thereon of independent public accountants, which opinion
shall state that such financial statements have been prepared in
accordance with generally accepted accounting principles consistently
applied and that the audit by such accountants in connection with such
financial statements has been made in accordance with generally
accepted auditing standards; and
(c) as soon as practicable, notify the holder of this Warrant
in writing of any potentially material adverse development concerning
the Company; and permit such holder of his representative to examine
the books and records of the company at any time during regular
business hours and make copies of any portions thereof desired to be
copied by such holder or his representative.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officers under its corporate seal and this Warrant to be
dated this ______ day of ____________, 1997.
CTI INDUSTRIES CORPORATION
By:_____________________________________
President
(CORPORATE SEAL)
Attest:
_____________________________________
Secretary
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SUBSCRIPTION AGREEMENT
Dated: ______________, 199__
To: CTI Industries Corporation
22160 N. Pepper Road
Barrington, Illinois
The undersigned, pursuant to the provisions set forth in the within
Warrant, hereby agrees to subscribe for and purchase shares of the Common Stock
covered by such Warrant, and makes payment herewith in full therefor at the
price per share provided by such Warrant.
Signature___________________________
Address_____________________________
____________________________________
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ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
all of the rights of the undersigned under the within Warrant, with respect to
the number of shares of Common stock set forth below, unto:
Name of Assignee Address Number of Shares
Dated: __________________, 199__
Signature___________________________
Witness_____________________________
13
EXHIBIT 10.9
E M P L O Y M E N T A G R E E M E N T
THIS AGREEMENT is made and entered into this 30th day of June, 1997
effective for the term provided herein, by and between CTI Industries
Corporation., an Illinois corporation (the "Company") and Howard W. Schwan
(hereinafter referred to as the "Executive").
WHEREAS, the Executive is presently, and for some time has been,
employed as an executive officer of the Company and has been instrumental in the
operation and management of the Company;
WHEREAS, the Company desires to be assured of the continued association
and services of Executive and Executive desires to continue in the employment of
the Company on the terms provided herein.
NOW, THEREFORE, in consideration of the premises and of the terms,
covenants and conditions hereinafter contained, the parties hereto agree as
follows:
1. Employment, Duties and Authority.
1.1 The Company hereby employs Executive and Executive hereby
accepts employment by the Company on the terms, covenants and
conditions herein contained.
1.2 The Executive is hereby employed by the Company as
President. The Executive shall have such duties, responsibilities and
authority as the by-laws of the Company shall from time to time provide
and as the Board of Directors of the Company shall from time to time
prescribe in writing.
1.3 During the term of Executive's employment hereunder, and
subject to the other provisions hereof, Executive shall devote his full
energies, interest, abilities and productive time to the performance of
his duties and responsibilities hereunder and will perform such duties
and responsibilities faithfully and with reasonable care for the
welfare of the Company. During the term of his employment hereunder,
Executive shall not perform any services for compensation for any
person, firm, partnership, company or corporation other than the
Company without the express written consent of the Board of Directors
of the Company.
2. Compensation and Benefits.
2.1 Basic Salary.
2.1.1 The Company shall pay to Executive during the
initial term of employment hereunder and each renewal term a
basic salary at an annual rate to be
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determined by the Board of Directors of the Company but not
less than the amount of $135,000. Such basic salary shall be
paid by the Company to Executive each month, less amounts
which the Company may be required to withhold from such
payments by applicable federal, state or local laws or
regulations.
2.1.2 If the Executive shall be absent from work on
account of personal injuries or sickness, he shall continue to
receive the payments provided for in paragraph 2.1.1 hereof;
provided, however, that any such payment may, at the Company's
option, be reduced by the amount which the Executive may
receive, for the period covered by any such payments, in
disability payments (i) pursuant to any disability insurance
which the Company, in its sole discretion, may maintain, or
(ii) under any governmental program for disability
compensation.
2.1.3 The Company agrees that the rate of the basic
salary of the Executive hereunder shall be reviewed annually
by the Board of Directors or such committee of the Board of
Directors designated by it to review such matters and that the
rate of the basic salary shall be determined and adjusted for
each year during the term of Executive's employment hereunder
by the Board of Directors or such committee commensurate with
(i) the performance of Executive, (ii) the net income of the
Company during the preceding fiscal year and as projected for
the fiscal year for which the basic salary determination is
made, (iii) comparable rates of compensation for executives
and (iv) such other factors as the Board of Directors or such
committee may deem relevant to the determination.
2.2 Benefits; Expense Reimbursement.
2.2.1 The Executive shall be entitled to, and shall
receive, all other benefits of employment available to other
executives of the Company generally, including, without
limitation, participation in any hospital, surgical, medical
or other group health plans or accident benefits, life
insurance benefits, pension or profit-sharing plans, bonus
plans or vacation plans as shall be instituted by the Company,
in its sole discretion.
2.2.2 During the term hereof, the Company shall
reimburse Executive for all reasonable and necessary expenses
incurred by Executive in the performance of his duties
hereunder, including without limitation, travel, meals,
lodging, office supplies or equipment subject to such
reasonable limitations, restrictions and reporting standards
as the Board of Directors of the Company may from time to time
establish. Executive shall provide to the Company promptly
after incurring any such expenses a detailed report thereof
and such information relating thereto as the Company shall
from time to time require. Such information shall be
sufficient to support the deductibility of all such expenses
by the Company for federal income tax purposes.
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2.2.3 The Company shall provide to Executive the use
of an automobile.
3. Term.
The employment of Executive hereunder shall be for a term commencing on
January 1, 1997 and expiring on June 30, 2002. Upon the expiration of the
initial term or any renewal term of Executive's employment hereunder, the term
of such employment automatically shall be renewed for an additional term of one
year commencing on July 1 and expiring on the succeeding June 30 unless
Executive or the Company shall give notice of the termination of Executive's
employment and this Agreement by written notice to the other more than 120 days
prior to the date of expiration of the initial or any renewal term. In the event
that such notice of termination shall be given timely, this Agreement shall
terminate on the date of expiration of such initial or renewal term.
4. Termination.
4.1 The Company shall be entitled to terminate this Agreement
prior to the expiration of its term or any renewal term on the
occurrence of either:
4.1.1 an event of default with respect to Executive
as provided herein, or
4.1.2 the permanent mental or physical disability of
Executive as provided herein occurring during the term or any
renewal term of Executive's employment hereunder.
4.2 For purposes of this Agreement, an event of default
with respect to Executive shall include:
4.2.1 Any failure by Executive to perform his duties,
responsibilities or obligations hereunder in a faithful and
diligent manner or with reasonable care and (if such failure
can be cured) the failure by Executive to cure such failure
within 10 days after written notice thereof shall have been
given to Executive by the Company; or
4.2.2 Commission by Executive of any material act of
dishonesty as an employee of the Company or of disloyalty to
the Company, or any wrongful or unauthorized appropriation,
taking or misuse of funds, property or business opportunities
of the Company.
4.3 Permanent mental or physical disability of Executive shall
be deemed to have occurred hereunder when Executive shall have failed
or been unable to perform his duties hereunder on a full-time basis for
an aggregate of 180 days in any one period of 210 consecutive days and
with a certification from a licensed physician in the State of Missouri
that Executive is permanently disabled from performing his duties
hereunder.
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4.4 Executive shall be entitled to terminate his employment
with the Company under this Agreement prior to the expiration of its
term upon the occurrence of an event of default with respect to the
Company.
4.5 For purposes of this Agreement an event of default
with respect to the Company shall include:
4.5.1 Any failure by the Company to perform its
obligations to Executive under this Agreement and (if such
failure can be cured) the failure by the Company to cure such
failure within 10 days after written notice thereof shall have
been given to the Company by Executive;
4.5.2 The Company shall:
(a) admit in writing its inability to pay
its debts generally as they become due,
(b) file a petition for relief under any
chapter of Title 11 of the United States Code or a
petition to take advantage of any insolvency under
the laws of the United States of America or any state
thereof,
(c) make an assignment for the benefit of
its creditors,
(d) consent to the appointment of a receiver
of itself or of the whole or any substantial part of
its property,
(e) suffer the entry of an order for relief
under any chapter of Title 11 of the United Sates
Code, or
(f) file a petition or answer seeking
reorganization under the Federal Bankruptcy Laws or
any other applicable law or statute of the United
States of America or any state thereof.
4.6 In the event of termination of this Agreement and
Executive's employment hereunder by the Company pursuant to paragraph
4.1 hereof, all rights and obligations of the Company and Executive
hereunder shall terminate on the date of such termination, subject to
the following:
4.6.1 Executive shall be entitled to receive (subject
to any rights of set off or counterclaim by the Company) all
salary, additional compensation and benefits, which shall have
accrued prior to the date of such termination and the
obligation of the Company for the payment of salary,
additional compensation or benefits shall terminate as at the
date of such termination;
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4.6.2 All rights of the Company or Executive which
shall have accrued hereunder prior to the date of such
termination, and all provisions of this Agreement provided
herein to survive termination of employment of Executive
hereunder, shall survive such termination and the Company and
Executive shall continue to be bound by such provisions in
accordance with the terms thereof;
4.7 In the event of termination of the Agreement by Executive
in accordance with paragraph 4.4 hereof, all rights and obligations of
the Company and Executive hereunder shall terminate on the date of such
termination, subject to the following:
4.7.1 Executive shall be entitled to receive all
salary, additional compensation and benefits which shall have
accrued prior to the date of such termination and the
Company's obligation for the payment of salary, additional
compensation and benefits shall terminate as of the date of
such termination;
4.7.2 All rights of the Company or Executive which
shall have accrued hereunder prior to the date of such
termination and the obligations of Executive pursuant to
paragraphs 5, 6 and 7 provided herein to survive termination
of employment of Executive hereunder shall survive such
termination and the Executive shall continue to be bound by
such provisions in accordance with their terms.
4.8 This Agreement and all rights and obligations of the
parties hereunder shall terminate immediately upon the death of
Executive except that the Company shall pay to the heirs, legatees or
personal representative of Executive (i) all compensation or benefits
hereunder accrued but not paid to the date of Executive's death and
(ii) an amount equal to the total compensation which would have been
payable to Executive hereunder, but for his death, for a period of six
months from the date of his death.
5. Confidential Information.
5.1 "Confidential Information" means information disclosed by
the Company to Executive, or developed or obtained by Executive during
his employment by the Company, either before the date or during the
term of this Agreement, or during the Consultation Period, provided
that such information is not generally known in the business and
industry in which the Company is or may subsequently become engaged,
relating to or concerning the business, projects, products, processes,
formulas, know-how, techniques, designs or methods of the Company,
whether relating to research, development, manufacture, purchasing,
accounting, engineering, marketing, merchandising, selling or
otherwise. Without limitation, Confidential Information shall include
all know-how, technical information, inventions, ideas, concepts,
processes and designs relating to products of the Company, whether now
existing or hereafter developed, and all prices, customer or
distributor names, customer or distributor lists, marketing and other
relationships, whether contractual or not, between the Company, its
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suppliers, customers, distributors, employees, agents, consultants and
independent contractors but shall exclude the names of customers or
distributors known to Executive prior to the effective date hereof.
5.2 Executive agrees that, during the term hereof or while
Executive shall receive compensation hereunder and after termination of
his employment with the Company for so long as the Confidential
Information shall not be generally known or generally disclosed (except
by Executive or by means of wrongful use or disclosure), Executive
shall not use any Confidential Information, except on behalf of the
Company, or disclose any Confidential Information to any person, firm,
partnership, company, corporation or other entity, except as authorized
by the President or the Board of Directors of the Company.
6. Inventions.
6.1 "Inventions" shall mean discoveries, concepts, ideas,
designs, methods, formulas, know-how, techniques or any improvements
thereon, whether patentable or not, made, conceived or developed, in
whole or in part, by Executive.
6.2 Executive covenants and agrees to communicate and fully
disclose to the Board of Directors of the Company any and all
Inventions made or conceived by him during the term hereof or while
receiving any compensation or payment from the Company and further
agrees that any and all such Inventions which he may conceive or make,
during the term hereof or while receiving any compensation or payments
from the Company, shall be at all times and for all purposes regarded
as acquired and held by him in a fiduciary capacity and solely for the
benefit of the Company and shall be the sole and exclusive property of
the Company. The provisions of this subparagraph shall not apply to an
invention for which no equipment, supplies, facilities or trade secret
information of the Company was used and which was developed entirely on
the Executive's own time, unless (a) the invention relates (i) to the
business of the Company, or (ii) to the Company's actual or
demonstrably anticipated research or development, or (b) the invention
relates from any work performed by Executive for the Company.
6.3 Executive also covenants and agrees that he will assist
the Company in every proper way upon request to obtain for its benefit
patents for any and all inventions referred to in paragraph 6.2 hereof
in any and all countries. All such patents and patent applications are
to be, and remain, the exclusive property of the Company for the full
term thereof and to that end, the Executive covenants and agrees that
he will, whenever so requested by the Company or its duly authorized
agent, make, execute and deliver to the Company, its successors,
assigns or nominees, without charge to the Company, any all
applications, applications for divisions, renewals, reissues,
specifications, oaths, assignments and all other instruments which the
Company shall deem necessary or appropriate in order to apply for and
obtain patents of the United States or foreign countries for any and
all Inventions referred to in paragraph 6.2 hereof or in order to
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assign and convey to the Company, its successors, assigns or nominees,
the sole and exclusive right, title and interest in and to such
Inventions, applications or patents. Executive likewise covenants and
agrees that his obligations to execute any such instruments or papers
shall continue after the expiration or termination of this Agreement
with respect to any and all such Inventions, and such obligations shall
be binding upon his heirs, executors, assigns, administrators or other
legal representatives.
7. Writings and Working Papers.
Executive covenants and agrees that any and all books, textbooks,
letters, pamphlets, drafts, memoranda or other writings of any kind written by
him for or on behalf of the Company or in the performance of Executive's duties
hereunder, Confidential Information referred to in paragraph 7.1 hereof and all
notes, records and drawings made or kept by him of work performed in connection
with his employment by the Company shall be and are the sole and exclusive
property of the Company and the Company shall be entitled to any and all
copyrights thereon or other rights relating thereto. Executive agrees to execute
any and all documents or papers of any nature which the Company or its
successors, assigns or nominees deem necessary or appropriate to acquire,
enhance, protect, perfect, assign, sell or transfer its rights under this
paragraph. Executive also agrees that upon request he will place all such notes,
records and drawings in the Company's possession and will not take with him
without the written consent of a duly authorized officer of the Company any
notes, records, drawings, blueprints or other reproductions relating or
pertaining to or connected with his employment of the business, books,
textbooks, pamphlets, documents work or investigations of the Company. The
obligations of this paragraph shall survive the term of employment hereunder or
the termination or expiration of the term or any renewal term hereof or the term
or termination of the Consultation Period.
8. Covenant Not to Compete.
8.1 For purposes of this paragraph:
8.1.1 "Conflicting Organization" means any person,
firm, company, partnership, business, corporation or other
entity engaged in, or intending to engage in, research,
development, production, marketing or selling a Conflicting
Product.
8.1.2 "Conflicting Product" means any product,
process, service or design which competes with, or is
reasonably interchangeable as a substitute for, any product,
process, service or design developed, planned, under
development, produced marketed or sold by the Company or any
Affiliate during the term of the covenant in this paragraph 8.
Without limitation, Conflicting Product includes any balloon
product, including without limitation, latex or mylar balloon
product and any printed or laminated film product.
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8.1.3 "Territory" means the geographic area within
which the Company or any Affiliate or any distributor or
representative of the Company or any Affiliate is actively
engaged in the sale of, or efforts to sell, the products of
the Company or any Affiliate at any time during the term of
this Agreement.
8.1.4 "Affiliate" shall mean any corporation of which
the Company, or any Affiliate, shall own majority of the
capital stock.
8.2 Executive acknowledges and agrees as follows:
8.2.1 That the Company and its Affiliates have
developed, and are developing and establishing, a valuable and
extensive trade in its services and products, including
without limitation, latex and mylar balloons and printed and
laminated films and that they have developed, and are
developing, operations and distributors to sell such products
and services throughout the United States and in foreign
countries.
8.2.2 That the Company and its Affiliates have
developed, and are developing, at great expense, technical
information concerning their products and methods of marketing
and sale which are kept and protected as Confidential
Information and trade secrets and are of great value to the
Company and its Affiliates.
8.2.3 That, during the course of his employment with
the Company or an Affiliate and during the term of this
Agreement, Executive has participated, and will participate,
in such matters and has acquired and will acquire, possession
of Confidential Information, and that Executive has had
significant responsibility for the development activities of
the Company and the development of unique products, methods
and techniques of the Company and its Affiliates.
8.2.4 That, for Executive to utilize Confidential
Information of the Company and its Affiliates, or unique
skills, techniques or information developed by him while an
employee of the Company or its Affiliates or during the term
of this Agreement for a Conflicting Organization within the
area or time provided herein would result in material and
irreparable injury to the Company.
8.2.5 That the area and conduct covered by the
restrictive covenant in this paragraph includes only a
percentage of the total number of organizations and
individuals who are customers or distributors or potential
customer or distributors for products, processes or services
with respect to which Executive has knowledge or expertise,
that Executive would be able to utilize his knowledge,
experience and expertise for an employer while fully complying
with the terms of this paragraph and that the terms and
conditions of this paragraph are reasonable and necessary for
the protection of the Company's business and assets.
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8.3 Executive agrees that, during the term of this Agreement,
during the term of the Consultation Period, for so long as Executive
shall be receiving compensation hereunder, and for a period of 36
months from and after the date of termination of this Agreement (other
than by Executive pursuant to paragraph 4.4 hereof), he will not,
anywhere within the Territory, directly or indirectly, whether as an
employee, agent, officer, consultant, partner, owner, shareholder or
otherwise:
8.3.1 solicit for the sale of, or participate with,
provide services to, or be employed by any person, company,
partnership, business or corporation which shall solicit for
the sale of, any Conflicting Product by a Conflicting
Organization;
8.3.2 engage or participate in, purchase or own any
stock or other equity interest in, be employed by, or provide
services or assistance to, any Conflicting Organization;
9. Specific Enforcement.
Executive is obligated under this Agreement to render service of a
special, unique, unusual, extraordinary and intellectual character, thereby
giving this Agreement peculiar value so that the loss of such service or
violation by Executive of this Agreement could not reasonably or adequately be
compensated in damages in an action at law. Therefore, in addition to other
remedies provided by law, the Company shall have the right during the term or
any renewal term of this Agreement (or thereafter with respect o obligations
continuing after the expiration or termination of this Agreement) to compel
specific performance hereof by Executive or to obtain injunctive relief against
violations hereof by Executive, and if the Company prevails in any proceeding
therefor, it will also be entitled to recover all costs and expenses incurred by
the Company in connection therewith, including attorneys' fees.
10. Assignment.
The rights and duties of a party hereunder shall not be assignable by
that party, except that the Company may assign this Agreement and all rights and
obligations hereunder to, and may require the assumption thereof by, any
corporation or any other business entity which succeeds to all or substantially
all the business of the Company through merger, consolidation or corporate
reorganization or by acquisition of all or substantially all of the assets of
the Company.
11. Binding Effect.
This Agreement shall be binding upon the parties hereto and their
respective successors in interest, heirs and personal representatives and, to
the extent permitted herein, the assigns of the Company.
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12. Severability.
If any provision of this Agreement or any part hereof or application
hereof to any person or circumstance shall be finally determined by a court of
competent jurisdiction to be invalid or unenforceable to any extent, the
remainder of this Agreement, or the remainder of such provision or the
application of such provision to persons or circumstances other than those as to
which it has been held invalid or unenforceable, shall not be affected thereby
and each provision of this Agreement shall remain in full force and effect to
the fullest extent permitted by law. The parties also agree that, if any portion
of this Agreement, or any part hereof or application hereof, to any person or
circumstance shall be finally determined by a court of competent jurisdiction to
be invalid or unenforceable to any extent, any court may so modify the
objectionable provision so as to make it valid, reasonable and enforceable.
13. Notices.
All notices, or other communications required or permitted to be given
hereunder shall be in writing and shall be delivered personally or mailed,
certified mail, return receipt requested, postage prepaid, to the parties as
follows:
If to the Company: Stephen M. Merrick
CTI Industries Corporation
22160 N. Pepper Road
Barrington, Illinois 60010
If to Executive: Howard W. Schwan
----------------------
----------------------
Any notice mailed in accordance with the terms hereof shall be deemed received
on the third day following the date of mailing. Either party may change the
address to which notices to such party may be given hereunder by serving a
proper notice of such change of address to the other party.
14. Entire Agreement.
This Agreement constitutes the entire agreement between the parties
hereto with respect to the subject matter hereof and supersedes all prior
written or oral negotiations, representations, agreements, commitments,
contracts or understandings with respect thereto and no modification, alteration
or amendment to this Agreement may be made unless the same shall be in writing
and signed by both of the parties hereto.
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15. Waivers.
No failure by either party to exercise any of such party's rights
hereunder or to insist upon strict compliance with respect to any obligation
hereunder, and no custom or practice of the parties at variance with the terms
hereof, shall constitute a waiver by either party to demand exact compliance
with the terms hereof. Waiver by either party of any particular default by the
other party shall not affect or impair such party's rights in respect to any
subsequent default of the same or a different nature, nor shall any delay or
omission of either party to exercise any rights arising from any default by the
other party affect or impair such party's rights as to such default or any
subsequent default.
16. Governing Law; Jurisdiction.
16.1 For purposes of construction, interpretation and
enforcement, this Agreement shall be deemed to have been entered into
under the laws of the State of Missouri and its validity, effect,
performance, interpretation, construction and enforcement shall be
governed by and subject to the laws of the State of Illinois.
16.2 Any and all suits for any and every breach of this
Agreement may be instituted and maintained in any court of competent
jurisdiction in the State of Illinois and the parties hereto consent to
the jurisdiction and venue in such court and the service of process by
certified mail to the addresses for the parties provided for notices
herein.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
CTI INDUSTRIES CORPORATION
By:/s/ Stephen M. Merrick
---------------------
Authorized Officer
Attest:
- ------------------------------
Secretary
EXECUTIVE:
/s/ Howard W. Schwan
------------------
Howard W. Schwan
11
EXHIBIT 10.10
MEMORANDUM OF AGREEMENT
FOR JOINT VENTURE AMONG
PULIDOS ET TERMINADOS FINOS AND CTI INDUSTRIES CORPORATION
THIS MEMORANDUM OF AGREEMENT is made and entered into this 16th day of
September, 1996 by and among Pulidos et Terminados Finos, a corporation
organized and existing under the laws of Mexico ("P&TF") and CTI Industries
Corporation, a corporation organized and existing under the laws of the State of
Delaware, U.S.A. ("CTI").
WHEREAS, P&TF is engaged in Guadalajara, Mexico in the manufacture and
sale of latex balloons and manufactures latex balloons under a long term
agreement for sale to CTI;
WHEREAS, CTI is engaged in the manufacture of metallized balloons and
other products and in the sale and distribution of metallized and latex balloons
and other products in the United States and throughout the world;
WHEREAS, the parties desire to enter into an agreement for the
formation and operation, as a joint venture, of a corporation under laws of
Mexico.
NOW, THEREFORE, in consideration of the premises and of the terms,
covenants and conditions hereinafter contained, the parties hereto agree as
follows:
1. Organization of Entity. Promptly upon execution of this Agreement,
the parties shall cause a Sociedad Anonima de Capital Variable ("Joint Venture")
to be organized and established under the laws of Mexico, pursuant to the
following terms:
1.1 The parties shall cause the Joint Venture to be properly
organized and registered promptly after execution of this Agreement;
1.2 The Joint Venture shall be authorized to issue capital
stock of up to 50,000 shares at the price per share of One Peso
(N$1.00)
1.3 Each of P&TF and CTI do hereby subscribe for and agree to
purchase 25,000 shares of capital stock of the Joint Venture at the
price of One Peso (N$1.00) per share. Promptly after organization of
the Joint Venture, the parties shall make full payment to the Joint
Venture for such shares and the Joint Venture shall issue and deliver
to each of them certificates representing the shares.
1.4 The Joint Venture shall be managed by a Board of Directors
of six persons to be elected by the shareholders. The parties agree
that, for the full term of this
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Agreement, they shall vote all shares of capital stock of the Joint
Venture for the election as Directors three persons designated by each
of PT&F and CTI.
1.5 The Board of Directors shall designate a General Manager
who shall manage the day to day operations of the Joint Venture and
such other officers and personel as they shall determine from time to
time. The vote of a majority of all of the members of the Board of
Directors shall be required for any action on the part of the Board of
Directors. The Board of Directors shall hold at least six meetings each
year. A director may participate in a meeting of the Board of Directors
by telephone. Written minutes of all meetings of the Board of Directors
shall be maintained. The Board of Directors may act by unanimous
written consent in lieu of a meeting. The General Manager shall have
such authority and duties as shall be prescribed by the Board of
Directors from time to time.
1.6 A certificate of organization and by-laws or similar
governing documents of the Joint Venture shall be adopted and shall not
be inconsistent with the provisions of this Agreement.
1.7 Sale or transfer of the shares of capital stock of the
Joint Venture shall be restricted in accordance with the following
provisions:
1.7.1 All shares of capital stock of the Joint
Venture which either of the parties hereto shall own, whether
now or hereafter acquired, shall be subject to the
restrictions on transfer provided herein;
1.7.2 No party shall be authorized or permitted to
sell or transfer any shares of capital stock of the Joint
Venture owned by such party, or any interest therein,
including without limitation to sell or pledge as security,
except strictly in accordance with the provisions hereof. Any
attempted sale or transfer in violation of the provisions
hereof shall be void and without effect. All shares of capital
stock of the Joint Venture issued to the parties shall bear an
appropriate legend stating that transfer of the shares are
restricted under this Agreement.
1.7.3 In the event that a party shall desire to sell
all, but not less than all of the shares of capital stock of
the Joint Venture owned by it and shall have received a bona
fide written offer therefor setting forth the price and all
terms of such offer, such party shall first offer to sell all
of such shares to the other party, by written notice the other
party, including a true copy of the bona fide offer to
purchase received. The other party shall have 30 days after
the date of such notice to accept such offer to sell all of
the party's shares. If such other party shall fail to accept
such offer by written notice to the party offering the shares
within 30 days after the date of such offer, the party
offering the shares shall be entitled to sell all, but not
less than all, of the shares but only to the third party
submitting the bona
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fide offer on the terms specified in the offer; provided,
further, that in connection with any sale to a third party,
such third party shall execute and deliver an agreement
accepting all of the terms of this Agreement.
1.7.4 In the event that a party hereto shall become
insolvent, shall cease to conduct business, shall file a
petition for relief under any bankruptcy laws, shall suffer or
permit any determination of insolvency or bankrutcy under any
bankruptcy laws or shall sell all or substantially all of its
assets, the other party shall have the option and right for a
period of 90 days from and after receiving notice of any such
event to purchase all of such party's shares of capital stock
of the Joint Venture at the price paid therefore by such
party. Such right and option shall be exercised by written
notice to the party from whom the shares are to be purchased
and the tender of the purchase price for the shares against
delivery of the certificates therefore, duly endorsed for
transfer.
1.8 The Joint Venture shall obtain and maintain all permits
and licenses necessary or appropriate to the conduct of its business as
provided herein.
2. Office and Facilities.
2.1 The initial office and facility of the Joint Venture shall
be at _________________, Zapopan, Jalisco, Mexico, which is a leased
facility of approximately ____________ square feet.
2.2 The Joint Venture shall enter into a lease agreement for
the lease of the Initial Facility on such terms as the Board of
Directors shall agree.
2.3 The Joint Venture shall acquire, lease, own and operate
such other and additional facilities and equipment as the Board of
Directors of the Joint Venture shall from time to time authorize and
approve.
3. Business and Operations.
3.1 The Joint Venture shall be authorized to engage in any and
all lawful business activites under the laws of Mexico and shall engage
from time to time in such business ventures and activities as the Board
of Directors of the Joint Venture shall authorize.
3.2 It is contemplated that the Joint Venture shall provide a
variety of services, initially, and may provide products, to P&TF and
CTI, as well as to third parties. The charges or prices for services or
products to be provided by the Joint Venture to a party shall be
determined by the Board of Directors of the Joint Venture. The parties
agree that such charges and prices shall be fair and reasonable and
consistent with rates, prices and
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charges in the industry. In the event that the Board of Directors is
unable to agree on a charge or price for any service or product which,
under this Agreement, the Joint Venture is to provide to a party, such
charge or price shall be determined by arbitration in the manner
provided herein.
3.2 The parties contemplate and agree that the business
activities in which the Joint Venture initially shall engage shall
include the following:
3.2.1 The Joint Venture shall provide the service of
printing of latex balloons utilizing printing equipment
supplied by P&TF and CTI and leased to the Joint Venture. P&TF
agree that, for the term, they shall retain the Joint Venture
exclusively for the printing of all latex balloons which
either shall manufacture or sell. Latex balloons owned by P&TF
or CTI shall be delivered to the Joint Venture for printing
and P&TF or CTI, as the case may be, shall pay to the Joint
Venture a service charge for such printing services.
3.2.2 The Joint Venture shall provide packaging
services to P&TF and CTI in which packaging for latex and
mylar balloons is provided and balloons are placed in packages
for retail display and sale.
3.2.3 It is contemplated that the Joint Venture shall
provide services to CTI in converting (producing balloons from
printed film) and packaging mylar balloons on equipment
supplied by CTI and leased to the Joint Venture utilizing
printed film supplied by CTI.
3.3 With respect to all materials and products provided by
P&TF or CTI as to which the Joint Venture shall provide services, (i)
at all times the party providing such materials or products shall be
and remain the sole owner of such materials and products, (ii) the
Joint Venture shall not have or obtain any right, title or interest in
or to such materials or products, (iii) the Joint Venture shall not,
and shall not have any authority or right to, sell, transfer, deliver,
pledge or grant any right or interest in or to any of such materials or
products, and (iv) the Joint Venture shall hold, handle, process,
package and deliver such materials and products strictly in accordance
with the directions of the party providing and owning such materials
and products.
3.4 The parties shall deliver and lease to the Joint Venture
equipment as follows:
3.4.1 The terms of the lease of equipment owned by a
party and leased to the Joint Venture shall be on such terms
as the Board of Directors of the Joint Venture. Such terms
shall be fair and reasonable and shall be consistent with
standards in the industry. In the event that the Board of
Directors is unable to agree on lease terms for an item of
equipment provided herein to be leased to the
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Joint Venture by a party, the terms of such lease shall be
determined by arbitration in accordance with the provisions
hereof.
3.4.2 P&TF agrees to lease to the Joint Venture the
following equipment:
3.4.3 CTI agrees to lease to the Joint Venture the
following equipment:
3.4.3 With respect to all equipment leased by a party
to the Joint Venture, (i) the Joint Venture shall have all
risk of loss with respect to the equipment, (ii) the Joint
Venture shall have the obligation to maintain such equipment
in good working order and condition and, at the termination of
the lease, to return the equipment to the owner in the same
condition as at the time of the lease, ordinary wear and tear
excepted, and (iii) the Joint Venture shall have the
obligation to obtain and maintain insurance covering such
equipment in such amounts and for such risks as the party
owning the equipment reasonably shall require.
4. Certain Operational Matters.
4.1 The Joint Venture shall maintain proper and complete books
of account, files and records of its business and operations in
accordance with law and as the Board of Directors of the Joint Venture
or any party shall reasonably request. All books of account, files and
records shall at all times be open to inspection and copying by any
member of the Board of Directors or any authorized representative of a
party.
4.2 The Joint Venture shall prepare, have prepared and
maintain financial statements in proper form on a monthly and annual
basis, such statements to include a statement of the results of
operation, balance sheet and cash flows, prepared in accordance with
generally accepted accounting principles. The General Manager shall
provide financial statments of the Joint Venture to each member of the
Board of Directors, for each month within thirty days after the last
day of such month and for each year within 90 days after the last day
of the fiscal year.
4.3 The Joint Venture shall make such distributions to the its
shareholders as the Board of Directors shall determine from time to
time and in accordance with law. All distributions to shareholders of
the Joint Venture shall be proportionate among them in accordance with
their interests as shareholders.
4.4 The Joint Venture shall not enter into or perform any
contract, agreement, or transaction of any kind or nature with
(including without limitation any purchase or sale of goods or
services, lease, expense provision or reimbursement), or make any
payment of any kind to, any party hereto or any officer, director or
shareholder of any party hereto unless the same shall have been fully
disclosed to, and authorized by, the Board of Directors of the Joint
Venture.
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5. Arbitration.
5.1 Any dispute, controversy or claim arising out of or in
relation to this Agreement including but not limited to its existence,
breach, termination or legal validity, shall be finally and exclusively
settled by binding arbitration in accordance with the UNCITRAL
arbitration rules as are then in force by a single arbitrator appointed
by the Arbitration Center most proximate to Chicago, Illinois who will
be requested to provide the appropriate administrative services.
6.2 The place of the arbitration shall be Chicago, Illinois,
U.S.A. and the English language shall be used throughout the
arbitration proceedings.
6.3 The parties expressly agree to confer upon the arbitrator
the powers to fill gaps, cure contractual omissions and to perform all
other activities which he may deem necessary or appropriate.
6.4 The award of the arbitrator shall be the sole and
exclusive remedy between the parties regarding any claims and
counter-claims presented to the arbitrator and shall be final and
binding on the parties. The parties undertake to fully and punctually
abide by the award rendered by the arbitrator. Failing such voluntary
compliance, judgment upon the award or any other appropriate procedures
may be entered or sought in any court having jurisdiction thereof to
secure enforcement of said award.
6.5 The final award of the arbitrator shall be payable in
United States currency without deduction or offset and costs, fees or
taxes incidental to the enforcement of the arbitration award shall be
charged in accordance with the decision of the arbitrator against a
party resisting enforcement. Payment of the award including interest
from the date of breach and violation shall be made in accordance with
the relevant provisions of this Agreement.
6.6 Nothing herein contained shall prevent any party hereto
from instituting an action at law against the other party requesting
temporary restraining orders, preliminary injunctions or other
procedures in a court of competent jurisdiction to obtain interim
relief when deemed necessary by such court to preserve the status quo
or prevent irreparable injury pending formal settlement of such dispute
by arbitration. Each of the parties does hereby consent to the
jurisdiction of the courts situated in the State of Illinois, U.S.A.
for such purposes and does hereby consent to service of process for any
action in such courts by notice delivered in accordance with the notice
provisions of this Agreement.
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7. Notices.
7.1 Any notice, demand, consent, service or other
communication required or permitted to be given under this Agreement
shall be in writing and addressed to the party at its address stated
below:
If to CTI Howard W. Schwan
Executive Vice President
CTI Industries Corporation
22132 Pepper Road
Barrington, Illinois 60010, U.S.A.
If to P&TF Enrique Mora Velasco
Pulidos & Terminados Finos
Hugo Vazquez Reyes No. 33
Zapopan, Jalisco, Mexico
Any party may change the address to which notices to it shall be sent
hereunder by giving a proper notice of such change of address to the
other party hereunder.
7.2 Notices may be delivered by hand, registered mail, or fax
and shall be deemed to have been received as follows:
7.2.1 If delivered by hand, at the time of delivery
to a responsible person at the address for the party;
7.2.2 If sent by fax, at the time of confirmation of
transmission provided a confirmation copy is sent by airmail
or registered mail within twenty-four hours after the
transmission; or,
7.2.3 If sent by registered mail, at the time of
delivery or at the time of attempted delivery in the case
delivery cannot be completed due to no fault of the sender.
If the time of such deemed receipt as provided above is not during the
customary business hours of the party, the notice shall be deemed to
have been received at 10:00 a.m. at the place of delivery on the first
customary day of business thereafter.
7.3 All such notices, demands, service or other communications
shall be in the English language.
8. Force Majeure. A party hereto shall not be in default hereunder or
be liable for any loss or damage for any delay in the performance of its
obligations hereunder due to causes beyond its control such as acts of God, acts
of the other party, acts of military authority,
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priorities, fires, strikes, floods, epidemics, quarantine restrictions, war,
riots, delays in transportation, or inability due to causes beyond its
reasonable control to obtain necessary labor, material or manufacturing
facilities.
9. Binding Effect. This Agreement shall be binding upon, and shall
inure to the benefit of, the parties hereto and their respective successors in
interest and, to the extent permitted herein, their assigns.
10. Assignment. This Agreement, and the rights and obligations of a
party, may not be assigned without the express written consent of the other
party; provided, however, that the rights and obligations of a party hereunder
may be assigned to a third party in connection with a transaction in which
substantially all of the assets, properties and business of the party are
acquired by a third party in a merger or purchase of all or substantially all of
the assets of the party and such third party executes an instrument by which it
agrees to assume and be bound by all of the obligations of the party in this
Agreement.
11. Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law. If any paragraph of this Agreement shall be unenforceable or
invalid under applicable law, such provision shall be ineffective only to the
extent and duration of such unenforceability or invalidity and the remaining
substance of such provision and the remaining paragraphs of this Agreement shall
in such event continue to be binding and in full force and effect.
12. Waivers. Nor failure by a party to exercise any of such party's
rights hereunder or to insist upon strict compliance with respect to any
obligation hereunder, and no custom or practice of the parties at variance with
the terms hereof, shall constitute a waiver by any party to demand exact
compliance with the terms hereof. Waiver by any party of any particular default
by any other party shall not affect or impair such party's rights in respect to
any subsequent default of the same or of a different nature, nor shall any delay
or omission of any party to exercise any right arising from any default by any
other party affect or impair such party's rights as to such default or any
subsequent default.
13. Entire Agreement. This Agreement constitutes the entire agreement
among the parties hereto with respect to the subject matter hereof and
supersedes all prior written or oral negotiations, representations, inducements,
understandings, commitments, contracts or agreements. This Agreement may not be
amended or modified except by a written instrument signed by the parties hereto.
14. Governing Law. This Agreement shall be governed by, and shall be
construed and enforced in all respects in accordance with, the laws of the State
of Illinois, U.S.A.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
CTI INDUSTRIES CORPORATION
BY /s/ Howard W. Schwan
----------------------
Howard W. Schwan
Executive Vice President
WITNESS:
/s/ Eric B. Flower
--------------------------
--------------------------
PULIDOS & TERMINADOS FINOS
s.a. de c.v.
BY /s/ Enrique Mora Velasco
------------------------
Enrique Mora Velasco
Director - Apodegrado
WITNESS:
- -------------------------------
- -------------------------------
9
EXHIBIT 10.11
AGREEMENT
THIS AGREEMENT is made and entered into this 8th day of September, 1995
by and among CTI Industries Corporation, a corporation organized and existing
under the laws of the State of Delaware, U.S.A. ("CTI") and Pulidos & Terminados
Finos s.a. de c.v., a corporation organized and existing under the laws of
Mexico and having its principal place of business in Zapopan, State of Jalisco,
Mexico ("P&TF).
WHEREAS, CTI presently owns and operates in the State of Illinois,
U.S.A. two dipping machines used in the manufacture of latex balloons, such
machines being more particularly described in Exhibit A hereto;
WHEREAS, CTI is engaged in the business of manufacturing and selling,
among other things, latex balloons;
WHEREAS, P&TF is engaged in Mexico in the business of manufacturing and
selling latex balloons;
NOW, THEREFORE, in consideration of the premises and of the terms,
covenants and conditions hereinafter contained, the parties hereto agree as
follows:
1. Definition of Terms. The terms set forth in this paragraph shall,
for purposes of this Agreement, have the meanings set forth herein:
1.1 "Balloons" shall mean latex balloons.
1.2 "CTI Balloons" shall mean Balloons manufactured and
produced on the Machines when delivered and operating at P&TF's
facility.
1.3 "Machines" means the two dipping machines owned by CTI and
used in the manufacture of latex balloons as more particularly
described and including all of the items set forth on Exhibit A hereto.
"Machine" shall mean one of the Machines.
1.4 "Specifications" shall mean (i) with respect to CTI
Balloons, CTI's present specifications for latex balloons which it
manufactures utilizing the Machines, which specifications are in
writing and shall be transmitted to P&TF promptly after the execution
of this Agreement by the parties, (ii) with respect to Balloons other
than CTI Balloons produced by P&TF and sold to CTI hereunder, the
specifications therefor developed and agreed upon by the parties
pursuant to paragraph 3.6 hereof.
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2. Sale and Delivery of Machines.
2.1 CTI does hereby agree to sell and deliver to P&TF, and
P&TF agrees to purchase, acquire, own, install and operate, the
Machines on the terms and conditions set forth herein. The Machines
shall include the machinery and components described on Exhibit A
hereto, together with (i) copies of all blueprints and schematics for
the equipment in CTI's possession and (ii) all auxiliary and associated
equipment such as tanks, mixers and dryers. CTI shall be entitled to
retain any and all plans, blueprints, schematics or other technical
information concerning the Machines and all rights to use, sell,
license or dispose of such items and information (including without
limitation the right to manufacture, assemble, use or sell the
equipment) and nothing herein shall be deemed a sale or transfer of any
technical or proprietary rights in the Machines or any components
thereof, whether patentable or not.
2.2 The purchase price for the Machines shall be $400,000,
which the parties agree is the fair value therefor. The purchase price
shall be allocated among the two Machines as the parties shall agree.
The purchase price herein shall be exclusive of any and all sales, use,
excise, transfer or other similar taxes or charges, or any customs,
duty or other levy arising from the sale and delivery of the Machines
which may be imposed by any governmental authority in the United States
or Mexico. P&TF shall pay any and all such taxes, duties, charges or
levies, or shall reimburse CTI therefor if paid or advanced by CTI
promptly upon receipt of an invoice therefor. Payment of the purchase
price for the Machines shall be made by P&TF in accordance with the
provisions of paragraph 5.9 hereof. In the event that either party
hereto shall terminate this Agreement pursuant to paragraph 9 hereof
prior to the time that the purchase price for the Machines shall have
been paid in full, the balance of the purchase price shall become
immediately due and payable at such time.
2.3 Promptly upon execution of this Agreement and within 30
days thereafter, CTI shall, at CTI's expense, disassemble, crate and
ship to P&TF one of the Machines. Promptly upon receipt of the Machine
shipped and, in any event within 60 days after receipt thereof, P&TF
shall reassemble the Machines and shall commence manufacture of latex
balloons utilizing the Machine. Within 30 days after CTI shall confirm
that the first Machine shall be fully operational and shall be in
production of CTI Balloons meeting the Specifications, CTI shall
disassemble, crate and ship to P&TF the second balloon machine.
Promptly upon receipt thereof, and in any event within 60 days after
receipt thereof, P&TF shall reassemble such second Machine and begin
manufacture of latex balloons on such machine. Except as otherwise
provided herein with respect to the services of a
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CTI engineer, P&TF shall bear all of the expenses of assembly,
installation and operation of the Machines at its plant.
2.4 CTI shall be responsible for the cost of freight charges
in connection with shipping the machines to the Mexico border and P&TF
shall be responsible for freight charges from the Mexican border to its
plant. Title and risk of loss shall pass to P&TF at the time of
delivery of the Machines to the carrier.
2.5 CTI shall make available to P&TF the services of one
engineer employed by CTI who is knowledgeable concerning the Machines
for a period of 90 days from the date that each Machine shall be
received by P&TF for the purpose of assisting P&TF in the assembly,
installation and operation of the Machines and the training of P&TF
personnel in Jalisco. For both such 90 day periods, CTI will be
responsible for the wages of such engineer and P&TF shall be
responsible for, and shall pay, all of the travel, lodging, meal and
other related and reasonable expenses of such engineer in connection
with the provision of such services. In the event that P&TF shall
request services of such engineer after either of such 90 day periods,
CTI shall provide reasonable additional assistance of such person and
P&TF shall be responsible for, and shall pay to CTI, a per diem charge
which for such services which shall cover the full cost to CTI of
compensation and related expense for such person as well as all travel,
lodging and meal expenses incurred in the provision of such services.
2.6 Until the date of disassembly of a Machine, CTI shall be
entitled to continue to operate the Machine for the production of latex
balloons, at the sole cost, and for the sole benefit of CTI.
2.7 CTI warrants only that the Machines are presently in good
working order and condition, subject to reasonable wear and tear from
operation, and include all of the parts and components necessary for
operation. EXCEPT AS EXPRESSLY PROVIDED IN THE FOREGOING SENTENCE, CTI
EXPRESSLY DISCLAIMS ALL WARRANTIES WITH RESPECT TO THE MACHINERY,
EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. P&TF acknowledges
and agrees that (i) it has knowledge and expertise with respect to
machinery and equipment for the manufacture of latex balloons, has made
a full inspection of the Machinery and has found the Machinery to be in
good working order and condition, (i) the Machines are, and have been
in use, that components of the Machinery may fail by reason of wear and
tear in ordinary use and operation and that no warranty is made as to
the continued operation or condition of any part or component of the
Machines and (iii) P&TF, based on its inspection and observation of the
Machines,
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<PAGE>
has determined the method of function, capability and capacity of the
Machines and that no warranty, promise or assurance is made by CTI with
respect thereto. CTI shall be responsible for the repair or replacement
of any loss or damage to the Machines arising from the disassembly and
crating of the Machines; P&TF shall be responsible for any loss or
damage arising from the assembly and installation of the Machines at
its plant.
CTI's sole liability for breach of the limited express
warranty provided herein with respect to the Machines, and P&TF's
exclusive remedy on any claim arising out of any failure of the
Machines or any component thereof constituting a breach of the limited
express warranty herein, shall be limited to the repair or replacement
of any part or component shown to have been defective and not in good
operating condition at the time of disassembly by CTI, and in no event
shall CTI be liable to P&TF for any incidental or consequential
damages.
3. Manufacture and Sale of Latex Balloons.
3.1 Subject to and on the terms and conditions provided in
this Agreement, P&TF agrees to manufacture, sell and deliver latex
balloons to CTI and CTI agrees to purchase and pay for latex balloons
manufactured by P&TF.
3.2 The Balloons which P&TF agrees to manufacture, sell and
deliver to CTI hereunder are 11" CTI Balloons, Standards, Crystals,
Metallics and Pearls and the present standard line of latex balloons
manufactured by P&TF including 12", 9" and 5" Standards and Crystals.
P&TF agrees to manufacture and sell to CTI any and all other latex
balloons which it shall determine, in its sole discretion, to
manufacture during the term hereof.
3.3 P&TF agrees that, during the term provided herein, it will
not sell any CTI Balloons or any of its 5", 9" or 12" Balloons to any
customer situated in the United States orCanada or to any customer who
shall resell such balloons to a customer or customers in the United
States, other than CTI, Imperial Toy and Hedstrom. P&TF shall make
reasonable inquiry of each of its customers to determine the place of
resale of Balloons by such customer and shall require each customer for
such balloons other than CTI, Imperial Toy and Hedstrom to certify in
writing that such balloons will not be offered for sale or sold in the
United States or Canada. P&TF agrees that, during the term designated
herein, it will not sell any Balloons to any person found to have
violated such certification. P&TF agrees that it will give priority to
CTI orders over orders for Balloons from Imperial Toy and Hedstrom.
3.4 Subject to and on the terms and conditions provided herein
and for the term provided herein, CTI agrees that it will purchase all
of its requirements for 5", 9" , 11" and 12" Balloons from P&TF.
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3.5 Promptly after the execution of this Agreement, CTI shall,
by written notice to P&TF, provide to P&TF written specifications for
Balloons. Unless P&TF shall, by written notice to CTI given within 15
days after such notice from CTI, reasonably object to any provision of
such specifications, such specifications provided by CTI shall become
the Specifications for Balloons produced and sold hereunder (other than
CTI Balloons). If P&TF shall reasonably object to any portion of the
specifications provided by CTI, the parties shall negotiate in good
faith to develop agreed terms of the Specifications.
4. Ordering and Supply.
4.1 CTI shall submit to P&TF orders for Balloons from time to
time during the term hereof. All such orders shall be in writing and
shall specify the quantity and the type of the Balloons ordered. Orders
may be transmitted to P&TF by mail or by facsimile transmission.
4.2 Balloons may be ordered by CTI, and P&TF will supply
Balloons as ordered, bulk packed, in gross bags and in 36-count bags.
The parties agree to negotiate, in good faith, terms under which P&TF
will supply Balloons in single packages.
4.3 P&TF agrees to utilize its best efforts to delivery
Balloons ordered by CTI to the carrier for shipment within 30 days
after the date of receipt of the order and, in any event shall deliver
Balloons ordered by CTI to the carrier for shipment within ___ days
after the receipt of the order. The obligation of P&TF to deliver CTI
Balloons shall commence at the time of the completion of assembly and
installation of the first Machine as provided in paragraph 3 hereof.
4.4 P&TF shall select the carrier for shipment to CTI of
Balloons sold hereunder, subject to the reasonable approval of CTI.
Title and risk of loss with respect to Balloons shall transfer to CTI
at the time of delivery of the goods to CTI at its plant.
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5. Price.
5.1 The initial prices per gross for Balloons sold and
delivered to CTI hereunder shall be:
CTI Balloons
------------
11" Standards $3.50 per gross/packed in Hytex Bags
11" Crystals $3.50 per gross/packed in Hytex Bags
11" Metallics $4.00 per gross/packed in Hytex Bags
11" Pearls $4.00 per gross/packed in Hytex Bags
P&TF Balloons
12" Standards $2.90 per gross/packed in Pivoli Bags
12" Crystals $2.90 per gross/packed in Pivoli Bags
9" Standards $1.39 per gross/packed in Pivoli Bags
9" Crystals $1.39 per gross/packed in Pivoli Bags
5" Standards $0.62 per gross/packed in Pivoli Bags
5" Crystals $0.62 per gross/packed in Pivoli Bags
5.2 With respect to any Balloons other than designated in
paragraph 5.1 hereof which P&TF may manufacture during the term hereof,
or packaging other than that specified in paragraph 4.2 or 5.1 hereof,
the parties shall negotiate in good faith a price for such Balloons if
ordered by CTI, such prices to be consistent with the prices for the
Balloons designated in paragraph 5.1 hereof in termsof manufacturing
cost.
5.3 P&TF shall be entitled during the term hereof, upon 60
days prior written notice, to increase the price for any Balloon
hereunder solely to the extent of any demonstrable increase in the cost
of raw materials.
5.4 Atthe time of shipment of Balloons ordered, manufactured
and sold hereunder, P&TF shall prepare and deliver to CTI an invoice
for such Balloons. Delivery of the invoice may be by mail or facsimile
transmission.
5.5 For a period of one year from the date of this Agreement,
payment for Balloons manufactured, sold and delivered hereunder shall
be due at the time of shipment of the Balloons. From and after one year
from the date of this Agreement, payment for Balloons manufactured,
sold and delivered hereunder shall be due 30 days after the date of
shipment. Payment shall be made by CTI for Balloons purchased hereunder
by check or by wire transfer, at the discretion of CTI.
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5.6 All prices and amounts herein shall be expressed and paid
in United States currency.
5.7 All prices herein are FOB CTI's plant Barrington,
Illinois.
5.8 All prices herein are exclusive of any applicable sales,
use or excise taxes imposed by any governmental authority which may be
due with respect to the transaction. CTI shall be responsible for the
payment of any and all such taxes. P&TF may, if required to do so, make
payment for any of such taxes and shall include on its invoice to CTI
the amount thereof.
5.9 Notwithstanding the other provisions of this paragraph,
with respect to invoices issued for CTI Balloons more than 60 days
after CTI's first order for CTI Balloons hereunder, the amount due for
CTI Balloons designated and sold in the invoice shall be reduced by 40%
of the amount shown to be due on the invoice (being the price therefor
as set forth in paragraph 5.1 hereof) until the aggregate amount of the
reduction in price for CTI Balloons, by reason of the reduction in the
amount due provided for in this paragraph, shall be $400,000; provided
that the foregoing reduction shall be applicable with respect to the
first $1 million of purchases made within 12 months after CTI's first
order for CTI Balloons hereunder. The amount of such reductions shall
be credited against and deemed as payments for, the purchase price of
the Machines purchased pursuant to paragraph 2 hereof.
6. Warranty.
6.1 P&TF warrants to CTI the Balloons manufactured and sold by
it to CTI hereunder shall conform with the Specifications and shall be
free of defects in workmanship and materials.
6.2 CTI shall not be obligated to inspect any of the Balloons
at any time, it being understood that the Balloons shall be received in
packaged form and may be resold in such form, and the rights of CTI
hereunder with respect to any breach of warranty shall not be affected
by the fact that CTI shall, or shall not, have conducted an inspection
of any lot or shipment of Balloons manufactured and sold to it
hereunder.
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7. Indemnification. P&TF shall indemnify CTI, and its successors and
assigns, officers, directors, employees and agents, and save and hold each of
them harmless from and against any liabilities, claims, causes of actions,
suits, damages and expenses (including reasonable attorney's fees and expenses)
which CTI or any of such other persons indemnified herein is or becomes liable
for, or may incur, or may be called upon to pay, or may pay, by reason of:
7.1 Any personal injury suffered by any third party as a
result of the use of any Balloon sold hereunder;
7.2 Any injury, loss or damage suffered, or claimed to be
suffered, by any third party by reason of, or arising out of, the
violation by P&TF of any of its obligations in this Agreement or of any
warranty respecting the Balloons sold pursuant to this Agreement.
8. Term. The term of this Agreement for the purposes set forth herein
shall be a period of three years from the date hereof.
9. Termination. Either party hereto may terminate this Agreement as to
executory covenants or obligations of the party herein in the event of a
violation by the other party of any of its obligations hereunder and the failure
by such other party to cure such violation within 30 days after written notice
of the violation shall have been given.
10. Arbitration.
10.1 Any dispute, controversy or claim arising out of or in
relation to this Agreement including but not limited to its existence,
breach, termination or legal validity shall be finally and exclusively
settled by binding arbitration in accordance with the UNCITRAL
arbitration rules as are then in force by a single arbitrator appointed
by the Arbitration Center most proximate to Chicago, Illinois who will
be requested to provide the appropriate administrative services.
10.2 The place of the arbitration shall be Chicago, Illinois,
U.S.A. and the English language shall be used throughout the
arbitration proceedings.
10.3 The parties expressly agree to confer upon the arbitrator
the powers to fill gaps, cure contractual omissions and to perform all
other activities which he may deem necessary or appropriate.
10.4 The award of the arbitrator shall be the sole and
exclusive remedy between the parties regarding any claims and
counter-claims presented to the arbitrator and shall be final and
binding on the parties. The parties undertake to fully and punctually
abide by the award rendered by the arbitrator. Failing such voluntary
compliance, judgment upon the award or any other appropriate
8
<PAGE>
procedures may be entered or sought in any court having jurisdiction
thereof to secure enforcement of said award.
10.5 The final award of the arbitrator shall be payable in
United States currency without deduction or offset and costs, fees or
taxes incidental to the enforcement of the arbitration award shall be
charged in accordance with the decision of the arbitrator against a
party resisting enforcement. Payment of the award including interest
from the date of breach and violation shall be made in accordance with
the relevant provisions of this Agreement.
10.6 Nothing herein contained shall prevent any party hereto
from instituting an action at law against the other party requesting
temporary restraining orders, preliminary injunctions or other
procedures in a court of competent jurisdiction to obtain interim
relief when deemed necessary by such court to preserve the status quo
or prevent irreparable injury pending formal settlement of such dispute
by arbitration. Each of the parties does hereby consent to the
jurisdiction of the courts situated in the State of Illinois, U.S.A.
for such purposes and does hereby consent to service of process for any
action in such courts by notice delivered in accordance with notice
provisions of this Agreement.
11. Notices.
11.1 Any notice, demand, consent, service or other
communication required or permitted to be given under this Agreement
shall be in writing and addressed to the party at its address stated
below:
If to CTI John C. Davis
CTI Industries Corporation
22132 Pepper Road
Barrington, Illinois 60010, U.S.A.
If to P&TF Enrique Mora Velasco
Pulidos & Terminados Finos
Hugo Vasquez Reyes No. 33
Zapopan, Jalisco, Mexico
Any party may change the address to which notices to it shall be sent
hereunder by giving a proper notice of such change of address to the
other party hereunder.
11.2 Notices may be delivered by hand, registered mail, or fax
and shall be deemed to have been received as follows:
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11.2.1 If delivered by hand, at the time of delivery
to a responsible person at the address for the party;
11.2.2 If sent by fax, at the time of confirmation of
transmission provided a confirmation copy is sent by airmail
or registered mail within twenty-four hours after the
transmission; or
11.2.3 If sent by registered mail, at the time of
delivery or at the time attempted delivery in the case
delivery cannot be completed due to no fault of the sender.
If the time of such deemed receipt as provided above is not during the
customary business hours of the party, the notice shall be deemed to
have been received at 10:00 a.m. at the place of delivery on the first
customary day of business thereafter.
11.3 All such notices, demands, service or other
communications shall be in the English language.
12. Force Majeure. A party hereto shall not be in default hereunder or
be liable for any loss or damage for any delay in the performance of its
obligations hereunder due to causes beyond its control such as acts of God, acts
of the other party, acts of military authority, priorities, fires, strikes,
floods, epidemics, quarantine restrictions, war, riots, delays in
transportation, or inability due to causes beyond its reasonable control to
obtain necessary labor, material or manufacturing facilities.
13. Binding Effect. This Agreement shall be binding upon, and shall
inure to the benefit of, the parties hereto and their respective successors in
interest and, to the extent permitted herein, their assigns.
14. Assignment. This Agreement, and the rights and obligations of a
party, may not be assigned without the express written consent of the other
party; provided, however, that the rights and obligations of a party hereunder
may be assigned to a third party in connection with a transaction in which
substantially all of the assets, properties and business of the party are
acquired by a third party in a merger or purchase of all or substantially all of
the assets of the party and such third party executes an instrument by which it
agrees to assume and be bound by all of the obligations of the party in this
Agreement.
15. Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law. If any paragraph of this Agreement shall be unenforceable or
invalid under applicable law, such
10
<PAGE>
provision shall be ineffective only to the extent and duration of such
unenforceability or invalidity and the remaining substance of such provision and
the remaining paragraphs of this Agreement shall in such event continue to be
binding and in full force and effect.
16. Waivers. No failure by a party to exercise any of such party's
rights hereunder or to insist upon strict compliance with respect to any
obligation hereunder, and no custom or practice of the parties at variance with
the terms hereof, shall constitute a wavier by any party to demand exact
compliance with the terms hereof. Waiver by any party of any particular default
by any other party shall not affect or impair such party's rights in respect to
any subsequent default of the same or of a different nature, nor shall any delay
or omission of any party to exercise any right arising from any default by any
other party affect or impair such party's rights as to such default or any
subsequent default.
17. Entire Agreement. This Agreement constitutes the entire agreement
among the parties hereto with respect to the subject matter hereof and
supersedes all prior written or oral negotiations, representations, inducements,
understandings, commitments, contracts or agreements. This Agreement may be
amended or modified except by a written instrument signed by the parties hereto.
18. Governing Law. This Agreement shall be governed by, and shall be
construed and enforced in all respects in accordance with, the laws of the State
of Illinois, U.S.A.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
CTI INDUSTRIES CORPORATION
By:/s/ John C. Davis
----------------------------
John C. Davis
Chief Executive Officer
WITNESS:
- -----------------------------
- -----------------------------
PULIDOS & TERMINADOS FINOS
s.a. de c.v.
By: /s/ Enrique Mora Velasco
--------------------------
Enrique Mora Velasco
Director - Apodegrado
WITNESS:
- -----------------------------
EXHIBIT 10.12
AMENDMENT TO AGREEMENT
THIS AMENDMENT TO AGREEMENT is made and entered into this 24th day of
May, 1996 by and among CTI Industries Corporation ("CTI") and Pulidos et
Terminados Finos s.a. de c.v. (P&TF).
WHEREAS, CTI and P&TF have entered into that certain Agreement dated
September 8, 1995 ("Agreement");
WHEREAS, the parties desire to amend the Agreement as provided herein.
NOW, THEREFORE, in consideration of the premises and of the terms
herein provided, the parties hereto agree as follows:
1. Paragraph 8 of the Agreement is amended to provide that the term of
the Agreement shall be for a period of ten years from the date of the Agreement.
2. With regard to paragraph 5.9 of the Agreement relating to payment
for the Machines:
2.1 With respect to any invoice as to which a reduction in
payment would be provided for, P&TF shall have the option, for a period
of four years from the date of this Agreement, to defer the reduction
by so notifying CTI and CTI shall then pay the full amount of the
invoice, provided that from and after one year from the date of this
Agreement, CTI may deduct amounts from invoices during any year equal
to 20% of the total purchase price of the Machines;
2.2 The period of time within which deductions from invoices
to CTI shall be made to apply against the purchase price of the
Machines shall be extended and continue to the earlier of the date upon
which full payment of the purchase price shall have been made or four
years from the date hereof;
2.2 Any remaining balance of the purchase price for the
Machines shall be due and payable four years from the date of this
Agreement; provided that CTI and PT&F, jointly, may further extend such
payment date.
2. As amended hereby, the parties reaffirm the Agreement and the
Agreement shall remain in full force and effect for its term.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to
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Agreement as of the day and year first above written.
PULIDOS & TERMINADOS FINOS
s.a. de c.v.
By/s/ Enrique Mora Valasco
------------------------
Enrique Mora Valasco
Director
WITNESS:
- --------------------------
CTI INDUSTRIES CORPORATION
By/s/ Stephen M. Merrick
------------------------
Stephen M. Merrick
President
WITNESS:
/s/ Suzanne Trapani
2
EXHIBIT 10.13
AGREEMENT
AGREEMENT MADE AND ENTERED IN AS OF July 14, 1997 by and among CTI
INDUSTRIES CORPORATION, a corporation incorporated under the laws of Delaware,
U.S.A. ("CTI") and PULIDOS & TERMINADOS FINOS S.A. de C.V., a corporation
organized under the laws of Mexico (the "Company") and Alpes Promotora
Inmobiliaria S.A. de C. V., Juan Manuel Carrillo Coronado, Pablo Gortazar de
Oyarzabal, Francisco Hernandez Herrera, Jose Antonio Hernandez Amaya, Enrique
Mora Velasco, Rosa Maria Velasco de Mora, Enrique Mora Hernandez, Manuel Mora
Velasco, Ricardo Mora Velasco, Roberto Mora Velasco, Rosana Mora Velasco,
Veronica Mora Velasco, Alejandra Mora Velasco, Claudia Mora Velasco, Maria
Guadalupe Mora Velasco (collectively the "Stockholders").
DECLARATIONS
I. Whereas the Company is engaged in manufacture and sale of latex
balloons;
II. Whereas the Company has issued 1,928,364 shares, no par value, which
represent 100% of the capital stock;
III. Whereas the actual shareholders who enter into this Agreement haved
1,060,600 no par value shares subscribed and fully paid. Those shares
represent actually the 55% of the whole capital stock of the Company.
These shares are the only A shares authorized up to this moment to
exercise patrimonial and corporate rights of the Company.
IV. The Company has B shares in treasury which were previously issued but
not paid. They were not paid but authorized by virtue of the increase
of the capital stock by means of the shareholders' general meeting
which took place on May 2, 1997 (attached hereto is documentary proof
thereof). The increase of capital stock is represented by 867,764 no
par value shares ("B shares"). These shares will represent the 45% of
the remaining capital stock as soon as they are paid.
V. CTI wishes to subcribe and pay for a secured promissory note in the
amount of U.S. $1,200,000, to be secured by 477,270 shares of A shares,
and an option to purchase the 867,764 B shares by exchanging the
principal amount of such promissory note for such B shares;
THEREFORE, in consideration of the foregoing premises and mutual
covenants and agreements contained in this Agreement, the parties hereto agree
as follows:
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ARTICLE ONE
Subscription of Secured Note and Option
1.1 Sale and Issuance of Note and Option. Subject to the terms and
conditions of this Agreement, at the closing, CTI shall purchase a Secured
Promissory Note (in the form attached hereto as Exhibit A) in the principle
amount of US $1,200,000 and an Option (in the form attached hereto as Exhibit B)
to purchase 867,764 shares of Capital Stock of the Company, the B Shares, for an
aggregate purchase price of US$1,200,000, exercisable on or after February 1,
1998, and in consideration therefor shall:
(a) pay or cause to be paid to the Company the amount of U.S.
$1,200,000; such payment shall consist of and include (1) the
outstanding amount of the loan to the Company by CTI pursuant to
paragraph 1.2 hereof, (2) the principal amount of U.S. $400,000 which
the Company currently owes to CTI for the purchase of certain balloon
manufacturing equipment and which debt the Company hereby acknowledges
and (3) U.S.$400,000 to be paid at closing; and,
(b) loan or provide for a loan to the Company in the amount of
U.S. $800,000 on terms no less favorable than (1) a five year term, (2)
an interest rate of 2% over the "prime" rate published by The Wall
Street Journal, adjusted quarterly and (3) with principal payable in
equal quarterly installments over the term, together with interest
thereon. The loan shall be secured by an industrial mortgage on the
Company's business and assets.
The Secured Promissory Note shall be secured by the pledge to CTI by the
Stockholders of shares of Capital Stock of the Company owned by them
representing 45% of the presently outstanding Capital Stock of the Company. The
Stockholders shall execute a pledge agreement ("Pledge Agreement") in form and
substance satisfactory to CTI and shall deliver to CTI certificates, duly
endorsed in blank, representing such shares of Capital Stock to be held by CTI
as security for the payment and performance of the Secured Promissory Note. In
the event that the Company shall default on the Secured Promissory Note, CTI
shall be entitled to take, in payment of the Secured Promissory Note, all of the
shares pledged to it under the Pledge Agreement and such shares shall be deemed
B shares under the Shareholders Agreement.
1.2 Current Advances
(a) CTI agrees that prior to the Closing, it shall make loans
to the Company in an aggregate amount not to exceed U.S. $400,000.
Advances with respect to such loan shall be made within 10 days of a
written request by the Company; provided that the Company shall have
the right to request advances of no more than U.S. $100,000 in any
consecutive 20 day period.
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(b) The loan provided for in this paragraph 1.2 shall be
evidenced by a Promissory Note of the Company payable to CTI in the
principal amount of U.S. $400,000 due on December 31, 1998. The
Promissory Note shall not bear interest prior to November 30, 1997. In
the event that the Promissory Note shall not have been paid or
satisfied on or before November 30, 1997 by application to the purchase
price for the Secured Promissory Notes and Options as provided in
paragraph 1.1(a) hereof or as provided in paragraph 1.2(d) hereof, (i)
the principal amount of the Promissory Note outstanding from time to
time thereafter shall bear interest at the rate of 18% per annum from
and after November 30, 1997, and (ii) the Company shall be entitled to
make payment with respect to principal and interest due under the
Promissory Note in the amount of the purchase price of goods sold and
delivered to CTI, as they may be ordered from time to time by CTI. The
Promissory Note shall have no right of prepayment without the express
written consent of CTI prior to November 30, 1997.
(c) As security for the Promissory Note, each of the
Stockholders agree to pledge to CTI that number of shares which
represents 45% of the shares of stock of the Company owned by them and,
at the time of execution of this Agreement, shall deliver to CTI (1)
certificates representing such shares duly endorsed in blank and such
other documents as may be necessary or appropriate to effect transfer
of the shares in accordance with the provisions hereof and (2) an
executed Pledge Agreement.
(d) In the event that, on or before September 30, 1997, if all
conditions to the Closing for the benefit of CTI shall have occurred or
been performed, or on or before November 30, 1997, if any of such
conditions shall not have been performed or occurred on or before such
date, CTI shall have tendered to the Company all of the items provided
for in paragraphs 1.4(b) and (c) (that is, the payments provided for in
paragraph 1.1(a) and the loan provided for in paragraph 1.1(b)) and the
Company shall fail to complete the Closing and deliver to CTI all of
the items to be provided to CTI pursuant to paragraph 1.4 hereof, CTI
shall have the right, at its election to be exercised by written notice
to the Company, to transfer all of the shares pledged to it by the
Stockholders as provided herein. In the event that CTI shall so
transfer the shares of Stock pledged to it by the Stockholders, such
shares shall be and become B Shares under the Shareholders Agreement
among CTI, the Company and the Stockholders.
(e) The Company and the Stockholders covenant and agree that
they shall, concurrently with the execution of this Agreement, or as
soon thereafter as practicable:
(1) Execute and deliver the Shareholders Agreement;
(2) From and after the date hereof and pending the
purchase of the B Shares by CTI upon the exercise of the
Option, or the election of CTI to transfer the pledged shares
to CTI pursuant to paragraph 1.2(d), operate and perform
pursuant to the terms of this Agreement and the Shareholders
Agreement as if the Closing shall
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have taken place and the Option exercised for the purchase of
the B Shares or as if the pledged shares shall have been
transferred to CTI;
provided, however, that, if the Closing shall not occur on or before
November 30, 1997 by reason of the non-performance or non-occurrence of
any condition of this Agreement for the benefit of CTI and CTI shall
not elect to have transferred to it the shares pledged to CTI by the
Stockholders pursuant to this paragraph, then the Shareholders
Agreement shall be terminated and canceled and shall be of no further
force or effect and the Company and Stockholders shall not be bound by
the provisions of this paragraph 1.2(e).
1.3 Closing Date. The parties agree that the Closing shall take place
on September 30, 1997, provided that if CTI's closing conditions as set forth in
Article 5 have not occurred or been satisfied as of such date, the Closing shall
be extended until such conditions have been satisfied. Notwithstanding the
above, if the conditions have not been satisfied or waived by November 30, 1997,
CTI shall have the right not to proceed with the Closing and to require payment
of the Promissory Note in accordance with its terms and the terms provided
herein.
1.4 Closing Deliveries. At the Closing, the certificates, documents and
other contracts described herein, as specified below, will be delivered:
(a) The Company will deliver to CTI a Secured Promissory Note
in the form attached hereto as Exhibit A in the aggregate principal
amount of $1,200,000 and an Option in the form attached hereto as
Exhibit B for the purchase of 867,764 B Shares for an aggregate
purchase price of $1,200,000, such Option to be exercisable at any time
after February 1, 1998.
(b) CTI will deliver to the Company the amount provided in
Section 1.1(a) in immediately available funds other than obligations
applied to payment.
(c) CTI will provide the loans as provided in Section 1.1(b);
(d) The Company and Stockholders will execute all necessary
loan documents;
(e) CTI will return to the Stockholders certificates
representing the pledged shares as provided in Section 1.3; and
(f) CTI, the Company and the Stockholders will execute and
deliver each of the other documents and instruments required to be
delivered under the terms of this Agreement.
1.6 Further Assurances. At or after the Closing, and without further
consideration, the Stockholders and the Company shall execute and deliver to CTI
such further instruments of conveyance and transfer and such other documents as
CTI may reasonably request to more
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effectively convey and transfer to CTI the Secured Promissory Note, the Option
and the B Shares of capital stock upon exercise thereof..
ARTICLE TWO
Representations and Warranties of the Company and the Stockholders
The Company and each of the Stockholders, jointly and severally, hereby
represent and warrant to CTI as follows:
2.1 Organization. The Company is a corporation duly organized, validly
existing, and in good standing under the laws of Mexico and has full corporate
power to own its properties and to conduct its business as presently conducted.
The Company is duly, authorized, qualified or licensed to do business in Mexico
or abroad or other jurisdiction in which its assets are located or in which its
business or operations as presently conducted make such qualification necessary.
2.2 Authority. The Company has granted all requisite power and
authority to execute, deliver and perform this Agreement and all other documents
and instruments contemplated by this Agreement to its representatives Juan
Manuel Carrillo Coronado and Enrique Mora Velasco. The Stockholders have all
requisite power and authority to execute, deliver, and perform this Agreement
and all other documents and instruments contemplated by this Agreement. The
execution, delivery and performance of this Agreement and related documents by
the Company and the Stockholders have been authorized by all necessary action,
corporate or otherwise. The obligations undertaken hereunder by the Company and
the Stockholders are legal, valid and binding obligations.
2.3 Corporate Records. The Company and the Stockholders have delivered
to CTI true, correct and complete copies of the certificate of incorporation,
bylaws, minutes books and stock record books of the Company. The minute books of
the Company contain complete and accurate minutes or consents reflecting all
actions taken by the directors (including any committees) and security holders
of the Company.
2.4 Capitalization. The Company currently has an authorized capital
stock of 1,928,364 shares of which 1,060,600 are A shares and 867,764 are B
shares. There are no outstanding options, warrants, convertible securities or
other rights, agreements, arrangements, or commitments obligating the Company,
any Stockholder or any other Person (as defined below) to issue or sell any
securities or ownership interests in the Company. There are no stockholders'
agreements, voting agreements, voting trusts, or similar agreements binding on
any Stockholder or applicable to any of the Shares. The "B" Shares when issued
to CTI upon conversion of the Option shall represent 45% of the then outstanding
shares of capital stock of the Company.
2.5 Title to the Shares. The Shares are duly issued treasury shares in
accordance with Article 216 of the General Law of Business Organizations ("Ley
General de Socladades Mercantiles") and Article of the bylaws of the Company.
The B Shares are free and clear of any lien, pledge, security interest,
liability, charge or other encumbrance or claim of any Person (a "Lien"). Upon
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exercise of the Option, CTI will acquire the entire legal and beneficial
interest, in all of the B Shares, free and clear of any Liens.
2.6 No Violation. Neither the execution or the delivery of this
Agreement and its attachments nor the consummation of the transactions
contemplated by this Agreement including without limitation the subscription of
the Shares by CTI will conflict with or result in the breach of any term or
provision of, or violate, or constitute a default under, or result in the
creation of any Lien on the Company's assets pursuant to, or relieve any third
party of any obligation to the Company, give any third party the right to
terminate or accelerate any obligation under or increase the rights of any
person under or increase the liabilities or obligation of the Company under, any
charter provision, bylaws, Material Agreement (as defined in Section 2.18),
Permit (as defined in 2.13), order, law or regulation to which the Company or
any of the Stockholders is a party or by which the Company, any of the
Stockholders, or any of their respective assets is in any way bound or
obligated, except for violations or beaches that would not have a material
adverse effect on the Company or its assets. For purposes of this Agreement, the
term "Material Adverse Effect" shall mean such effect as would (I) cause the
Company not to be able to operate immediately after Closing in the business,
currently conducted, or contemplated by CTI, absent any expenditure that is not
specifically provided for herein, or (ii) preclude the consummation of any
transaction contemplated herein.
2.7 Financial Statements. Attached as Schedule 2.7 is a true and
complete copy of the unaudited balance sheet, statement of income, and cash
flows of the Company ( the "Financial Statements") for the five months ending
and as of May 30, 1997 (the Balance Sheet Date"). The Financial Statements
present fairly the financial condition of the Company at the dates specified and
the results of its operations for the periods specified and have been prepared
in accordance with Mexican Generally Accepted Accounting Principles ("MGAAP")
consistently applied, subject in the case of the unaudited statements to changes
resulting from normal period-end adjustments for recurring accruals (which will
not have a material adverse effect on the financial condition of the Company)
and to the absence of footnote disclosure and other presentation items. The
Financial Statements do not contain any items of a special or nonrecurring
nature, except as expressly stated in the Financial Statements. The Financial
Statements have been prepared from the books and records of the Company, which
accurately and fairly reflect all the transactions of acquisitions and
dispositions of assets by, and incurrence of liabilities by the Company.
2.8 Absence of Undisclosed Liabilities. The Company will have no direct
or indirect debts, obligations or liabilities of any nature, whether absolute or
contingent, accrued or unaccrued, asserted or unasserted, known or unknown, or
otherwise and whether due or to become due, (collectively "Liabilities"), except
for (I) liabilities specifically identified in the Financial Statements as
"current liabilities" in accordance with MGAAP and that are not related to
indebtedness for borrowed money, (ii) obligations to be performed in the
ordinary course of business since the Balance Sheet Date, and (iii) obligations
set forth in Schedule 2.8.
2.9 Absence of Material Adverse Change. Since the Balance Sheet Date,
except as specifically contemplated by this Agreement, there has not been: (a)
any material adverse change in
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the condition (financial or otherwise), results of operations, business,
prospects, assets, or Liabilities of the Company or with respect to the manner
in which the Company conducts its business or operations; (b) any payment or
transfer of assets (including without limitation any dividend, stock repurchase,
or other distribution or any repayment of indebtedness ) to any of the
Stockholders or their respective affiliates; (c) any breach or default (or event
that with notice or lapse of time would constitute a breach or default),
termination, or threatened termination under any Material Agreement; (d) any
material theft, damage, destruction, casualty loss, condemnation, or eminent
domain proceeding affecting the Company's assets, whether or not covered by
insurance; (e) any sale, assignment, or transfer of any of the assets of the
Company, except in the ordinary course of business and consistent with past
practices; (f) any waiver by the Company of any rights related to the Company's
business, operations, or assets, except in the ordinary course of business; (g)
any other transaction, agreement, or commitment entered into by the Company or
any of the Stockholders affecting the Company's business, operations or assets,
except in the ordinary course of business and consistent with past practices; or
(h) any agreement or understanding to do or resulting in any of the foregoing.
2.10 Taxes. Except as set forth in Schedule 2.10, all required federal,
state, local, and other tax returns, notices, and reports (including without
limitation income, property, sales, use, franchise, withholding, social security
tax returns) relating to or involving transactions with the Company have been
accurately prepared and duly and timely filed, and all taxes required to be paid
with respect to the periods covered by any such returns have been timely paid.
No tax deficiency has been proposed or assessed against the Company, and the
Company has not executed any waiver of any statute of limitations on the
assessment or collection of any tax. No tax audit, action, suit, proceeding,
investigation, or claim is now pending or, to the knowledge of the Company or
any of the Stockholders, threatened against the Company, and no issue or
question has been raised (and is currently pending ) by any taxing authority in
connection with the Company's tax returns or reports. The Company has withheld
or collected from each payment to its employees the full amount of all taxes
required to be withheld or collected therefrom and has paid all such taxes to
the proper tax receiving officers or authorized depositories. Neither the
Stockholders nor the Company has given or been requested to give waivers or
extensions (or is or would be subject to a waiver or extension given by any
other Person) of any statute of limitations relating to the payment of taxes of
the Company or for which the Company may be liable.
2.11 Litigation. Except as described in Schedule 2.11 hereto, there are
no pending, or to the knowledge of the Company or the Stockholders, threatened
lawsuits, administrative proceedings, or reviews, or formal or informal
complaints or investigations by any individual, corporation, partnership,
Governmental Body, or other entity ( a "Person") against or relating to the
Company or any of its directors, employees, or agents (in their capacities as
such) or to which any assets of the Company are subject. Neither the
Stockholders nor the Company is not subject to or bound by any currently
existing judgment, order, writ, injunction, or decree.
2.12 Compliance with Laws. The Company is currently complying with, and
has at all times complied with, and the use, operation, and maintenance of its
assets comply with and have at
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all times complied with, and neither the Company nor its assets nor the use,
operation, or maintenance of its assets is in violation or contravention of, any
applicable statute, law, ordinance, decree, order, rule, or regulation of any
Governmental Body, except for violations that would not have a material adverse
effect on the Company or its assets.
2.13 Permits. The Company owns and possesses for each appropriate
Governmental Body all right, title, and interest in all permits, licenses,
authorizations, approvals, quality certifications, franchises, all rights
(individually, "Permit", collectively "Permits") issued by an Governmental Body
necessary to conduct its business, except where the failure to obtain a Permit
would not have a material adverse effect on the Company or its assets. Each of
such Permits is described in Schedule 2.13 hereto. No loss or expiration of any
such Permit is pending, or to the knowledge of the Company or the Stockholders,
threatened or enforceable, other than expiration in accordance with the terms of
Permits that may be renewed in the ordinary course of business without lapsing.
2.14 Environmental Matters. The Company is not in violation of any
environmental law that could have a material adverse effect on the Company, its
assets or its business.
2.15 Employee Matters. The consummation of the transactions
contemplated by this Agreement and attachments hereto will not accelerate the
time of payment or vesting or increase the amount of compensation due to any
director, officer or employee (present or former) of the Company. The Company
has never experienced, and neither the Company nor the Stockholders know or have
reasonable grounds to know of any basis for, any strike, labor trouble, work
stoppage, slowdown or other interference with or impairment of the business of
the Company.
2.16 Title to Assets. Set forth in Schedule 2.16 hereto is a complete
list (including the street address, where applicable) of (i) all real property
currently owned by the Company; (ii) all real property currently leased or
otherwise used by the Company, (iii) all real property formerly owned leased or
otherwise used by the Company, indicating the nature of any facilities or
operations of the Company on such property and the date and manner of
disposition; (iv) each vehicle owned or leased by the Company, and (v) each
asset owned or leased by the Company with a book value or fair market value
greater than U.S. $5,000. The Company has good and marketable title to all of
its assets, including without limitation, the assets listed on Schedule 2.16
(other than those described in (iii) above), the assets reflected on the
Financial Statements and all assets used by the Company in the conduct of its
business (except for assets disposed of since the Balance Sheet Date in the
ordinary course of business for fair value to Persons that are not affiliates of
the Company or any of the Stockholders and consistent with past practices and
except for assets held under leases or licenses disclosed pursuant to Section
2.18); and all such assets are owned free and clear of any Liens, except for (A)
minor imperfections of title and encumbrances that do not materially detract
from or interfere with the use or value of such properties; and (B) liens
securing liabilities of the Company reflected on the Financial Statements.
2.17 Condition of Properties. Except as set forth in Schedule 2.17, all
facilities, machinery, equipment, fixture, vehicles, and other tangible property
owned, leased or used by the
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Company are in good operating condition and repair, normal wear and tear
excepted, are reasonably fit and usable for the purposes for which they are
being used, will not likely require major overhaul or repair in the foreseeable
future, are adequate and sufficient for the Company's business, and conform with
all applicable laws, rules and regulations, except as would not have a material
adverse effect on the Company or its assets. The Company maintains policies of
insurance issued by insurers of recognized responsibility insuring the Company
and its assets and business against such losses and risks, and in such amounts,
as are customary in the case of corporations of established reputation engaged
in the same or similar businesses and similarly situated.
2.18 Material Agreements.
(I) Schedule 2.18 lists each agreement (whether written or
oral and including all amendments) to which a Company is a party or a
beneficiary or by which the Company or any of its assets is bound
(collectively the "Material Agreements"), including without limitation
(A) any real estate leases; (B) any agreement that is material to the
business, operations or prospects of the Company; (C) any agreement
evidencing, securing, or otherwise relating to any indebtedness for
which the Company is liable; (D) any capital or operating leases or
conditional sales agreements relating to vehicles, equipment or other
assets of the Company; (E) any supply or manufacturing agreements or
arrangements pursuant to which the Company is entitled or obligated to
require any assets from a third party; (F) any insurance policies; (G)
any employment, consulting, non-competition, separation, collective
bargaining, union or labor agreements or arrangements; (H) any
agreement with or for the benefit of any of the Stockholders, any
director, officer or employee of the Company or any affiliate or family
member of such Person, and (I) any other agreement or arrangement
pursuant to which the Company could be required to make or entitle to
receive aggregate payments in excess of U.S. $5,000.
(ii) The Stockholders and the Company have delivered to CTI a
copy of each Material Agreement. Except as described in Schedule 2.18
(A) each Material Agreement is valid, binding, and in full force in
effect and enforceable in accordance with its terms; (B) the Company
has performed all its obligations under each Material Agreement, and
there exists no breach or default (or event that with notice of lapse
of the time would constitute a breach or default) under any Material
Agreement; (C) there has been no termination or notice of default or
any threatened termination under any Material Agreement and (D) no
consent of any Person is required in connection with the transactions
contemplated by this Agreement in order to preserve the rights of the
Company under or to prevent any disadvantage to the Company in respect
of any Material Agreement.
2.19 Intellectual Property Rights. Except as set forth in Schedule 2.19
there are not other registered patents, trademarks, service marks, trade names,
and copyrights, and applications for, and licenses (to or from the Company) with
respect to, any of the foregoing (collectively "Registered Intellectual
Property"), owned by the Company or with respect to which the Company has any
rights.
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2.20 Subsidiaries and Investments. Except as set forth in Schedule in
2.20 the Company does not own any direct or indirect equity or debt interest in
any other Person, including, without limitation, any interest in a partnership
or joint venture (other than with CTF International), and the Company is not
obligated or committed to acquire any such interest.
2.21 Competing Interests. None of the Company, Stockholders, nor any
director, officer, relatives, or affiliate of any of such Persons owns, directly
or indirectly, an interest in any Person that is a competitor for the same
business, customer, or supplier of the Company or that otherwise has business
dealings with the Company other than Comercializadora Hecht SA de CV and CTF
International SA de CV.
2.22 Illegal or Unauthorized Payments; Political Contributions. Neither
the Company, nor any of its officers, directors, employees, agents, or other
representatives or, to the knowledge of the Company or the Stockholders, any
other Person with which the Company is or has been affiliated or associated, has
directly or indirectly, made or authorized any payment, contribution, or gift of
money, property, or services, whether or not in contravention of applicable law,
(a) as a kickback or bribe to any Person or (b) to any political organization,
or the holder of or any aspirant to any elective or appointive public office,
except for person political contributions not involving the direct or indirect
use of funds of the Company. The Company has not violated any federal or state
antitrust statutes, rules or regulations, including without limitation those
relating to unfair competition, price fixing, bid rigging, or collusion.
2.23 Governmental Consents. Schedule 2.23 sets forth all consents,
approvals, orders or authorizations of, or registrations, qualifications,
designations, declarations, or filing with Governmental Body that is required on
the part of the Company or any of the Stockholders in connection with the
transactions contemplated by this Agreement or attachments hereto.
2.24 No Misrepresentations; Adverse Information. The Company and the
Stockholders have disclosed to CTI all facts and information known to them that
would be material to a purchase of the Convertible Notes. Neither the Company
nor the Stockholders have received any appraisal, report, or other similar
information relating to the value or condition of the Company or any of its
assets. The representations, warranties and statements made by the Company and
the Stockholders in or pursuant to this Agreement (including the Schedules to
this Agreement) are true, complete, and correct in all material respects and do
not contain any untrue statement of a material fact or omit to state any
material fact necessary to make any such representation, warranty, or statement,
under the circumstances in which it is made, not misleading. Neither the Company
nor the Stockholders have any information or knowledge of any change
contemplated in any applicable law, ordinances or restrictions, or any judicial
or administrative action, which would have a material adverse effect upon the
business or assets of the Company, or its value.
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ARTICLE THREE
Representations and Warranties of CTI
CTI represents and warrants to the Company as follows:
3.1 Organization. CTI is a corporation duly organized, validly
existing, and in good standing under the laws of Delaware, U.S.A.
3.2 Authority. CTI has all requisite power and authority to execute,
deliver, and perform under this Agreement. The execution, delivery, and
performance of this Agreement by CTI has been duly authorized by all necessary
action, corporate or otherwise, on the part of CTI. This Agreement has been duly
executed and delivered by CTI and is a legal, valid, and binding agreement of
CTI enforceable against CTI in accordance with its terms.
3.3 No Violation. The execution, delivery, and performance of this
Agreement by CTI will not conflict with or result in the breach of any term or
provision of, or violate or constitute a default under, any charter provision or
bylaw or under any material agreement, instrument, order, law, or regulation
which CTI is a party or by which CTI is any way bound or obligated
ARTICLE FOUR
Covenants and Agreements
4.1 Release of the Stockholders. Each of the Stockholders, for
themselves and their respective heirs, executors, administrators, successors,
and assigns, hereby fully and unconditionally release and forever discharge and
hold harmless each of the Company, CTI and their respective employees, officers,
directors, successors, and assigns from any and all claims, demands losses,
costs, expenses (including reasonable attorneys' fees and expenses),
obligations, liabilities, and damages of every kind and nature whatsoever,
whether or not now existing or known, relating in any way, directly or
indirectly, to the Company, that such Stockholder may now have or may hereafter
claim to have against the Company, CTI or any of such employees, officers,
directors, successors, or assigns; provided that the foregoing release will not
affect any obligations of CTI to the Stockholders under this Agreement or the
attachments thereto nor will it affect any current obligation of the Company to
the Stockholders as show on the Financial Statements.
4.2 Publicity. CTI and the Company will cooperate with each other in
the development and distribution of all news releases and other public
disclosures relating to the transactions contemplated by this Agreement. Neither
CTI on the one hand, nor the Stockholders or the Company, on the other hand,
will issue or make, or allow to have issued or made, any press release or public
announcement concerning the transactions contemplated by this Agreement without
the advance approval in writing of the form and substance thereof by the other
parties, unless otherwise required by applicable legal or stock exchange
requirements.
4.3 Transaction Costs. The Company will pay all attorneys',
accountants', finders', brokers', investment banking and other fees, costs, and
expenses incurred by the Company or the Stockholders prior to the Closing, or by
the Stockholders after the Closing in connection with the
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preparation, negotiation, execution, and performance of this Agreement and
attachments hereto or any of the transactions contemplated by this Agreement and
attachments hereto. CTI will pay all attorneys', accountants', finders',
brokers', investment banking and other fees, costs and expenses that it incurs
in connection with the preparation, negotiation, execution and performance of
this Agreement or any of the transactions contemplated by this Agreement.
4.4 Nondisclosure. Each of the Stockholders acknowledges and agrees
that all customer, prospects, and marketing lists, sales data, intellectual
property, proprietary information, and trade secrets of the Company
(collectively, "Confidential Information") are valuable, special, and unique
assets and are and will be owned exclusively by the Company. Each of the
Stockholders agrees to treat the Confidential Information as confidential and
not disclose any Confidential Information to any Person or make use of any
Confidential Information for such Stockholder's own purposes or for the benefit
of any other Person (other than the Company).
4.5 Charter Amendments. Upon exercise of the Option, the Company and
the Stocholders will take such action as is necessary and appropriate to cause
the Charter of the Company to be amended consistent with the terms of the
Shareholders' Agreement.
ARTICLE FIVE
Closing Conditions
5.1 Conditions to Obligations of CTI. The obligations of CTI under this
Agreement are subject to the satisfaction at or prior to the Closing of the
following conditions, but compliance with any such condition may be waived by
CTI in writing:
(a) An order shall have been entered terminating the pending
suspension of payments proceedings involving the Company.
(b) The obligations of the Company to BanCrecer (in the
present principal amount of approximately US $1.1 million shall have
been satisfied or paid in full or shall have been renegotiated on other
terms satisfactory to CTI.
(c) CTI shall have completed a public offering of its
securities in an aggregate amount of not less than U.S. $6,000,000.
(d) All representations and warranties of the Company and the
Stockholders contained in this Agreement and the attachments thereto
must be true and correct in all material respects at and as of the
Closing with the same effect as though such representations and
warranties were made at and as of the Closing.
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(e) The Company and the Stockholders must have performed and
complied with all the covenants and the agreements and satisfied the
conditions required by this Agreement to be performed, complied with or
satisfied by them at or prior to the Closing, including without
limitation, the delivery of all items required to be delivered by them
pursuant to Section 1.4.
(f) There must be no pending or threatened litigation in any
court or any proceeding before or by an Governmental Body against any
of the Stockholders, the Company or CTI to restrain or prohibit or
obtain damages or other relief with respect to this Agreement or the
attachments hereto or the consummation of the transactions contemplated
by this Agreement or the attachments thereto.
(g) All necessary contractual and governmental consents will
be obtained to comply with the applicable laws and regulations.
(h) Execution of a Stockholders Agreement by and between the
Stockholders and CTI in form reasonably satisfactory to CTI.
(I) The satisfactory completion of due diligence audit by
counsel of CTI.
(j) The Stockholders must have delivered to CTI a legal
opinion of their counsel dated on or before the date of Closing in the
form of Exhibit C and addressing such other matters as CTI reasonably
requests.
(k) All documents and proceedings related to the Closing and a
subscription of the Shares must be satisfactory in form and substance
to CTI.
5.2 Conditions to Obligations of Stockholders and the Company. The
obligation of the Stockholders and the Company under this Agreement are subject
to the satisfaction at or prior to Closing of the following conditions, but
compliance with any such conditions may be waived by the Stockholders and the
Company in writing:
(a) All representations and warranties of CTI contained in
this Agreement must be true and correct in all material respects at and
as of the Closing with the same effect as though such representations
and warranties were made at and as of the Closing.
(b) CTI must have performed and complied with the covenants
and agreements and satisfied the conditions required by this Agreement
to be performed, complied with, or satisfied by it or prior to the
Closing, including without limitation, the delivery of all items
required to be delivered by CTI pursuant to Section 1.4
(c) All necessary governmental consents, approvals, orders,
and authorizations must have been obtained and all necessary
governmental notices have been given with respect
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to this Agreement and attachments thereto and the transactions
contemplated by this Agreement and its attachments.
ARTICLE SIX
Indemnification
6.1 Indemnification of CTI. The Company and the Stockholders jointly
and severally, will indemnify and hold CTI, its subsidiaries, and their
respective affiliates, directors, officers, employees, and agents ("the CTI
Parties") harmless from any and all liabilities, obligations, claims,
contingencies, damages, costs, diminution in value of the B Shares, and
expenses, including all court costs and reasonable attorneys' fees (the
"Claims"), that any CTI Party may suffer or incur as a result of or relating to:
(a) the breach or inaccuracy, or any alleged breach or
inaccuracy, of any of the representations, warranties, covenants, or
agreements made by the Company or the Stockholders in this Agreement or
any attachment or pursuant to this Agreement or any attachment; and
(b) any lawsuit, claim, or proceeding of any nature existing
at or prior to the Closing, or arising out of any act or transaction of
the Stockholders or the Company occurring prior to the Closing, or
arising out of facts or circumstances that existed at or prior to the
Closing that is related to the Company, its assets or the operation of
its business.
6.2 Defense of Claims. Except as set forth below, if any lawsuit or
enforcement action is filed against any CTI Party entitled to the benefit of
indemnity hereunder, written notice thereof describing such lawsuit or
enforcement action in reasonable detail and indicating the estimated amount of
the reasonably foreseeable Claims (which estimate shall in no way limit the
amount of indemnification the CTI Party is entitled to receive hereunder), shall
be given to the Stockholders as promptly as practicable (and in any event within
three days, after the service of the citation or summons); provided that the
failure of any CTI Party to give timely notice shall not affect is rights to
indemnification hereunder except to the extent that the Stockholders demonstrate
that the CTI Party's failure to so notify the Stockholders with such ten (10)
day period increased the Claims with respect to which the CTI Party is otherwise
entitled to indemnification. Upon receipt of such notice, the Stockholders shall
have the right, but not the obligation, to undertake the defense of or, with the
consent of the CTI Party (which consent may not be unreasonably withheld), to
settle or compromise such claim. If the Stockholders elect to defend any such
asserted liability and to assume all obligations contained in Section 6.1 to
indemnify the CTI Party, then the Stockholders shall so notice the CTI Party and
shall be entitled if they so elect, to take control of the defense and
investigation of such lawsuit or action and to employ and engage attorneys of
their own choice to handle and defend the same, at the Stockholders' sole cost,
risk and expense, and such CTI Party shall cooperate in all reasonable respects,
at the Stockholders' sole cost, risk and expense, with the Stockholders and such
attorneys in the investigation trial, and defense of such lawsuit or action and
any appeal arising
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therefrom; provided however, that the CTI Party may, at its own cost and
expense, participate in such investigation, trial and the defense of such
lawsuit or action and any appeal arising therefrom. If the Stockholders promptly
notify the CTI Party that they intend to defend the claim and to assume all
obligations contained in Section 6.1 to indemnify the CTI Party, the CTI Party
shall not pay, settle or compromise such claim without the Stockholders' consent
(which consent shall not be unreasonably withheld). If the Stockholders elect
not to defend the Claim of the CTI Party, The CTI Party may, but shall not be
obligated to, undertake the defense of or, with the consent of Stockholder
(which consent may not be unreasonably withheld), settle or compromise such
claim, on behalf, for the account, and at the risk, of the Stockholders.
6.3 Survival. All representations and warranties made in or pursuant to
this Agreement will survive the execution and delivery of this Agreement and the
consummation of the transactions contemplated by this Agreement, and will be
unaffected by any notice, investigation, or knowledge to the contrary. All
statements contained in any Schedule, certificate, attachments hereto, or other
writing delivered in connection with this Agreement or the transactions
contemplated by this Agreement will constitute representations and warranties
under this Agreement. Each party agrees that no other party to this Agreement
will be under any duty, express or implied, to make any investigation of any
representation or warranty made by any other party to this Agreement, and that
no failure to so investigate will be considered negligent or unreasonable. All
Statements contained in any schedule, certificate, or other writing delivered in
connection with this Agreement or the transactions contemplated by this
Agreement will constitute representations and warranties under this Agreement.
ARTICLE SEVEN
Noncompetition Agreement
7.1 Noncompetition. Each of the Stockholders hereby agree to refrain
for a period of two years after the Closing (the "Non-Compete Period"), directly
or indirectly, as an employee, consultant, advisor, referring source, agent of,
or investor in, any Person from:
(a) engaging in the manufacture, sale, or distribution of
latex balloons (the "Business") within 200 kilometers of any city in
which the Company, its subsidiaries, or their respective successors and
assigns engage in the Business at such time (the "Territory");
(b) directly or indirectly influencing or attempting to
influence any customer or potential customer of the Company, its
subsidiaries, or their respective successors and assigns to purchase
products related to the Business from any person other than Company,
its subsidiaries, or their respective successors and assigns.
(c) employing or attempting to employ or solicit for any
employment competitive with the Company, its subsidiaries, or their
respective successors and assigns any individuals who are employees of
the Company, its subsidiaries, or their respective successors and
assigns
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at any time at which any Stockholders employs or attempts to employ or
solicit such individuals (or were employees of the Company, its
subsidiaries, or their respective successors and assigns within one
year prior to such time) or influence or seek to influence any such
employees to leave the Company's its subsidiaries', or there respective
successors' or assigns' employment;
provided that all provisions of (a) above will not apply to (I) any investment
in publicly traded securities constituting less than 2% of the outstanding
securities in such class, or (ii) to the ownership of an interest in, or the
provision of services to Hecht. Each of the Stockholders acknowledges that such
Stockholder's obligations under this Article Seven are a material inducement and
condition to CTI entering into this Agreement and performing the transactions
contemplated by this Agreement. Each of the Stockholders acknowledges that this
Section 7.1 is necessary to protect the interest of CTI and its affiliates and
that the restrictions and remedies contained in this Agreement are reasonable in
light of the consideration and other value the Stockholders have accepted
pursuant to this Agreement. If any provision of this Section 7.1 should be found
by any court of competent jurisdiction to be unenforceable by reason of its
being too broad as to the period of time, territory, and/or scope, then and in
that even, such provision will nevertheless remain valid and fully effective,
but will be considered to be amended so that the period of time, territory,
and/or scope set forth will be changed to be the maximum period of time, the
largest territory, and/or the broadest scope, as the case may be, that would be
found enforceable by such court. Should any Person violate this Section 7.1 the
period of time of the Non-Compete Period will automatically be extended for a
period of time equal to the period of time such person began such violation
until such violation permanently ceases.
7.2 Liquidated Damages. In the event of a violation of this Article
Seven, will be entitled to liquidated damages from the Stockholders in the
amount of U.S. $1,000.00 per day for each day the violation continues.
ARTICLE EIGHT
Miscellaneous
8.1 Notices. All notices that are required or may be given pursuant to
this Agreement must be in writing and delivered personally, by a recognized
courier service or by facsimile, to the parties at the following address (or to
the attention of such other person or such other address as any party may
provide to the other parties by notice in accordance with this Section 8.1):
If to CTI: Howard W. Schwan
President
CTI Industries Corporation
22166 N. Pepper Road
Barrington, IL 60010,
U.S.A.
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If to the Company: Enrique Mora V.
Hugo Vazquez Reyes #33
Zapopan, Jalisco, Mexico
With a copy to: Juan Manuel Carrillo Coronado
At his address as shown herein
If to the Shareholders: To the address set forth next to
their signatures
Any such notice or other communication will be deemed to have been given and
received when actually received.
8.2 Attorneys' Fees and Costs. If attorneys' fees or other costs are
incurred to secure performance of any obligations under this Agreement, or to
establish damages for the breach of this Agreement or to obtain any other
appropriate relief, whether by way of prosecution or defense, the prevailing
party will be entitled to recover reasonable attorneys' fees and costs incurred
in connection therewith.
8.3 No Brokers. Each party to this Agreement represents to the other
party that it has not incurred and will not incur any liability for brokerage
fees or agents' commissions in connection with this Agreement or the
transactions contemplated by this Agreement, and agrees that it will indemnify
and hold harmless the other parties against any claim for brokerage and finders'
fees or agents' commissions in connection with the negotiation or consummation
of the transactions contemplated by this Agreement.
8.4 Counterparts. This Agreement may be executed in counterparts for
the convenience of the parties to this Agreement, all of which together will
constitute one and the same instrument.
8.5 Assignment Neither this Agreement nor any of the rights, interests,
or obligations under this Agreement will be assigned or delegated by the
Company, the Stockholders or CTI without the prior written consent of the other
parties; except that CTI may assign its rights and obligations under this
Agreement to any direct or indirect subsidiary of CTI. This Agreement is not
intended to confer any rights or benefits to any person (including, without
limitation, any employees of the Company) other than the parties to this
Agreement.
8.6 Entire Agreement. This Agreement and the related documents
contained as Exhibits and Schedules to this Agreement or expressly contemplated
by this Agreement contain the entire understanding of the parties relating to
the subject matter of this Agreement and supersede all prior written or oral and
all contemporaneous oral agreements and understandings relating to the subject
matter of this Agreement and supersede all prior written or oral and all
contemporaneous oral agreements and understandings relating to the subject
matter of this Agreement. This Agreement cannot be modified or amended except in
writing signed by the party against whom enforcement is
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sought. The Exhibits and Schedules to this Agreement are by this Agreement
incorporated by reference into and made a part of this Agreement for all
purposes.
8.7 Governing Law. This Agreement will be governed by and construed and
interpreted in accordance with the substantive laws of Mexico, without giving
effect to any conflicts-of-law rule or any other principle that might require
the application of the laws of another jurisdiction.
8.9 Arbitration. Except as otherwise specifically set forth herein, the
parties agree to submit any and all disputes relating to this Agreement to final
and binding arbitration. Any such disputes will be resolved by arbitration in
accordance with the Commercial Arbitration Rules of the Commercial Code of the
United Mexican States ("Commercial Code"), which arbitration proceedings must be
conducted in Mexico D.F. All arbitration proceedings will be conducted in both
English and Spanish. Unless the parties agree otherwise, within thirty (30) days
after initiation of an arbitration hereunder the Company and the Stockholders,
on the one hand, and CTI on the other hand, will designate an arbitrator
pursuant to the Commercial Code rules. The two appointed arbitrators will then
appoint a neutral arbitrator in the matter prescribed in the Commercial Code
rules. The parties also agree that judgment of a court of competent jurisdiction
may be entered upon any award made pursuant to arbitration hereunder.
IN WITNESS WHEREOF, the parties to this Agreement have executed this
Agreement as of the date first above written.
CTI INDUSTRIES CORPORATION
By: /s/ Howard W. Schwan
--------------------------
Howard W. Schwan, President
PULIDOS & TERMINADOS FINOS S.A. de C.V.
By: /s/ Juan Manuel Carrillo Coronado
---------------------------------
Authorized Officer
/s/ Enrique Mora Velasco
------------------------
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STOCKHOLDERS:
/s/ Juan Manuel Carrillo Coronado ____________________________
Juan Manuel Carrillo Coronado, Pablo Gortazar de Oyarzabal
31,819 shares 90,150 shares
============================== ==============================
Address Address
- ------------------------------ ------------------------------
Francisco Hernandez Herrera, Jose Antonio Hernandez Amaya
30,771 shares 30,771 shares
============================== ==============================
Address Address
/s/ Enrique Mora Velasco ______________________________
Enrique Mora Velasco 92,313 Shares Rosa Maria Valasco de Mora 15,986 Shares
============================== ==============================
Address Address
- ------------------------------ ------------------------------
Enrique Mora Hernandez, 58,297 Shares Manuel Mora Velasco, 5,289 Shares
============================== ==============================
Address Address
- ------------------------------ ------------------------------
Ricardo Mora Velasco 5,289 Shares Roberto Mora Velasco, 5,289 Shares
============================== ==============================
Address Address
- ------------------------------ ------------------------------
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Rosana Mora Velasco, 5,289 Shares Veronica Mora Velasco, 5,289 Shares
============================== ==============================
Address Address
- ------------------------------ ------------------------------
Alejandra Mora Velasco, 5,289 Shares Claudia Mora Velasco, 5,289 Shares
============================== ==============================
Address Address
Alpes Promotora Inmobiliria SA de CV ______________________________
668,182 shares Maria Guadalupe Mora Velasco
5,289 shares
By___________________________
==============================
Address
20
EXHIBIT 10.14
AGREEMENT
THIS AGREEMENT is made and entered into this __ day of March, 1996 by
and among CTI Industries Corporation, a Delaware corporation ("CTI") and Michael
M. Miller, an individual residing at 2218 N. Burling Street, Chicago, Illinois
("Miller")
WHEREAS, Miller has been an employee of CTI since September, 1984 and
was employed by CTI as Senior Vice President:
WHEREAS, CTI and Miller entered into a deferred compensation agreement
dated January 15, 1987, a copy of which is attached hereto as Exhibit A
(Deferred Compensation Agreement);
WHEREAS, CTI and Miller entered into a Subscription Agreement dated
August 14, 1987, attached hereto as Exhibit B ("Subscription Agreement"),
pursuant to which Miller purchased 45,000 shares of Common Stock of the
Corporation (subsequently split to three for one to 135,000 shares) (such shares
hereinafter sometimes referred to as the "Stock");
WHEREAS, pursuant to the Stock Purchase Agreement, Miller executed and
delivered to CTI that certain Promissory Note dated October 30, 1987, attached
hereto as Exhibit C ("Promissory Note") and an associated Security Agreement;
WHEREAS, on or about October 30, 1987, Miller entered into a Buy-Sell
Agreement with the Company and John C. Davis;
WHEREAS, on or about December 15, 1988, John C. Davis, Stephen M.
Merrick and Russell W. Steger, as voting trustees and Miller and several other
persons as shareholders entered into that certain Amended and Restated Voting
Trust Agreement ("Voting Trust Agreement") pursuant to which the Stock and
shares of Common Stock of certain other shareholders of the Company were
transferred to the voting trustees;
WHEREAS, the parties desire to enter into an agreement respecting the
termination of Miller's full time employment with CTI, a consulting arrangement
among Miller and CTI, the Deferred Compensation Agreement, the Stock Purchase
Agreement and Promissory Note.
NOW, THEREFORE, in consideration of the premises and of the terms,
covenants and conditions hereinafter contained, the parties hereto agree as
follows:
1. Termination of Employment. The parties agree that Miller's full time
employment with CTI was terminated on December 15, 1995 and that Miller
continued to receive compensation as an employee through January 31, 1996.
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2. Consulting Services.
2.1 CTI hereby retains Miller effective February 1, 1996, and
Miller accepts such retention, as a consultant to CTI to provide such
advice and consulting services to CTI for the term provided herein as
CTI shall request from time to time consistent with the provisions
hereof. During the Initial Term, Miller shall provide services up to 40
hours per week as requested. Miller shall not be obligated to provide
more than 10 hours of service during any month during the Second Term
provided herein. It is agreed that, during both terms, Miller may be
employed by, or provide services to, other persons or entities and
Miller shall not be obligated to provide services hereunder which would
conflict with any obligations of Miller with respect to such other
persons or entities.
2.2 In consideration of Miller's agreement to provide
consulting services hereunder, the Company shall pay to Miller the sum
of $3,000 on or before the 15th day of each month during the Initial
Term and $1,000 per month for the Second Term, provided herein for such
services. Further, the Company shall continue coverage of Miller under
its health insurance coverage for employees for the Initial Term of the
consulting agreement herein.
2.3 The Initial Term of the consulting agreement herein shall
be for a period of fifteen months commencing on February 1, 1996 and
the Second Term shall be for a period commencing on May 1, 1997 and
expiring on the earlier of Miller's death or January 31, 2016.
2.4 Miller shall provide consulting services hereunder as an
independent contractor, not as an employee. Miller shall not be
obligated to provide services at the offices of the Company or at any
particular time or location. Miller shall not be an agent for the
Company and shall not have any authority to bind the Company with
respect to any matter.
2.5 In connection with the provision of services by Miller
hereunder which the Company shall have requested, the Company shall
reimburse Miller for the reasonable and necessary expenses incurred by
Miller, provided that any expense in excess of $100 shall have been
approved by the Company in advance of the time it is incurred.
2.6 During the Initial Term of the consulting agreement
herein, Miller shall not be employed by or provide services to any
person who is engaged anywhere in the United States in the business of
manufacturing, distributing or selling (other than at retail)
metallized or latex balloons as a material part of the business of such
person and where Miller shall have any responsibility or authority in
connection with the marketing or sale of metallized or latex balloons.
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<PAGE>
2.7 Miller agrees that, during the term of the consulting
agreement, and after expiration thereof for so long as the Confidential
Information shall not be generally known or generally disclosed, Miller
shall not use any Confidential Information except on behalf of the
Company during the term of the consulting agreement, or disclose any
Confidential Information to any person, firm, partnership, company,
corporation or other entity, except as may be authorized in writing by
the Company. For purposes of this paragraph, "Confidential Information"
shall mean and include information disclosed to Miller by the Company,
or developed or obtained by Miller during the term of his employment by
the Company or during the term of this consulting agreement, provided
that such information is not generally known in the business or
industry in which the Company is engaged relating to or concerning the
business, financial condition, projects, products, processes, formulas,
know-how, techniques, designs or methods of the Company, whether
relating to research, development, manufacture, purchasing, accounting,
engineering, marketing, merchandising, selling or otherwise. Without
limitation, Confidential Information shall include all know-how,
technical information, financial information, inventions, ideas,
concepts, processes or designs relating to metallized balloons, latex
balloons, printing or laminations and all prices, written customer
lists or written lists of its suppliers, employees, agents, consultants
or independent contractors.
2.8 Miller agrees that, promptly after request by the Company,
Miller shall deliver to the Company all documents in his possession or
control which contain any Confidential Information.
2.9 Miller acknowledges and agrees that any violation by him
of the terms of paragraphs 2.6, 2.7 or 2.8 hereof could not reasonably
or adequately be compensated in damages in an action at law and,
accordingly, in addition to any other remedies provided by law with
respect to any such violation, the Company shall have the right to
compel specific performance of such provisions by Miller or to obtain
injunctive relief against violations thereof by Miller, and if the
Company prevails in any such proceeding, it will be entitled to recover
all reasonable costs and expenses incurred by it in connection
therewith, including a reasonable sum for its attorneys fees.
3. CTI Stock.
3.1 The Subscription Agreement is hereby amended to provide
that the purchase price per share for the Stock is $1.22 per share
($.407 per share, post split). The Company acknowledges that Miller has
paid to the Company the entire amount of the purchase price for the
Stock and that all shares of the Stock are duly authorized, validly
issued, fully paid and non-assessable.
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3.2 The Promissory Note is hereby terminated and canceled and
is of no further force or effect. The Company agrees forthwith to
deliver the original of the Promissory Note to Miller or to destroy the
same.
3.3 The Pledge Agreement is hereby terminated and canceled and
is of no further force or effect.
3.4 The Buy-Sell Agreement is hereby terminated and canceled
and shall be of no further force or effect.
3.5 On March 6, 1996, the Voting Trust Agreement was
terminated by instrument executed by all of the voting trustees
thereof.
3.6 Promptly after execution of this Agreement, the Company
shall deliver to Miller a certificate or certificates evidencing all
shares of the Stock.
4. Deferred Compensation. The Deferred Compensation Agreement
is hereby canceled and terminated as of the date hereof.
5. Life and Disability Policies.
5.1 The Company has maintained a life insurance policy on
Miller with a face amount of $500,000 ("Policy One"), a life insurance
policy on Miller in the face amount of $300,000 in connection with the
Deferred Compensation Agreement ("Policy Two"), a disability policy on
Miller providing for disability benefits to him of $3,200 per month
("Policy Three"), a disability policy on Miller providing for
disability benefits to him of $2,800 per month ("Policy Four") and, the
parties believe, pursuant to the health insurance program of the
Company, a life insurance policy in the face amount of $160,000
("Policy Five")
5.2 With respect to Policy One, (i) the Company acknowledges
that Miller is the owner thereof and has all rights to the cash
surrender value of the policy, (ii) the Company has paid all premiums
due on the policy for the period expiring on November 1, 1996, (iii)
the Company shall have no obligation to pay any additional premiums
with respect to Policy One.
5.3 With respect to Policy Two, (i) the Company is the sole
owner of the policy and any and all cash surrender value of such
policy, (ii) the Company has paid all premiums due on the policy
through November 15, 1996, (iii) the Company shall have no obligation
to pay any additional premiums with respect to such policy.
5.4 With respect to Policies Three and Four, (i) the Company
has paid the premiums with respect to such policies for the period
through October, 1996 and (ii) the
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Company will have no obligation to pay future premiums with respect
to such policies hereafter and shall have no obligation to maintain
any disability coverage with respect to Miller hereafter.
5.5 The parties are informed, and to the best of their
knowledge believe, that upon termination of Miller's benefits under the
Company's health insurance program, Miller will have the right to
convert and maintain Policy Five as an ordinary life insurance policy.
However, no assurance is made by the Company that Policy Five will be
in effect at the time of such termination, in the face amount of
$160,000, or any other amount, or that Miller will be able to convert
and maintain Policy Five after such termination on terms acceptable to
Miller or the Company, if at all. The parties agree with respect to
Policy Five as follows:
5.5.1 Miller and the Company shall use their best
efforts to effect a conversion and transfer of Policy Five as
an ordinary life policy at the time of the termination of
Miller's coverage under the Company's health insurance
program;
5.5.2 The Company shall pay all premiums with respect
to such policy during the term of the consulting agreement
herein; such premium amounts may be paid directly to Miller
who, in such event, shall use such funds solely for the
purpose of paying the premiums on such policy;
5.5.3 At all times, Miller shall borrow the maximum
amount allowed under such policy and apply the amount of such
borrowing to payment of premiums on the policy.
In the event that Miller shall inform the Company on or before May 30,
1997, that he is unable to obtain to obtain the conversion and transfer
of Policy Five as an ordinary life policy, the obligation of the
Company to pay premiums with respect to such a policy shall terminate
and (1) the amount of the consulting fee payable each month during the
Second Term shall be increased by $1,000 and (2) the Second Term shall
expire on the earlier of the death of Miller or September 30, 2006.
6. Release.
6.1 The Company does hereby absolutely and forever remise,
release and discharge Miller from any and all causes of action in law
or in equity, claims, suits, demands, or other obligations or liability
of any nature whatsoever, whether known or unknown, that the Company
ever had, now has, or may hereafter have, by reason of any matter,
cause or thing whatsoever existing prior to or as of the date of the
execution hereof, except the obligations of Miller provided herein or
in any document referred to herein.
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6.2 Miller does hereby absolutely and forever remise, release
and discharge the Company and each of its officers, directors,
shareholders, employees, agents and representatives from any and all
causes of action in law or in equity, claims, suits, demands, or other
obligations or liability of any nature whatsoever, whether known or
unknown, that Miller ever had, now has, or may in the future have, by
reason of any matter, cause or thing whatsoever existing prior to or as
of the date of execution hereof, except the obligations of the Company
provided herein or in any document referred to herein.
7. Severability. If any provision of this Agreement or any part hereof
or application hereof to any person or circumstance shall be finally determined
by a court of competent jurisdiction to be invalid or unenforceable to any
extent, the remainder of this Agreement, or the remainder of such provision or
the application of such provision to persons or circumstances other than those
as to which it has been held invalid or unenforceable, shall not be affected
thereby and each provision of this Agreement shall remain in full force and
effect to the fullest extent permitted by law. The parties also agree that, if
any portion of this Agreement, or any part hereof or application hereof to any
person or circumstance, shall be finally determined by a court of competent
jurisdiction to be invalid or unenforceable to any extent, any court may modify
the objectionable provision so as to make it valid, reasonable and enforceable.
8. Notices. All notices or other communications required or permitted
to be given hereunder shall be in writing and shall be delivered personally or
mailed, certified mail, return receipt requested, postage prepaid, to the
parties, as follows:
If to CTI: Mr. Stephen M. Merrick
CTI Industries Corporation
22160 N. Pepper Road
Barrington, IL 60010
If to Miller: Mr. Michael M. Miller
2218 Burling Street
Chicago, IL 60614
Any notice mailed in accordance with the terms hereof shall be deemed received
on the third day following the date of mailing. Either party may change the
address to which notices to such party may be given hereunder by serving a
proper notice of such change of address to the other party.
9. Waivers. No failure or delay by any party to exercise any of such
party's rights hereunder or to insist upon strict compliance with respect to any
obligation hereunder, and no custom or practice of the parties at variance with
the terms hereof, shall constitute a waiver by any party to demand exact
compliance with the terms hereof. Waiver by any party of any particular default
by any other party shall not affect or impair such party's rights in respect to
any subsequent default of the same or of a different nature, nor shall any delay
or omission of any party to exercise any right arising from any default by any
other party affect or impair such party's rights as to such default or any
subsequent default.
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10. Benefit and Assignment. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective heirs,
personal representatives and successors in interest. No party may assign any of
such party's rights or duties hereunder to any other person.
11. Entire Agreement. This Agreement constitutes the entire agreement
among the parties hereto with respect to the subject matter hereof and
supersedes all prior written or oral negotiations, representations,
understandings, commitments, contracts or agreements with respect to the subject
matter hereof.
12. Rights to Specific Performance. Each of the parties acknowledges
that, in the event of a violation of the provisions of this Agreement, the
remedies of the parties hereto at law may be inadequate and either party may, as
a result of such violation, suffer irreparable harm and, accordingly, the
parties hereto shall have the right to obtain specific performance, or to enjoin
violations hereof, in a court of competent jurisdiction, and the prevailing
party in any action in which injunctive relief or specific performance shall be
granted shall be entitled to recover all reasonable costs and expenses of such
party in such action including a reasonable sum for attorneys' fees.
13. Governing Law. This Agreement shall be governed by, and shall be
construed and enforced in all respects, in accordance with the laws of the State
of Illinois.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
CTI INDUSTRIES CORPORATION
/s/ Michael R. Miller By /s/ Stephen M. Merrick
- --------------------- ---------------------
MICHAEL M. MILLER Authorized Officer
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EXHIBIT 10.15
LOAN AND SECURITY AGREEMENT
THIS AGREEMENT is made as of August 22, 1996, by and between
CTI Industries Corporation, a Delaware corporation (the "Borrower"), and First
American Bank, an Illinois banking corpo ration (the "Bank").
In consideration of the mutual covenants, conditions, and
agreements herein contained, the parties hereto agree as follows:
Section 1. THE BANK'S AGREEMENT TO LEND.
1.1. Loan Amount. Subject to and upon the terms and conditions
set forth in this Agreement, the Bank agrees to lend to the Borrower, from time
to time, such sums as may be requested by the Borrower and which the Bank in its
discretion agrees to lend from time to time, the total of which shall not
exceed, in the aggregate, $6,300,000.00, subject to the further limits
hereinafter set forth (the "Loan") pursuant to the First Term Loan, the Second
Term Loan, and the Revolving Loan hereinafter provided.
1.1.1. First Term Loan. The Bank agrees to lend to the
Borrower, subject to and upon the terms and conditions herein set forth, the sum
of One Million One Hundred Thousand and No/100 Dollars ($1,100,000.00) (herein
referred to as the "First Term Loan"). The First Term Loan shall be evidenced by
and be repayable with interest in accordance with the terms of this Agreement
and a promissory note payable to the order of the Bank in the original principal
amount of $1,100,000.00, which shall be dated on or before the initial
disbursement of the First Term Loan and shall be duly executed and delivered by
the Borrower (the "First Term Note").
1.1.2. Second Term Loan. The Bank agrees to lend to the
Borrower, subject to and upon the terms and conditions herein set forth, the sum
of Two Million Two Hundred Thousand and No/100 Dollars ($2,200,000.00)(herein
referred to as the "Second Term Loan"). The Second Term Loan shall be evidenced
by and be repayable with interest in accordance with the terms of this Agreement
and a promissory note payable to the order of the Bank in the original principal
amount of $2,200,000.00, which shall be dated on or before the initial
disbursement of the Second Term Loan and shall be duly executed and delivered by
the Borrower (the "Second Term Note").
1.1.3. Revolving Loan. The Bank agrees to lend to the
Borrower, subject to and upon the terms and conditions set forth herein, at any
time or from time to time on or after the date hereof and on or before September
1, 1997, such amounts (each such loan and all such loans, collectively, as the
context requires being herein referred to as the "Revolving Loan") as may be
requested by the Borrower and which the Bank in its discretion agrees to lend
from time to time, subject to the limitations hereinafter set forth. Within the
limits and subject to and upon the terms and conditions herein set forth,
amounts under the Revolving Loan may be borrowed and repaid and reborrowed from
time to time. Except as otherwise permitted by the Bank, the aggregate unpaid
principal amount of the Revolving Loan outstanding at any time shall not exceed
the lesser of Three Million and No/100 Dollars ($3,000,000.00) or
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the Advance Limit (as hereinafter defined). The Revolving Loan shall be
evidenced by and be repayable with interest in accordance with the terms of this
Agreement and a promissory note payable to the order of the Bank in the original
principal amount of $3,000,000.00 which shall be dated on or before the initial
disbursement of the Revolving Loan and shall be duly executed and delivered by
the Borrower (the "Revolving Note"). For purposes of this Agreement, the Advance
Limit shall be equal to the sum of: (i) 80% of the Eligible Accounts (as
hereinafter defined) or $3,000,000.00, whichever is less; and (ii) 25% of
Eligible Inventory (as hereinafter defined) or $1,000,000.00, whichever is less.
For purposes of this Agreement the Eligible Accounts shall
mean all Accounts Receivable (as defined in Section 4.1(a) hereof) created by
the Borrower in the ordinary course of business arising out of the sale or lease
of goods or the rendition of services by the Borrower and which are and at all
times shall continue to be (to the effect that any Eligible Account that at any
subsequent time fails to meet the requirements to be an Eligible Account shall
cease to be an Eligible Account) acceptable to the Bank in all respects as the
Bank shall from time to time determine in its discretion, but excluding in all
events:
(a) any Accounts Receivable unpaid for more than 90
days from the date of invoice;
(b) any Accounts Receivable against the payment of
which the account debtor claims to have, may have, or has a defense,
set-off, or counterclaim;
(c) any Accounts Receivable as to which the account
debtor is located outside the United States, unless supported by a
letter of credit or other security deemed to be acceptable by the Bank;
(d) any Accounts Receivable as to which the account
debtor is a parent, subsidiary, or affiliate of the Borrower;
(e) any Accounts Receivable with respect to which
goods are placed on consignment, guaranteed sale, or other terms which
are conditions precedent to payment by the account debtor;
(f) any Accounts Receivable as to which an account
debtor is the United States of America or any department, agency, or
instrumentality of the United States of America, unless appropriate
assignment of claims forms are executed in advance;
(g) any Accounts Receivable not arising out of the
Borrower's ordinary course of trade or business;
(h) any Accounts Receivable not evidenced by an
invoice;
(i) any Accounts Receivable arising out of a contract
or order that, by its terms, forbids or makes void or unenforceable the
assignment by the Borrower to the Bank of the Accounts Receivable
arising with respect thereto; and
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(j) any Accounts Receivable that the Bank elects to
exclude from eligibility due to any actual or potential liens, claims,
or risks, including unsatisfactory financial responsibility, payment
record, or reputation of the account debtor.
For purposes of this Agreement, the Eligible Inventory shall
mean the lower of cost or market value (as determined in accordance with
generally accepted accounting principles consistently applied) of the Inventory
(as defined in Section 4.1(b) hereof) of the Borrower and which is and at all
times shall continue to be (to the effect that any Inventory that at any
subsequent time fails to meet the requirements to be Eligible Inventory shall
cease to be Eligible Inventory) acceptable to the Bank in all respects as the
Bank shall from time to time determine in its discretion, but excluding in all
events:
(a) any Inventory that is subject to any prior
assignment, claim, lien, security interest, or encumbrance, other than
the security interest in favor of the Bank;
(b) any Inventory that is not new and unused, except
as the Bank may otherwise consent in writing;
(c) any Inventory that is stored with a bailee,
warehouseman, or similar party, unless such bailee, ware houseman, or
similar party shall issue and deliver to the Bank, in form and
substance acceptable to the Bank, an agreement or other instrument
acknowledging the Bank's prior security interest therein; and
(d) any Inventory that the Bank elects to exclude
from eligibility due to any actual or potential liens, claims, or
risks, including age, type, category, and/or quantity of the Inventory.
1.2. Loan Disbursements.
1.2.1. First Term Loan Disbursements. The First Term Loan
shall be disbursed, as the Borrower shall direct, upon the satisfaction of the
conditions set forth in Sections 2 and 3 hereof.
1.2.2. Second Term Loan Disbursements. The Second Term Loan
shall be disbursed, as the Borrower shall direct, upon the satisfaction of the
conditions set forth in Sections 2 and 3 hereof.
1.2.3. Revolving Loan Disbursements. The Revolving Loan shall
be disbursed, as the Borrower shall direct, upon the submission of such evidence
as the Bank shall request to verify the Advance Limit and the satisfaction of
the conditions set forth in Sections 2 and 3 hereof. Whenever the Borrower
desires to make a borrowing of the Revolving Loan, the Borrower shall give the
Bank written or telephonic notice thereof not later than 1:00 p.m. Chicago time
on the borrowing date. Each notice of borrowing required under this section
shall specify the amount of the proposed borrowing and the proposed borrowing
date.
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1.3. Interest and Penalties.
1.3.1. First Term Loan Interest and Penalties The First Term
Loan shall bear interest on its principal amount outstanding from time to time
at a rate per annum equal to one percent (1%) per annum over the Prime Rate
announced from time to time by the Bank (the "Bank's Prime Rate," which may not
be the Bank's lowest rate of interest) which shall be adjusted daily when and as
the Bank's Prime Rate changes. Upon and after the occurrence of an Event of
Default, the First Term Loan shall bear interest on its principal amount
outstanding from time to time at a rate per annum (the "First Term Loan Default
Rate") equal to four percent (4%) per annum over the Bank's Prime Rate, which
shall be adjusted daily when and as the Bank's Prime Rate changes. Interest
accruing prior to maturity of the First Term Loan (whether by lapse of time,
acceleration, or otherwise) shall be due and payable on the first day of each
calendar month, commencing with the month following the date on which the first
disbursement of the First Term Loan is made. After maturity of the First Term
Loan (whether by lapse of time, acceleration, or otherwise) accrued interest
shall be due and payable upon demand. The Borrower shall pay a late charge of
five percent (5%) of the amount of any sum payable to the Bank under this
Agreement or any of the Notes that is received by the Bank more than 10 days
after the date on which it is due. Such late charges shall be due and payable on
the due date of the next installment of principal or interest, together with the
regular installment then due.
1.3.2. Second Term Loan Interest and Penalties The Second
Term Loan shall bear interest on its principal amount outstanding from time to
time at a rate per annum equal to eight and three-quarters percent (8.75%) per
annum. Upon and after the occurrence of an Event of Default, the Second Term
Loan shall bear interest on its principal amount outstanding from time to time
at a rate per annum (the "Second Term Loan Default Rate") equal to eleven and
three-quarters percent (11.75%) per annum. Interest accruing prior to maturity
of the Second Term Loan (whether by lapse of time, acceleration, or otherwise)
shall be due and payable on the first day of each calendar month, commencing
with the month following the date on which the first disbursement of the Second
Term Loan is made. After maturity of the Second Term Loan (whether by lapse of
time, acceleration, or otherwise) accrued interest shall be due and payable upon
demand.
1.3.3. Revolving Loan Interest and Penalties The Revolving
Loan shall bear interest on its principal amount outstanding from time to time
at a rate per annum equal to one percent (1%) per annum over the Prime Rate
announced from time to time by the Bank (the "Bank's Prime Rate," which may not
be the Bank's lowest rate of interest) which shall be adjusted daily when and as
the Bank's Prime Rate changes. Upon and after the occurrence of an Event of
Default, the Revolving Loan shall bear interest on its principal amount
outstanding from time to time at a rate per annum (the "Revolving Loan Default
Rate") equal to four percent (4%) per annum over the Bank's Prime Rate, which
shall be adjusted daily when and as the Bank's Prime Rate changes. Interest
accruing prior to maturity of the Revolving Loan (whether by lapse of time,
acceleration, or otherwise) shall be due and payable on the first day of each
calendar month, commencing with the month following the date on which the first
disbursement of the Revolving Loan is made. After maturity of the Revolving Loan
(whether by lapse of time, acceleration, or otherwise) accrued interest shall be
due and payable upon demand.
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1.3.4 Adjustment in the Interest Rate. Providing no Event of
Default has occurred and is continuing, the rate of interest on the First Term
Loan and the Revolving Loan shall be reduced under the following terms and
conditions:
a) if on the last day of any calender month (as
evidenced by a financial statement delivered to the Bank pursuant to
Section 5.1(a) hereof), the Borrower achieves a ratio of total debt to
tangible net worth of no more than 2 to 1, then the rate of interest
accruing on the outstanding principal balance for the following month
shall be reduced to one-half of one percent (.5%) per annum over the
Prime Rate announced from time to time by the Bank; and
b) if on the last day of any calender month (as
evidenced by a financial statement delivered to the Bank pursuant to
Section 5.1 (a) hereof) the Borrower achieves a ratio of total debt to
tangible net worth of no more than 1 to 1, then the rate of interest
accruing on the outstanding principal balance for the following month
shall be reduced to the Bank's Prime Rate announced from time to time
by the Bank.
For purposes of this Section total debt shall mean all items that, in accordance
with generally accepted accounting principles, would be included in determining
total liabilities as shown on the liabilities side of a balance sheet as of the
date the amount of total liabilities is to be determined and, in any event,
shall include (without duplication) capitalized lease obligations, letters of
credit, and all obligations relating thereto, any liabilities secured by any
mortgage, pledge, lien, or security interest on property owned or acquired,
whether or not such liabilities shall have been assumed and guaranties and
endorsements (other than for collection in the ordinary course of business) and
other contingent obligations. Tangible net worth shall mean the total of all
assets appearing on a balance sheet prepared in accordance with generally
accepted accounting principles consistently applied, less total liabilities, as
determined in accordance with generally accepted accounting principles
consistently applied, less the amount of any intangible assets as determined by
the Bank in its discretion.
1.4. Maturity of the Loan.
1.4.1. First Term Loan Maturity. The First Term Loan shall be
due and payable in monthly installments of $18,333.33 of principal, commencing
on October 1, 1996, and a like sum on the first day of each calendar month
thereafter until the principal of and accrued and unpaid interest on the First
Term Loan is paid in full, provided that the outstanding principal of and
accrued and unpaid interest on the First Term Loan, if not sooner paid in full,
shall be due and payable in full on September 1, 2001 (or earlier as provided in
this Agreement or the First Term Note).
1.4.2. Second Term Loan Maturity. The Second Term Loan shall
be due and payable in equal monthly installments of $19,617.26 of principal and
interest, commencing on October 1, 1996, and a like sum on the first day of each
calendar month thereafter until the principal of and accrued and unpaid interest
on the Second Term Loan is paid in full, provided that the out standing
principal of and accrued and unpaid interest on the Second Term Loan, if not
sooner paid in full, shall be due and payable in full on September 1, 2001 (or
earlier as provided in this Agreement or the Second Term Note).
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1.4.3. Revolving Loan Maturity. The Revolving Loan shall be
prepayable as provided in this Agreement and, if not sooner paid in full, shall
be due and payable on September 1, 1997 (or earlier as provided in this
Agreement or the Revolving Note).
1.5. Mandatory and Optional Prepayments. The Borrower shall
prepay the Revolving Loan if and to the extent that the outstanding principal
amount of the Revolving Loan shall from time to time exceed the limits therefor.
In addition, the Revolving Loan may be prepaid at any time at the option of the
Borrower without premium or penalty. All prepayments required or permitted
hereunder shall be applied first to prepayment of accrued and unpaid interest on
the Revolving Loan and then to the prepayment of the outstanding principal of
the Revolving Loan in the inverse order of maturity thereof.
1.6 Second Term Loan Prepayment Fee. The Second Term Note may
be prepaid at any time and from time to time prior to maturity, without premium,
penalty, or discount, but only to the extent that the source of such prepayment
is not derived, directly or indirectly, from money borrowed by the Borrower, any
Guarantor, or any Affiliate (as hereinafter defined) of the Borrower or any
Guarantor. The Borrower agrees to pay the Bank, on demand, in addition to the
payment of all other obligations of the Borrower to the Bank that are then due
and payable, a fee (the "Second Term Loan Prepayment Fee") determined as
hereinafter provided if the Second Term Note is prepaid in whole or in part at
any time or from time to time prior to maturity, but only to the extent that the
source of such prepayment is derived, directly or indirectly, from money
borrowed by the Borrower, any Guarantor, or any Affiliate of the Borrower or any
Guarantor. The Second Term Loan Prepayment Fee shall be equal to the applicable
Loan Prepayment Percentage provided below, multiplied by the outstanding
principal amount of the Second Term Note so prepaid. For any year in which a
prepayment of the Second Term Note occurs, the applicable Second Term Loan
Prepayment Percentage shall be the percentage set forth opposite such year in
the following schedule:
Second Term Loan
Year Prepayment Percentage
---- --------------------
August 22, 1996 to September 1, 1997 5%
September 2, 1997 to September 1, 1998 4%
September 2, 1998 to September 1, 1999 3%
September 2, 1999 to September 1, 2000 2%
September 2, 2000 to September 1, 2001 1%
All payments shall be applied first to accrued and unpaid interest on the Second
Term Note then, at the Bank's election, to any Second Term Loan Prepayment Fee
due by reason of any prepayment, and then to the outstanding principal of the
Second Term Note in the inverse order of maturity thereof. For purposes of this
Section the term "Affiliate" shall mean: any director, officer, or stockholder
of the Borrower.
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Section 2. CONDITIONS PRECEDENT TO THE BANK'S OBLIGATION TO
MAKE THE INITIAL LOAN DISBURSEMENT. Prior to the initial disbursement by the
Bank of any monies pursuant to this Agreement the following conditions must be
satisfied:
2.1. Delivery of Loan Documents. The Borrower shall execute
and deliver or cause to be executed and delivered to the Bank, as evidence of
and as security for all obligations under this Agreement, the following
documents (the "Loan Documents"), all to be in form and content as specified by
the Bank:
(a) the First Term Note, the Second Term Note and the
Revolving Note (collectively, the "Notes");
(b) a first mortgage (the "Mortgage") on the real
estate commonly known as 22160 N. Pepper Rd., Barrington, IL 60010 (the
"Premises") owned by American National Bank and Trust Company of
Chicago, not personally, but solely as Trustee under Trust Agreement
dated September 19, 1984 and known as Trust No. 61978 (the "Trust") to
secure the obligations of the Borrower under this Agreement and the
Second Term Note;
(c) a collateral assignment of beneficial interest in
the Trust;
(d) the filing with the Secretary of State of the
State of Illinois and the recording with the Recorder's Office of Lake
County, Illinois duly executed U.C.C. Financing Statements showing the
Bank as secured party; and
(e) guaranties of the obligations of the Borrower
under this Agreement and the Notes, executed and delivered by Stephen
M. Merrick, Howard W. Schwan and John H. Schwan (together with any
other persons obligated at any time with respect to all or any part of
the Borrower's obligations to the Bank, the "Guarantors").
2.2. Liens on Property. The Bank shall have received evidence
satisfactory to the Bank that all real and personal property, fixtures and
equipment in which the Bank is taking a security interest will be free and clear
of all liens and encumbrances of every nature and description other than: the
security interest in favor of the Bank; the Permitted Exceptions (as defined in
Section 2.3); security interests disclosed in the search, conducted on behalf of
the Bank in July, 1996, for financing statements on file with the Illinois
Secretary of State naming the Borrower as debtor for XLI Datacomp, Inc.,
Suburban National Bank of Palatine, Fathom Technologies, AT & T Credit
Corporation, and Xerox Corporation; and security interests and liens permitted
under this Agreement or to which the Bank shall have otherwise consented in
writing (collectively, the "Permitted Liens").
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2.3. Title Insurance. The Borrower shall have furnished the
Bank with an ALTA Mortgage Loan Policy issued by Real Estate Index Inc. (the
"Title Company") (such policy being referred to herein as the "Title Policy"),
in the aggregate amount of $2,200,000.00. The Title Policy shall insure the
Mortgage (for its full amount) as a first lien on the Premises. The Title Policy
shall be subject only to the exceptions approved by the Bank (the "Permitted
Exceptions") and shall contain no exceptions for mechanic's or materialmen's
liens. The Title Policy shall contain affirmative endorsements as required by
the Bank and otherwise shall be in all respects in form and content satisfactory
to the Bank.
2.4. Insurance. The Borrower shall have delivered to the Bank
insurance policies with premiums prepaid, with issuing companies, coverages and
amounts satisfactory to the Bank, insuring the Premises and other properties of
the Borrower against loss or damage by fire and such other hazards as may be
required by the Bank, including, but not limited to, extended coverage,
vandalism, malicious mischief, and comprehensive public liability insurance as
required by the Bank. Each policy shall contain standard mortgage clauses
satisfactory to the Bank and loss payable clauses satisfactory to the Bank with
respect to such other insurance and shall provide that the policy may not be
canceled by any party for any reason whatsoever without first giving the Bank at
least thirty (30) days' prior written notice of any proposed cancellation. The
Borrower shall provide the Bank with fully paid valid policies each year as long
as any sums are owed the Bank. All policies shall name the Bank as mortgagee,
additional insured and loss payee with endorsements acceptable to the Bank.
2.5. Survey. The Borrower shall have delivered to the Bank a
surveyor's current plat of survey of the Premises prepared by a registered
surveyor, which shall locate the improvements on the Property with respect to
lot lines, streets, alleys, driveways, known easements, and encroachments and
contain the legal description as provided by the Title Policy, certified to the
Bank and the Title Company as having been made in accordance with ALTA Land
Survey Standards.
2.6. Opinion of Counsel. The Borrower shall have furnished the
Bank the favorable written opinion of the Borrower's legal counsel dated the
date of the initial advance hereunder, addressed to the Bank and in form and
substance satisfactory to the Bank.
2.7. Authority. The Borrower shall have furnished to the Bank
such documents, in form and content satisfactory to the Bank, as the Bank may
request as evidence of the due organization and good standing of the Borrower
and the due authorization and execution of the Loan Documents by the Borrower.
Section 3. ADDITIONAL CONDITIONS PRECEDENT TO THE BANK'S
OBLIGATIONS TO MAKE DISBURSEMENTS OF THE LOAN. Prior to and as a condition to
each disbursement of the Loan by the Bank:
3.1. Accuracy of Representations and Warranties. The
representations and warranties of the Borrower made herein shall be true and
correct as though made on and as of the date of such disbursement.
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3.2. No Material Adverse Change. There shall have been no
material adverse change in the financial condition of the Borrower from the
financial condition reflected on the financial statements of the Borrower last
furnished to the Bank.
3.3. No Default. There shall exist no Event of Default and no
event or condition which, with the giving of notice or lapse of time, or both,
would constitute an Event of Default.
Section 4. SECURITY INTEREST.
4.1. Grant of Security Interest. In order to secure the timely
and full performance of the obligations of the Borrower to the Bank under this
Agreement and the Notes and any and all interest accruing thereon, and any and
all extensions, renewals, or refinancings thereof, and all other present and
future obligations of the Borrower to the Bank, the Borrower hereby grants to
the Bank a security interest in the following property (collectively, the
"Collateral"):
(a) all present and future accounts, accounts
receivable, other receivables and claims for money due, instruments,
documents, chattel paper, contract rights, and general intangibles (the
"Accounts Receivable");
(b) all raw materials, supplies, work-in-process,
finished goods, and all other inventory of whatsoever kind or nature,
wherever located, whether now owned or hereafter acquired (the
"Inventory");
(c) all machinery, equipment, vehicles, furniture,
tools, and trade fixtures and all substitutions and replacements
thereof wherever located, and all attach ments, accessions, parts, and
additions thereto, whether now owned or hereafter acquired;
(d) all of the Borrower's deposit accounts (whether
checking, savings, or otherwise) with the Bank or any other depositary
institution, whether now or hereafter existing and including accounts
held jointly with others;
(e) all monies, securities, drafts, notes, and other
property of the Borrower and the proceeds thereof, now or hereafter
held or received by or on behalf of the Bank from or for the Borrower,
whether for custody, pledge, transmission or otherwise;
(f) all books, records, and general intangibles
evidencing or relating to any of the foregoing; and
(g) any and all proceeds and products of the
foregoing.
4.2. Filing and Recording; Perfection. The Borrower shall
execute and deliver to the Bank financing statements and take whatever other
actions are requested by the Bank to perfect and continue the Bank's security
interest in the Collateral. Upon the request of the Bank, the Borrower will
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deliver to the Bank any and all of the documents and instruments evidencing or
constituting the Collateral or any part thereof, together with an appropriate
endorsement or assignment thereof satisfactory to the Bank, and the Borrower
will note the Bank's security interest upon any and all chattel paper included
in the Collateral. The Borrower irrevocably appoints the Bank as the agent and
attorney-in-fact of the Borrower to execute such documents and take such actions
as the Bank deems necessary to preserve and perfect the Bank's security interest
in the Collateral.
4.3. Collections of Accounts. The Borrower hereby authorizes
the Bank, now and at any time or times hereafter, to (a) notify any or all
account debtors that the Accounts Receivable have been assigned to the Bank and
that the Bank has a security interest therein and (b) direct such account
debtors to make all payments due from them to the Borrower upon the Accounts
Receivable directly to the Bank or to a lockbox designated by the Bank. Until
such time as the Bank shall exercise such rights, the Borrower shall collect and
enforce all of its Accounts Receivable. The costs of collection and enforcement
of the Accounts Receivable shall be borne by the Borrower, whether such costs
are incurred by the Borrower or the Bank. All collections and proceeds of the
Accounts Receivable and other Collateral shall be held in trust for the Bank,
separate and apart from other funds and properties of the Borrower, and shall be
promptly delivered by the Borrower to the Bank in the form in which they are
received by the Borrower (except for any necessary endorsement in favor of the
Bank) by mailing or delivering the same to the Bank not later than the business
day following receipt thereof by the Borrower. The Bank will, within two (2)
business days after receipt of checks and one business day after receipt of cash
and cash equivalents, apply the whole or any part of such collections against
the Borrower's liabilities to the Bank. All checks, drafts, instruments, and
other items of payment or proceeds of Collateral shall be endorsed by the
Borrower to the order of the Bank. The Borrower irrevocably constitutes and
appoints the Bank and all persons designated by the Bank as the true and lawful
agent and attorney-in-fact to endorse the Borrower's name to any payment or
proceeds of Collateral.
Section 5. GENERAL COVENANTS. The Borrower agrees
that so long as any of the Notes shall be outstanding, unless
waived in writing by the Bank:
5.1. Financial Information, Reports. The Borrower will
maintain a standard and modern system of accounting in accordance with generally
accepted practice and will furnish to the Bank and its duly authorized
representatives such information with respect to the business, affairs,
operations, and financial condition of the Borrower as may be reasonably
requested from time to time. The Borrower shall furnish to the Bank:
(a) as soon as available, and in any event within 30
days after the close of each monthly fiscal period of the Borrower, a
copy of the balance sheet and profit and loss statement for the
Borrower prepared by the Borrower and signed by a principal officer of
the Borrower for such monthly period and the period from the beginning
of the current fiscal year to the end of such monthly period;
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(b) as soon as practicable and in any event within
120 days after the end of each fiscal year of the Borrower, a profit
and loss statement and a reconciliation of surplus accounts of the
Borrower for such year, and a balance sheet of the Borrower as of the
end of such year, setting forth in each case in comparative form
corresponding figures from the preceding fiscal year, all in reasonable
detail and satisfactory to the Bank and audited by an independent
certified public accounting firm of recognized standing selected by the
Borrower, with a certificate of such independent certified public
accounting firm satisfac tory to the Bank in scope and substance;
(c) within 15 days after the close of each monthly
fiscal period of the Borrower, and otherwise from time to time as the
Bank may request, a schedule of the Eligible Accounts and Eligible
Inventory and an aging of the Accounts Receivable and accounts payable,
and a report of Inventory in form acceptable to the Bank, signed by a
principal officer of the Borrower, together with copies of invoices, if
requested by the Bank pertaining to the Eligible Accounts arising since
the previous such report to the Bank;
(d) promptly upon receipt thereof, copies of any
detailed reports submitted to the Borrower by independent accountants
in connection with each annual audit or any annual or interim review of
the books and records of the Borrower made by such accountants; and
(e) with reasonable promptness, such other financial
information, including annual financial statements of the Guarantors,
as the Bank may reasonably request.
All financial statements of the Borrower specified in the preceding clauses (a)
and (b) shall be furnished in consolidated and consolidating form for the
Borrower and all subsidiaries that the Borrower may at any time have. Together
with each delivery of financial statements required by the preceding clauses (a)
and (b), the Borrower will deliver to the Bank a certificate of a principal
officer of the Borrower stating that there exists no Event of Default or any
event or condition that, with notice or lapse of time, or both, would constitute
an Event of Default, or, if any such Event of Default or event or condition
exists, specifying the nature thereof, the period of existence thereof, and what
action the Borrower proposes to take with respect thereto. The Borrower will
permit any person designated by the Bank to visit and inspect any of the
properties, corporate books, and financial records of the Borrower, and to
discuss the affairs, finances, and accounts of the Borrower, all at such
reasonable times and as often as the Bank may reasonably request.
5.2. Taxes. The Borrower shall cause to be paid on a timely
basis all taxes and assessments, special or otherwise, and any other such
charges which are due and payable. In the event the Borrower fails to pay taxes
as required herein, the Bank reserves the right to require the Borrower to make
monthly deposits into an escrow account established for the payment of taxes in
an amount satisfactory to the Bank. The Borrower may contest in good faith and
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through appropriate proceedings any tax or assessment or other charge due and
payable provided that the Borrower shall have deposited with the Bank a cash sum
sufficient to discharge such tax assessment or charge.
5.3. Insurance. The Borrower will maintain insurance coverage
by reputable insurance companies in such forms and amounts, and against such
hazards, as are ordinarily carried by other companies similarly situated in
operating like businesses and properties. Without limiting the generality of the
foregoing, property and casualty insurance shall be in amounts and forms
insuring the full replacement cost of fixed assets of the Borrower.
5.4. Liens and Encumbrances. The Borrower shall not create,
assume, or suffer to exist any mortgage, deed of trust, pledge, encumbrance,
lien, or charge of any kind (including the charge upon the property purchased
under conditional sales or other title retention agreements) upon any of the
property or assets of the Borrower, whether now owned or hereafter acquired,
except: (a) liens for taxes not yet due or which are being contested in good
faith by appropriate proceedings; (b) other liens, charges, and encumbrances
incidental to the conduct of the Borrower's business or the ownership of its
property and assets which are not incurred in connection with the borrowing of
money or the obtaining of advances of credit and which do not in the aggregate
materially impair the use of such property or assets in the operation of the
Borrower's business; (c) Permitted Liens; and (d) purchase money mortgages and
other purchase money liens or security interests (including finance leases) upon
any fixed or capital assets hereafter acquired by the Borrower, provided that no
such mortgage, lien, or security interest shall extend to or cover any other
property of the Borrower, and further provided that the principal amount of the
aggregate of all such indebted ness secured by all such mortgages, liens, and
security interests shall not exceed $50,000.00.
5.5. Maintenance of Properties. The Borrower will maintain,
keep, and preserve all of its properties (tangible and intangible) necessary or
useful in the proper conduct of its business in good working order and
condition, ordinary wear and tear excepted. The Borrower shall from time to time
make or cause to be made all necessary and proper repairs, renewals,
replacements, additions, and improvements to its properties so that the business
carried on by the Borrower may be properly and advantageously conducted at all
times in accordance with prudent business management.
5.6. Compliance With Laws. The Borrower shall comply in all
material respects with all laws, ordinances, regulations, and orders of all
governmental authorities applicable to its business or the use of its
properties. The Borrower may contest, in good faith, any such law, ordinance,
regulation, or order and withhold compliance during any proceeding, including
appropriate appeals, so long as the Bank's security interest in the Collateral
or lien in the Premises, in the opinion of the Bank, is not jeopardized.
5.7. Location of Collateral. All Collateral now owned by the
Borrower is and will be, and all Collateral hereafter acquired by the Borrower
will be, and to the extent the Collateral consists of intangible property such
as accounts, the records concerning the Collateral will be, kept at the
Borrower's facilities at either 22160 North Pepper Road, Barrington, IL 60010
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or 675 Industrial Drive, Cary, Illinois or , ______________________England.
Except in the ordinary course of its business, the Borrower shall not remove the
Collateral from its existing locations. To the extent the Collateral consists of
vehicles or other property, the ownership of which is evidenced by a certifi
cate of title, the Borrower shall not take or permit any action that would
require registration of such Collateral outside the State of Illinois.
5.8. Mergers, Sales of Assets. The Borrower shall not merge or
consolidate with any other corporation or sell, lease, transfer, or otherwise
dispose of all or any substantial part of the assets of the Borrower or enter
into any sale and leaseback transaction or arrangement with respect to any
properties of the Borrower, change the name of the Borrower, or wind up,
liquidate, or dissolve, or agree to do any of the foregoing, except that the
Borrower may sell in the ordinary course of business assets or properties no
longer necessary for the proper conduct of the business of the Borrower having a
value amounting, in any single transaction, to not more than $50,000.00.
5.9. Bank Account. The Borrower shall maintain its principal
deposit relationship, including its corporate operating checking account and
money market deposit account, with the Bank.
5.10. Tangible Net Worth. The Borrower shall at all times
maintain a Tangible Net Worth in an amount greater than $1,200,000.00. For
purposes of this Agreement, Tangible Net Worth shall mean the total of all
assets appearing on a balance sheet of the Borrower prepared in accordance with
generally accepted accounting principles consistently applied, less the total
liabilities of the Borrower, as determined in accordance with generally accepted
accounting principles consistently applied, less the amount of any intangible
assets as determined by the Bank in its discretion.
5.11. Permitted Debt. The Borrower shall not create, incur,
assume, or suffer to exist any funded or current debt, or guarantee, endorse or
otherwise be or become contingently liable in connection with the obligations,
stock, or dividends of any person, except: (a) debt represented by the Notes;
(b) funded or current debt secured by mortgages and other liens and retentions
permitted under Section 5.4 hereof; (c) contingent liabilities arising out of
the endorsement in the ordinary course of business of negotiable instruments in
the course of collection thereof; and (d) current liabilities arising in the
ordinary course of business of the Borrower and which are not incurred for money
borrowed.
5.12. Leases and Purchases. The Borrower shall not incur or
have outstanding any obligations for the payment for purchases of property or
for rentals on account of the use or possession of real or personal property
(whether or not any express or implied arrangement is made for the acquisition
by the Borrower of title thereto at any time) if after giving effect thereto the
maximum aggregate amount of rentals for which the Borrower is obligated in any
fiscal year on all leases having a term in excess of three years would exceed
$50,000.00.
5.13. Investments. The Borrower shall not make or permit to
remain outstanding any loan or advance to, or own, purchase, or acquire any
stock or securities of, any person, excepting loans to employees not exceeding,
at any time, in the aggregate, $50,000.00 outstanding.
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5.14. Restricted Payments. The Borrower shall not pay or
declare any dividend on any shares of any class of its capital stock or make any
other distribution on account of any shares of any class of its stock, or
redeem, purchase, or otherwise acquire, directly or indirectly, any shares of
any class of its capital stock in excess of $250,000.00 in any year.
5.15. Transactions with Affiliates. The Borrower shall not,
directly or indirectly, purchase, acquire, or lease any material property or
service from, or sell, transfer, or lease any material property or service to,
any Affiliate (as hereinafter defined) except in the usual, regular, and
ordinary course of business of the Borrower and upon fair and reasonable terms
no less favorable to the Borrower than would result from arm's-length bargaining
with an unaffiliated person. For purposes of this Agreement, "Affiliate" shall
mean: any person or entity, directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control with the
Borrower; or any director, officer, trustee, or shareholder of the Borrower or
any entity, directly or indirectly, through one or more intermediaries,
controlling, controlled by, or under common control with the Borrower.
Section 6. DEFAULT AND REMEDIES.
6.1. Events of Default. Each of the following shall
constitute an "Event of Default" under this Agreement:
(a) The Borrower fails to pay, within ten (10) days
after the date on which payment thereof is due, any installment of
principal or interest on any of the Notes or any other sum due and
payable under this Agreement, any of the Notes, or the Mortgage; or
(b) the Borrower fails to keep or perform any
agreement, undertaking, obligation, covenant or condition set forth in
Section 5.2, 5.3 or 5.4 of this Agreement; or
(c) the Borrower fails to keep or perform any other
agreement, undertaking, obligation, covenant, or condition set forth in
this Agreement or any of the Loan Documents or any other agreement
between the Borrower and the Bank within thirty (30) days after notice
that such performance is due and such performance remains uncured
within that period; or
(d) if default shall occur in the payment of any
principal, interest, or premium with respect to any indebt edness of
the Borrower or any Guarantor for borrowed money and such default shall
continue for more than the period of grace, if any, therein specified
and shall not have been effectively waived, or if any such indebtedness
shall be declared due and payable prior to the stated maturity thereof;
or
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(e) (i) any representation, warranty or
certification, made or given in or pursuant to this Agree ment by the
Borrower or otherwise made by the Borrower in writing in connection
with this Agreement, proves to be untrue in any respect when such
representation, warranty or certification is made or given hereunder;
or (ii) any representation, warranty or certification, made or given in
or pursuant to this Agreement by the Borrower or otherwise made by the
Borrower in writing in connection with this Agreement, although true in
all respects when such represen tation, warranty or certification was
made or given, proves to be untrue in any material respect at any
subsequent time when such representation, warranty or certification is
operative or applicable and such representation, warranty or
certification continues to be untrue ten (10) days after written notice
from the Bank to the Borrower; or
(f) the Collateral or the Premises, or any material
part thereof, is damaged or destroyed by fire or other casualty and the
cost to rebuild or reconstruct exceeds the face amount of insurance
actually collected or in the process of collection through diligent
efforts of the Borrower, and if the Borrower fails to deposit or to
cause to be deposited with the Bank the deficiency within ten (10) days
after the Bank's written request therefor, unless such deficiency is
less than $50,000.00; or
(g) an order of condemnation by eminent domain
proceedings is entered with respect to the Premises or any
part thereof and is not dismissed or stayed; or
(h) any petition is filed or proceeding is commenced
for any attachment, levy, or seizure of any property of the Borrower
subject to a lien in favor of the Bank; or any judgment or judgments,
writ or writs, warrant or warrants of attachment, or any similar
process or pro cesses in an aggregate amount in excess of $50,000.00
shall be entered or filed against the Borrower or against any property
or assets of the Borrower and remains unvacated, unbonded or unstayed
for a period of sixty (60) days; or
(i) if the Borrower or any Guarantor: shall be unable
to pay its debts as they become due; files a petition to take advantage
of any insolvency act; makes an assignment for the benefit of its
creditors; commences a proceeding for or consents to the appointment of
a receiver, trustee, liquidator, or conservator of itself or of the
whole or any substantial part of its property; files a petition to a
petition under any chapter of the Bankruptcy Reform Act of 1994, as
amended, or files a petition or seeks relief under or takes advantage
of any other reorganization, arrangement or readjustment of debt,
insolvency, or receivership law or statute of the United States of
America or any state thereof; or if there is commenced against the
Borrower or any Guarantor any proceeding for any of the foregoing
relief which is not dismissed or withdrawn within 90 days after the
filing thereof; or if the Borrower or any Guarantor by any act
indicates its consent to, or approval or authorization of, any such
proceeding or petition; or
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(j) if Stephen M. Merrick shall cease to own of
record and beneficially at least 406,401 shares of common stock
representing 14.34% of 2,833,188 shares of common stock, if Stephen M.
Merrick, John H. Schwan and Howard W. Schwan shall cease to have
beneficial interest in shares of preferred stock as follows: 571,429,
857,143 and 428,571. Preferred stock is held in a limited liability
company (CTI Investors) with one other investor having a beneficial
interest in 714,286 shares. CTI Investors owns 2,571,969 shares of
preferred stock out of a total outstanding of 2,857,143. The preferred
stock has the right to elect four of five directors of the Borrower and
Stephen M. Merrick, John H. Schwan and Howard W. Schwan control CTI
Investors. Common and preferred stock are both voting. There are a
total of 5,690,331 shares of common and preferred outstanding of which
Stephen M. Merrick owns 17.18%, John H. Schwan 15.06% and Howard W.
Schwan 7.53%; or
(k) if either Stephen M. Merrick, John H. Schwan
or Howard W. Schwan ceases to be actively employed in their
respective offices and positions held as of the date hereof;
or
(l) if any Guarantor shall die or be declared
incompetent; or
(m) if, in the reasonable opinion of the Bank,
there shall be any material adverse change in the financial
condition of the Borrower or any Guarantor.
6.2. Remedies. After the occurrence of any Event of Default,
the Bank shall have the right in addition to all the remedies conferred upon the
Bank by law or equity or the terms of any of the Loan Documents, to do any or
all of the following, concurrently or successively, without notice to the
Borrower:
(a) Declare the Notes to be, and the Notes shall
thereupon become, immediately due and payable, provided that if an
Event of Default described in Section 6.1(i) shall occur or exist, the
Notes shall automatically become immediately due and payable, in each
case without presentment, demand, protest or notice of any kind, all of
which are hereby expressly waived, anything contained herein or in the
Loan Documents to the contrary notwithstanding;
(b) terminate the Bank's obligations under this
Agreement to extend credit of any kind or to make any disbursement,
whereupon the commitment and obligations of the Bank to extend credit
or to make disbursements hereunder shall terminate; and
(c) exercise all rights and remedies of a secured
party under the Uniform Commercial Code and otherwise, including,
without limitation, the right to foreclose the security interest
granted herein by any available judicial or other procedure and/or to
take possession of any or all of the Collateral and the books and
records relating thereto with or without judicial process, for which
purpose the Bank may enter on any or all of the premises where any of
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the Collateral or books or records may be situated and take possession
and remove the same therefrom; proceed to protect and enforce its
rights or remedies either by suit in equity or by action at law, or
both; require the Borrower to assemble any or all of the Collateral and
any or all certif icates of title and other documents relating to the
Collat eral at a place designated by the Bank; charge or set off all
sums owing to the Bank by the Borrower against any and all of the
Borrower's accounts (including accounts held jointly with others) and
credit balances at the Bank, regardless of the stated maturity thereof;
and exercise in the Borrower's name all rights with respect to the
Collateral, including the right to collect any and all money due or to
become due, endorse checks, notes, drafts, instru ments, or other
evidences of payment, receive and open mail addressed to the Borrower,
and settle, adjust, or compromise any dispute with respect to any item
of Collateral.
6.3. Rights and Remedies Cumulative. All of the Bank's rights
and remedies, whether evidenced by this Agreement or by any other writing, shall
be cumulative and may be exercised singularly or concurrently. Election by the
Bank to pursue any remedy shall not exclude pursuit of any other remedy, and an
election to make expenditures or to take action to perform an obligation of the
Borrower under this Agreement, after the failure of the Borrower to perform,
shall not affect the Bank's right to declare a default and to exercise its
remedies.
Section 7. REPRESENTATIONS AND WARRANTIES.
The Borrower represents and warrants to the Bank as follows:
7.1. Power and Authority. The Borrower is a corporation duly
organized and validly existing and in good standing under the laws of its state
of incorporation. The Borrower has the requisite authority to execute, deliver
and carry out the terms and provisions of this Agreement, and the Loan Documents
and other documents to be executed and delivered by it in connection with this
Agreement. This Agreement constitutes, and the Loan Documents and other
documents to be executed and delivered in connection with this Agreement, when
executed and delivered pursuant hereto will constitute, the duly authorized
obligations of the party or parties (other than the Bank) executing the same and
will be enforceable in accordance with their respective terms.
7.2. No Violation of Agreements, Etc. The Borrower is not in
default under any agreement to which it is a party, the effect of which will
materially adversely affect performance by the Borrower of its obligations
pursuant to and as contemplated by the terms and provisions of this Agreement or
any of the Loan Documents. Neither the execution and delivery of this Agreement,
the Loan Documents or other documents to be executed and delivered by the
Borrower, or the performance of its obligations under this Agreement (a) violate
any presently existing provisions of law or any presently existing applicable
order, writ, injunction or decree of any court or government department,
commission, board, bureau, agency or instrumentality, or (b) conflict or are
inconsistent with or result in any breach of any of the terms, covenants,
conditions or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, instrument, document, agreement or contract of any kind
which creates, represents, evidences or provides for any lien, charge or
encumbrance upon any of the assets of the Borrower, or any other indenture,
mortgage, deed of trust, instrument, document, agreement or contract of any kind
to which the Borrower is a party or by which the Borrower may be bound.
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7.3. Financial Statements, Financial Condition. The Borrower
has furnished the Bank with financial statements of the Borrower as of and for
the fiscal year ended October 31 in each of the years 1993, 1994, and 1995 and a
balance sheet as of May 31, 1996 and statement of operations for the seven month
period then ended. Such financial statements are true and correct, subject, as
to the interim statements, to changes resulting from year-end reviews and
adjustments, and have been prepared in accordance with generally accepted
accounting principles consis tently followed throughout the periods involved.
The balance sheets included therein fairly present the condition of the Borrower
as at the dates thereof, and the profit and loss and surplus statements included
therein fairly present the results of operations of the Borrower for the periods
indicated. There has been no material adverse change in the condition, financial
or otherwise, of the Borrower since May 31, 1996.
7.4. No Litigation. Except for an action filed by NRS for
services performed by NRS in the aggregate of approximately $105,000.00, there
are no actions, suits or proceedings pending or, to the knowledge of the
Borrower, threatened against or affecting the Borrower before any court or any
governmental, administrative, regulatory, adjudicatory or arbitrational body or
agency of any kind which will materially adversely affect performance by any of
such parties of its obligations pursuant to and as contemplated by the terms and
provisions of this Agreement or the Loan Documents.
7.5. Taxes. The Borrower has filed all state and federal
income tax returns that are required to be filed, and has paid all taxes shown
to be due on such returns and such assessments received by the Borrower to the
extent that the same had become due.
7.6. Title to Property. The Borrower holds and will hold all
right, title, and interest in and to its properties, including the Collateral,
free and clear of all liens, claims and encumbrances, except as permitted under
this Agreement. The Trust holds and will hold all right, title, and interest in
and to its properties, including the Premises, free and clear of all liens,
claims and encumbrances, except as permitted under this Agreement. The Borrower
has no subsidiaries.
7.7. Accounts Receivable. With respect to the Accounts
Receivable, the Borrower represents and warrants that, unless otherwise
indicated in writing by the Borrower:
(a) all Accounts Receivable are genuine, are in all
respects what they purport to be, are not evidenced by a judgment and
are evidenced by only one, if any, executed original instrument,
agreement, contract, or document;
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(b) all Accounts Receivable represent undisputed bona
fide transactions completed in accordance with the terms and provisions
contained in any documents or agreements related thereto;
(c) the face amount shown on any schedule of Accounts
Receivable heretofore or hereafter provided to the Bank and all
invoices and statements delivered to the Bank with respect to any
Accounts Receivable are or will be actually and absolutely owing to the
Borrower and are not contingent for any reason;
(d) to the best of the Borrower's knowledge, there
are no set-offs, counterclaims, or disputes existing or asserted with
respect to the Accounts Receivable, and the Borrower has not made any
agreement with any account debtor for any deduction therefrom, except
for discounts and allowances allowed by the Borrower in the ordinary
course of its business for prompt payment, all of which discounts or
allowances are reflected in the calculation of the face amount of the
invoices to which such discounts or allowances relate;
(e) to the best of the Borrower's knowledge, there
are no facts, events, or conditions which in any way impair the
validity or enforcement of the Accounts Receiv able or tend to reduce
the amount payable thereunder from the invoice face amount shown on any
schedule of Accounts Receivable delivered to the Bank;
(f) the Borrower has no knowledge of any fact or
circumstance that would impair the validity or collectibility of the
Accounts Receivable; and
(g) the Accounts Receivable that the Borrower shall,
expressly or by implication, request the Bank to treat as Eligible
Accounts will, as of the time such request is made, conform in all
requests to the conditions to be treated as Eligible Accounts.
7.8. Inventory. With respect to the Inventory, the Borrower
represents and warrants that, unless otherwise indicated in writing by the
Borrower:
(a) all inventory is located at the location set
forth in Section 5.7 hereof or is Inventory that is in transit;
(b) no Inventory is, or shall at any time or times
hereafter be, stored with a bailee, warehouseman, or similar party
without the prior written consent of the Bank;
(c) no Inventory is under consignment to or from any
person;
(d) all Inventory is currently usable and salable in
the normal course of the Borrower's business; and
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(e) the Inventory that the Borrower shall, expressly
or by implication, request the Bank to treat as Eligible Inventory
will, as of the time such request is made, conform in all respects to
the conditions to be treated as Eligible Inventory.
7.9. Compliance with Environmental Laws. Except as disclosed
in writing to the Bank on or before the date hereof, the Premises and its
present use complies, and at all times shall comply, with all applicable laws
and governmental regulations including, without limitation, all applicable
federal, state and local laws pertaining to air and water quality, hazardous
waste, waste disposal, air emissions and other environmental matters, all zoning
and other land use matters, and utility availability. Except as disclosed in
writing to the Bank on or before the date hereof, neither the Borrower nor, to
the best of the Borrower's knowledge, any previous owner or occupier of the
Premises, used, generated, stored or disposed of, on, under or about the
Premises any Hazardous Materials. For purposes of this Agreement, Hazardous
Materials shall mean and include any hazardous substance or any pollutant or
contaminant defined as such in (or for purposes of) the Comprehensive
Environmental Response, Compensation, and Liability Act, any so-called
applicable "Superfund" or "Superlien" or "Non-priority Lien" law, the Toxic
Substances Control Act, or the Resource Conservation and Recovery Act, all as
amended from time to time. Further, to the best of the Borrower's knowledge,
except as disclosed in writing to the Bank on or before the date hereof, the
Premises does not contain any underground tanks and does not contain and has not
in the past contained any asbestos-containing material in friable form.
7.10. Material Facts. Neither this Agreement nor any document,
financial statement, credit information, certificate or statement furnished to
the Bank by the Borrower contains, or will contain, any untrue statement of a
material fact or omits, or will omit, to state a material fact necessary to make
the statements made not misleading.
7.11. Representations and Warranties to be Continuing. All of
the foregoing representations and warranties will be true at the date of the
initial disbursement and at the dates of all subsequent disbursements of the
Loan. All representations, warranties, covenants, and agreements made herein or
in any certificate or other document delivered to the Bank by or on behalf of
the Borrower shall be deemed to have been relied upon by the Bank
notwithstanding any investigation heretofore or hereafter made by the Bank or on
its behalf, and shall survive the making of any or all of the disbursements
contemplated hereby and shall continue in full force and effect as long as there
remains unperformed any obligation to the Bank hereunder or under any of the
Loan Documents.
Section 8. MISCELLANEOUS PROVISIONS.
8.1. Notices. Any communications, requests or notices required
or appropriate to be given under this Agreement shall be in writing and deemed
given when delivered in person or when mailed by certified mail, return receipt
requested, deposited in the United States mail postage pre-paid, addressed to
the party for whom the notice is intended as follows:
20
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BORROWER: CTI Industries Corporation
22160 North Pepper Road
Barrington, IL 60010
Attention: Stephen M. Merrick
President
BANK: First American Bank
975 Busse Road
Elk Grove Village, Illinois 60007
Attention: Martin J. Carmody
Exec. Vice President
These addresses may be changed by notice as provided herein.
8.2. No Waiver. No failure by the Bank to exercise, or delay
by the Bank in exercising, any right, power or privilege hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of any right,
power or privilege hereunder preclude any other or further exercise thereof, or
the exercise of any other right, power or privilege. The rights and remedies
provided in this Agreement are cumulative and not exclusive of any right or
remedy provided by law. No notice to or demand on the Borrower in any case
shall, in itself, entitle the Borrower to any other or further notice or demand
in similar or other circumstances or constitute a waiver of the rights of the
Bank to any other or further action in any circumstances without notice or
demand.
8.3. Binding Effect. This Agreement and the Loan Documents
shall be binding upon and inure to the benefit of the respective parties hereto
and their respective successors and assigns. This Agreement is made for the sole
benefit of the Borrower and the Bank and no other person or persons shall have
any benefits, rights or remedies under or by reason of this Agreement.
8.4. Further Assurances. The Borrower agrees that, at any time
or from time to time, upon the written request of the Bank, it will execute and
deliver all such further documents and do all such other acts and things as the
Bank may reasonably request to give effect to this Agreement and the Loan
Documents.
8.5. Time of the Essence. Time is of the essence of this
Agreement and of every part hereof. The obligations of the Bank hereunder shall
be of no further force or effect if the initial disbursement of the Loan does
not occur on or before September 30, 1996.
8.6. Fees and Expenses. The Borrower shall promptly pay or
reimburse the Bank for all reasonable expenses, regardless of whether the Loan
is disbursed in whole or in part, incurred in connection with the issuance of
the Bank's commitment letter and the making of the Loan, including, but not
limited to, examina tion and insurance of title by the Title Company,
preparation and review of all Loan Documents by the Bank's outside counsel,
taxes of any kind, appraisal, surveys, recording costs, escrow disbursement
costs, inspection costs and attorney's fees. The Borrower shall also pay
promptly to the Bank on demand the customary fees and out-of-pocket expenses
21
<PAGE>
of the Bank in connection with the Bank's periodic examinations of the
Collateral and inspections of books and records of the Borrower. The Borrower
shall pay promptly to the Bank on demand reasonable attorneys' fees and all
costs and other expenses paid or incurred by the Bank in duly enforcing or
exercising its rights or reme dies created by, connected with or provided in
this Agreement, the Notes, the Mortgage or the other Loan Documents or as a
result of any litigation or threatened litigation or the preparation therefor in
which the Bank is a party or threatened to be made a party and which in any way
whatsoever relates to this Agreement.
8.7. Indemnity Agreement. The Borrower agrees to indemnify,
defend, and hold the Bank harmless from and against any and all losses, damages,
liabilities, and expenses (including reasonable attorneys' fees) the Bank may
sustain as a consequence of the occurrence of any Event of Default or the breach
or inaccuracy of any representation and warranty made by the Borrower in this
Agreement or any document, financial statement, credit information, certificate,
or statement furnished to the Bank. The Borrower agrees to indemnify, defend,
and hold the Bank harmless from and against any and all losses, damages,
liabilities, and expenses (including reasonable attorneys' fees) that at any
time or from time to time may be paid, incurred, or suffered by, or asserted
against, the Bank for, with respect to, or as a direct or indirect result of the
presence on or under, or the escape, seepage, leakage, spillage, discharge,
emission, or release from, the Premises or any part thereof, into or upon any
land, the atmosphere, or any water course, body of water, or wet lands, of any
Hazardous Material occurring during or prior to the period of ownership of the
Premises or any part thereof by the Borrower or as a result of conditions
existing during such period (including, without limitation, any losses,
liabilities, damages, or expenses asserted or arising under any applicable law
or regulation). The provisions of and undertakings and indemni fications set
forth in this Section shall survive the payment of the Notes and the other
obligations of the Borrower to the Bank and shall not be affected by the Bank's
acquisition of any interest in the Premises, whether by foreclosure or
otherwise.
8.8. Security for Disbursements and Payments. Any and all
disbursements, payments and amounts expended by the Bank pursuant to this
Agreement, and all other expenses reimbursable by the Borrower, shall, as and
when advanced or incurred, be and become evidenced and secured by this Agreement
and the Loan Documents and shall bear interest from the date of advance or
expenditure at the rate provided in this Agreement or, if no such rate is
provided, then at the highest applicable interest rate provided in the Notes.
Any Event of Default which may occur under this Agreement shall constitute a
default under the Loan Documents.
8.9. Entire Agreement. This Agreement and the Loan Documents
constitute the entire agreement between the parties hereto and may not be
modified or amended in any manner other than by supplemental written agreement
executed by the parties hereto. This Agreement supersedes any other agreement
made by the Bank with or for the benefit of the Borrower.
22
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8.10. Governing Law. This Agreement shall be a contract
governed by and construed in accordance with the laws of the State of Illinois.
IN WITNESS WHEREOF, the parties hereto caused this Agreement
to be executed as of the day and year first written above.
BORROWER: CTI Industries Corporation
BY:/s/ Stephen M. Merrick
--------------------
Stephen M. Merrick
President
ATTEST:
BY:______________________
Name:
Title: Secretary
BANK: First American Bank
BY:/s/ Martin J. Carmody
--------------------
Martin J. Carmody
Exec. Vice President
23
EXHIBIT 10.16
THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT
This Agreement is made as of July 1, 1997 among CTI Industries
Corporation, a Delaware corporation (the "Borrower"), and First American Bank,
an Illinois banking corporation (the "Bank"), and Stephen M. Merrick, John H.
Schwan, and Howard W.
Schwan (the "Guarantors").
Whereas, the Borrower and the Bank are parties to a Loan and
Security Agreement dated as of August 22, 1996, as it has been amended from time
to time (the "Loan Agreement"), and the Borrower is the maker of the Revolving
Note dated August 22, 1996 payable to the order of the Bank in the original
principal amount of $3,000,000.00 (the "Revolving Note"), and the Borrower is
the maker of the First Term Note dated August 22, 1996 payable to the order of
the Bank in the original principal amount of $1,100,000.00 (the "First Term
Note"), and the Borrower is the maker of the Second Term Note dated August 22,
1996 payable to the order of the Bank in the original principal amount of
$2,200,000.00 (the "Second Term Note") each delivered by the Borrower to the
Bank; and
Whereas, the obligations of the Borrower are secured by, among
other things: a security interest in all of Borrower's assets; a first mortgage
made by American National Bank and Trust Company of Chicago, not personally, but
solely as Trustee under Trust Agreement dated September 19, 1984 and known as
Trust No. 61978 (the "Trust") to secure the obligations of the Borrower under
the Loan Agreement and the Second Term Note; and a Collateral Assignment of
Beneficial Interest in the Trust (the "ABI")and
Whereas, the Guarantors have guaranteed the obligations of the
Borrower to the Bank pursuant to a Guaranty dated August 22, 1996 (hereinafter
referred to as the "Guaranty"); and
Whereas, on November 21, 1996 the Borrower and the Bank
executed a First Amendment to Loan and Security Agreement whereby the Bank
temporarily increased the rate of the advance limit on eligible inventory; and
Whereas, on March 21, 1997 the Borrower and the Bank executed
a Second Amendment to Loan and Security Agreement whereby the Bank temporarily
increased the rate of the advance limit on eligible inventory; and
Whereas, the Borrower and the Bank desire to enter into this
Agreement in order to extend additional indebtedness to the Borrower in the form
of a third and fourth term loans, extend the maturity of the Revolving Note, and
otherwise confirm the obligations of the Borrower under the Loan Agreement, the
Note (as hereinafter defined), the Guaranty, the Mortgage, the ABI, and all
other documents and instruments at any time evidencing, creating, or securing
the obligations of the Borrower to the Bank (collectively, the "Loan
Documents").
Now, therefore, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
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<PAGE>
1. Defined Terms. Capitalized words used in this Agreement as
defined terms are used herein with the same meanings as in the Loan Agreement,
unless otherwise defined herein.
2. Amendment to Loan Agreement. Section 1.1 of the Loan
Agreement shall be amended and restated and, as amended in its entirety, reads
as follows:
1.1 Loan Amount. Subject to and upon the terms and conditions
set forth in this Agreement, the Bank agrees to lend to the Borrower,
from time to time, such sums as may be requested by the Borrower and
which the Bank in its discretion agrees to lend from time to time, the
total of which shall not exceed, in the aggregate, $6,553,513.67,
subject to the further limits hereinafter set forth (the "Loan")
pursuant to the First Term Loan, the Second Term Loan, the Third Term
Loan, the Fourth Term Loan and the Revolving Loan hereinafter provided.
3. Amendment to Loan Agreement. The first paragraph in Section
1.1.3 of the Loan Agreement shall be amended and restated in its entirety and,
as amended, reads as follows:
1.1.3 Revolving Loan. The Bank agrees to lend to the Borrower,
subject to and upon the terms and conditions set forth herein, at any
time or from time to time on or after the date hereof and on or before
July 1, 1998, such amounts (each such loan and all such loans,
collectively, as the context requires being herein referred to as the
"Revolving Loan") as may be requested by the Borrower and which the
Bank in its discretion agrees to lend from time to time, subject to the
limitations hereinafter set forth. Within the limits and subject to and
upon the terms and conditions herein set forth, amounts under the
Revolving Loan may be borrowed and repaid and reborrowed from time to
time. Except as otherwise permitted by the Bank, the aggregate unpaid
principal amount of the Revolving Loan outstanding at any time shall
not exceed the lesser of Three Million and No/100 Dollars
($3,000,000.00) or the Advance Limit (as hereinafter defined). The
Revolving Loan shall be evidenced by and be repayable with interest in
accordance with the terms of this Agreement and a promissory note
payable to the order of the Bank in the original principal amount of
$3,000,000.00 which shall be dated on or before the initial
disbursement of the Revolving Loan and shall be duly executed and
delivered by the Borrower (the "Revolving Note"). For purposes of this
Agreement, the Advance Limit shall be equal to the sum of: (i) 80% of
the Eligible Accounts (as defined in the Loan Agreement) or
$3,000,000.00, whichever is less; and (ii) 25% of Eligible Inventory
(as defined in the Loan Agreement) or $1,000,000.00, whichever is less,
except for the period from June 19, 1997 through October 17, 1997 when
the advance on Eligible Inventory shall be increased to 35% or
$1,300,000.00, whichever is less.
4. Amendment to Loan Agreement. Section 1 of the Loan
Agreement shall be amended and restated in its entirety to add
the following sub-sections:
2
<PAGE>
1.1.4 Third Term Loan. The Bank agrees to lend to the
Borrower, subject to and upon the terms and conditions herein set
forth, the sum of Two Hundred Seventy Five Thousand and No/100 Dollars
($275,000.00) (herein referred to as the "Third Term Loan"). The Third
Term Loan shall be evidenced by and be repayable with interest in
accordance with the terms of this Agreement and a promissory note
payable to the order of the Bank in the original principal amount of
$275,000.00, which shall be dated on or before the initial disbursement
of the Third Term Loan and shall be duly executed and delivered by the
Borrower (the "Third Term Note").
1.1.5 Fourth Term Loan. The Bank agrees to lend to the
Borrower, subject to and upon the terms and conditions herein set
forth, the sum of Two Hundred Thousand and No/100 Dollars
($200,000.00)(herein referred to as the "Fourth Term Loan"). The Fourth
Term Loan shall be evidenced by and be repayable with interest in
accordance with the terms of this Agreement and a promissory note
payable to the order of the Bank in the original principal amount of
$200,000.00, which shall be dated on or before the initial disbursement
of the Fourth Term Loan and shall be duly executed and delivered by the
Borrower (the "Fourth Term Note").
5. Amendment to Loan Agreement. Section 1.2 of the Loan
Agreement shall be amended and restated in its entirety to add the following
sub-sections:
2.1.4 Third Term Loan Disbursements. The Third Term Loan shall
be disbursed, as the Borrower shall direct, upon the satisfaction of
the conditions set forth in Sections 2 and 3 of the Loan Agreement.
2.1.5 Fourth Term Loan Disbursements. The Fourth Term Loan
shall be disbursed, as the Borrower shall direct, upon the satisfaction
of the conditions set forth in Sections 2 and 3 of the Loan Agreement.
6. Amendment to Loan Agreement. Section 1.3 of the Loan
Agreement shall be amended and restated in its entirety to add the following
sub-sections:
1.3.4 Third Term Loan Interest and Penalties The Third Term
Loan shall bear interest on its principal amount outstanding from time
to time at a rate per annum equal to one percent (1%) per annum over
the Bank's Prime Rate, which shall be adjusted daily when and as the
Bank's Prime Rate changes. Upon and after the occurrence of an Event of
Default, the Third Term Loan shall bear interest on its principal
amount outstanding from time to time at a rate per annum (the "Third
Term Loan Default Rate") equal to four percent (4%) per annum over the
Bank's Prime Rate, which shall be adjusted daily when and as the Bank's
Prime Rate changes. Interest accruing prior to maturity of the Third
Term Loan (whether by lapse of time, acceleration, or other wise) shall
be due and payable on the first day of each calendar month, commencing
with the month following the date on which the first disbursement of
the Third Term Loan is made. After maturity of the Third Term Loan
(whether by lapse of time, acceleration, or otherwise) accrued interest
shall be due and payable upon demand. The Borrower shall pay a late
charge of five percent (5%) of the amount of any sum payable to the
Bank under this Agreement or any of the Notes that is received by the
Bank more than 10 days after the date on which it is due. Such late
charges shall be due and payable on the due date of the next
installment of principal or interest, together with the regular
installment then due.
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<PAGE>
1.3.5 Fourth Term Loan Interest and Penalties The Fourth Term
Loan shall bear interest on its principal amount outstanding from time
to time at a rate per annum equal to one percent (1%) per annum over
the Bank's Prime Rate, which shall be adjusted daily when and as the
Bank's Prime Rate changes. Upon and after the occurrence of an Event of
Default, the Fourth Term Loan shall bear interest on its principal
amount outstanding from time to time at a rate per annum (the "Fourth
Term Loan Default Rate") equal to four percent (4%) per annum over the
Bank's Prime Rate, which shall be adjusted daily when and as the Bank's
Prime Rate changes. Interest accruing prior to maturity of the Fourth
Term Loan (whether by lapse of time, acceleration, or other wise) shall
be due and payable on the first day of each calendar month, commencing
with the month following the date on which the first disbursement of
the Fourth Term Loan is made. After maturity of the Fourth Term Loan
(whether by lapse of time, acceleration, or otherwise) accrued interest
shall be due and payable upon demand. The Borrower shall pay a late
charge of five percent (5%) of the amount of any sum payable to the
Bank under this Agreement or any of the Notes that is received by the
Bank more than 10 days after the date on which it is due. Such late
charges shall be due and payable on the due date of the next
installment of principal or interest, together with the regular
installment then due.
7. Amendment to Loan Agreement. Section 1.4 of the Loan
Agreement shall be amended and restated in its entirety to add the following
sub-sections:
1.4.4 Third Term Loan Maturity. The Third Term Loan shall be
due and payable in monthly installments of $7,738.89 of principal,
commencing on November 1, 1997, and a like sum on the first day of each
calendar month thereafter until the principal of and accrued and unpaid
interest on the Third Term Loan is paid in full, provided that the
outstanding principal of and accrued and unpaid interest on the Third
Term Loan, if not sooner paid in full, shall be due and payable in full
on October 1, 2000 (or earlier as provided in this Agreement or the
Third Term Note).
1.4.5 Fourth Term Loan Maturity. The Fourth Term Loan shall be
due and payable in monthly installments of $16,666.67 of principal,
commencing on August 1, 1997, and a like sum on the first day of each
calendar month thereafter until the principal of and accrued and unpaid
interest on the Fourth Term Loan is paid in full, provided that the out
standing principal of and accrued and unpaid interest on the Fourth
Term Loan, if not sooner paid in full, shall be due and payable in full
on July 1, 1998 (or earlier as provided in this Agreement or the Fourth
Term Note).
8. Amendment to Loan Agreement. Section 2.1(a) of the Loan
Agreement shall be amended and restated in its entirety and, as amended, reads
as follows:
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<PAGE>
(a) the First Term Note, the Second Term Note, the Third Term
Note, the Fourth Term Note, and the Revolving Note (collectively, the
"Note");
9. Delivery of Loan Documents The Borrower shall execute and
deliver to the Bank:
(a) a First Amendment to Revolving Note in the form attached
as Appendix A hereto providing that the Revolving Note shall be due and
payable in full on July 1, 1998 (or earlier as provided in the First
Amendment to Revolving Note, or the Loan Agreement;
(b) a Third Term Note dated July 1, 1997 in the original
principal amount of $275,000.00;
(c) a Fourth Term Note dated July 1, 1997 in the original
principal amount of $200,000.00;
(d) a Guaranty dated July 1, 1997 executed by the Guarantors;
and
(e) an Officer's Certificate dated July 1, 1997.
10. Validity of Agreements. Except as specifically provided in
this Agreement, all of the terms, provisions, and covenants of the Borrower in
the Loan Agreement, the Note, and the other Loan Documents are now and shall
remain in full force and effect and have not been and shall not be modified in
any way and are hereby affirmed, confirmed, and ratified in all respects. The
Borrower and the Guarantors hereby acknowledge that they have no claims or
offsets against, or defenses or counterclaims to, the enforcement by the Bank of
the Loan Agreement, the Note and the Amendment, or any of the other Loan
Documents. After the date hereof, all references to "Agreement", "hereof",
"herein", or the like appearing in the Loan Agreement shall be deemed to be
references to the Loan Agreement as herein amended or modified; all references
to the "First Term Note," the "Second Term Note," the "Third Term Note," the
"Fourth Term Note," and the "Revolving Note" in the Loan Agreement, the Note, or
any other Loan Documents shall be deemed to refer to the Note as amended by the
Third Amendment to Loan and Security Agreement and any extension, renewal,
refinancing, modification, amendment, or restructuring thereof.
11. Miscellaneous Provisions.
a. This Agreement shall be governed by the internal laws of
the State of Illinois.
b. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of
which, when taken together, shall constitute one and the same
instrument.
c. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and
assigns.
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d. This Agreement represents the complete agreement of the
parties with respect to the subject matter hereof and supersedes all
prior negotiations and Agreements with respect to the subject matter
hereof.
In Witness hereof, the parties have executed this Agreement on
the date first written above.
BORROWER:
CTI Industries Corporation
Attest:
By:/s/Stephen M. Merrick,
---------------------
Stephen M. Merrick,
By:/s/Howard W. Schwan President
------------------
Howard W. Schwan,
Secretary
BANK:
First American Bank
By:/s/ Martin J. Carmody
---------------------
Martin J. Carmody,
Executive Vice President
GUARANTORS:
/s/ Stephen M. Merrick
---------------------
Stephen M. Merrick,ndividually
/s/ John H. Schwan
---------------------
John H. Schwan, Individually
/s/ Howard W. Schwan
---------------------
Howard W. Schwan, Individually
Exhibit 10.17
FIRST TERM NOTE
$1,100,000.00 Elk Grove Village, Illinois
August 22, 1996
Loan No. 600804665-55
FOR VALUE RECEIVED, the undersigned, CTI Industries
Corporation, a Delaware corporation (the "Borrower"), hereby promises to pay to
the order of First American Bank, an Illinois banking corporation (the "Bank"),
the principal sum of One Million One Hundred Thousand and No/100 Dollars
($1,100,000.00) on September 1, 2001 (or earlier as hereinafter provided), or so
much thereof as may be advanced by the Bank and evidenced by this Note under the
Loan and Security Agreement dated August 22, 1996 between the Borrower and the
Bank (the "Loan Agreement"), together with interest to maturity (whether by
lapse of time, accel eration, or otherwise) on the balance of principal
remaining from time to time outstanding at a fluctuating rate (or such lower
interest rate as determined by Section 1.3.4 of the Loan Agreement) per annum
equal to one percent (1%) per annum over the Prime Rate announced from time to
time by the Bank (which may not be the Bank's lowest rate of interest) which
shall be adjusted daily when and as the Bank's Prime Rate changes. Interest
shall be calculated on the basis of a 360-day year and actual days.
Unless accelerated as hereinafter provided or as otherwise
provided in the Loan Agreement, the principal sum outstanding shall be payable
in installments of $18,333.33 of principal per month payable on the first day of
each calendar month commencing with the month of October, 1996 and on the first
day of each succeeding month until this Note is fully paid except that the final
payment of principal, if not sooner paid, shall be due on September 1, 2001.
Accrued interest shall be paid on the first day of the month following the month
in which the first disbursement evidenced by this Note is made under the Loan
Agreement and thereafter on the first day of each succeeding month until this
Note is fully paid, except that the final payment of interest, if not sooner
paid, shall be due on September 1, 2001. If an Event of Default (as defined in
the Loan Agreement) shall occur, the outstanding principal of and accrued and
unpaid interest on this Note shall become immediately due and payable as
provided in the Loan Agreement without notice.
All payments on account of the indebtedness evidenced by this
Note (other than required prepayments which shall be applied as provided in the
Loan Agreement and optional prepayments which shall be applied as provided in
this Note) shall be applied first to accrued and unpaid interest and the
remainder to principal. Payments on this Note shall be made at the offices of
the Bank or at such other office as the legal holder of this Note may, from time
to time, designate in writing.
Notwithstanding anything to the contrary contained herein, the
undersigned agrees to pay a late charge of five percent (5%) of the amount of
any monthly installment received more than 10 days after the installment is due.
Late charges shall be due and payable on the due date of the next installment of
principal or interest, together with the regular installment then due.
Upon and after the occurrence of an Event of Default, the
undersigned shall pay interest at the rate (the "Default Rate") of four percent
(4%) per annum over the Bank's Prime Rate then in effect, which shall be
adjusted daily when and as the Bank's Prime Rate changes.
-1-
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First Term Note
Page Two
Except as otherwise provided in the Loan Agreement, this Note
may be prepaid in whole or in part without premium or penalty at any time at the
option of the undersigned in accordance with the Loan Agreement. Any partial
prepayment made at the option of the undersigned shall be applied against the
principal amount outstanding and shall not postpone the due date of any
subsequent monthly installment or change the amount of such installment unless
the Bank shall otherwise agree in writing.
This Note is secured by the Loan Agreement and other
documents, agreements, and instruments executed by the Borrower. This Note is
made and delivered pursuant to the Loan Agreement and is subject to the further
terms and conditions thereof, including the right of the holder to accelerate
payment of the principal of and accrued and unpaid interest on this Note and
other remedies upon the occurrence of an Event of Default, all of which are
hereby incorporated and made a part of this Note by reference.
Any waiver of any payment due hereunder or the acceptance by
the Bank of partial payments hereunder shall not, at any other time, be taken to
be a waiver of the terms of this Note or the Loan Agreement or any other
agreement between the Borrower and the Bank.
The makers, sureties, guarantors, and endorsers of this Note,
if any, jointly and severally hereby waive notice of and consent to any and all
extensions of this Note or any part thereof without notice, and each hereby
waives demand, presentment for payment, notice of nonpayment, and protest and
any and all notice of whatever kind or nature and the exhaustion of legal
remedies herein, or any release of liability or any other indulgences or
forbearances whatsoever, without releasing or in any way affecting the personal
liability of any other party hereunder.
This Note shall be the joint and several obligation of all
makers, sureties, guarantors, and endorsers and shall be binding upon them,
their heirs, personal representatives, and assigns.
In the event the holder of this Note shall refer this Note to
an attorney for collection, the undersigned agrees to pay, in addition to unpaid
principal and interest, all of the costs and expenses incurred in attempting or
effecting collection, including reasonable attorneys' fees, whether or not suit
is instituted.
IN WITNESS WHEREOF, the undersigned has executed this Note as
of the date first written above.
Attest: CTI Industries Corporation
_________________________ BY: /s/Stephen M. Merrick
- ------------------------- -------------------------
Name: ___________________ Stephen M. Merrick
Title:___________________ President
EXHIBIT 10.18
Second Term Note
$2,200,000.00 Elk Grove Village, IL
August 19, 1996
Loan No. 600804665-57
FOR VALUE RECEIVED, the undersigned, CTI Industries
Corporation, a Delaware corporation (the "Borrower"), hereby promises to pay to
the order of First American Bank, an Illinois banking corporation (the "Bank"),
the principal sum of Two Million Two Hundred Thousand and No/100 Dollars
($2,200,000.00) on September 1, 2001 (or earlier as hereinafter provided), or so
much thereof as may be advanced by the Bank and evidenced by this Note under the
Loan and Security Agreement of even date between the Borrower and the Bank (the
"Loan Agreement"), together with interest to maturity (whether by lapse of time,
acceleration, or otherwise) on the balance of principal remaining from time to
time outstanding at a rate per annum equal to eight and three-quarters percent
(8.75%). Interest shall be calculated on the basis of a 360-day year and actual
days.
Unless accelerated as hereinafter provided or as otherwise
provided in the Loan Agreement, the principal sum outstanding shall be payable
in equal installments of $19,617.26 of principal and interest per month payable
on the first day of each calendar month commencing with the month of October 1,
1996 and on the first day of each succeeding month until this Note is fully
paid, except that the final payment of principal and interest, if not sooner
paid, shall be due on September 1, 2001. If an Event of Default (as defined in
the Loan Agreement) shall occur, the outstanding principal of and accrued and
unpaid interest on this Note shall become immediately due and payable as
provided in the Loan Agreement without notice.
All payments on account of the indebtedness evidenced by this
Note (other than required prepayments which shall be applied as provided in the
Loan Agreement and optional prepayments which shall be applied as provided in
this Note) shall be applied first to accrued and unpaid interest and the
remainder to principal. Payments on this Note shall be made at the offices of
the Bank or at such other office as the legal holder of this Note may, from time
to time, designate in writing.
Notwithstanding anything to the contrary contained herein, the
undersigned agrees to pay a late charge of five percent (5%) of the amount of
any monthly installment received more than 10 days after the installment is due.
Late charges shall be due and payable on the due date of the next installment of
principal or interest, together with the regular installment then due.
<PAGE>
Second Term Note
Page Two
Upon and after the occurrence of an Event of Default, the
undersigned shall pay interest at the rate (the "Default Rate") of eleven and
three-quarters percent (11.75%) per annum.
Except as otherwise provided in Section 1.6 of the Loan
Agreement, this Note may be prepaid in whole or in part without premium or
penalty at any time at the option of the undersigned in accordance with the Loan
Agreement. Any partial prepayment made at the option of the undersigned shall be
applied against the principal amount outstanding and shall not postpone the due
date of any subsequent monthly installment or change the amount of such
installment unless the Bank shall otherwise agree in writing.
This Note is secured by the Loan Agreement, the Mortgage and other
documents, agreements, and instruments executed by the Borrower. This Note is
made and delivered pursuant to the Loan Agreement and is subject to the further
terms and conditions thereof, including the right of the holder to accelerate
payment of the principal of and accrued and unpaid interest on this Note and
other remedies upon the occurrence of an Event of Default, all of which are
hereby incorporated and made a part of this Note by reference.
Any waiver of any payment due hereunder or the acceptance by
the Bank of partial payments hereunder shall not, at any other time, be taken to
be a waiver of the terms of this Note or the Loan Agreement or any other
agreement between the Borrower and the Bank.
The makers, sureties, guarantors, and endorsers of this Note,
if any, jointly and severally hereby waive notice of and consent to any and all
extensions of this Note or any part thereof without notice, and each hereby
waives demand, presentment for payment, notice of nonpayment, and protest and
any and all notice of whatever kind or nature and the exhaustion of legal
remedies herein, or any release of liability or any other indulgences or
forbearances whatsoever, without releasing or in any way affecting the personal
liability of any other party hereunder.
This Note shall be the joint and several obligation of all
makers, sureties, guarantors, and endorsers and shall be binding upon them,
their heirs, personal representatives, and assigns.
In the event the holder of this Note shall refer this Note to
an attorney for collection, the undersigned agrees to pay, in addition to unpaid
principal and interest, all of the costs and expenses incurred in attempting or
effecting collection, including reasonable attorneys' fees, whether or not suit
is instituted.
IN WITNESS WHEREOF, the undersigned has executed this Note as
of the date first written above.
Attest: CTI Industries Corporation
/s/ Howard W. Schwan BY: /s/ John H. Scwan
- -------------------- ---------------------
Howard W. Schwan John H. Schwan
Vice President Chief Executive Officer
EXHIBIT 10.19
REVOLVING NOTE
$3,000,000.00 Elk Grove Village, Illinois
August 22, 1996
Loan No. 600804665-55
FOR VALUE RECEIVED, the undersigned, CTI Industries
Corporation, a Delaware corporation (the "Borrower"), hereby promises to pay to
the order of First American Bank, an Illinois banking corporation (the "Bank"),
the principal sum of Three Million and No/100 Dollars ($3,000,000.00), or so
much thereof as may be advanced by the Bank and evidenced by this Note under the
Loan and Security Agreement dated August 19, 1996 between the Borrower and the
Bank (the "Loan Agreement"), on September 1, 1997 (or earlier as hereinafter
provided), together with interest to maturity (whether by lapse of time,
acceleration, or other wise) on the balance of principal remaining from time to
time outstanding at a fluctuating rate per annum equal to one percent (1%) per
annum over the Prime Rate announced from time to time by the Bank (which may not
be the Bank's lowest rate of interest) which shall be adjusted daily when and as
the Bank's Prime Rate changes. Interest shall be calculated on the basis of a
360-day year and actual days.
Unless accelerated or prepayable as hereinafter provided or as
otherwise provided in the Loan Agreement, the principal sum outstanding shall be
payable on September 1, 1997. Accrued interest shall be paid on the first day of
the month following the month in which the first disbursement evidenced by this
Note is made under the Loan Agreement and thereafter on the first day of each
succeeding month until this Note is fully paid, except that the final payment of
interest, if not sooner paid, shall be due on September 1, 1997. If an Event of
Default (as defined in the Loan Agreement) shall occur, the outstanding
principal of and accrued and unpaid interest on this Note shall become
immediately due and payable as provided in the Loan Agreement without notice.
All payments on account of the indebtedness evidenced by this
Note (other than required prepayments which shall be applied as provided in the
Loan Agreement) shall be applied first to accrued and unpaid interest and the
remainder to principal. Payments on this Note shall be made at the offices of
the Bank or at such other office as the legal holder of this Note may, from time
to time, designate in writing.
Notwithstanding anything to the contrary contained herein, the
undersigned agrees to pay a late charge of five percent (5%) of the amount of
any monthly installment received more than 10 days after the installment is due.
Late charges shall be due and payable on the due date of the next installment of
interest, together with the regular installment then due.
<PAGE>
Revolving Note
Page Two
Upon and after the occurrence of an Event of Default, the
undersigned shall pay interest at the rate (the "Default Rate") of four percent
(4%) per annum over the Bank's Prime Rate then in effect, which shall be
adjusted daily when and as the Bank's Prime Rate changes.
Except as otherwise provided in the Loan Agreement, this Note
may be prepaid in whole or in part without premium or penalty at any time at the
option of the undersigned in accordance with the Loan Agreement.
This Note is secured by the Loan Agreement and other
documents, agreements, and instruments executed by the Borrower. This Note is
made and delivered pursuant to the Loan Agreement and is subject to the further
terms and conditions thereof, including the right of the holder to accelerate
payment of the principal of and accrued and unpaid interest on this Note and
other remedies upon the occurrence of an Event of Default and the required
prepayment of the principal of this Note upon certain other events or
conditions, all of which are hereby incorporated and made a part of this Note by
reference.
Any waiver of any payment due hereunder or the acceptance by
the Bank of partial payments hereunder shall not, at any other time, be taken to
be a waiver of the terms of this Note or the Loan Agreement or any other
agreement between the Borrower and the Bank.
The makers, sureties, guarantors, and endorsers of this Note,
if any, jointly and severally hereby waive notice of and consent to any and all
extensions of this Note or any part thereof without notice, and each hereby
waives demand, presentment for payment, notice of nonpayment, and protest and
any and all notice of whatever kind or nature and the exhaustion of legal
remedies herein, or any release of liability or any other indulgences or
forbearances whatsoever, without releasing or in any way affecting the personal
liability of any other party hereunder.
This Note shall be the joint and several obligation of all
makers, sureties, guarantors, and endorsers and shall be binding upon them,
their heirs, personal representatives, and assigns.
In the event the holder of this Note shall refer this Note to
an attorney for collection, the undersigned agrees to pay, in addition to unpaid
principal and interest, all of the costs and expenses incurred in attempting or
effecting collection, including reasonable attorneys' fees, whether or not suit
is instituted.
IN WITNESS WHEREOF, the undersigned has executed this Note as
of the date first written above.
CTI Industries Corporation
BY:/s/ John H. Schwan
---------------------
John H. Schwan
Chief Executive Officer
ATTEST
/s/ Howard W. Schwan
- --------------------
Howard W. Schwan
Vice President
EXHIBIT 10.20
THIS INSTRUMENT WAS )
PREPARED BY AND AFTER )
RECORDING RETURN TO: )
Maria F. Cardone )
First American Bank )
975 Busse Road )
Elk Grove Village, )
Illinois 60007 )
)
PERMANENT INDEX #: )
13-21-400-014 )
)
STREET ADDRESS: )
22160 North Pepper Road )
Barrington, IL 60010 )
MORTGAGE
THIS MORTGAGE, made August 22, 1996, by and between CTI
Industries Corporation, a Delaware corporation (hereinafter referred to as
"Mortgagor"), and First American Bank, an Illinois banking corporation
(hereinafter referred to as "Mortgagee");
WITNESSETH:
WHEREAS, Mortgagor is justly indebted to Mortgagee in the
principal sum of Two Million Two Hundred Thousand and No/100 Dollars
($2,200,000.00), evidenced by the certain Second Term Note of even date herewith
(the "Note"), made by Mortgagor pursuant to the Loan and Security Agreement,
dated August 19, 1996 between Mortgagor and Mortgagee (the "Loan Agreement"),
and made payable to the order of and delivered to Mortgagee, in and by which
Note the Mortgagor promised to pay the principal sum and interest as set forth
in the Note in installments as provided in the Note, with a final maturity date
occurring on September 1, 2001 (or earlier as so provided in the Note).
NOW, THEREFORE, Mortgagor, to secure the payment of the
principal sum of money and the interest and other charges and sums due in
accordance with the terms, provisions and limitations of this Mortgage, the Note
(and all extensions, renewals, refinancings, modifications, amendments, and
replacements thereof), and the Loan Agreement and the performance of the cove
nants and agreements herein contained by Mortgagor to be performed, and the
performance of the covenants and agreements contained in the Loan Agreement to
be performed by the Mortgagor, and also in consideration of the sum of One
Dollar ($1.00) in hand paid, the receipt of which is hereby acknowledged, does
by these presents MORTGAGE and CONVEY unto Mortgagee, its successors and
assigns, the real estate described on Exhibit A attached hereto and all of its
estate, right, title and interest therein, situated, lying and being in the City
of Barrington, County of Lake, and State of Illinois, which, with the property
hereinafter described, is referred to herein as the "Premises";
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<PAGE>
TOGETHER with all improvements, tenements, easements,
fixtures, and appurtenances thereto belonging, and all rents, issues, profits
and monies for so long and during all such times as Mortgagor may be entitled
thereto (which are pledged primarily and on a parity with the real estate and
not secondarily), including, without limiting the foregoing, if and to the
extent owned by Mortgagor: (a) all fixtures, fittings, furnishings, appliances,
apparatus, equipment and machinery including, without limitation, all gas and
electric fixtures, radiators, heaters, engines and machinery, boilers, ranges,
ovens, elevators and motors, bathtubs, sinks, water closets, basins, pipes,
faucets and other air-conditioning, plumbing and heating fixtures, mirrors,
mantles, refrigerating plants, refrigerators, iceboxes, dishwashers, carpeting,
furniture, laundry equipment, cooking apparatus and appurtenances, and all
building material, supplies and equipment now or hereafter delivered to the
Premises and intended to be installed therein; all other fixtures and personal
property of whatever kind and nature at present contained in or hereafter placed
in any building standing on the Premises; such other goods, equipment, chattels
and personal property as are usually furnished by landlords in letting other
premises of the character of the Premises; and all renewals or replacements
thereof or articles in substitution thereof; and all proceeds and profits
thereof and all of the estate, right, title and interest of the Mortgagor in and
to all property of any nature whatsoever, now or hereafter situated on the
Premises or intended to be used in connection with the operation thereof; (b)
all of the right, title and interest of the Mortgagor in and to any fixtures or
personal property subject to a lease agreement, conditional sale agreement,
chattel mortgage, or security agreement, and all deposits made thereon or
therefor, together with the benefit of any payments now or hereafter made
thereon; (c) all leases and use agreements of machinery, equipment and other
personal property of Mortgagor in the categories hereinabove set forth, under
which Mortgagor is the lessee of, or entitled to use, such items; (d) all rents,
income, profits, revenues, receipts, leases, tenancies, licenses or other use
agreements or arrangements now existing or hereafter created of the Premises or
any part thereof including any business conducted thereon) with the right to
receive and apply the same to indebtedness due Mortgagee and Mortgagee may
demand, sue for and recover such payments but shall not be required to do so;
(e) all judgments, awards of damages and settlements hereafter made as a result
of or in lieu of any taking of the Premises of any part thereof or interest
therein under the power of eminent domain, or for any damage (whether caused by
such taking or otherwise) to the Premises or the improvements thereon or any
part thereof or interest therein, including any award for change of grade of
streets; (f) all proceeds of the conversion, voluntary or involuntary of any of
the foregoing into cash or liquidated claims; (g) any monies on deposit for the
payment of real estate taxes or special assessments against the Premises or for
the payment of premiums on policies of fire and other hazard insurance covering
the collateral described hereunder or the Premises, and all proceeds paid for
damage done to the collateral described hereunder or the Premises; and (h) all
substitutions, replacements, additions and proceeds, including insurance and
condemnation award proceeds, of any of the foregoing property; it being
understood that the enumeration of any specific articles of property shall in no
way exclude or be held to exclude any items of property not specifically
mentioned. All of the land, estate and property hereinabove described, real,
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<PAGE>
personal and mixed, whether affixed or annexed or not (except where otherwise
hereinabove specified) and all rights hereby conveyed and mortgaged are intended
so to be as a unit and are hereby understood, agreed and declared to form a part
and parcel of the real estate and to be appropriated to the use of the real
estate, and shall be for the purposes of this Mortgage deemed to be real estate
and conveyed and mortgaged hereby. As to any of the property aforesaid which
(notwithstanding the aforesaid declaration and agreement) does not so form a
part and parcel of the real estate, this Mortgage is hereby deemed tobe, as
well, a security agreement under the Uniform Commercial Code in effect in the
jurisdiction in which the Premises are located (hereinafter referred to as the
"UCC") for the purpose of creating a security interest in such property, which
Mortgagor hereby grants to Mortgagee as Secured Party (as defined in the UCC),
securing the indebtedness and obligations of Mortgagor, and Mortgagee shall have
in addition to its rights and remedies hereunder all rights and remedies of a
Secured Party under the UCC. As to the above personal property which the UCC
classifies as fixtures, this instrument shall constitute a fixture filing and
financing statement under the UCC.
Mortgagor covenants (a) that it is lawfully seized of the
Premises, (b) that the same are subject only to (i) the liens, encumbrances,
conditions, restrictions, easements, leases, and other matters, rights or
interests disclosed in Schedule B (or an equivalent section or portion) of the
mortgage loan title insurance policy delivered to Mortgagee, and (ii) matters
disclosed in writing by Mortgagor to Mortgagee, and (c) that it has good right,
full power and lawful authority to convey and mortgage the same and that it will
forever defend the Premises and the quiet and peaceful possession of the same
against the lawful claims of all persons whomsoever.
TO HAVE AND TO HOLD the Premises unto the Mortgagee, its
successors and assigns, forever, for the purposes and uses herein set forth.
IT IS FURTHER UNDERSTOOD AND AGREED THAT:
1. Maintenance, Repair and Restoration of Im provements,
Payment of Prior Liens. Mortgagor shall (a) promptly repair, restore or rebuild
any buildings or improvements now or hereafter on the Premises which may become
damaged or be destroyed; (b) keep the Premises in good condition and repair,
without waste, and free from mechanics' liens or other liens or claims for lien
not expressly subordinated to the lien hereof (except for mechanics' liens being
contested in good faith and as to which adequate reserves have been set aside in
conformity with generally accepted accounting principles consistently maintained
by Mortgagor); (c) pay when due any indebtedness which may be secured by a lien
or charge on the Premises superior to the lien hereof, and upon request exhibit
satisfactory evidence of the discharge of such prior lien to Mortgagee; (d)
complete within a reasonable time all public improvements and any building or
buildings now or at any time in process of construction upon the Premises; (e)
comply with all requirements of law, municipal ordinances, or restrictions of
record with respect to the Premises and the use thereof; (f) make alterations in
the Premises only in accordance with plans and specifications duly approved by
Mortgagee; (g) suffer or permit no change in the general nature of the occupancy
of the Premises, without Mortgagee's written consent; (h) initiate or acquiesce
in no zoning variation or reclassification, without Mortgagee's written consent;
(i) pay the indebtedness secured hereby when due according to the terms hereof
or of the Loan Agreement and the Note.
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<PAGE>
2. Payment of Taxes. Mortgagor shall pay, before any penalty
attaches (except to the extent diligently contested in good faith by appropriate
proceedings and provided proper reserves are established on the books of
Mortgagor), all general taxes, and shall pay special taxes, special assessments,
water charges, sewer service charges, and other charges against the Premises
when due, and shall furnish to Mortgagee paid tax receipts within sixty (60)
days after the final due date of such taxes. Mortgagee reserves the right to
require Mortgagor to make monthly deposits into an escrow account established
and controlled by Mortgagee for the payment of taxes under terms and in an
amount satisfactory to Mortgagee.
3. Insurance. Mortgagor shall cause all buildings and
improvements now or hereafter situated on the Premises to be insured against
loss or damage by fire and such other hazards as may be requested from time to
time by Mortgagee, including, but not limited to, hazards ordinarily insured
against by other companies similarly situated in operating like businesses and
properties, and including comprehensive public liability insurance as required
by Mortgagee and flood insurance if the Premises lie within an area designated
by any government agency as a flood risk area. All policies of insurance to be
furnished hereunder shall be in forms, companies and amounts satisfactory to
Mortgagee, with mortgagee clauses attached to all policies in favor of and in
form satisfactory to Mortgagee, including a provision requiring that the
coverage evidenced thereby shall not be terminated or materially modified
without thirty (30) days' prior written notice to Mortgagee. Without limiting
the generality of the foregoing, property and casualty insurance shall be in
amounts and forms insuring the full replacement cost of fixed assets of
Mortgagor. All policies shall name Mortgagee as an additional insured and as
loss payee. Mortgagor shall deliver all policies, including additional and
renewal policies, to Mortgagee, and, in the case of insurance about to expire,
shall deliver renewal policies not less than ten (10) days prior to their
respective dates of expiration. Mortgagor shall not take out separate insurance
concurrent in form or contributing in the event of loss with that required to be
maintained hereunder unless Mortgagee is included thereon under a standard
mortgagee clause acceptable to Mortgagee. Mortgagor shall immediately notify
Mortgagee whenever any such separate insurance is taken out and shall promptly
deliver to Mortgagee the policy or policies of such insurance.
4. Adjustment of Losses With Insurer and Application of
Proceeds of Insurance. In case of loss or damage by fire or other casualty,
Mortgagee is authorized to (a) settle and adjust any claim under insurance
policies which insure against such risks, or (b) allow Mortgagor to agree with
the insurance company or companies on the amount to be paid in regard to such
loss. In either case, Mortgagee is authorized to collect and issue a receipt for
any such insurance money. At the option of Mortgagee, such insurance proceeds
may be applied in reduction of the indebtedness secured hereby, whether due or
not, or may be held by Mortgagee and used to reimburse Mortgagor for the cost of
the rebuilding or restoration of buildings or improvements on the Premises.
Irrespective of whether such insurance proceeds are used to reimburse Mortgagor
for the cost of rebuilding or restoration or not, and irrespective of whether
such insurance proceeds are or are not adequate for such purpose, the buildings
and improvements shall be so restored
4
<PAGE>
or rebuilt so as to be of at least equal value and substantially the same
character as prior to such damage or destruction. If the cost of rebuilding,
repairing or restoring the building and improvements can reasonably exceed the
sum of TWENTY-FIVE THOUSAND AND 00/100 DOLLARS ($25,000.00), then Mortgagor
shall obtain Mortgagee's approval of plans and specifications for such work
before such work shall be commenced. In any case, where the insurance proceeds
are made available for rebuilding and restoration, such proceeds shall be
disbursed in the manner and under the conditions that Mortgagee may require and
upon Mortgagee being furnished with satisfactory evidence of the estimated cost
of completion thereof and with architect's certificates, waivers of lien,
contractor's and subcontractors' sworn statements and other evidence of cost and
payments so that Mortgagee can verify that the amounts disbursed from time to
time are represented by completed and in place work and that the work is free
and clear of mechanics' lien claims. If the estimated cost of completion exceeds
the amount of the insurance proceeds available, Mortgagor immediately shall, on
written demand of Mortgagee, deposit with Mortgagee in cash the amount of such
estimated excess cost. No payment made prior to the final completion of the work
shall exceed ninety percent (90%) of the value of the work performed from time
to time, and at all times the undisbursed balance of the proceeds remaining in
the hands of the disbursing party shall be at least sufficient to pay for the
cost of completion of the work free and clear of liens. Any surplus which may
remain out of the insurance proceeds after payment of the cost of building or
restoration shall, at the option of Mortgagee, be applied on account of the
indebtedness secured hereby or be paid to any party entitled thereto, without
interest.
5. Condemnation. Mortgagor hereby assigns, transfers and sets
over unto Mortgagee the entire proceeds of any award or any claim for damages
for any of the Premises taken or damaged under the power of eminent domain or by
condemnation. Mortgagee may elect to apply the proceeds of the award upon or in
reduction of the indebtedness secured hereby, whether due or not, or make the
proceeds available for restoration or rebuilding of the Premises. Irrespective
of whether such proceeds are made available for restoration or rebuilding, and
irrespective of whether such proceeds are adequate for such purpose, the
buildings and improvements shall be restored or rebuilt in accordance with plans
and specifications to be submitted to and approved by Mortgagee. In the event
said proceeds are made available for rebuilding or restoration, the proceeds of
the award shall be disbursed in the manner and under the conditions that
Mortgagee may require and paid out in the same manner as provided in Section 4
hereof for the payment of insurance proceeds toward the cost of rebuilding or
restoration. In such event, if the estimated cost to complete rebuilding or
restoration exceeds the proceeds of the condemnation awards, Mortgagor
immediately shall, on written demand of Mortgagee, deposit with Mortgagee in
cash the amount of such excess cost. Any surplus which may remain out of any
such award after payment of such cost of building or restoration shall, at the
option of Mortgagee, be applied on account of the indebtedness secured hereby or
be paid to any party entitled thereto, without interest.
6. Effect of Extensions of Time. If the payment of the
indebtedness secured hereby or any part thereof is extended or varied or if any
part of any security for the payment of the indebtedness secured hereby is
released or additional security is taken, all persons now or at any time
hereafter liable therefor, or interested in the Premises, shall be held to
assent to such extension, variation, or taking of additional security or
release, and their liability and the lien and all provisions of this Mortgage
shall continue in full force, the right of recourse against all such persons
being expressly reserved by Mortgagee, notwithstanding such extension,
variation, taking of additional security or release.
5
<PAGE>
7. Effect of Changes in Laws Regarding Taxation. In the event
of the enactment after this date of any law of the state in which the Premises
is located deducting from the value of the land for the purpose of taxation any
lien thereon, or imposing upon Mortgagee the payment of the whole or any part of
the taxes or assessments or charges or liens herein required to be paid by
Mortgagor, or changing in any way the laws relating to the taxation of mortgages
or debts secured by mortgages or Mortgagee's interest in the Premises, or the
manner of collection of taxes, so as to affect this Mortgage or the indebtedness
secured hereby or the holders thereof, then, and in any event, Mortgagor, upon
demand by Mortgagee, shall pay such taxes or assessments, or reimburse Mortgagee
therefor, provided, however, that if in the opinion of counsel for Mortgagee (a)
it might be unlawful to require Mortgagor to make such payment or (b) the making
of such payment might result in the imposition of interest beyond the maximum
amount permitted by law, then and in such event, Mortgagee may elect, by notice
in writing given to Mortgagor, to declare all of the indebtedness secured hereby
to be and become due and payable sixty (60) days after the giving of such
notice.
8. Mortgage as Security. The proceeds of the loan secured
hereby are to be disbursed by Mortgagee to Mortgagor in accordance with the
provisions contained in the Loan Agreement. All advances and indebtedness
arising and accruing under the Loan Agreement from time to time, whether or not
the total amount thereof may exceed the face amount of the Note, shall be
secured hereby to the same extent as though the Loan Agreement were fully
incorporated in this Mortgage. In the event of any inconsistencies or conflicts
between this Mortgage and the Loan Agreement, the terms of the Loan Agreement
shall govern and control.
9. Mortgagee's Performance of Defaulted Acts. In case of
default herein, Mortgagee may, but need not, make any payment or perform any act
herein required of Mortgagor in any form and manner deemed expedient, and may,
but need not, make full or partial payments of principal or interest on prior
encumbrances, if any, and purchase, discharge, compromise or settle any tax lien
or other prior lien or title or claim thereof, or redeem from any tax sale or
forfeiture affecting the Premises or consent to any tax or assessment or cure
any default of the landlord in any lease of the Premises. All monies paid for
any of the purposes herein authorized and all expenses paid or incurred in
connection therewith, including attorneys' fees, and any other monies advanced
by Mortgagee in regard to any tax or any leases of the Premises or to protect
the Premises and the lien of this Mortgage, shall be so much additional
indebtedness secured hereby, and shall become immediately due and payable on
demand and with interest thereon at the rate per annum applicable under the Note
upon and after an Event of Default under the Loan Agreement. Inaction of
Mortgagee shall never be considered as a waiver of any right accruing to it on
account of any default on the part of Mortgagor.
10. Mortgagee's Reliance on Tax Bills. Mortgagee in making any
payment hereby authorized: (a) relating to taxes and assessments, may do so
according to any bill, statement or estimate procured from the appropriate
public office without inquiry into the accuracy of such bill, statement or
estimate or into the validity of any tax, assessment, sale, forfeiture, tax lien
or title or claim thereof; or (b) for the purchase, discharge, compromise or
settlement of any other prior lien, may do so without inquiry as to the validity
or amount of any claim for lien which may be asserted.
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<PAGE>
11. Acceleration of Indebtedness in Case of Default. If (a)
default is made in the due and punctual payment of the principal (or any part(s)
thereof) of the Note, or the Mortgagor fails to pay, within (10) days after the
date on which payment thereof is due, any installment of interest on the Note or
any other sum due and payable under the Loan Agreement, the Note, or this
Mortgage; or (b) default shall be made in the due observance or performance of
any other of the covenants, agreements or conditions herein contained, required
to be kept or performed or observed by Mortgagor; or (c) default shall be made
in the due observance or performance of any of the covenants, agreements or
conditions contained, required to be kept or observed by Mortgagor in any other
instrument given at any time to secure the payment of the Note; or (d) an Event
of Default shall occur under the Loan Agreement; or (e) Mortgagor or any
guarantor of the indebtedness secured hereby becomes insolvent or bankrupt or
admits in writing its inability to pay its debts as they mature, or makes an
assignment for the benefit of creditors, or applies for or consents to the
appointment of a trustee or receiver for a major portion of its property or
business; or (f) any petition is filed or proceeding is commenced for any
attachment, levy, or seizure of any property of Mortgagor or any guarantor of
the indebtedness subject to a lien in favor of Mortgagee; or any judgment or
judgments, writ or writs, warrant or warrants of attachment, or any similar
process or processes in an aggregate amount in excess of $25,000.00 shall be
entered or filed against Mortgagor or any guarantor of the indebtedness or
against any property or assets of Mortgagor or any guarantor of the indebtedness
and remains unvacated, unbonded or unstayed for a period of sixty (60) days; or
(g) bankruptcy, reorganization, arrangement, insolvency or liquidation
proceedings or other proceedings for relief under any bankruptcy law or similar
law for the relief of debtors is instituted by or against Mortgagor or any
guarantor of the indebtedness and, if instituted against Mortgagor or any
guarantor of the indebtedness, are allowed against Mortgagor or any guarantor of
the indebtedness or are consented to or are not dismissed within sixty (60) days
after such institution, then and in every such case if default shall be
continuing the whole of the indebtedness secured hereby shall, at once, at the
option of Mortgagee, become immediately due and payable without notice to
Mortgagor.
12. Due on Sale -- Due on Encumbrance. Mortgagee may at its
option accelerate the maturity date of the indebtedness evidenced by the Note,
whereupon the whole of the indebtedness secured hereby shall at once become
immediately due and payable (without any cure or grace period), if Mortgagor
shall (whether voluntarily or by operation of law), without the prior written
consent of Mortgagee, sell, mortgage, encumber, hypothecate or otherwise
transfer the Premises or any part thereof, or otherwise cease to own the
Premises.
13. Application of Funds. If while any insurance proceeds or
condemnation awards are being held by Mortgagee to reimburse Mortgagor for the
cost of rebuilding or restoration of buildings or improvements on the Premises,
as set forth in Sections 4 or 5 hereof, or while Mortgagor is holding deposits
for the payment of taxes, Mortgagee shall be or become entitled to, and shall
accelerate the indebtedness secured hereby, then and in such event, Mortgagee
shall be entitled to apply all such insurance proceeds and condemnation awards
and deposits then held by it in reduction of the indebtedness secured hereby,
and any excess held by it over the amount of indebtedness then due shall be
returned to Mortgagor or any party entitled thereto, without interest.
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14. Foreclosure; Expense of Litigation. When the indebtedness
hereby secured, or any part thereof, shall become due, whether by acceleration
or otherwise, Mortgagee shall have the right to foreclose the lien of this
Mortgage for such indebtedness or part thereof. In any civil action to foreclose
the lien of this Mortgage, there shall be allowed and included as additional
indebtedness in the order or judgment for sale all expenditures and expenses
which may be paid or incurred by or on behalf of Mortgagee for attorneys' fees,
appraiser's fees, outlays for documentary and expert evidence, stenographers'
charges, publication costs, and costs (which may be estimated as to items to be
expended after entry of the order or judgment) of procuring all such abstracts
of title, title searches and examinations, title insurance policies, Torrens
certificates, and similar data and assurances with respect to title as Mortgagee
may deem reasonably necessary either to prosecute such civil actions or to
evidence to bidders at any sale which may be had pursuant to such order or
judgment the true condition of the title to or the value of the Premises. All
expenditures and expenses of the nature mentioned in this Section, and such
expenses and fees as may be incurred in the protection of the Premises and
maintenance of the lien of this Mortgage, including the fees of any attorney
employed by Mortgagee in any litigation or proceeding affecting this Mortgage,
the Note or the Premises, including probate, bankruptcy and appellate
proceedings, or in preparations for the commencement or defense of any
proceeding or threatened civil actions or proceeding shall be immediately due
and payable by Mortgagor, with interest thereon at the rate of interest
applicable under the Note upon the occurrence of an Event of Default under the
Loan Agreement, and shall be secured by this Mortgage.
15. Application of Proceeds of Foreclosure Sale. The proceeds
of any foreclosure sale of the Premises shall be distributed and applied in the
following order of priority: first, on account of all costs and expenses
incident to the foreclosure proceedings, including all such items as are
mentioned in Section 14 hereof; second, all other items which may under the
terms hereof or the Loan Agreement constitute secured indebtedness additional to
that evidenced by the Note, with interest thereon as provided herein or in the
Loan Agreement; third, all principal and interest remaining unpaid on the Note;
and fourth, any overplus to Mortgagor, its successors or assigns, as their
rights may appear.
16. Appointment of Receiver. Upon, or at any time after the
filing of a complaint to foreclose this Mortgage, the court in which such
complaint is filed may appoint a receiver of the Premises. Such appointment may
be made either before or after sale, without notice, without regard to the
solvency or insolvency of Mortgagor at the time of application for such receiver
and without regard to the then value of the Premises or whether the same shall
be then occupied as a homestead, and Mortgagee or any holder of the Note may be
appointed as such receiver. Such receiver shall have power to collect the rents,
issues and profits of the Premises during the pendency of such foreclosure suit
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<PAGE>
and during the full statutory period of redemption, whether there be redemption
or not, as well as during any further times when Mortgagor, except for the
intervention of such receiver, would be entitled to collect such rents, issues
and profits, and all other powers which may be necessary or are usual in such
cases for the protection, possession, control, management and operation of the
Premises during the whole of such period. The court from time to time may
authorize the receiver to apply the net income in his hands to the payment in
whole or in part of: (a) the indebtedness secured hereby, or by any judgment or
order foreclosing this Mortgage, or any tax, special assessment or other lien
which may be or become superior to the lien hereof or of such decree, provided
such application is made prior to foreclosure sale; and (b) the deficiency in
case of a sale and deficiency.
17. Mortgagee's Right of Possession in Case of Default. In any
case in which under the provisions of this Mortgage, Mortgagee has a right to
institute foreclosure proceedings, whether before or after the whole
indebtedness secured hereby is declared to be immediately due, or whether before
or after the institution of legal proceedings to foreclose the lien hereof or
before or after sale thereunder, forthwith, upon demand of Mortgagee, Mortgagor
shall surrender to Mortgagee and Mortgagee shall be entitled to take actual
possession of the Premises or any part thereof personally, or by its agent or
attorneys. In such event Mortgagee in its discretion may, in accordance with
law, enter upon and take and maintain possession of all or any part of the
Premises, together with all documents, books, records, papers and accounts of
Mortgagor or the then owner of the Premises relating thereto, and may exclude
Mortgagor, its agents or servants, wholly therefrom and may as attorney in fact
or agent of Mortgagor, or in its own name as Mortgagee and under the powers
herein granted, hold, operate, manage and control the Premises and conduct the
business, if any, thereof, either personally or by its agents, and with full
power to use such measures, legal or equitable, as in its discretion or in the
discretion of its successors or assigns may be deemed proper or necessary to
enforce the payment or security of the avails, rents, issues, and profits of the
Premises, including actions for the recovery of rent, actions in forcible
detainer and actions in distress for rent, and with full power to: (a) cancel or
terminate any lease or sublease for any cause or on any ground which would
entitle Mortgagor to cancel the same; (b) elect to disaffirm any lease or
sublease which is then subordinate to the lien hereof; (c) extend or modify any
then existing leases and to make new leases, which extensions, modifications and
new leases may provide for terms to expire, or for options to lessees to extend
or renew terms to expire, beyond the maturity date of the indebtedness hereunder
and beyond the date of the issuance of a deed or deeds to a purchaser or
purchasers at a foreclosure sale, it being understood and agreed that any such
leases, and the options or other such provisions to be contained therein, shall
be binding upon Mortgagor and all persons whose interests in the Premises are
subject to the lien of this Mortgage and upon the purchaser or purchasers at any
foreclosure sale, notwithstanding any redemption from a foreclosure of this
Mortgage, discharge of the indebtedness secured hereby, satisfaction of any
foreclosure decree, or issuance of any certificate of sale or deed to any
purchaser; (d) make all necessary or proper repairs, decorating, renewals,
replacements, alterations, additions, betterments and improvements to the
Premises as to it may seem judicious; (e) insure and reinsure the same and all
risks incidental to Mortgagee's possession, operation and management thereof;
and (f) receive all of such avails, rents,
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<PAGE>
issues and profits, hereby granting full power and authority to exercise each
and every of the rights, privileges and powers herein granted at any and all
times hereafter, without prior notice to Mortgagor provided that Mortgagor shall
give subsequent notice thereof. Mortgagee shall not be obligated to perform or
discharge, nor does it hereby undertake to perform or discharge, any obligation,
duty or liability under any leases. Mortgagor shall and does hereby agree to
indemnify and hold Mortgagee harmless of and from any and all liability, loss,
damage, or expense (including reasonable attorneys' fees) which Mortgagee may or
might incur under said leases or under or by reason of the assignment thereof
and of and from any and all claims and demands whatsoever which may be asserted
against it by reason of any alleged obligations or undertakings on its part to
perform or discharge any of the terms, covenants or agreements contained in said
leases. Should Mortgagee incur any such liability, loss or damage, under said
leases or under or by reason of the assignment thereof, or in the defense of any
claims or demands, the amount thereof, including costs, expenses and reasonable
attorneys' fees, shall be secured hereby, and Mortgagor shall reimburse
Mortgagee therefor immediately upon demand.
18. Application of Income Received by Mortgagee. Mortgagee, in
the exercise of the rights and powers conferred herein, shall have full power to
use and apply the avails, rents, issues and profits of the Premises to the
payment of or on account of the following, in such order as Mortgagee may
determine:
(a) to the payment of the operating expenses of the
Premises, including cost of management, established claims for damages,
if any, and premiums on insurance hereinabove authorized;
(b) to the payment of taxes and special assess ments
now due or which may hereafter become due on the Premises;
(c) to the payment of all repairs, replacements,
alterations, additions, betterments, and improvements of the Premises
and of placing the Premises in such condition as will, in the judgment
of Mortgagee, make it readily marketable;
(d) to the payment of any indebtedness secured hereby
or any deficiency which may result from any foreclosure sale.
19. Rights Cumulative. Each right, power and remedy herein
conferred upon Mortgagee is cumulative and in addition to every other right,
power or remedy, express or implied, given now or hereafter existing, at law or
in equity, and each and every right, power and remedy herein set forth or
otherwise so existing may be exercised from time to time as often and in such
order as may be deemed expedient by Mortgagee, and the exercise or the beginning
of the exercise of one right, power or remedy shall not be a waiver of the right
to exercise at the same time or thereafter any other right, power or remedy, and
no delay or omission of Mortgagee in the exercise of any right, power or remedy
accruing hereunder or arising otherwise shall impair any such right, power or
remedy, or be construed to be a waiver of any default or acquiescence therein.
10
<PAGE>
20. Compliance With Illinois Mortgage Foreclosure Law. In the
event that any provision in this Mortgage shall be inconsistent with any
provision of the Illinois Mortgage Foreclosure Law (Sections 735 ILCS 5/15-1101
et seq., Illinois Compiled Statutes) (herein called the "Act"), the provisions
of the Act shall take precedence over the provisions of this Mortgage, but shall
not invalidate or render unenforceable any other provision of this Mortgage that
can be construed in a manner consistent with the Act. If any provision of this
Mortgage shall grant to Mortgagee any rights or remedies upon default of
Mortgagor which are more limited than the rights that would otherwise be vested
in Mortgagee under the Act in the absence of said provision, Mortgagee shall be
vested with the rights granted in the Act to the full extent permitted by law.
Without limiting the generality of the foregoing, all expenses incurred by
Mortgagee to the extent reimbursable under Sections 735 ILCS 5/15-1510 and
15-1512 of the Act, whether incurred before or after any decree or judgment of
foreclosure, and whether enumerated in Section 14 of this Mortgage, shall be
added to the indebtedness secured by this Mortgage or by the judgment of
foreclosure.
21. Waiver of Statutory Rights. Mortgagor shall not apply for
or avail itself of any appraisal, valuation, stay, extension or exemption laws,
or any so-called "Moratorium Laws," now existing or hereafter enacted, in order
to prevent or hinder the enforcement or foreclosure of this Mortgage, but hereby
waives the benefit of such laws. Mortgagor, for itself, and all who may claim
through or under it, waives any and all right to have the property and estates
comprising the Premises marshalled upon any foreclosure of the lien hereof and
agrees that any court having jurisdiction to foreclose such lien may order the
Premises sold as an entirety. Mortgagor does hereby expressly waive any and all
rights of redemption from any order, judgment or decree of foreclosure of this
Mortgage on behalf of Mortgagor and each and every person acquiring any interest
in or title to the Premises subsequent to the date of this Mortgage. Mortgagor
does hereby further expressly waive, to the extent now or hereafter permitted by
law, all rights of reinstatement of this Mortgage pursuant to Section 15-1602 of
the Act.
22. Waiver of Notice. No action for the enforcement of the
of the lien or of any provision hereof shall be subject to any defense which
would not be good and available to the party interposing same in an action at
law upon the Note.
23. Release upon Payment and Discharge of Mortgagor's
Obligations. Mortgagee shall release this Mortgage and the lien thereof by
proper instrument upon payment and discharge of all indebtedness secured hereby,
in accordance with the terms and conditions in the Note and the Loan Agreement,
and including a reasonable fee to Mortgagee for the execution of such release.
24. Filing and Recording Fees. Mortgagor will pay all filing,
registration or recording fees, and all expenses incident to the execution and
acknowledgement of this Mortgage and all federal, state, county, and municipal
taxes, and other taxes, duties, imposts, assessments and charges arising out of
or in connection with the execution and delivery of the Note and this Mortgage.
25. Compliance With Laws. Except as disclosed in writing to
Mortgagee on or before the date hereof, the Premises and its present use
complies, and at all times shall comply, with all applicable laws and
governmental regulations including, without limitation, all applicable federal,
state and local laws pertaining to air and water quality, hazardous
11
<PAGE>
waste, waste disposal, air emissions and other environmental matters, all zoning
and other land use matters, and utility availability. Except as disclosed in
writing to Mortgagee on or before the date hereof, neither Mortgagor nor, to the
best of Mortgagor's knowledge, any previous owner or occupier of the Premises,
used, generated, stored or disposed of, on, under or about the Premises any
Hazardous Materials. For purposes of this Mortgage, Hazardous Materials shall
mean and include any hazardous substance, hazardous material, toxic substance,
solid waste, or any pollutant or contaminant now or hereafter defined as such in
(or for purposes of) the Comprehensive Environmental Response, Compensation, and
Liability Act, any so-called applicable "Superfund" or "Superlien" or
"Non-priority lien" law, the Toxic Substances Control Act, or the Resource
Conservation and Recovery Act, all as amended from time to time. Further, to the
best of Mortgagor's knowledge, except as disclosed in writing to Mortgagee on or
before the date hereof, the Premises does not contain any underground tanks and
does not contain and has not in the past contained any asbestos-containing
material in friable form. Mortgagor shall protect, indemnify and hold harmless
Mortgagee, its directors, officers, employees, agents, successors and assigns,
from and against any and all loss, damage, cost, expense or liability (including
attorneys' fees and costs) directly or indirectly arising out of or attributable
to the use, generation, manufacture, production, storage, release, threatened
release, discharge, disposal or presence of Hazardous Materials or asbestos on,
under or about the Premises including without limitation (a) all foreseeable
consequential damages; and (b) the costs of any required or necessary repair,
cleanup or detoxification of the Premises and the preparation and implementation
of any closure, remedial or other required plans. This indemnity shall survive
the payment of the Note and the reconveyance or release of the lien of this
Mortgage, or the extinguishment of the lien by foreclosure or action in
reconveyance or extinguishment or deed in lieu of foreclosure. This indemnity
shall not apply to any claims, losses, liabilities, damages, penalties, and
expenses which are incurred by the Mortgagee solely as a direct result of any
act or omission of Mortgagee and which are not the result, in whole or in part,
of any pre-existing condition or event. In the event that any investigation,
site monitoring, containment, clean-up, removal, restoration or other remedial
work of any kind or nature (the "Remedial Work") is reasonably necessary or
desirable under any applicable local, state or federal law or regulation, any
judicial order, or by any governmental entity or person because of, or in
connection with, the current or future presence, suspected presence, release or
suspected release of any Hazardous Materials in or about the air, soil, ground
water, surface water or soil vapor at, on, about, under or within the Premises
(or any portion thereof), Mortgagor shall within thirty (30) days after written
demand for performance thereof by Mortgagee (or such shorter period of time as
may be required under any applicable law, regulation, order or agreement),
commence and thereafter diligently prosecute to completion, all the Remedial
Work. All Remedial Work shall be performed by contractors approved in advance by
Mortgagee, and under the supervision of a consulting engineer approved by
Mortgagee. All costs and expenses of Remedial Work shall be paid by Mortgagor
including, without limitation, Mortgagee's reasonable attorneys' fees and costs
incurred in connection with monitoring or review of the Remedial Work. In the
event Mortgagor shall fail to timely prosecute to completion, the Remedial Work,
Mortgagee may, but shall not be required to, cause the Remedial Work to be
performed and all costs and expenses thereof, or incurred in connection
therewith, shall become part of the indebtedness secured hereby.
12
<PAGE>
26. Indemnity. Mortgagor agrees to indemnify and hold harmless
Mortgagee from and against any and all losses, liabilities, suits, obligations,
fines, damages, judgments, penalties, claims, charges, costs and expenses
(including attorneys' fees and disbursements) which may be imposed on, incurred
or paid by or asserted against Mortgagee by reason or on account of, or in
connection with, (a) any willful misconduct of Mortgagor or any default by
Mortgagor hereunder or under any other documents executed at any time to secure
the payment of the Note, (b) Mortgagee's good faith and commercially reasonable
exercise of any of its rights and remedies, or the performance of any of its
duties, hereunder or under any other documents executed at any time to secure
payment of the Note, (c) the construction, reconstruction or alteration of the
Premises, (d) any negligence of Mortgagor, or any negligence or willful
misconduct of any lessee of the Premises, or any of their respective agents,
contractors, subcontractors, servants, employees, licensees or invitees or (e)
any accident, injury, death or damage to any person or property occurring in, on
or about the Premises or any street, drive, sidewalk, curb or passageway
adjacent thereto, except for the willful misconduct or gross negligence of the
indemnified person. Any amount payable to Mortgagee under this Section shall be
due and payable within ten (10) days after demand therefor and receipt by
Mortgagor of a statement from Mortgagee setting forth in reasonable detail the
amount claimed and the basis therefor, and such amounts shall bear interest,
from and after the date such amounts are paid by Mortgagee until paid in full by
Mortgagor, at the rate of interest applicable under the Note upon the occurrence
of an Event of Default under the Loan Agreement. Mortgagor's obligations under
this Section shall not be affected by the absence or unavailability of insurance
covering the same or by the failure or refusal by any insurance carrier to
perform any obligation on its part under any such policy of covering insurance.
If any claim, action or proceeding is made or brought against Mortgagor and/or
Mortgagee which is subject to the indemnity set forth in this Section, Mortgagor
shall resist or defend against the same, if necessary, in the name of Mortgagee,
by attorneys for Mortgagor's insurance carrier (if the same is covered by
insurance) or otherwise by attorneys approved by Mortgagee. Notwithstanding the
foregoing, Mortgagee, in its discretion, may engage its own attorneys to resist
or defend, or assist therein, and Mortgagor shall pay, or, on demand, shall
reimburse Mortgagee for the payment of, the reasonable fees and disbursements of
Mortgagee's attorneys.
27. Giving of Notice. Any notice which either party hereto may
desire or be required to give to the other party shall be in writing and shall
be given in person or by the mailing thereof by certified mail addressed to
Mortgagor at: CTI Industries Corporation, 22160 North Pepper Road, Barrington,
IL 60010 or to Mortgagee at: First American Bank, 975 Busse Road, Elk Grove
Village, Illinois 60007, or at such other place as any party hereto may by
notice in writing designate as a place for service of notice.
28. Miscellaneous.
(a) This Mortgage, and all provisions hereof, shall
extend to and be binding upon Mortgagor and its successors, grantees
and assigns, any subsequent owner or owners of the Premises and all
persons claiming under or through Mortgagor, and the word "Mortgagor"
when used herein shall include all such persons and all persons liable
13
<PAGE>
for the payment of the indebtedness secured hereby or any part thereof,
whether or not such persons shall have executed the Note or this
Mortgage. The word "Mortgagee" when used herein shall include the
successors and assigns of Mortgagee named herein, and the holder or
holders, from time to time, of the Note. The word "indebtedness" when
used herein shall include the principal sum evidenced by the Note,
together with all interest, additional interest, and late charges
thereon and other sums due thereunder and all other sums due to
Mortgagee under the Loan Agreement or this Mortgage. The word "Note"
when used herein shall include all extensions, renewals, refinancings,
modifications, amendments, and replacements thereof.
(b) In the event one or more of the provisions
contained in this Mortgage or the Note or in any other security
documents given to secure the payment of the Note shall for any reason
be held to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall, at the option of
Mortgagee, not affect any other provision of this Mortgage, and this
Mortgage shall be construed as if such invalid, illegal or
unenforceable provision had never been contained herein or therein.
This Mortgage shall be construed and governed by the laws of the State
of Illinois.
(c) At all times, regardless of whether any loan
proceeds have been disbursed, this Mortgage secures (in addition to any
loan proceeds disbursed from time to time) the payment of any and all
expenses and advances due to or incurred by Mortgagee in connection
with the indebtedness secured hereby, provided, however,
notwithstanding anything to the contrary herein, the total aggregate
indebtedness secured by this Mortgage shall not exceed an amount equal
to two (2) times the face amount of the Note.
(d) No offset or claim that Mortgagor now has or may
have in the future against Mortgagee shall relieve Mortgagor from
paying any amounts due under the Note or from performing any other
obligations contained herein or secured hereby.
(e) Mortgagor shall not by act or omission permit any
building or other improvement on the Premises not subject to the lien
of this Mortgage to rely on the Premises or any part thereof or any
interest therein to fulfill any municipal or governmental requirement,
and Mortgagor hereby assigns to Mortgagee any and all rights to give
consent for all or any portion of the Premises or any interest therein
to be used. Similarly, no building or other improvement on the Premises
shall rely on any premises not subject to the lien of this Mortgage or
any interest therein to fulfill any governmental or municipal
requirement. Mortgagor shall not by act or omission impair the
integrity of the Premises as zoned for its present or intended use. Any
act or omission by Mortgagor which would result in a violation of any
of the provisions of this Section shall be void.
(f) Mortgagee shall have the right to inspect the
Premises at all reasonable times and access thereto shall be permitted
for that purpose.
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<PAGE>
IN WITNESS WHEREOF, Mortgagor has executed this instrument the
day and year first written above.
CTI Industries Corporation
BY:/s/ John H. Schwan
---------------------
John H. Schwann,
Chief Executive Officer
ATTEST:
/s/ Howard W. Schwan
- --------------------
Howard W. Schwann,
Vice President
STATE OF ILLINOIS )
) SS
COUNTY OF _______ )
I, , a Notary Public in and for said County in the State
aforesaid, DO HEREBY CERTIFY THAT John H. Schwann and Howard W. Schwann,
personally known to me and known by me to be the Chief Executive Officer and
Vice President, respectively, of CTI Industries Corporation in whose name the
above and foregoing instrument is executed, appeared before me this day in
person and acknowledged that they signed and deliv ered the said instrument as
their free and voluntary act and as the free and voluntary act of said CTI
Industries Corporation, for the uses and purposes therein set forth, and the
said John H. Schwann then and there acknowledged that he, as custodian of the
corporate seal of said CTI Industries Corporation did affix the said corporate
seal to said instrument as his free and voluntary act and as the free and
voluntary act of said CTI Industries Corporation, for the uses and purposes
therein set forth.
GIVEN under my hand and Notarial Seal this______day of_______________
, 19_____.
_________________________
Notary Public
My Commission Expires:
______________________________
15
<PAGE>
EXHIBIT A
______________
Legal Description
_________________________
EXHIBIT 10.21
GUARANTY
FOR VALUE RECEIVED and in consideration of any loan or other financial
accommodation heretofore or hereafter at any time made or granted to CTI
Industries Corporation, a Delaware corporation (hereinafter called the
"Borrower") by First American Bank, an Illinois banking corporation (hereinafter
called the "Bank"), the undersigned hereby unconditionally guarantee(s) the full
and prompt payment when due, whether by acceleration or otherwise, and at all
times thereafter, of all obligations of the Borrower to the Bank, howsoever
created, arising or evidenced, whether direct or indirect, absolute or
contingent, or now or hereafter existing, or due or to become due (all such
obligations being hereinafter collectively called the "Obligations"), and the
undersigned further agree(s) to pay all expenses (including attorneys' fees and
legal expenses) paid or incurred by the Bank in endeavoring to collect the
Obligations, or any part thereof, and in enforcing this Guaranty.
1. Each of the undersigned agrees that, in the event of the death,
incompetency, dissolution or insolvency of the Borrower or such undersigned, or
the inability of the Borrower or such undersigned to pay debts as they mature,
or an assignment by the Borrower or such undersigned for the benefit of
creditors, or the institution of any proceeding by or against the Borrower or
such undersigned alleging that the Borrower or such undersigned is insolvent or
unable to pay debts as they mature, and if such event shall occur at a time when
any of the Obligations may not then be due and payable, such undersigned will
pay to the Bank forthwith the full amount that would be payable hereunder by
such undersigned if all Obligations were then due and payable.
2. This Guaranty shall in all respects be a continuing, absolute and
unconditional guaranty, and shall remain in full force and effect
(notwithstanding, without limitation, the death, incompetency or dissolution of
any of the undersigned or that at any time or from time to time all Obligations
may have been paid in full).
3. The undersigned further agree(s) that, if at any time all or any
part of any payment theretofore applied by the Bank to any of the Obligations is
or must be rescinded or returned by the Bank for any reason whatsoever
(including, without limitation, the insolvency, bankruptcy or reorganization of
the Borrower), such Obligations shall, for the purposes of this Guaranty, to the
extent that such payment is or must be rescinded or returned be deemed to have
continued in existence, notwithstanding such application by the Bank, and this
Guaranty shall continue to be effective or be reinstated, as the case may be, as
to such Obligations, all as though such application by the Bank had not been
made. The undersigned shall indemnify and defend the Bank
<PAGE>
Guaranty
-2-
and hold the Bank harmless from and against any and all loss, damage, cost, or
expense, (including reasonable attorney's fees) arising out of any claim for
rescission or return of all or any part of any payment theretofore applied by
the Bank to any of the Obligations.
4. The Bank may, from time to time, at its sole discretion and without
notice to the undersigned (or any of them), take any or all of the following
actions: (a) retain or obtain a security interest in any property to secure any
of the Obligations or any obligation hereunder, (b) retain or obtain the primary
or secondary obligation of any obligor or obligors, in addition to the
undersigned, with respect to any of the Obligations, (c) extend or renew for one
or more periods (whether or not longer than the original period), alter or
exchange any of the Obligations, or release or compromise any obligation of any
of the undersigned hereunder or any obligation of any nature of any other
obligor with respect to any of the Obligations, (d) release its security
interest in, or surrender, release, or permit any substitution or exchange for,
all or any part of any property securing any of the Obligations or any
obligation hereunder, or extend or renew for one or more periods (whether or not
longer than the original period) or release, compromise, alter or exchange any
obligations of any nature of any obligor with respect to any such property, and
(e) resort to the undersigned (or any of them) for payment of any of the
Obligations, whether or not the Bank shall have resorted to any property
securing any of the Obligations or any obligation hereunder or shall have
proceeded against any other of the undersigned or any other obligor primarily or
secondarily obligated with respect to any of the Obligations.
5. Any amounts received by the Bank from whatsoever source on account
of the Obligations may be applied by it toward the payment of such of the
Obligations, and in such order of application, as the Bank may from time to time
elect. Notwithstanding any payments made by or for the account of the
undersigned pursuant to this Guaranty, the undersigned shall not be subrogated
to any rights of the Bank. The undersigned hereby waive all rights of
subrogation, indemnity, contribution, exoneration, reimbursement or other claim
which the undersigned now or may hereafter have or claim against the Borrower or
any other person liable in any way with respect to the Obligations.
6. The undersigned hereby expressly waive(s): (a) notice of the
acceptance by the Bank of this Guaranty, (b) notice of the existence or creation
or non-payment of all or any of the Obligations, (c) presentment, demand, notice
of dishonor,
<PAGE>
Guaranty
-3-
protest, and all other notices whatsoever, and (d) all diligence in collection
or protection of or realization upon the Obligations or any thereof, any
obligation hereunder, or any security for or guaranty of any of the foregoing.
7. The Bank may, from time to time, without notice to the undersigned
(or any of them), assign or transfer any or all of the Obligations or any
interest therein; and, notwithstanding any such assignment or transfer or any
subsequent assignment or transfer thereof, such Obligations shall be and remain
Obligations for the purposes of this Guaranty, and each and every immediate and
successive assignee or transferee of any of the Obligations or of any interest
therein shall, to the extent of the interest of such assignee or transferee in
the Obligations, be entitled to the benefits of this Guaranty to the same extent
as if such assignee or transferee were the Bank; provided, however, that, unless
the Bank shall otherwise consent in writing, the Bank shall have an unimpaired
right, prior and superior to that of any such assignee or transferee, to enforce
this Guaranty, for the benefit of the Bank, as to those of the Obligations which
the Bank has not assigned or transferred.
8. No delay on the part of the Bank in the exercise of any right or
remedy shall operate as a waiver thereof, and no single or partial exercise by
the Bank of any right or remedy shall preclude other or further exercise thereof
or the exercise of any other right or remedy; nor shall any modification or
waiver of any of the provisions of this Guaranty be binding upon the Bank except
as expressly set forth in a writing duly signed and delivered on behalf of the
Bank. No action of the Bank permitted hereunder shall in any way affect or
impair the rights of the Bank and the obligation of the undersigned under this
Guaranty. For the purposes of this Guaranty, the Obligations shall include all
obligations of the Borrower to the Bank, notwithstanding any right or power of
the Borrower or anyone else to assert any claim or defense as to the invalidity
or unenforceability of any such obligation, and no such claim or defense shall
affect or impair the obligations of the undersigned hereunder.
9. This Guaranty shall be binding upon the undersigned, and upon the
heirs, legal representatives, successors and assigns of the undersigned; and to
the extent that the Borrower or any of the undersigned is either a partnership
or a corporation, all references herein to the Borrower and to the undersigned,
respectively, shall be deemed to include any successor or successors, whether
immediate or remote, to such partnership or corporation. If more than one party
shall execute this Guaranty, the term "undersigned" as used herein shall mean
all parties executing this Guaranty and each of them, and all such parties
<PAGE>
shall be jointly and severally obligated hereunder. This Guaranty shall inure to
the benefit of the Bank and its successors and assigns, and all references
herein to the Bank shall be deemed to include its successors and assigns.
10. This Guaranty has been delivered in the State of Illinois and shall
be construed in accordance with and governed by the laws of the State of
Illinois. Wherever possible each provision of this Guaranty shall be interpreted
in such manner as to be effective and valid under applicable law, but if any
provision of this Guaranty shall be prohibited by or invalid under such law,
such provision shall be ineffective to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Guaranty.
11. To secure all obligations of each of the undersigned hereunder, the
Bank shall have a lien upon and security interest in (and may, without demand or
notice of any kind, at any time and from time to time when any amount shall be
due and payable by such undersigned hereunder, appropriate and apply toward the
payment of such amount, in such order of application as the Bank may elect) any
and all balances, credits, deposits, accounts, or monies of or in the name of
such undersigned now or hereafter with the Bank and any and all property of any
kind or description of or in the name of such undersigned now or hereafter, for
any reason or purpose whatsoever, in the possession or control of, or in transit
to, the Bank or any agent or bailee for the Bank.
Signed and delivered July 1, 1997.
/s/ Stephen M. Merrick
----------------------
Stephen M. Merrick
/s/ John H. Schwan
----------------------
John H. Schwan
/s/ Howard W. Schwan
----------------------
Howard W. Schwan
EXHIBIT 10.22
THIRD TERM NOTE
$275,000.00 Elk Grove Village, Illinois
July 1, 1997
Loan No. 600804665-59
FOR VALUE RECEIVED, the undersigned, CTI Industries
Corporation, a Delaware corporation (the "Borrower"), hereby promises to pay to
the order of First American Bank, an Illinois banking corporation (the "Bank"),
the principal sum of Two Hundred Seventy Five Thousand and No/100 Dollars
($275,000.00) on October 1, 2000 (or earlier as hereinafter provided), or so
much thereof as may be advanced by the Bank and evidenced by this Note under the
Loan and Security Agreement dated August 19, 1996, as it has been amended from
time to time, between the Borrower and the Bank (the "Loan Agreement"), together
with interest to maturity (whether by lapse of time, acceleration, or otherwise)
on the balance of principal remaining from time to time out standing at a
fluctuating rate per annum equal to one percent (1%) per annum over the Prime
Rate announced from time to time by the Bank (which may not be the Bank's lowest
rate of interest) which shall be adjusted daily when and as the Bank's Prime
Rate changes. Interest shall be calculated on the basis of a 360-day year and
actual days.
Unless accelerated as hereinafter provided or as otherwise
provided in the Loan Agreement, the principal sum outstanding shall be payable
in installments of $7,738.89 of principal per month payable on the first day of
each calendar month commencing with the month of November, 1997 and on the first
day of each succeeding month until this Note is fully paid except that the final
payment of principal, if not sooner paid, shall be due on October 1, 2000.
Accrued interest shall be paid on the first day of the month following the month
in which the first disbursement evidenced by this Note is made under the Loan
Agreement and thereafter on the first day of each succeeding month until this
Note is fully paid, except that the final payment of interest, if not sooner
paid, shall be due on October 1, 2000. If an Event of Default (as defined in the
Loan Agreement) shall occur, the outstanding principal of and accrued and unpaid
interest on this Note shall become immediately due and payable as provided in
the Loan Agreement without notice.
All payments on account of the indebtedness evidenced by this
Note (other than required prepayments which shall be applied as provided in the
Loan Agreement and optional prepayments which shall be applied as provided in
this Note) shall be applied first to accrued and unpaid interest and the
remainder to principal. Payments on this Note shall be made at the offices of
the Bank or at such other office as the legal holder of this Note may, from time
to time, designate in writing.
Notwithstanding anything to the contrary contained herein, the
undersigned agrees to pay a late charge of five percent (5%) of the amount of
any monthly installment received more than 10 days after the installment is due.
Late charges shall be due and payable on the due date of the next installment of
principal or interest, together with the regular installment then due.
Upon and after the occurrence of an Event of Default, the
undersigned shall pay interest at the rate (the "Default Rate") of four percent
(4%) per annum over the Bank's Prime Rate then in effect, which shall be
adjusted daily when and as the Bank's Prime Rate changes.
<PAGE>
Third Term Note
Page Two
Except as otherwise provided in the Loan Agreement, this Note
may be prepaid in whole or in part without premium or penalty at any time at the
option of the undersigned in accordance with the Loan Agreement. Any partial
prepayment made at the option of the undersigned shall be applied against the
principal amount outstanding and shall not postpone the due date of any
subsequent monthly installment or change the amount of such installment unless
the Bank shall otherwise agree in writing.
This Note is secured by the Loan Agreement and other
documents, agreements, and instruments executed by the Borrower. This Note is
made and delivered pursuant to the Loan Agreement and is subject to the further
terms and conditions thereof, including the right of the holder to accelerate
payment of the principal of and accrued and unpaid interest on this Note and
other remedies upon the occurrence of an Event of Default, all of which are
hereby incorporated and made a part of this Note by reference.
Any waiver of any payment due hereunder or the acceptance by
the Bank of partial payments hereunder shall not, at any other time, be taken to
be a waiver of the terms of this Note or the Loan Agreement or any other
agreement between the Borrower and the Bank.
The makers, sureties, guarantors, and endorsers of this Note,
if any, jointly and severally hereby waive notice of and consent to any and all
extensions of this Note or any part thereof without notice, and each hereby
waives demand, presentment for payment, notice of nonpayment, and protest and
any and all notice of whatever kind or nature and the exhaustion of legal
remedies herein, or any release of liability or any other indulgences or
forbearances whatsoever, without releasing or in any way affecting the personal
liability of any other party hereunder.
This Note shall be the joint and several obligation of all
makers, sureties, guarantors, and endorsers and shall be binding upon them,
their heirs, personal representatives, and assigns.
In the event the holder of this Note shall refer this Note to
an attorney for collection, the undersigned agrees to pay, in addition to unpaid
principal and interest, all of the costs and expenses incurred in attempting or
effecting collection, including reasonable attorneys' fees, whether or not suit
is instituted.
IN WITNESS WHEREOF, the undersigned has executed this Note as
of the date first written above.
Attest: CTI Industries Corporation
/s/ Howard W. Schwan BY:/s/ John H. Schwan
- -------------------- --------------------
Howard W. Schwan John H. Schwan
Vice President Chief Executive Officer
EXHIBIT 10.23
FOURTH TERM NOTE
$200,000.00 Elk Grove Village, Illinois
July 1, 1997
Loan No. 600804665-60
FOR VALUE RECEIVED, the undersigned, CTI Industries
Corporation, a Delaware corporation (the "Borrower"), hereby promises to pay to
the order of First American Bank, an Illinois banking corporation (the "Bank"),
the principal sum of Two Hundred Thousand and No/100 Dollars ($200,000.00) on
July 1, 1998 (or earlier as hereinafter provided), or so much thereof as may be
advanced by the Bank and evidenced by this Note under the Loan and Security
Agreement dated August 19, 1996, as it has been amended from time to time,
between the Borrower and the Bank (the "Loan Agreement"), together with interest
to maturity (whether by lapse of time, acceleration, or otherwise) on the
balance of principal remaining from time to time outstanding at a fluctuating
rate per annum equal to one percent (1%) per annum over the Prime Rate announced
from time to time by the Bank (which may not be the Bank's lowest rate of
interest) which shall be adjusted daily when and as the Bank's Prime Rate
changes. Interest shall be calculated on the basis of a 360-day year and actual
days.
Unless accelerated as hereinafter provided or as otherwise
provided in the Loan Agreement, the principal sum outstanding shall be payable
in installments of $16,666.67 of principal per month payable on the first day of
each calendar month commencing with the month of August, 1997 and on the first
day of each succeeding month until this Note is fully paid except that the final
payment of principal, if not sooner paid, shall be due on July 1, 1998. Accrued
interest shall be paid on the first day of the month following the month in
which the first dis bursement evidenced by this Note is made under the Loan
Agreement and thereafter on the first day of each succeeding month until this
Note is fully paid, except that the final payment of interest, if not sooner
paid, shall be due on July 1, 1998. If an Event of Default (as defined in the
Loan Agreement) shall occur, the outstanding principal of and accrued and unpaid
interest on this Note shall become immediately due and payable as provided in
the Loan Agreement without notice.
All payments on account of the indebtedness evidenced by this
Note (other than required prepayments which shall be applied as provided in the
Loan Agreement and optional prepayments which shall be applied as provided in
this Note) shall be applied first to accrued and unpaid interest and the
remainder to principal. Payments on this Note shall be made at the offices of
the Bank or at such other office as the legal holder of this Note may, from time
to time, designate in writing.
Notwithstanding anything to the contrary contained herein, the
undersigned agrees to pay a late charge of five percent (5%) of the amount of
any monthly installment received more than 10 days after the installment is due.
Late charges shall be due and payable on the due date of the next installment of
principal or interest, together with the regular installment then due.
Upon and after the occurrence of an Event of Default, the
undersigned shall pay interest at the rate (the "Default Rate") of four percent
(4%) per annum over the Bank's Prime Rate then in effect, which shall be
adjusted daily when and as the Bank's Prime Rate changes.
Except as otherwise provided in the Loan Agreement, this Note
may be prepaid in whole or in part without premium or penalty at any time at the
option of the undersigned in accordance with the Loan Agreement. Any partial
prepayment made at the option of the undersigned shall be applied against the
principal amount outstanding and shall not postpone the due date of any
subsequent monthly installment or change the amount of such installment unless
the Bank shall otherwise agree in writing.
<PAGE>
Fourth Term Note
Page Two
This Note is secured by the Loan Agreement and other
documents, agreements, and instruments executed by the Borrower. This Note is
made and delivered pursuant to the Loan Agreement and is subject to the further
terms and conditions thereof, including the right of the holder to accelerate
payment of the principal of and accrued and unpaid interest on this Note and
other remedies upon the occurrence of an Event of Default, all of which are
hereby incorporated and made a part of this Note by reference.
Any waiver of any payment due hereunder or the acceptance by
the Bank of partial payments hereunder shall not, at any other time, be taken to
be a waiver of the terms of this Note or the Loan Agreement or any other
agreement between the Borrower and the Bank.
The makers, sureties, guarantors, and endorsers of this Note,
if any, jointly and severally hereby waive notice of and consent to any and all
extensions of this Note or any part thereof without notice, and each hereby
waives demand, presentment for payment, notice of nonpayment, and protest and
any and all notice of whatever kind or nature and the exhaustion of legal
remedies herein, or any release of liability or any other indulgences or
forbearances whatsoever, without releasing or in any way affecting the personal
liability of any other party hereunder.
This Note shall be the joint and several obligation of all
makers, sureties, guarantors, and endorsers and shall be binding upon them,
their heirs, personal representatives, and assigns.
In the event the holder of this Note shall refer this Note to
an attorney for collection, the undersigned agrees to pay, in addition to unpaid
principal and interest, all of the costs and expenses incurred in attempting or
effecting collection, including reasonable attorneys' fees, whether or not suit
is instituted.
IN WITNESS WHEREOF, the undersigned has executed this Note as
of the date first written above.
Attest: CTI Industries Corporation
/s/ Howard W. Schwan BY: /s/ John H. Schwan
- -------------------- --------------------
Howard W. Schwan John H. Schwan
Vice President Chief Executive Officer
EXHIBIT 10.24
FIRST AMENDMENT TO REVOLVING NOTE
Loan No. 600804665-57
The undersigned, CTI Industries, Inc., a Delaware corporation (the
"Borrower"), hereby agrees with First American Bank, an Illinois banking
corporation (the "Bank"), that the Revolving Note dated August 22, 1996, made by
the Borrower payable to the order of the Bank in the original principal amount
of $3,000,000.00 (the "Note"), shall be and hereby is amended as follows:
Notwithstanding any contrary provision of the Note:
1. The principal and accrued interest sum outstanding, if not
sooner paid in full and unless accelerated as provided in the Note or
prepayable as hereinafter provided, shall be due and payable in full on
July 1, 1998.
2. Commencing July 1, 1997, Borrower shall make regular
monthly payments of accrued unpaid interest and on the same day of each
month thereafter, until July 1, 1998, when the Note shall be paid in
full.
All references in the Note to this "Note" or the like, shall be deemed
to be references to the Note as amended by this Amendment.
The Borrower hereby authorizes the Bank to affix this Amendment to the
Note. Except as herein amended, the Note is ratified and confirmed and shall
remain in full force and effect in accordance with its terms.
IN WITNESS WHEREOF, the undersigned has executed this Amendment to the
Note this 1st day of July, 1997.
BORROWER
CTI Industries Corporation
Attest:
By:/s/ Stephen M. Merrick
-----------------------
Stephen M. Merrick,
By: /s/ Howard W. Schwan President
---------------------
Howard W. Schwan,
Secretary
Agreed to as of this 1st day of July, 1997.
First American Bank
By: /s/ Martin J. Carmody
-----------------------
Martin J. Carmody,
Exec. Vice President
EXHIBIT 10.25
FINANCIAL ADVISORY AND CONSULTING AGREEMENT
This Agreement is made and entered into as of this __ day of
________, 1997, by and between CTI Industries Corporation, a Delaware
corporation (the "Company"), and Joseph Stevens & Company, Inc. (the
"Consultant").
In consideration of and for the mutual promises and covenants
contained herein, and for other good and valuable consideration, the receipt of
which is hereby acknowledged, the parties hereto hereby agree as follows:
1. Purpose. The Company hereby retains the Consultant during
the term specified in Section 2 hereof to render consulting advice to the
Company as an investment banker relating to financial and similar matters, upon
the terms and conditions as set forth herein.
2. Term. Subject to the provisions of Sections 8, 9 and 10
hereof, this Agreement shall be effective for a period of twenty-four (24)
months commencing on the date hereof.
3. Duties of Consultant. During the term of this Agreement,
the Consultant will provide the Company with such regular and customary
consulting advice as is reasonably requested by the Company, provided that the
Consultant shall not be required to undertake duties not reasonably within the
scope of the consulting advisory service contemplated by this Agreement. In
performance of these duties, the Consultant shall provide the Company with the
benefits of its best judgment and efforts. It is understood and acknowledged by
the parties that the value of the Consultant's advice is not measurable in any
quantitative manner, and that the Consultant shall be obligated to render
advice, upon the request of the Company, in good faith, but shall not be
obligated to spend any specific amount of time in doing so. The Consultant's
duties may include, but will not necessarily be limited to:
A. Providing sponsorship and exposure in connection
with the dissemination of corporate information regarding the Company to the
investment community at large under a systematic planned approach.
B. Rendering advice and assistance in connection with
the preparation of annual and interim reports and press releases.
C. Arranging, on behalf of the Company and its
representatives, at appropriate times, meetings with securities analysts of
major regional investment banking firms.
D. Assisting in the Company's financial public
relations, including discussions between the Company and the financial
community.
<PAGE>
E. Rendering advice with regard to internal
operations, including:
(i) advice regarding formation of corporate goals
and their implementation;
(ii) advice regarding the financial structure of
the Company and its divisions or subsidiaries or any
programs and projects of such entities;
(iii) advice concerning the securing, when
necessary and if possible, of additional financing
through banks, insurance companies and/or other
institutions; and
(iv) advice regarding corporate organization and
personnel.
F. Rendering advice with respect to any acquisition
program of the Company.
G. Rendering advice regarding a future public or
private offering of securities of the Company or of any subsidiary.
4. Relationships with Others. The Company acknowledges that
the Consultant and its affiliates are in the business of providing financial
services and consulting advice (of all types contemplated by this Agreement) to
others. Nothing herein contained shall be construed to limit or restrict the
Consultant or its affiliates from rendering such services or advice to others.
5. Consultant's Liability. In the absence of gross negligence
or willful misconduct on the part of the Consultant, or the Consultant's breach
of this Agreement, the Consultant shall not be liable to the Company, or to any
officer, director, employee, shareholder or creditor of the Company, for any act
or omission in the course of or in connection with the rendering or providing of
advice hereunder. Except in those cases where the gross negligence or willful
misconduct of the Consultant or the breach by the Consultant of this Agreement
is alleged and proven, the Company agrees to defend, indemnify and hold the
Consultant harmless from and against any and all reasonable costs, expenses and
liability (including, but not limited to, attorneys' fees paid in the defense of
the Consultant) which may in any way result from services rendered by the
Consultant pursuant to or in any connection with this Agreement.
6. Expenses. The Company, upon receipt of appropriate
supporting documentation, shall reimburse the Consultant for any and all
reasonable out-of-pocket expenses incurred by the Consultant in connection with
services rendered by the Consultant to Company pursuant to this Agreement,
including, but not limited to, hotel, food and associated expenses, all charges
for travel and long-distance telephone calls and all other expenses incurred by
the Consultant in connection with services rendered by the Consultant to the
Company pursuant to this Agreement. Expenses payable under this Section 6 shall
not include allocable overhead expenses of the Consultant, including, but not
limited to, attorneys' fees, secretarial charges and rent.
2
<PAGE>
7. Compensation. As compensation for the services to be
rendered by the Consultant to the Company pursuant to Section 3 hereof, the
Company shall pay the Consultant a financial consulting fee of two thousand
dollars ($2,000) per month for twenty-four (24) months commencing on ______ __
1997. Forty-Eight Thousand Dollars ($48,000), representing payment in full of
all amounts due the Consultant pursuant to this Section 7, shall be paid by the
Company on _______ __, 1997.
8. Other Advice. In addition to the duties set out in Section
3 hereof, the Consultant agrees to furnish advice to the Company in connection
with the acquisition of and/or merger with other companies, joint ventures with
any third parties, license and royalty agreements and any other financing (other
than the private or public sale of the Company's securities for cash),
including, but not limited to, the sale of the Company itself (or any
significant percentage, subsidiaries or affiliates thereof).
In the event that any such transactions are directly or
indirectly originated by the Consultant for a period of five (5) years from the
date hereof, the Company shall pay fees to the Consultant as follows:
Legal Consideration Fee
------------------- ---
1. $ -0- - $3,000,000 5% of legal consideration
2. $ 3,000,001 - $4,000,000 Amount calculated pursuant to line 1
of this computation, plus 4% of
excess over $3,000,000
3. $ 4,000,001 - 5,000,000 Amount calculated pursuant to lines
1 and 2 of this computation, plus 3%
of excess over $4,000,000
4. above $ 5,000,000 Amount calculated pursuant to lines
1, 2 and 3 of this computation, plus
2% of excess over $5,000,000.
Legal consideration is defined, for purposes of this
Agreement, as the total of stock (valued at market on the day of closing, or if
there is no public market, valued as set forth herein for other property), cash
and assets and property or other benefits exchanged by the Company or received
by the Company or its shareholders (all valued at fair market value as agreed
or, if not, by any independent appraiser), irrespective of period of payment or
terms.
9. Sales or Distributions of Securities. If the Consultant
assists the Company in the sale or distribution of securities to the public or
in a private transaction, the Consultant shall receive fees in the amount and
form to be arranged separately at the time of such transaction.
3
<PAGE>
10. Form of Payment. All fees due to the Consultant pursuant
to Section 8 hereof are due and payable to the Consultant, in cash or by
certified check, at the closing or closings of a transaction specified in such
Section 8 or as otherwise agreed between the parties hereto; provided, however,
that in the case of license and royalty agreements specified in Section 8
hereof, the fees due the Consultant in receipt of such license and royalty
agreements shall be paid as and when license and/or royalty payments are
received by the Company. In the event that this Agreement shall not be renewed
for a period of at least twelve (12) months at the end of the five (5) year
period referred to in Section 8 hereof or if terminated for any reason prior to
the end of such five (5) year period then, notwithstanding any such non-renewal
or termination, the Consultant shall be entitled to the full fee for any
transaction contemplated under Section 8 hereof which closes within twelve (12)
months after such non-renewal or termination.
11. Limitation Upon the Use of Advice and Services.
A. No person or entity, other than the Company or any of its
subsidiaries, shall be entitled to make use of or rely upon the advice of the
Consultant to be given hereunder, and the Company shall not transmit such advice
to others, or encourage or facilitate the use of or reliance upon such advice by
others, without the prior written consent of the Consultant.
B. It is clearly understood that the Consultant, for services
rendered under this Agreement, makes no commitment whatsoever as to making a
market in the securities of the Company or to recommend or advise its clients to
purchase the securities of the Company. Research reports or corporate finance
reports that may be prepared by the Consultant will, when and if prepared, be
done solely on the merits or judgment of analysts of the Consultant or senior
corporate finance personnel of the Consultant.
C. The use of the Consultant's name in any annual report or
other report of the Company, or any release or similar document prepared by or
on behalf of the Company, must have the prior written approval of the Consultant
unless the Company is required by law to include the Consultant's name in such
annual report, other report or release, in which event the Consultant will be
furnished with a copy of such annual report, other report or release using
Consultant's name in advance of publication by or on behalf of the Company.
D. Should any purchases of securities be requested to be
effected through the Consultant by the Company, its officers, directors,
employees or other affiliates, or by any person on behalf of any profit sharing,
pension or similar plan of the Company, for the account of the Company or the
individuals or entities involved, such orders shall be taken by a registered
account executive of the Consultant, shall not be subject to the terms of this
Agreement, and the normal brokerage commission as charged by the Consultant will
apply in conformity with all rules and regulations of the New York Stock
Exchange, the National Association of Securities Dealers, Inc. or other
regulatory bodies. Where no regulatory body sets the fee, the normal established
fee as used by the Consultant shall apply.
4
<PAGE>
E. The Consultant shall not disclose confidential information
which it learns about the Company as a result of its engagement hereunder,
except as such disclosure as may be required for Consultant to perform its
duties hereunder.
12. Indemnification. Since the Consultant will be acting on
behalf of the Company in connection with its engagement hereunder, the Company
and Consultant have entered into a separate indemnification agreement
substantially in the form attached hereto as Exhibit A and dated the date
hereof, providing for the indemnification of Consultant by the Company. The
Consultant has entered into this Agreement in reliance on the indemnities set
forth in such indemnification agreement.
13. Severability. Every provision of this Agreement is
intended to be severable. If any term or provision hereof is deemed unlawful or
invalid for any reason whatsoever, such unlawfulness or invalidity shall not
affect the validity of the remainder of this Agreement.
14. Miscellaneous.
A. Any notice or other communication between the parties
hereto shall be sent by certified or registered mail, postage prepaid, if to the
Company, addressed to 22160 North Pepper Road, Barrington, Illinois 60010,
Attention: Stephen Merrick, President, with a copy to Fishman & Merrick, P.C.,
30 La Salle Street, Suite 3500, Chicago, Illinois, Attention: John M. Klimek,
or, if to the Consultant, addressed to it at 33 Maiden Lane, 8th Floor, New
York, New York 10038, Attention: Joseph Sorbara, Chief Executive Officer, with a
copy to Orrick, Herrington & Sutcliffe, 666 Fifth Avenue, New York, New York
10103, Attention: Rubi Finkelstein, Esq., or to such address as may hereafter be
designated in writing by one party to the other. Such notice or other
communication shall be deemed to be given on the date of receipt.
B. If, during the term hereof, the Consultant shall cease to
do business, the provisions hereof relating to the duties of the Consultant and
compensation by the Company as it applies to the Consultant shall thereupon
cease to be in effect, except for the Company's obligation of payment for
services rendered prior thereto. This Agreement shall survive any merger of,
acquisition of, or acquisition by the Consultant and, after any such merger or
acquisition, shall be binding upon the Company and the corporation surviving
such merger or acquisition.
C. This Agreement embodies the entire agreement and
understanding between the Company and the Consultant and supersedes any and all
negotiations, prior discussions and preliminary and prior agreements and
understandings related to the central subject matter hereof.
D. This Agreement has been duly authorized, executed and
delivered by and on behalf of the Company and the Consultant.
E. This Agreement shall be construed and interpreted in
accordance with laws of the State of New York, without giving effect to
conflicts of laws.
N
5
<PAGE>
F. This Agreement and the rights hereunder may not be assigned
by either party (except by operation of law) and shall be binding upon and inure
to the benefit of the parties and their respective successors, assigns and legal
representatives.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date hereof.
CTI INDUSTRIES CORPORATION
By:_______________________________
Howard W. Schwan
President
JOSEPH STEVENS & COMPANY, INC.
By:_______________________________
Name:
Title:
6
<PAGE>
EXHIBIT A
_________________, 1997
JOSEPH STEVENS & COMPANY, INC.
33 Maiden Lane
8th Floor
New York, New York 10038
Ladies and Gentlemen:
In connection with our engagement of JOSEPH STEVENS & COMPANY, INC.
(the "Consultant") as our financial advisor and investment banker, we hereby
agree to indemnify and hold the Consultant and its affiliates, and the
directors, officers, partners, shareholders, agents and employees of the
Consultant (collectively the "Indemnified Persons"), harmless from and against
any and all claims, actions, suits, proceedings (including those of
shareholders), damages, liabilities and expenses incurred by any of them
(including, but not limited to, fees and expenses of counsel) which are (A)
related to or arise out of (i) any actions taken or omitted to be taken
(including any untrue statements made or any statements omitted to be made) by
us, or (ii) any actions taken or omitted to be taken by any Indemnified Person
in connection with our engagement of the Consultant pursuant to the Financial
Advisory and Consulting Agreement, of even date herewith, between the Consultant
and us (the "Consulting Agreement"), or (B) otherwise related to or arising out
of the Consultant's activities on our behalf pursuant to the Consultant's
engagement under the Consulting Agreement, and we shall reimburse any
Indemnified Person for all expenses (including, but not limited to, fees and
expenses of counsel) incurred by such Indemnified Person in connection with
investigating, preparing or defending any such claim, action, suit or proceeding
(collectively a "Claim"), whether or not in connection with pending or
threatened litigation in which any Indemnified Person is a party. We will not,
however, be responsible for any Claim which is finally judicially determined to
have resulted exclusively from the gross negligence or willful misconduct of any
person seeking indemnification hereunder. We further agree that no Indemnified
Person shall have any liability to us for or in connection with the Consultant's
engagement under the Consulting Agreement except for any Claim incurred by us
solely as a direct result of any Indemnified Person's gross negligence or
willful misconduct.
We further agree that we will not, without the prior written consent of
the Consultant settle, compromise or consent to the entry of any judgment in any
pending or threatened Claim in respect of which indemnification may be sought
hereunder (whether or not any Indemnified
<PAGE>
Person is an actual or potential party to such Claim), unless such settlement,
compromise or consent includes a legally binding, unconditional, and irrevocable
release of each Indemnified Person hereunder from any and all liability arising
out of such Claim.
Promptly upon receipt by an Indemnified Person of notice of any
complaint or the assertion or institution of any Claim with respect to which
indemnification is being sought hereunder, such Indemnified Person shall notify
us in writing of such complaint or of such assertion or institution, but failure
to so notify us shall not relieve us from any obligation we may have hereunder,
unless, and only to the extent that, such failure results in the forfeiture by
us of substantial rights and defenses, and such failure to so notify us will not
in any event relieve us from any other obligation or liability we may have to
any Indemnified Person otherwise than under this Agreement. If we so elect or
are requested by such Indemnified Person, we will assume the defense of such
Claim, including the employment of counsel reasonably satisfactory to such
Indemnified Person and the payment of the fees and expenses of such counsel. In
the event, however, that such Indemnified Person reasonably determines in its
sole judgment that having common counsel would present such counsel with a
conflict of interest or such Indemnified Person concludes that there may be
legal defenses available to it or other Indemnified Persons different from or in
addition to those available to us, then such Indemnified Person may employ its
own separate counsel to represent or defend it in any such Claim and we shall
pay the reasonable fees and expenses of such counsel. Notwithstanding anything
herein to the contrary, if we fail timely or diligently to defend, contest, or
otherwise protect against any Claim, the relevant Indemnified Party shall have
the right, but not the obligation, to defend, contest, compromise, settle,
assert crossclaims or counterclaims, or otherwise protect against the same, and
shall be fully indemnified by us therefor, including, but not limited to, for
the fees and expenses of its counsel and all amounts paid as a result of such
Claim or the compromise or settlement thereof. In any Claim in which we assume
the defense, the Indemnified Person shall have the right to participate in such
defense and to retain its own counsel therefor at its own expense.
We agree that if any indemnity sought by an Indemnified Person
hereunder is held by a court to be unavailable for any reason, then (whether or
not the Consultant is the Indemnified Person) we and the Consultant shall
contribute to the Claim for which such indemnity is held unavailable in such
proportion as is appropriate to reflect the relative benefits to us, on the one
hand, and the Consultant, on the other, in connection with the Consultant's
engagement by us under the Consulting Agreement, subject to the limitation that
in no event shall the amount of the Consultant's contribution to such Claim
exceed the amount of fees actually received by the Consultant from us pursuant
to the Consultant's engagement under the Consulting Agreement. We hereby agree
that the relative benefits to us, on the one hand, and the Consultant, on the
other hand, with respect to the Consultant's engagement under the Consulting
Agreement shall be deemed to be in the same proportion as (a) the total value
paid or proposed to be paid or received by us or our stockholders as the case
may be, pursuant to the transaction (whether or not consummated) for which the
Consultant is engaged to render services bears to (b) the fee paid or proposed
to be paid to the Consultant in connection with such engagement.
2
<PAGE>
Our indemnity, reimbursement and contribution obligations under this
Agreement shall be in addition to, and shall in no way limit or otherwise
adversely affect any rights that an Indemnified Part may have at law or at
equity.
Should the Consultant, or any of its directors, officers, partners,
shareholders, agents or employees, be required or be requested by us to provide
documentary evidence or testimony in connection with any proceeding arising from
or relating to the Consultant's engagement under the Consulting Agreement, we
agree to pay all reasonable expenses (including but not limited to fees and
expenses of counsel) in complying therewith and one thousand dollars ($1,000)
per day for any sworn testimony or preparation therefor, payable in advance.
We hereby consent to personal jurisdiction and service of process and
venue in any court in which any claim for indemnity is brought by any
Indemnified Person.
It is understood that, in connection with the Consultant's engagement
under the Consulting Agreement, the Consultant may be engaged to act in one or
more additional capacities and that the terms of the original engagement or any
such additional engagement may be embodied in one or more separate written
agreements. The provisions of this Agreement shall apply to the original
engagement and any such additional engagement and shall remain in full force and
effect following the completion or termination of the Consultant's
engagement(s).
Very truly yours,
CTI INDUSTRIES CORPORATION
By: _________________________
Howard W. Schwan
President
CONFIRMED AND AGREED TO:
JOSEPH STEVENS & COMPANY, INC.
By:___________________________
Name:
Title:
3
EXHIBIT 11.1
CTI Industries Corporation
Computation of Earnings (Loss) Per Share
And Equivalent Share of Common Stock
for the years ended October 31, 1995 and 1996
<TABLE>
<CAPTION>
Year Ended October 31, 1995 Year Ended October 31, 1996
--------------------------- ---------------------------
Fully Fully
Primary Diluted Primary Diluted
---------- ----------- ---------- ----------
Line
----
AVERAGE SHARES OUTSTANDING
<S> <C> <C> <C> <C>
1 Weighted average number
of shares of common stock
outstanding during the period 1,089,689 1,089,689 1,026,572 1,026,572
2 Net additional shares assuming
stock options and warrants
exercised and proceeds used to
purchase treasury shares 263,695 263,695 263,695 263,695
---------- ----------- ---------- ----------
3 Weighted average number of shares
and equivalent shares
of common stock outstanding
during the period 1,353,384 1,353,384 1,290,267 1,290,267
========== =========== ========== ==========
EARNINGS (LOSS)
4 Loss applicable to common shares ($2,893,175) ($2,893,175) ($183,040) ($183,040)
5 Add back dividends applicable to
convertible preferred stock - - (74,211) (74,211)
---------- ----------- ---------- ----------
6 Amount for per share computation ($2,893,175) ($2,893,175) ($257,251) ($257,251)
=========== =========== ========== ==========
PER SHARE AMOUNTS
Loss applicable to common shares
(line 6 / line 3) ($2.14) ($2.14) ($0.20) ($0.20)
=========== =========== ========== ==========
</TABLE>
Earnings (loss) per share is computed by dividing net earnings (loss), less
convertible preferred stock dividends, by the weighted average number of shares
of common stock and common stock equivalents (common stock warrannts and
convertible preferred stock) outstanding during the period.
EXHIBIT 11.2
CTI Industries Corporation
Computation of Earnings (Loss) Per Share
And Equivalent Share of Common Stock
for the six months ended April 30, 1996 and 1997
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
April 30, 1996 April 30, 1997
--------------------------- ---------------------------
Fully Fully
Primary Diluted Primary Diluted
---------- ----------- ---------- ----------
Line
----
AVERAGE SHARES OUTSTANDING
<S> <C> <C> <C> <C>
1 Weighted average number
of shares of common stock
outstanding during the period 1,060,385 1,060,385 987,125 987,125
2 Net additional shares assuming
stock options and warrants
exercised and proceeds used to
purchase treasury shares 263,695 263,695 263,695 263,695
---------- ----------- ---------- ----------
3 Weighted average number of shares
and equivalent shares
of common stock outstanding
during the period 1,324,080 1,324,080 1,250,820 1,250,820
========== =========== ========== ==========
EARNINGS (LOSS)
4 Net earnings (loss) $(68,538) $(68,538) $390,691 $390,691
5 Less dividends applicable to
convertible preferred stock (10,294) (10,294) ($65,000) ($65,000)
----------- ----------- ---------- ----------
6 Amount for per share computation ($78,832) ($78,832) $325,691 $325,691
=========== =========== ========== ==========
PER SHARE AMOUNTS
Loss applicable to common shares
(line 8 / line 3) ($.06) ($.06) $.26 $.26
=========== =========== ========== ==========
</TABLE>
Earnings (loss) per share is computed by dividing net earnings (loss), less
convertible preferred stock dividends, by the weighted average number of shares
of common stock and common stock equivalents (common stock warrannts and
convertible preferred stock) outstanding during the period.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in the registration statement on Form SB-2 (File No.
__________) of our report dated July 22, 1997, on our audits of the financial
statements of CTI Industries Corporation. We also consent to the reference to
our firm ounder the caption "Experts."
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
July 22, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM SB-2 FOR THE SIX
MONTHS ENDED APRIL 30, 1997 AND FOR THE YEAR ENDED OCTOBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM SB-2.
</LEGEND>
<CIK> 0001042187
<NAME> CTI Industries Corporation
<MULTIPLIER> 1,000
<CURRENCY> dollars
<S> <C> <C>
<PERIOD-TYPE> 6-mos 12-mos
<FISCAL-YEAR-END> APR-30-1997 OCT-31-1996
<PERIOD-START> NOV-01-1996 NOV-01-1995
<PERIOD-END> APR-30-1997 OCT-31-1996
<EXCHANGE-RATE> 1.000 1.000
<CASH> 0 131
<SECURITIES> 0 0
<RECEIVABLES> 2,805 1,795
<ALLOWANCES> 126 130
<INVENTORY> 4,701 4,583
<CURRENT-ASSETS> 7,687 6,597
<PP&E> 10,266 10,000
<DEPRECIATION> 6,547 6,416
<TOTAL-ASSETS> 11,523 10,286
<CURRENT-LIABILITIES> 7,197 6,250
<BONDS> 0 0
0 0
1,044 1,028
<COMMON> 75 74
<OTHER-SE> (117) (620)
<TOTAL-LIABILITY-AND-EQUITY> 11,523 10,286
<SALES> 8,736 13,910
<TOTAL-REVENUES> 8,736 13,910
<CGS> 5,384 8,558
<TOTAL-COSTS> 5,384 8,558
<OTHER-EXPENSES> 2,658 4,976
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 304 553
<INCOME-PRETAX> 390 (177)
<INCOME-TAX> 0 6
<INCOME-CONTINUING> 390 (183)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 390 (183)
<EPS-PRIMARY> .26 (.20)
<EPS-DILUTED> .26 (.20)
</TABLE>
