<PAGE>
As filed with the Securities and Exchange Commission on October 2, 1997
SEC File No. 333-31969
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT No. 3
to
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------------
CTI INDUSTRIES CORPORATION
(Name of Small Business Issuer in its charter)
<TABLE>
<CAPTION>
Delaware 3970 36-2848943
<S> <C> <C>
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
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 any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. /X/
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.
===============================================================================
<PAGE>
CONTINUATION OF FACING SHEET
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Maximum
Title of Each Class Amount To Be Proposed Maximum Aggregate Amount of
of Securities To Be Registered Registered(1) Offering Price Per Share (2) Offering Price (2) Registration Fee
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.065 Par Value
("Common Stock") ............... 1,725,000(3) $ 4.00 $6,900,000.00 $ 2,090.91
- --------------------------------------------------------------------------------------------------------------------------------
Underwriter's Warrants(4) ...... 150,000 $ .0001 $ 15.00 $ 0(5)
- --------------------------------------------------------------------------------------------------------------------------------
Shares of Common Stock issuable
upon exercise of Underwriter's
Warrants ..................... 150,000 $ 5.40(6) $ 810,000.00 $ 245.46
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL ........................... $7,710,015.00 $ 2,336.37(7)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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 Underwriter's Warrants.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(3) Includes 225,000 shares of Common Stock subject to sale upon exercise
of over-allotment option granted to Underwriter which may be offered to cover
over-allotments, if any.
(4) Represents warrants, to be issued to the Underwriter, to purchase
Common Stock.
(5) No separate registration fee is required pursuant to Rule 457(g).
(6) Represents the exercise price of the Underwriter's Warrants.
(7) A registration fee of $5,718.18 was previously paid in connection with
the initial filing of this Registration Statement.
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; Manage-
ment's Discussion and Analysis of Financial
Condition and Results of Operations; Busi-
ness; 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>
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED OCTOBER 2, 1997
PROSPECTUS
1,500,000 Shares
CTI Industries Corporation [LOGO]
Common Stock
------------
CTI Industries Corporation, a Delaware corporation (the "Company"), is
hereby offering (this "Offering") 1,500,000 shares of common stock, $.065 par
value per share ("Common Stock"). Prior to this Offering, there has been no
public market for the Common Stock and there can be no assurance that such a
market will develop after the completion of this Offering or, if developed, that
it will be sustained. It is currently anticipated that the initial public
offering price will be $4.00 per share of Common Stock. The offering price of
the Common Stock was determined by negotiation between the Company and the
Underwriter and is 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 Capital Stock" and "Underwriting." The Common
Stock has been approved for quotation on the Nasdaq SmallCap Market ("Nasdaq")
under the symbol "CTIB."
----------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS,"
COMMENCING 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.
============================================================================
Price to Underwriting Proceeds to
Public Discounts(1) Company(2)
- ----------------------------------------------------------------------------
Per share ...... $ $ $
- ----------------------------------------------------------------------------
Total(3) ...... $ $ $
============================================================================
(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 225,000 additional shares of Common Stock
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."
The Common Stock is 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 this Offering and to reject any order in whole or in part. It is
expected that delivery of the Common Stock 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 OF SELECT LATEX AND MYLAR BALLOON PRODUCTS]
The Company intends to furnish to the registered holders of the 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 COMMON STOCK
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE MARKET PRICE, PURCHASES OF
THE COMMON STOCK MAINTAINED BY THE UNDERWRITER IN THE COMMON STOCK 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 the election of
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 this 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") is one of the leading
manufacturers and sellers 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. 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. See "Risk Factors--Dependence on Supplier; Creditors
Proceeding."
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
3
<PAGE>
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 Company's executive offices are located at 22160 North Pepper Road,
Barrington, Illinois 60010, and its telephone number is (847) 382-1000.
4
<PAGE>
The Offering
Common Stock offered ... 1,500,000 shares
Common Stock outstanding
before this Offering.... Common Stock Class B Common Stock
1,010,202(1) 1,098,901
Common Stock to be
outstanding after this
Offering............... 2,510,202 1,098,901
Nasdaq SmallCap
Market Symbol ......... CTIB
Use of Proceeds ...... The net proceeds of this Offering will be used as
follows: (i) approximately $1,250,000 for repayment
of bank indebtedness, 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)
$1,022,000, the balance, for working capital and
general corporate purposes.
Risk Factors ......... Investment in the Common Stock 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,
(iii) 121,000 shares of Common Stock issuable pursuant to options having
an exercise price equal to the initial public offering price per share of
Common Stock which were granted under the Company's stock option plan and,
(iv) 179,000 shares of Common Stock issuable pursuant to options which may
be granted under the Company's stock option plan in the future.
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 July 31, 1997, and for the nine month periods ended July 31,
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, Nine Months Ended July 31,
---------------------------------- ---------------------------
1995 1996 1996 1997
------------- ------------------ ------------ ------------
<S> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Net sales .................................... $ 22,784 $ 13,910 $ 10,769 $ 12,082
Cost of sales ................................. 15,078 8,558 6,547 7,346
Gross profit ................................. 7,706 5,352 4,222 4,736
Operating Expenses:
General and administrative .................. 2,900 2,055 1,603 1,335
Selling .................................... 3,770 2,387 1,863 2,043
Advertising and marketing .................. 2,356 592 489 625
Plant shut down expense ..................... 850 ---- ---- ----
---------- --------- ---------- ----------
Total operating expenses ..................... 9,876 5,034 3,955 4,003
---------- --------- ---------- ----------
Operating income (loss) ........................ (2,170) 318 267 733
Other income (expense) ........................ (1,497) (495) (395) (386)
Income tax benefit (expense) .................. 774 (6) ---- ----
---------- --------- ---------- ----------
Net income (loss) .............................. (2,893) (183) (128) 347
Dividends applicable to Convertible Preferred
Stock ....................................... ---- (74) (42) (97)
---------- --------- ---------- ----------
Net income (loss) applicable to common shares.... $ (2,893) $ (257) $ (170) $ 250
========== ========= ========== ==========
Net income (loss) per common and common
equivalent share .............................. $ (2.18) $ (.20) $ (.13) $ .20
========== ========= ========== ==========
Weighted average number of common and
common equivalent shares outstanding ......... 1,328,952 1,265,835 1,277,670 1,235,626
Pro forma per share data reflecting
recapitalization(1):
Net income (loss) per common and comon
equivalent shares ........................ $ (.08) $ .16
Weighted average common and common
equivalent shares outstanding ............ 2,268,582 2,238,373
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
July 31, 1997
-----------------------------------
Pro Forma
Pro Forma(2) As Adjusted2)(3)
-------------- ------------------
<S> <C> <C>
Consolidated Balance Sheet Data:
Working capital ........................... $ 1,166 $ 4,238
Total assets .............................. $ 11,756 $ 15,228
Long-term debt, less current portion ...... $ 3,670 $ 3,670
Total liabilities ........................... $ 10,424 $ 9,174
Stockholders equity ........................ $ 882 $ 5,604
</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. The following table presents a
reconciliation of the pro forma weighted average common shares used in the
pro forma per share computations.
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
October 31, 1996 July 31, 1997
------------------ ---------------
<S> <C> <C>
Weighted average common shares outstanding ...... 1,026,572 996,363
Conversion of preferred stock .................. 1,002,747 1,002,747
Warrants ....................................... 239,263 239,263
---------- ----------
2,268,582 2,238,373
========== ==========
</TABLE>
(2) Gives retroactive effect to recapitalization and conversion of Convertible
Preferred Stock to shares of Class B Common Stock. See "Certain
Transactions."
(3) Adjusted to give effect to this Offering assuming an initial public
offering price of $4.00 per share of Common Stock and the initial
application of the net proceeds therefrom.
7
<PAGE>
RISK FACTORS
The purchase of Common Stock 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 $347,000 for the nine months ended July 31, 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 that 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; Creditors Proceeding. 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. In
the event of the loss of this supplier, there can be no assurance that the
Company will be able to obtain an alternative source of supply on favorable
terms or at all. 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. The Company is also a party to a joint
venture with the Mexican supplier for the packaging of balloons and printing of
latex balloons of both the Company and the supplier. In the event of the
bankruptcy of the Mexican supplier, the Company anticipates that the business
of the joint venture would continue, subject to the approval of the Mexican
bankruptcy court. See "Use of Proceeds" and "Business--Manufacturing."
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
8
<PAGE>
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. The Company does not currently maintain key man life insurance on
its officers but has applied for a policy covering Mr. Schwan of which the
Company shall be the sole beneficiary. See "Management--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. These notes and warrants were purchased by an investor group
including Howard W. Schwan, John H. Schwan, Stephen M. Merrick and John C.
Davis, 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 this 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. All transactions between the Company and related parties are
subject to review and approval of a majority of the disinterested members of
the Company's board of directors who have access, at Company's expense, to the
Company's independent counsel. See "Management," "Certain Transactions" and
"Principal Stockholders."
Related Party; Corporate Counsel. 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 Common Stock. 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."
Related Party; Supplier. John H. Schwan, Chairman and principal
shareholder of the Company is also president and a principal owner of Packaging
Systems, Inc., a supplier to the Company. A conflict may arise between Mr.
Schwan's respective duties and responsibilities as an officer and shareholder
of these two entities. See "Certain Transactions."
Possible Control by Insiders; Reduced Probability of Change in
Control. Upon completion of this Offering, the Company's executive officers and
directors will beneficially own 65% of the outstanding Class B Common Stock and
will beneficially own approximately 35% of the outstanding Common Stock (43% 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. In addition, for a period of five years from the date of this
Prospectus, the Underwriter has been granted the right to designate a person
for election to the Company's board of directors. See "Principal Stockholders,"
"Management," "Description of Capital Stock" and "Underwriting."
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, 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
9
<PAGE>
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. The Company
has also agreed to restrictions on the payment of dividends in connection with
its current bank financing. See "Dividend Policy."
Broad Discretion of Management in Use of Proceeds. Approximately 39% of
the estimated net proceeds of this 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. In addition, a portion
of the proceeds of this Offering may be used to acquire companies or products
at the broad discretion of the board of directors. Except as otherwise
disclosed in this Prospectus, the Company has no agreement or arrangement with
respect to any such acquisition. See "Use of Proceeds."
Use of Proceeds to Repay Debt. Approximately 26% of the estimated net
proceeds of this Offering is to be used for the repayment of bank debt. These
funds will therefore not be otherwise available for the Company's operations.
See "Use of Proceeds."
Securities Eligible for Future Sale. Sales of substantial amounts of
Common Stock after this 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 this
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 2,510,202 shares of Common Stock that will be
outstanding after this Offering, the 1,500,000 shares 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 defined in
Rule 144, and in certain circumstances may be sold without registration
pursuant to such rule. After this 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."
10
<PAGE>
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 Common Stock, and there can be no assurance that an
active public market will develop or be sustained after this Offering. The
initial public offering price of the Common Stock 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 price of the Common
Stock after the consummation of this Offering, and there can be no assurance
that the price will not decline below the initial public offering price. See
"Underwriting." The trading price of the Common Stock 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 Common Stock.
Dilution; Disproportionate Risk to Purchasers of Common Stock. Purchasers
of the Common Stock at the initial public offering price will experience
immediate and substantial dilution in the net tangible book value per share of
Common Stock of $2.45 or 61% ($2.33 or 58%, 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 in this Offering 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 Common Stock 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 Common Stock, it will have no legal
obligation to do so. The price and the liquidity of the Common Stock 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."
Delisting from the Nasdaq SmallCap Market; Potential Penny Stock
Classification. The Common Stock has been approved for quotation on the Nasdaq
SmallCap Market. However, there can be no assurance that a trading market for
the Common Stock 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 Common Stock not being eligible for quotation.
If the Company were removed from the Nasdaq SmallCap Market, trading, if
any, in the Common Stock 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 Common Stock would
find it more difficult to dispose of, or to obtain accurate quotations as to
the market value of, the Common Stock.
In addition, if the Common Stock is 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
11
<PAGE>
schedule explaining the penny stock market and the risks associated therewith.
Such requirements could severely limit the market liquidity of the Common Stock
and the ability of purchasers in this Offering to sell their securities in the
secondary market. There can be no assurance that the Common Stock will not be
delisted or treated as a penny stock.
Litigation. The Company is a party to certain legal proceedings, and a
finding against the Company could adversely affect the Company's operations.
See "Legal Matters."
Independent Directors. The Company currently has one independent,
non-management director and will appoint a second independent director within
90 days of the date of this Prospectus. Management directors will constitute a
majority of the board and in the case of a conflict between the interests of
stockholders and those of management the board may be less likely to represent
the interests of stockholders than if a majority of the board were independent.
See "Management."
Limitation of Director Liability. The Company's Certificate of
Incorporation contains a provision which eliminates the personal liability of
directors for monetary damages for breach of their fiduciary duties as
directors subject to certain limitations. As a result, it may be more difficult
for stockholders to obtain relief against a director for breaches of such
director's fiduciary duty than if this provision was not included in the
Company's Certificate of Incorporation. See "Management--Limitation of
Liability and Indemnification."
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.
12
<PAGE>
THE COMPANY
Background. The Company was incorporated as Container Merger Company, Inc.
under the laws of the State of Delaware on October 14, 1983, and changed its
name to CTI Industries Corporation on August 2, 1985. 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 February, 1984. CTI Balloons Ltd. ("CTI Balloons"), the
Company's wholly-owned subsidiary, was organized as a corporation under the
laws of the United Kingdom on October 2, 1996. On October 24, 1996, the Company
entered into an agreement with CTI Balloons pursuant to which all of the assets
and liabilities of the Company in its branch operation in the United Kingdom
were sold and transferred to CTI Balloons and all of the capital stock of CTI
Balloons was issued and delivered to the Company. Unless otherwise specified,
all references 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 1,098,901 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. 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."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
by the Company hereby, after deduction of the underwriting discounts, the
Underwriter's non-accountable expense allowance and other estimated expenses of
this 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:
<TABLE>
<CAPTION>
Approximate Approximate
Application of Proceeds Amount Percentage
- ----------------------- ------------- --------------
<S> <C> <C>
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(5) ...... $ 1,022,000 21.6%
------------ ------
Total ................................................ $ 4,722,000 100%
============ ======
</TABLE>
- ------------
(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.
(5) Includes purchase of inventory and payment of trade payables.
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 this 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."
Pending application of the proceeds of this 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.
14
<PAGE>
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. Under the terms of its current loan
agreement, the Company has covenanted not to declare any dividend or other
distribution on its shares or redeem or purchase any of its shares in excess of
$250,000 in any year. 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."
CAPITALIZATION
The following table sets forth the proforma capitalization of the Company
as of July 31, 1997, and as adjusted to reflect the sale of the Common Stock
offered hereby at an assumed initial public offering price of $4.00 per share
of Common Stock 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. See "The
Company--Recapitalization" and "Certain Transactions." This table should be
read in conjunction with the Company's financial statements attached hereto.
<TABLE>
<CAPTION>
July 31, 1997
---------------------------
Pro Forma
Pro Forma As Adjusted
(in thousands)
<S> <C> <C>
Long-term debt, less current portion ........................... $ 3,670 $ 3,670
-------- --------
Stockholders' equity
Common Stock, $.065 par value, 11,000,000 shares authorized,
1,010,202 shares outstanding, pro forma, 2,510,202 shares pro
forma as adjusted(1) ....................................... $ 75 $ 173
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 $ 4,872
Retained earnings .......................................... $ 387 $ 387
Treasury stock ............................................. $ (371) $ (371)
Redeemable common stock ....................................... $ (450) $ (450)
Stock Subscription Receivable ................................. $ (7) $ (7)
-------- --------
Total stockholders' equity ................................. $ 882 $ 5,604
-------- --------
Total capitalization ....................................... $ 4,552 $ 9,274
======== ========
</TABLE>
- ------------
(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,
(iii) 121,000 shares of Common Stock issuable pursuant to options having
an exercise price equal to the initial public offering price per share of
Common Stock which were granted under the Company's stock option plan and
(iv) 179,000 shares of Common Stock issuable pursuant to options which may
be granted under the Company's stock option plan in the future.
15
<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 offered hereby, and the pro forma net
tangible book value per share as of July 31, 1997, after giving effect to this
Offering. The pro forma net tangible book value per share at July 31, 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 this Offering. See "Certain Transactions." At July 31, 1997, the pro forma
net tangible book value of the capital stock was (including shares of Class B
Common Stock) $882,000 in the aggregate, or $.42 per share. After giving effect
to the sale of the shares of Common Stock offered hereby (at the assumed
initial public offering price of $4.00 per share of Common Stock, resulting in
estimated net proceeds of $4,722,000, after deducting underwriting discounts
and estimated Offering expenses payable by the Company), the pro forma net
tangible book value of the capital stock (including shares of Class B Common
Stock), as of July 31, 1997, would have been $5,604,000 in the aggregate, or
$1.55 per share. This represents an immediate increase in pro forma net
tangible book value of $1.13 per share to existing stockholders and an
immediate dilution per share of $2.45, or 61%, to new investors in this
Offering.
The following table illustrates the dilution per share as described above:
<TABLE>
<S> <C> <C>
Initial public offering price per share of Common Stock ........................ $4.00
Pro forma net tangible book value per share (including shares of Class B
Common Stock) before this Offering ................................. $ .42
Increase attributable to new investors ................................. $1.13
------
Pro forma net tangible book value per share (including shares of Class B
Common Stock) after this Offering ............................................. $1.55
------
Dilution per share to new investors ............................................. $2.45
======
</TABLE>
Based on the foregoing assumptions, the following table sets forth, as of
completion of this 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 in this Offering.
<PAGE>
<TABLE>
<CAPTION>
Total Average Price
Shares Purchased Consideration Per Share
----------------------- ----------------------- ---------------
Number Percent Amount Percent
----------- --------- ------------ --------
<S> <C> <C> <C> <C> <C>
Existing Common Stock holders ...... 1,010,202 28% $ 256,388 3.53% $ .25
Class B Common Stock holders ...... 1,098,901 30% $1,000,000 13.78% $ .91
New Investors ..................... 1,500,000 42% $6,000,000 82.69% $4.00
--------- ---- ----------- ------
Total .............................. 3,609,103 100% $7,256,388 100%
========= ==== =========== ======
</TABLE>
If the Over-Allotment Option is exercised in full, the pro forma net
tangible book value at July 31, 1997, after giving effect to this Offering
would be approximately $6,387,000 or $1.67 per share, and the dilution per
share to new investors would be approximately $2.33 or 58%.
The foregoing also assumes no exercise of the Underwriter's Warrants or any
outstanding stock options or warrants. As of July 31, 1997, there were
outstanding warrants to purchase an aggregate of 230,769 shares of Common Stock
at an exercise price of $.91 per share and 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 granted options to purchase up to 121,000 shares
of its Common Stock with an exercise price equal to the initial public offering
price per share of Common Stock pursuant to its stock option plan. The Company
has a total of 179,000 shares of Common Stock reserved for issuance upon the
exercise of stock options which may be granted from time to time in the future
pursuant to its stock option plan. See "Management--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.
16
<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 nine months ended July 31, 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>
Nine Months
Year Ended October 31, Ended July 31,
-------------------------------- ---------------------------
1995 1996 1996 1997
------------- ---------------- ------------ ------------
<S> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Net sales ....................................... $ 22,784 $ 13,910 $ 10,769 $ 12,082
Cost of sales ................................. $ 15,078 $ 8,558 $ 6,547 $ 7,346
---------- ----------- ---------- ----------
Gross profit ................................. $ 7,706 $ 5,352 $ 4,222 $ 4,736
Operating Expenses:
General and administrative ..................... $ 2,900 $ 2,055 $ 1,603 $ 1,335
Selling ....................................... $ 3,770 $ 2,387 $ 1,863 $ 2,043
Advertising and marketing ..................... $ 2,356 $ 592 $ 489 $ 625
Plant shut down expense ........................ $ 850 -- -- --
---------- ----------- ---------- ----------
Total operating expenses ..................... $ 9,876 $ 5,034 $ 3,955 $ 4,003
---------- ----------- ---------- ----------
Operating income (loss) ........................ $ (2,170) $ 318 $ 267 $ 733
---------- ----------- ---------- ----------
Other income (expense) ........................ $ (1,497) $ (495) $ (395) $ (386)
---------- ----------- ---------- ----------
Income (loss) before income taxes ............... $ (3,667) $ (177) $ (128) $ 347
Income tax benefit (expense) .................. $ 774 $ (6) $ -- $ --
---------- ----------- ---------- ----------
Net income (loss) .............................. $ (2,893) $ (183) $ (128) $ 347
Dividends applicable to Convertible Preferred
Stock .......................................... -- $ (74) $ (42) $ (97)
---------- ----------- ---------- ----------
Net income (loss) applicable to common shares.... $ (2,893) $ (257) $ (170) $ 250
========== =========== ========== ==========
Net income (loss) per common and common
equivalent share .............................. $ (2.18) $ (.20) $ (.13) $ .20
========== =========== ========== ==========
Weighted average number of common and
common equivalent shares outstanding ......... 1,328,952 1,265,835 1,277,670 1,235,626
Pro forma per share data reflecting
recapitalization(1):
Net income (loss) per common and common
equivalent share ........................... $ (.08) $ .16
Weighted average common and common
equivalent shares outstanding ............... 2,268,582 2,238,373
</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.
17
<PAGE>
<TABLE>
<CAPTION>
Pro Forma(1)
October 31, 1996 July 31, 1997
------------------ ---------------
<S> <C> <C>
Consolidated Balance Sheet Data:
Working capital ........................... $ 347 $ 1,166
Total assets .............................. $ 10,286 $ 11,756
Long term debt, less current portion ...... $ 3,105 $ 3,670
Total liabilities ........................ $ 9,355 $ 10,424
Stockholders' equity ..................... $ 481 $ 882
</TABLE>
- ------------
(1) Gives retroactive effect to recapitalization and conversion of Convertible
Preferred Stock to shares of Class B Common Stock. See "Certain
Transactions."
18
<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%. Included in the expense reduction
was a $200,000 decrease in depreciation expense related to a change in
accounting estimate of the useful life of certain equipment. The net loss of
the Company was reduced from the 1995 level of $2,893,000 to $183,000 for
fiscal 1996; $1,672,000 of the loss in fiscal 1995 related to the shutdown and
sale of the Company's latex balloon manufacturing operation. While net sales
decreased 39% in fiscal 1996 to $13,910,000 from $22,784,000 in fiscal 1995,
net sales for the nine months ended July 31, 1997 have increased 12% from net
sales for the same period in 1996. For the nine months ended July 31, 1997, the
Company had net income of $347,000 compared to a net loss of $128,000 for the
same period in 1996. Working capital increased to $1,230,000 on July 31, 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.
See "Risk Factors--Dependence on Supplier; Creditors Proceeding." The Company
plans to invest a portion of the proceeds of this 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 nine months ended July 31, 1997, net sales increased to
$12,082,000 from $10,768,000 for the same period in 1996, an increase of
approximately 12%. 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. Several of the Company's national accounts were lost
to American Greetings, a recent entrant in the mylar balloon market. American
Greetings is a major greeting card company, and has existing sales
relationships with many national customers in the expression industry. The
Company has initiated several programs to compete with American Greetings,
including single pack mylar balloons, store servicing arrangements, helium
supply arrangements and discount pricing.
For the fiscal year ending October 31, 1996, foreign sales were
$1,777,000, or 12.8% of net sales, as compared to $1,823,000 or 8% of sales for
fiscal 1995. For the nine months ended July 31, 1997, foreign sales were
$1,532,000, or 12.7% of net sales as compared to $1,323,000, or 12.3% of sales
for the same period of 1996.
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
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87% of sales, latex balloons 4% of sales and laminated and printed films 9% of
sales. During the nine months ended July 31, 1997, mylar balloons represented
78% of sales, latex balloons 9% of sales and laminated and printed films 13% of
sales as compared to 92%, 2% and 6%, respectively, for the nine months ended
July 31, 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. The profit margins associated with latex balloons
and laminated and printed films are not materially different from the profit
margin on mylar balloons. For the nine months ended July 31, 1997, the profit
margins on mylar balloons, latex balloons and laminated and printed materials
were 28.7%, 29%, and 26%, respectively.
Cost of Sales. For the nine months ended July 31, 1997, cost of sales
represented 60.8% of net sales the same percentage experienced for the
comparative 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. The primary factors which contributed to reduced cost
of sales in 1996 were a decline in salaries and related payroll expenses, and a
decrease in depreciation expense of $200,000.
Administrative. For the nine months ended July 31, 1997, administrative
expenses were $1,335,000, or 11.1% of sales as compared to $1,603,000, or 14.9%
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 nine months ended July 31, 1997, selling expenses were
$2,043,000, or 16.9% of net sales, as compared to $1,863,000, or 17.3% 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 nine months ended July 31, 1997,
advertising and marketing expenses were $625,000, or 5.2% of sales, as compared
to advertising and marketing expenses of $489,000, or 4.5% 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. Specific shutdown expenses accrued were: rent of
$250,000; utilities of $30,000; operating expenses of $240,000; building
rehabilitation of $80,000; and latex inventory writedown of $200,000. No
accruals remain as of July 31, 1997. 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 nine months ended July 31, 1997, interest expense
was $471,000 as compared to $449,000 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 for fiscal 1996
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. The increase in interest expense
for the nine months ended July 31, 1997, as compared to the 1996 period, is a
result of interest paid on $865,000 of notes issued in June, 1997. See "Certain
Transactions."
Net Income or Loss. For the nine months ended July 31, 1997, the Company
had net income of $347,000 as compared to a net loss of $128,000 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.
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The Company has determined that a tax valuation allowance is necessary as
of July 31, 1997, based on (i) the loss carryback potential for existing net
operating losses have been exhausted; (ii) the Company has additional tax
losses as of July 31, 1997; and (iii) it is not possible to determine with
certainty that sufficient taxable income will be generated in the future that
will allow for the utilization of the Company's deferred net operating losses.
Due to the anticipated tax loss for the nine months ended July 31, 1997, no tax
provision has been recorded for such interim period.
Contracts with foreign suppliers are stated in U.S. dollars and the
Company is not subject to currency rate fluctuations on these transactions. The
effect of currency rate fluctuations on intercompany transactions with the
Company's England subsidiary has been immaterial. As a result, the Company has
determined not to provide any hedge against currency rate fluctuations.
Liquidity and Capital Resources
Cash flow used in operations during the nine months ended July 31, 1997
was $643,000. This resulted primarily from increased sales and resulting
increases in accounts receivable and inventory of over $950,000. 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 July 31, 1997 the Company maintained a cash balance of $263,000. The
Company's current cash management policy includes maintaining minimal cash
balances and utilizing the revolving line of credit for liquidity. As of
October 31, 1996, the Company had cash and cash equivalents of $131,000. As of
July 31, 1997, the Company had working capital of $1,230,000. 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 $441,000 was unused at July 31, 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. The proceeds of the placement
were used to reduce trade payables, to increase product inventories, for
acquiring product displays, for catalogue and artwork expenses, and for
providing loans to a Mexican supplier. See "Certain Transactions."
During fiscal 1995 and 1996, the Company invested $479,000 and $496,000,
respectively, in plant and equipment and has invested $471,000 during the nine
months ended July 31, 1997.
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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 nine months ended July 31, 1997, the Company has
generated $1,303,000 in financing activities.
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.
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BUSINESS
General
Background. CTI Industries Corporation (the "Company") is one of the
leading manufacturers and sellers 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. 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. See "Risk Factors--Dependence on Supplier; Creditors
Proceeding."
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.
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. See "Risk Factors--Dependence on Supplier; Creditors Proceeding."
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
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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 drug store 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 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 at least seven 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 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.
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The Company manufactures over 380 balloon designs, in different shapes and
sizes, including the following:
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) (41/2") and Pixiloons(TM) (21/2") 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.
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
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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.
The Company also sells balloons and related products to certain national
chain stores including grocery, general merchandise and drug store 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."
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.
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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. 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. In the event of
the loss of P&TF as a supplier, there can be no assurance that the Company will
be able to obtain an alternative source of supply on favorable terms or at all.
See "Risk Factors--Dependence on Supplier; Creditors Proceeding." 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 option, 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. It is
anticipated that the Company's commitment under the agreement to provide funds
to P&TF will enable P&TF to negotiate its debts with bank and other creditors
and allow it to successfully conclude the Suspension of Payments proceeding.
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.
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. 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." In the
event of the bankruptcy of P&TF, the Company anticipates that the business of
CTF would continue, subject to the approval of the Mexican bankruptcy court.
See "Risk Factors--Dependence on Supplier; Creditors Proceeding."
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.
27
<PAGE>
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 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 in the United
States, of whom nine are executive or supervisory, 22 are in sales, 106 are in
manufacturing and nine are clerical. As of that same date, the Company had 11
full time employees in England, of whom two are executive or supervisory, two
are in sales, five are in warehousing and two are clerical. The Company is not
a party to any collective bargaining agreement, has not experienced any work
stoppages and believes that its relationship with its employees is
satisfactory.
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
28
<PAGE>
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 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 $51,700 expiring 2013. This facility
is utilized for product packaging operations and to manage and service the
Company's operations in England and Europe.
29
<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:
<TABLE>
<CAPTION>
Name Age Position with Company
- -------------------------- ----- -------------------------------------------------------------
<S> <C> <C>
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 and Director
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
</TABLE>
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 devotes approximately 20% of his time to
his position as Chairman of the Company and the balance of his time to
Packaging Systems, Inc. and affiliates. 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, 1997 when he became Chief
Executive Officer of the Company. Mr. Merrick devotes approximately 20% of his
time to his position as Chief Executive Officer of the Company and the balance
of his time is devoted to the practice of law. 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, was appointed as a director in
January, 1996, and was appointed as President in June, 1997. Mr. Schwan manages
administration, production and engineering functions as well as the sales
function for latex balloons and custom and created films. 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 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.
30
<PAGE>
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.
For a period of five years from the date of this Prospectus, the
Underwriter has been granted the right to designate a person for election to
the Board of Directors. See "Underwriting."
Executive Compensation
The following table sets forth certain information with respect to the
compensation paid or accrued by the Company to its President, Chief Executive
Officer and any other officer who received compensation in excess of $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------------------------
Other Annual All Other
Name and Salary Bonus Compensation Compensation
Principal Position Year ($) ($) ($) ($)
- ------------------------- ------ ---------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Stephen M. Merrick 1996 $ 45,000 -- -- --
Chief Executive Officer 1995 -- -- -- --
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)
</TABLE>
- ------------
(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 Agreements
In April, 1996, the Company entered into an employment agreement with John
C. Davis as Executive Vice President-Sales, which provided for an annual salary
of $150,000. The term of the agreement was through January 31, 1998. On June
27, 1997, the agreement was amended to extend the term through January 31,
2000, and to provide for an annual salary of $120,000 per year. The agreement
contains covenants of Mr. Davis not to use the Company's confidential
information while such information remains confidential and establishing the
Company's rights to inventions created by Mr. Davis during the term of
employment. Mr. Davis' agreement does not contain a covenant not to compete.
31
<PAGE>
In June, 1997, the Company entered into an Employment Agreement with
Howard W. Schwan as President, which provides for an annual salary of not less
than $135,000. The term of the Agreement is through June 30, 2002. The
Agreement contains covenants of Mr. Schwan with respect to the use of the
Company's confidential information, establishes the Company's right to
inventions created by Mr. Schwan during the term of employment, and includes a
covenant of Mr. Schwan not to compete with the Company for a period of three
years after the date of termination of the Agreement.
Stock Option Plan
A total of 300,000 shares of Common Stock are reserved for issuance under
the Stock Option Plan. As of the date of this Prospectus, 121,000 options have
been granted with an exercise price equal to the initial public offering price
per share of Common Stock, none of which have been exercised. 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.
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
of 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 Common Stock 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
32
<PAGE>
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 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.
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 Percent of Common Stock(4)
Common Stock Stock Beneficially --------------------------------------
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 14.22
John H. Schwan 329,670 189,103(6) 22.57 13.66
Howard W. Schwan 164,835 92,949(7) 11.70 6.96
John C. Davis -- 464,281(8) 21.52 12.70
Sharon Konny -- -- -- --
Brent Anderson -- -- -- --
Stanley M. Brown -- -- -- --
747 Glenn Avenue
Wheeling, IL
Frances Ann Rohlen 274,725 -- 13.03 7.6
c/o Cheshire Partners
1504 Wells
Chicago, IL 60610
Philip W. Colburn 109,890 118,267(9) 10.82 6.32
All directors and executive 714,286 1,065,140 67.99 43.22
officers as a group (7 persons)
</TABLE>
33
<PAGE>
- ------------
(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.
(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.
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 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."
34
<PAGE>
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 $315,000 and $150,000, respectively, of the notes and warrants.
Mr. John Schwan and Mr. Merrick applied advances of $200,000 each, made to the
Company in January, 1997, toward the purchase of 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
Common Stock in this 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 "Risk Factors--Related Party;
Corporate Counsel" and "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 $184,154 for the nine months ended July 31, 1997. See "Risk
Factors--Related Party; Supplier."
The Company believes that each of the transactions set forth above were
entered into, and any future related party transactions will be entered into,
on terms as fair as those obtainable from independent third parties. All
related party transactions, including loans and forgiveness of debt, must be
approved by a majority of disinterested directors who have access, at Company's
expense, to the Company's independent counsel.
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 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.
35
<PAGE>
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.
SECURITIES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding an
aggregate of 2,510,202 shares of Common Stock and 1,098,901 shares of Class B
Common Stock assuming (i) the issuance by the Company of 1,500,000 shares of
Common Stock offered hereby, (ii) no issuance of shares of Common Stock
underlying the 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 1,500,000 shares included in this Offering 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.
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.
<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 Common Stock offered by the Company hereby.
The Company has been advised by the Underwriter that the Underwriter
initially proposes to offer the Common Stock 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 share of Common Stock, of which amount a sum not in excess of
$__________ per share of Common Stock may in turn be reallowed by such dealers
to other dealers. After the commencement of this 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.
36
<PAGE>
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 225,000 shares of Common Stock on the
same terms and conditions of this 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 Common
Stock underwritten, $30,000 of which has been paid to date.
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 Common Stock.
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 its market price. The
Underwriter also may create a short position for the account of the Underwriter
by selling more Common Stock in connection with this Offering than it is
committed to purchase from the Company, and in such case may purchase Common
Stock in the open market following completion of this 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 225,000 shares of Common Stock, 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 this Offering for the account of the Underwriter, the
selling concession with respect to shares of Common Stock that are distributed
in this 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 Common Stock 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 this 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 this 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's Warrants") to purchase 150,000 shares of Common Stock. 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 $__________ [135% of the offering price per share of the
Common Stock] and are restricted from sale, transfer, assignment or
hypothecation for a period of twelve months from the date hereof, except to
officers of the Underwriter. The shares of Common Stock issuable upon exercise
of the Underwriter's Warrants 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 incurred in
connection with
37
<PAGE>
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.
Prior to this Offering, there has been no public market for the Common
Stock. Accordingly, the initial public offering price of the Common Stock was
determined by negotiation between the Company and the Underwriter. Among the
factors considered in determining such price, 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 Common Stock offered hereby has 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; Corporate Counsel." Orrick, Herrington & Sutcliffe LLP, New York, New
York, has acted as counsel for the Underwriter in connection with this
Offering.
EXPERTS
The balance sheet 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.
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.
38
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
SB-2, including amendments thereto, relating to the Common Stock offered
hereby. 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 this 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 Common Stock 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.
39
<PAGE>
CTI Industries Corporation and Subsidiary
Table of Contents
<TABLE>
<CAPTION>
Page(s)
<S> <C>
Report of Independent Accountants ................................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of October 31, 1996 and July 31, 1997 (unaudited) ... F-3
Consolidated Statements of Operations for the years ended October 31, 1995 and 1996
and the nine months ended July 31, 1996 and 1997 (unaudited) ..................... F-4
Consolidated Statements of Stockholders' Equity for the years ended October 31, 1995
and 1996 ........................................................................... F-5
Consolidated Statements of Cash Flows for the years ended October 31, 1995 and 1996
and the nine months ended July 31, 1996 and 1997 (unaudited) ..................... F-6
Notes to Consolidated Financial Statements ....................................... F-7
</TABLE>
F-1
<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.
/s/ Coopers & Lybrand L.L.P.
----------------------------
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
July 22, 1997
F-2
<PAGE>
CTI Industries Corporation and Subsidiary
Consolidated Balance Sheet
<TABLE>
<CAPTION>
October 31, July 31, 1997
1996 Actual Pro Forma
--------------- --------------- -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash ............................................................................$ 130,818 $ 262,522
Accounts receivable (less allowance for doubtful accounts of $129,998 at
October 31, 1996 and $116,328 at July 31, 1997) ............................... 1,665,097 2,066,873
Inventories ................................................................... 4,582,593 5,059,442
Other ......................................................................... 218,879 531,454
------------- -------------
Total current assets ....................................................... 6,597,387 7,920,291
------------- -------------
Property and equipment:
Machinery and equipment ....................................................... 6,352,054 6,561,773
Building ...................................................................... 2,168,563 2,168,563
Office furniture and equipment ................................................. 1,082,665 1,263,115
Land ............................................................................ 250,000 250,000
Leasehold improvements .......................................................... 147,128 147,128
------------- -------------
10,000,410 10,390,579
Less: accumulated depreciation ................................................. (6,418,486) (6,684,620)
------------- -------------
Total property and equipment, net ........................................... 3,581,924 3,705,959
------------- -------------
Other assets:
Deferred financing costs, net .................................................... 106,224 69,258
Investment in joint venture .................................................... -- 60,260
------------- -------------
106,224 129,518
------------- -------------
Total assets ................................................................$ 10,285,535 $ 11,755,768
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................$ 2,755,700 $ 2,684,411
Line of credit ................................................................... 2,058,816 2,559,481
Stock redemption contract payable -- current portion ............................ 100,000 --
Advances from related parties .................................................... -- 47,199
Notes payable -- current portion ................................................. 402,798 554,315
Accrued liabilities ............................................................. 932,575 844,570
------------- -------------
Total current liabilities .................................................... 6,249,889 6,689,976
------------- -------------
Stock redemption contract payable ................................................. 47,908 --
Notes payable ................................................................... 3,056,923 2,804,559
Subordinated debt ................................................................ -- 865,000
------------- -------------
Total long-term liabilities ................................................. 3,104,831 3,669,559
------------- -------------
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 $63,917 (July 31, 1997) ......................... 1,027,625 1,063,917 $ --
Common stock -- $.065 par value, 11,000,000 shares authorized,
1,131,507 (October 31, 1996) and 1,154,585 (July 31, 1997) shares issued,
987,125 (October 31, 1996) and 1,010,202 (July 31, 1997) shares outstanding..... 73,548 75,048 75,048
Class B Common stock -- $.91 par value, 1,100,000 shares authorized,
1,098,901 shares outstanding ................................................. -- -- 1,000,000
Paid-in-capital ................................................................ 230,348 248,348 248,348
Retained earnings ............................................................. 137,194 386,820 386,820
Less:
Treasury stock -- 144,382 shares at cost ..................................... (370,700) (370,700) (370,700)
Redeemable common stock ....................................................... (450,000) (450,000) (450,000)
Stock subscription receivable ................................................. (167,200) (7,200) (7,200)
------------- ------------- -----------
Total stockholders' equity ................................................. 480,815 946,233 882,316
------------- ------------- ===========
Total liabilities and stockholders' equity ..................................$ 10,285,535 $ 11,755,768
============= =============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
<PAGE>
CTI Corporation and Subsidiary
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years Ended Nine Months Ended
October 31, July 31,
1995 1996 1996 1997
---------------- ------------- ------------- ----------------
(unaudited)
<S> <C> <C> <C> <C>
Net sales .............................. $ 22,783,780 $13,910,104 $10,768,327 $12,082,091
Cost of sales ........................... 15,077,979 8,558,053 6,547,001 7,346,119
------------ ----------- ----------- -----------
Gross profit on sales ............... 7,705,801 5,352,051 4,221,326 4,735,972
------------ ----------- ----------- -----------
Operating expenses:
Administrative ........................ 2,899,640 2,054,780 1,603,359 1,335,518
Selling .............................. 3,770,462 2,387,027 1,862,906 2,042,852
Advertising and marketing ............ 2,356,255 592,309 488,511 624,579
Plant shutdown expense ............... 850,000 -- -- --
------------ ----------- ----------- -----------
Total operating expenses ............ 9,876,357 5,034,116 3,954,776 4,002,949
------------ ----------- ----------- -----------
Income (loss) from operations ......... (2,170,556) 317,935 266,550 733,023
------------ ----------- ----------- -----------
Other income (expense):
Interest expenses ..................... (799,839) (553,027) (449,412) (471,218)
Other ................................. 125,516 57,986 54,741 85,328
Loss on disposition of latex equipment (822,439) -- -- --
------------ ----------- ----------- -----------
Total other expense ............... (1,496,762) (495,041) (394,671) (385,890)
------------ ----------- ----------- -----------
Income (loss) before income taxes ...... (3,667,318) (177,106) (128,121) 347,133
Income tax expense (benefit) ............ (774,143) 5,934 -- --
------------ ----------- ----------- -----------
Net income (loss) .................. (2,893,175) (183,040) (128,121) 347,133
Dividends applicable to convertible
preferred stock ........................ -- (74,211) (41,711) (97,500)
------------ ----------- ----------- -----------
Income (loss) applicable to
common shares ........................ $ (2,893,175) $ (257,251) $ (169,832) $ 249,633
============ =========== =========== ===========
Primary income (loss) per common and
common equivalent shares ............... $ (2.18) $ (0.20) $ (0.13) $ 0.20
============ =========== =========== ===========
Fully diluted income (loss) per common
and common equivalent shares ......... $ -- $ -- $ -- $ 0.16
============ =========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
<PAGE>
CTI Industries Corporation and Subsidiary
Consolidated Statements of Stockholders' Equity
for the years ended October 31, 1995 and 1996
<TABLE>
<CAPTION>
Common Stock Preferred Stock
---------------------- Paid-In -------------------------
Shares Amount Capital Shares Amount
<S> <C> <C> <C> <C> <C>
Balance, October 31, 1994 ... 1,131,507 $73,548 $230,348
Net loss .....................
--------- ------- --------
Balance, October 31, 1995 ... 1,131,507 73,548 230,348
Payment on stock
subscription receivable .
Preferred stock
subscription receivable .
Issuance of preferred stock 1,098,901 $1,000,000
Accumulated preferred
stock dividends ............ 27,625
Redeemable common
stock .....................
Acquisition of treasury
stock .....................
Net loss .....................
Preferred dividends .........
--------- -------- --------- --------- -----------
Balance, October 31, 1996 ... 1,131,507 $73,548 $230,348 1,098,901 $1,027,625
========= ======== ========= ========= ===========
</TABLE>
<TABLE>
<CAPTION>
Less
--------------------------------------------------
Redeemable Stock
Retained Treasury Stock Common Subscription
Earnings Shares Amount Stock Receivable Total
<S> <C> <C> <C> <C> <C> <C>
Balance, October 31, 1994 ... $ 3,287,620 41,818 $170,700 $ $ 126,450 $ 3,294,366
Net loss ..................... (2,893,175) (2,893,175)
------------- ------- --------- ---------- -------------
Balance, October 31, 1995 ... 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 1,000,000
Accumulated preferred
stock dividends ............ 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 ... $ 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.
F-5
<PAGE>
CTI Industries Corporation and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended Nine Months Ended
-------------------------------- --------------------------------
October 31, July 31,
1995 1996 1996 1997
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) .................................... $ (2,893,175) $ (183,040) $ (128,121) $ 347,133
Adjustments to reconcile net loss to cash provided
by (used in) operating activities:
Depreciation and amortization ........................ 755,638 371,893 388,296 383,936
Gain on sale of property and equipment ............... (8,500) (20,712) (21,452) (42,942)
Loss on disposition of latex equipment ............... 822,439 -- -- --
Provision for losses on accounts receivable and
inventory .......................................... 150,000 255,738 154,523 89,554
Deferred income taxes .............................. (211,300) -- -- --
Change in assets and liabilities:
Accounts receivable ................................. 1,136,740 1,006,439 1,085,964 (478,945)
Inventories ....................................... 902,389 486,483 825,249 (489,234)
Other assets ....................................... 361,195 (12,526) (230,054) (312,575)
Accounts payable and accrued expenses ............... (474,072) (1,064,584) (626,972) (139,492)
------------ ------------ ------------ ------------
Net cash provided by (used in) operating
activities .................................... 541,354 839,691 1,447,433 (642,565)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of property and equipment ......... 8,500 45,415 29,500 2,942
Purchases of property and equipment .................. (478,637) (495,880) (257,490) (471,312)
Cash surrender value -- officers' life insurance ...... -- 10,700 -- --
Investment in joint venture ........................... -- -- -- (60,260)
------------ ------------ ------------ ------------
Net cash used in investing activities ............ (470,137) (439,765) (227,990) (528,630)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Stock redemption contract payments ..................... -- (52,092) (35,034) (60,709)
Advances on line of credit ........................... 3,232,942 3,270,970 3,304,022 4,813,520
Repayments on line of credit ........................... (3,731,857) (4,843,239) (4,573,718) (4,312,855)
Proceeds from issuance of long-term debt ............... 1,910,273 3,300,000 -- 218,000
Repayment of long-term debt ........................... (1,535,236) (2,694,358) (575,473) (318,847)
Proceeds from debt issued to related parties ......... -- -- -- 865,000
Proceeds from issuance of preferred stock ............ -- 840,000 800,000 160,000
Payment of debt issue costs ........................... -- (110,400) -- --
Dividends paid ....................................... -- (46,586) (30,335) (61,210)
------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities .................................... (123,878) (335,705) (1,110,538) 1,302,899
------------ ------------ ------------ ------------
Net increase (decrease) in cash ........................ (52,661) 64,221 108,905 131,704
Cash at beginning of period ........................... 119,258 66,597 66,597 130,818
------------ ------------ ------------ ------------
Cash at end of period ................................. $ 66,597 $ 130,818 $ 175,502 $ 262,522
============ ============ ============ ============
Supplemental disclosures:
Cash paid for interest ................................. $ 777,227 $ 617,952 $ 499,903 $ 432,272
Cash paid for income taxes ........................... $ 5,776
Noncash financing activities:
Purchase of treasury stock through issuance of
stock redemption contract payable .................. $ 200,000 $ 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-6
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements
(Information presented for the nine month periods
ended July 31, 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 July 31, 1997 and for
the nine months ended July 31, 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.
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.
F-7
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements -- (Continued)
(Information presented for the nine month periods ended
July 31, 1996 and 1997 is unaudited)
2. Summary of Significant Accounting Policies -- (Continued)
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.
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 July 31, 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 16).
F-8
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements -- (Continued)
(Information presented for the nine month periods ended
July 31, 1996 and 1997 is unaudited)
2. Summary of Significant Accounting Policies -- (Continued)
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.
Impairment of Long-Lived Assets
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." The Company assesses the impairment of
its long-lived assets, including goodwill and property, plant and equipment,
whenever economic events or changes in circumstances indicate that the carrying
amounts of the assets may not be recoverable. Long-lived assets are considered
to be impaired when the sum of the expected future operating cash flows,
undiscounted and without interest charges, is less than the carrying amounts of
the related assets.
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. The primary weighted average number of common and
equivalent shares outstanding was 1,328,952 and 1,265,835 for the years ended
October 31, 1995 and 1996 and 1,277,670 and 1,235,626 for the nine months ended
July 31, 1996 and 1997.
<PAGE>
The following 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
========== ==========
Nine months ended July 31,
--------------------------
1996 1997
Primary earnings per share:
Net income (loss) per share ................. $ (0.16) $ 0.20
========== ===========
Weighted average common and common
equivalent shares outstanding.................. 1,038,407 1,235,626
========== ===========
Fully diluted earnings per share:
Net income per share .......................... $ 0.16
===========
Weighted average common and common
equivalent shares outstanding.................. 2,238,373
===========
F-9
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements -- (Continued)
(Information presented for the nine month periods ended
July 31, 1996 and 1997 is unaudited)
2. Summary of Significant Accounting Policies -- (Continued)
For the years ended October 31, 1995 and 1996 and for the nine month
period ended July 31, 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, July 31,
1996 1997
------------- -------------
(unaudited)
Raw materials ......... $ 278,976 $ 374,780
Work in process ......... 510,098 475,000
Finished goods ......... 3,793,519 4,209,662
------------ -----------
Total inventory ...... $ 4,582,593 $5,059,442
============ ===========
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 $440,519 was
available at October 31, 1996 and July 31, 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 July 31, 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.
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. Redeemable common stock has been
reflected as a liability and a contra equity account on the balance sheet. As
of the date of this report, 102,564 shares of Common Stock have been redeemed
under the Stock Redemption Agreement.
F-10
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements -- (Continued)
(Information presented for the nine month periods ended July 31, 1996 and 1997
is unaudited)
6. Notes Payable
Long-term debt at October 31, 1996 consists of:
<TABLE>
<CAPTION>
<S> <C>
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
============
</TABLE>
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 13).
F-11
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements -- (Continued)
(Information presented for the nine month periods ended
July 31, 1996 and 1997 is unaudited)
8. Income Taxes
The income tax provisions (benefits) as of October 31, are comprised of
the following:
<TABLE>
<CAPTION>
1995 1996
--------------- -----------
<S> <C> <C>
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
=========== =======
</TABLE>
The components of the net deferred tax asset (liability) are as follows:
<TABLE>
<CAPTION>
October 31, July 31,
1996 1997
------------- -------------
(unaudited)
<S> <C> <C>
Deferred tax assets:
Accounts receivable allowance ..................... $ 43,331 $ 40,538
Inventory valuation .............................. 54,826 66,819
Accrued liabilities .............................. 220,964 135,651
Net operating loss carryforwards .................. 452,178 455,629
Alternative minimum tax credit carry forwards ...... 291,759 291,759
----------- ---------
Total deferred tax assets ..................... 1,063,058 990,396
Deferred tax liabilities:
Book over tax basis of capital assets ............... 458,706 485,259
Less: Valuation allowance ........................... 604,352 505,137
----------- ---------
Net deferred tax asset (liability) ............ $ -- $ --
=========== =========
</TABLE>
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 July 31,
1997, the Company has net operating loss carryforwards for tax purposes of
approximately $1,200,000. 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.
F-12
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements -- (Continued)
(Information presented for the nine month periods ended
July 31, 1996 and 1997 is unaudited)
8. Income Taxes -- (Continued)
Income tax provisions differed from the taxes calculated at the statutory
federal tax rate as follows:
<TABLE>
<CAPTION>
Years ended Nine months ended
-------------------------------- -----------------------------
October 31, July 31,
1995 1996 1996 1997
---------------- ------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Taxes at statutory rate ............ $ (1,246,889) $ (60,216) $ (57,611) $ 79,078
State income taxes .................. (114,846) 127 -- --
Foreign taxes paid .................. -- 5,776 -- --
Increase in valuation allowance ...... 467,707 59,164 51,928 (86,495)
Other .............................. 119,885 1,083 5,683 7,417
------------ --------- --------- ---------
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 on the first $300 of employee contributions with an
additional bonus match of 1% of compensation for all participants who are
employees on the last 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.
10. 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 $84,351 and $105,093 for the nine
months ended July 31, 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 $184,154 for the periods ended October 31,
1996 and July 31, 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 2013.
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.
F-13
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements -- (Continued)
(Information presented for the nine month periods ended
July 31, 1996 and 1997 is unaudited)
12. Commitments and Contingencies -- (Continued)
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 ............ 334,366 139,280 195,086
1999 ............ 326,587 326,587
2000 ............ 99,564 99,564
Thereafter ...... 1,026,000 1,026,000
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. 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.
14. 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. 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
F-14
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements -- (Continued)
(Information presented for the nine month periods ended
July 31, 1996 and 1997 is unaudited)
14. Stock Option Plan -- (Continued)
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.
15. 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.
16. Public Offering of Common Stock and Warrants
In June, 1997 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 1,500,000 shares of common stock. The offering also includes up to
an additional 225,000 shares of Common Stock 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 150,000 shares of Common Stock.
17. 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 and is effective for both
interim and annual periods ending after December 15, 1997. SFAS No. 129
consolidates the existing requirements relating to 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.
F-15
<PAGE>
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements -- (Continued)
(Information presented for the nine month periods ended
July 31, 1996 and 1997 is unaudited)
17. Future Adoption of Recently Issued Accounting Standards -- (Continued)
With the exception of SFAS No. 128, 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.
18. 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
United States Kingdom Eliminations Consolidated
1995 ---------------- ------------- -------------- -----------------
<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>
F-16
<PAGE>
[Photographs of latex and mylar "Coordinated Balloon Products," "Laminated and
Printed Packaging Films," product "Displays" and mylar "Licensed Balloon
Products." Text in quotes above and copyright symbols of licensed products
accompanies photographs.]
<PAGE>
===============================================================================
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 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 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
Page
----------
Prospectus Summary ........................ 3
Risk Factors .............................. 8
The Company .............................. 13
Use of Proceeds ........................... 14
Dividend Policy ........................... 15
Capitalization ........................... 15
Dilution ................................. 16
Selected Financial Data .................. 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ........................... 19
Business ................................. 23
Management .............................. 30
Principal Stockholders .................. 33
Certain Transactions ..................... 34
Description of Capital Stock ............ 35
Securities Eligible for Future Sale ...... 36
Underwriting .............................. 36
Legal Matters ........................... 38
Experts ................................. 38
Change in Independent Accountants ......... 38
Available Information ..................... 39
Index to Financial Statements ............ F-1
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.
===============================================================================
<PAGE>
===============================================================================
[LOGO]
CTI INDUSTRIES
CORPORATION
1,500,000 Shares
of
Common Stock
---------------------------------
PROSPECTUS
---------------------------------
JOSEPH STEVENS & COMPANY, INC.
, 1997
===============================================================================
<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.
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, Frances A. Rohlen. One other
accredited investor, Philip W. Colburn, invested the remaining $100,000. The
sale was exempt from registration under Section 4(2) of the Securities Act of
1933, as amended (the "Securities Act") as a transaction not involving a public
offering as sales were made to a small number of accredited investors,
including members of management, who were sophisticated and had access to
information about the Company. Upon the closing of this Offering, the shares of
Preferred Stock will be converted into 1,098,901 shares of Class B Common
Stock.
II-1
<PAGE>
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 as all participants were members of management who were sophisticated
and had access to information about the Company.
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. The offering was exempt from registration under Section 4(2) of
the Securities Act as a transaction not involving a public offering as all
participants were members of management who were sophisticated and had access
to information about the Company.
Item 27. Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
- --------- ----------------------------------------------------------------------------------------------
<S> <C>
1.1 Amended 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 Amended Form of Underwriter's Warrant Agreement
* 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
*10.10 Joint Venture Agreement dated September 16, 1996, between CTI Industries Corporation and
Pulidos & Terminados Finos S.A. de C.V.
*10.11 Agreement for purchase of assets dated September 8, 1995, between CTI Industries Corporation
and Pulidos & Terminados Finos S.A. de C.V.
*10.12 Amendment dated May 24, 1996, to Agreement for purchase of assets between CTI Industries
Corporation and Pulidos & Terminados Finos S.A. de C.V.
*10.13 Form of Agreement dated July 14, 1997 between CTI Industries Corporation and Pulidos &
Terminados Finos S.A. de C.V.
*10.14 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.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- --------- ----------------------------------------------------------------------------------------------
<S> <C>
*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 - Nine 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
</TABLE>
- ------------
* Filed previously.
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.
II-3
<PAGE>
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 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-4
<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 2nd day of
October, 1997.
CTI INDUSTRIES CORPORATION
By: /s/ Howard W. Schwan
-----------------------------------
Howard W. Schwan, President
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.
<TABLE>
<CAPTION>
Signatures Title Date
- ------------------------------- -------------------------------- -----------------
<S> <C> <C>
/s/ Howard W. Schwan President, Principal Executive October 2, 1997
- ----------------------------- Officer and Director
Howard W. Schwan
/s/ Howard W. Schwan* Chairman and Director October 2, 1997
- -----------------------------
John H. Schwan
/s/ Howard W. Schwan* Chief Executive Officer, October 2, 1997
- ----------------------------- Secretary, Principal Accounting
Stephen M. Merrick Officer and Director
/s/ Howard W. Schwan* Vice President and Director October 2, 1997
- -----------------------------
John C. Davis
/s/ Howard W. Schwan* Manager of Finance and October 2, 1997
- ----------------------------- Administration
Sharon Konny
/s/ Howard W. Schwan* Director October 2, 1997
- -----------------------------
Stanley M. Brown
</TABLE>
* pursuant to lawful power of attorney previously filed with the Commission
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Page
- -------- ------------------------------------------------------------------------------------------- ------
<S> <C> <C>
1.1 Amended 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 Amended Form of Underwriter's Warrant Agreement
* 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
*10.10 Joint Venture Agreement dated September 16, 1996, between CTI Industries Corporation and
Pulidos & Terminados Finos S.A. de C.V.
*10.11 Agreement for purchase of assets dated September 8, 1995, between CTI Industries
Corporation and Pulidos & Terminados Finos S.A. de C.V.
*10.12 Amendment dated May 24, 1996, to Agreement for purchase of assets between CTI Industries
Corporation and Pulidos & Terminados Finos S.A. de C.V.
*10.13 Form of Agreement dated July 14, 1997 between CTI Industries Corporation and Pulidos &
Terminados Finos S.A. de C.V.
*10.14 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 - Nine 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Page
- -------- ---------------------------------------------------------------------------------------- ------
<S> <C> <C>
*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
</TABLE>
- ------------
* Filed previously.
<PAGE>
1,500,000 Shares of
Common Stock
CTI INDUSTRIES CORPORATION
UNDERWRITING AGREEMENT
New York, New York
October __, 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 1,500,000 shares of
common stock, $.065 par value (the "Common Stock"). Such 1,500,000 are
hereinafter referred to as the "Firm Shares." 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 225,000 Shares for the purpose of
covering over-allotments, if any. Such 225,000 Shares are hereinafter
collectively referred to as the "Option Shares." The Company also proposes to
issue and sell to the Underwriter or its designees warrants (the "Underwriter's
Warrants"), pursuant to the Underwriter's Warrant Agreement (the "Underwriter's
Warrant Agreement"), for the purchase of an additional 150,000 Shares (the
"Underwriter's Shares"). The Firm Shares, the Option Shares, the Underwriter's
Warrants and the Underwriters 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. 333-31969), including any related
preliminary prospectus or prospectuses
<PAGE>
(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 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,
2
<PAGE>
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 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 the Company's security holders
(collectively, the "Recapitalization Participants") have effected and will
effect, as the case may be, a recapitalization (the "Recapitalization") which
provided for, and provides for, among other things, the following:
i) The restatement of the Company's 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.
3
<PAGE>
ii) A 1 for 2.6 reverse stock split, effective in July, 1997,
of both its Common Stock and Class B Common Stock.
iii) The holders of the Company's then outstanding Convertible
Preferred Stock shall upon the Closing Date convert all
outstanding shares of such Convertible Preferred Stock into
1,098,901 shares of Class B Common Stock.
The actions effected pursuant to the Recapitalization have been duly and validly
authorized and have been or will be on the Closing Date, 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 Participants, in compliance with
applicable law, and constitute valid and binding obligations of the Company in
accordance with the terms of the Recapitalization 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 and the Underwriter's
Warrant 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
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 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
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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.
(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) Except as disclosed in the Registration Statement, 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,
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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 or the Consulting
Agreement (as defined in Section 1(ff) 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 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 and the Consulting Agreement and to
consummate the transactions provided for in such agreements and in connection
with the Recapitalization; and each of the Recapitalization, this Agreement, the
Underwriter's 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 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 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 or the Consulting Agreement, its performance hereunder and
thereunder, its consummation of the transactions contemplated herein and therein
or in connection with the Recapitalization, 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,
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domestic or foreign, is required for the issuance of the Securities pursuant to
the Prospectus and the Registration Statement, this Agreement and the
Underwriter's Warrant Agreement, the performance of this Agreement, the
Underwriter's 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 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.
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(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. 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,
8
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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.
(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
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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 Common Stock has 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, 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
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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.
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 financial advisory and
consulting agreement substantially in the form filed as Exhibit 10.25 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).
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(gg) 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 Shares at a price equal to $____
per Share [90% of the initial public offering price].
(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 Shares at a price equal to
$________ per Share [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 Shares upon notice by the Underwriter to
the Company setting forth the number of Option Shares as to which the
Underwriter is then exercising the option and the time and date of payment and
delivery for any such Option Shares. 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 Shares shall be
delivered unless the Firm Shares 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 Shares 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 Shares are purchased by the Underwriter,
payment of the purchase price for, and delivery of certificates for, such Option
Shares 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 Shares and the Option Shares, if any, shall be
made to the Underwriter against payment by the Underwriter of the purchase price
for the Firm Shares and the Option Shares, if any, to the order of the Company
by New York Clearing House funds. Certificates for the Firm Shares and the
Option Shares, 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
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Date or the relevant Option Closing Date, as the case may be. The certificates
for the Firm Shares and the Option Shares, 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 150,000 Shares. 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 price equaling one hundred and thirty-five percent (135%) of the initial
public offering price of the Shares. 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 4.2 to the Registration Statement. Payment for the
Underwriter's Warrants shall be made on the Closing Date.
3. Public Offering of the Shares. As soon after the
Registration Statement becomes effective as the Underwriter deems advisable, the
Underwriter shall make a public offering of the Firm Shares and such of the
Option Shares as the Underwriter may determine (other than to residents of or in
any jurisdiction in which qualification of the Shares 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 Shares 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
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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.
(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
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<PAGE>
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
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 five (5) 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;
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<PAGE>
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.
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 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 Common Stock.
(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(u) 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
16
<PAGE>
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.
(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 Common Stock to be quoted on
Nasdaq and, for a period of five (5) years from the date hereof, use its best
efforts to maintain the Nasdaq quotation of the Common Stock 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 Common Stock 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 five (5) years.
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<PAGE>
(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 Shares 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 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 Shares 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 use its best efforts to 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
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<PAGE>
elected or is unavailable to serve, the Company shall notify
the Underwriter of each meeting of the Board.
(x) For a period equal to the lesser of (i) five (5) 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 Shares.
(y) 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, 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 and the Underwriter's 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 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, 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
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<PAGE>
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
Shares, a non-accountable expense allowance equal to three percent (3%) of the
gross proceeds received by the Company from the sale of the Firm Shares, 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 Shares
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 Shares.
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 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 Shares 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
20
<PAGE>
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, Miller, Genelly, Springer, Klimek &
Anderson, 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; 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
21
<PAGE>
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 and the Recapitalization 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 and the Recapitalization 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
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 and the Recapitalization 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,
22
<PAGE>
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 or the
Recapitalization, 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 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 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
23
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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 or the
Consulting Agreement or which in any manner draws into
question the validity or enforceability of this Agreement, the
Underwriter's 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 and the Consulting Agreement
and to consummate the transactions provided for herein and
therein and in connection with the Recapitalization; and each
of this Agreement, the Underwriter's Warrant Agreement, the
Recapitalization 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 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 or the Consulting Agreement,
its performance hereunder and thereunder, its consummation of
the transactions contemplated herein and therein or in
connection with the Recapitalization, 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
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,
24
<PAGE>
(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 and the
Recapitalization, or the performance of this Agreement, the
Underwriter's Warrant Agreement, the Recapitalization 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
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;
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<PAGE>
xii) the Common Stock has 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, 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 has been duly and validly
authorized by the Company and constitutes valid and binding
obligations of the Company in accordance with the terms of the
Recapitalization, 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
26
<PAGE>
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 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
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, Miller, Genelly,
Springer, Klimek & Anderson, P.C.,
27
<PAGE>
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, Miller, Genelly, Springer, Klimek & Anderson, 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 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
28
<PAGE>
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
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
29
<PAGE>
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 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 July 31,
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<PAGE>
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 July 31, 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 July 31, 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.
(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.
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<PAGE>
(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 4.2
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 Common Stock 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 10.25 to the Registration Statement
and (ii) paid the Underwriter $48,000 representing the retainer fee pursuant to
the Consulting Agreement.
(s) 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
32
<PAGE>
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
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.
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<PAGE>
(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), 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
34
<PAGE>
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 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.
35
<PAGE>
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.
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.
36
<PAGE>
(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 Shares 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 Shares 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.
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, Miller, Genelly,
Springer, Klimek & Anderson, 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 Shares 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.
37
<PAGE>
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.
38
<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:
39
<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
40
<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
41
<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
42
<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
43
<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.
44
<PAGE>
================================================================================
CTI INDUSTRIES 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 150,000 shares
("Shares") of common stock, $.065 par value per share, of the Company ("Common
Stock"); 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 1,500,000 shares of Common
Stock at a public offering price of $____ per share; 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 fifteen dollars ($15.00), 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:
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 150,000 Shares at
<PAGE>
an initial exercise price (subject to adjustment as provided in Section 8
hereof) of $__________ [135% of the IPO price per Share] per Share subject to
the terms and conditions of this 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 Share 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 Purchase duly
executed and payment of the Exercise Price (as hereinafter defined) for the
Shares 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 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 underlying the Warrants). Warrants may be exercised to purchase all
or part of the Shares represented thereby. In the case of the purchase of less
than all the Shares 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 Shares
purchasable thereunder.
2
<PAGE>
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 Shares equal to the product of (x) the number of
Shares 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 Shares minus the Exercise Price of the Shares and the denominator
of which is the Market Price per Share. Solely for the purposes of 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 13 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 Shares,
at any date shall be deemed to be the last reported sale price of the Common
Stock, 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 shares
of the Common Stock 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 Common Stock is 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")
3
<PAGE>
through Nasdaq or similar organization if Nasdaq is no longer reporting such
information. If the Market Price of the Shares cannot be determined pursuant to
sentence above, the Market Price of the Shares shall be determined in good 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.
4. Issuance of Certificates. Upon the exercise of the
Warrants, the issuance of certificates for shares of Common Stock or other
securities, properties or rights underlying such 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 underlying the Warrants 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. 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,
4
<PAGE>
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 Share [135% of the IPO price per Share]. 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 and the shares of Common Stock underlying the Warrants and any 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. 333-31969) (the "Registration Statement"). All the
representations and warranties of the Company contained 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
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Statement, upon exercise, in part or in whole, of the Warrants, certificates
representing the shares of Common Stock underlying the Warrants and any 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 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.
If a registration of the Company's securities is an
underwritten primary registration on behalf of the Company, and the managing
underwriters advise the Company in writing that in their reasonable opinion
based upon market conditions the number of securities requested to be included
in such registration exceeds the number which can be sold in such
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offering the Company will include in such registration (i) first, the securities
the Company proposes to sell, (ii) second, the Warrant Securities on a pro-rata
basis among such holders; and (iii) third, other securities to be included in
such registration.
If a registration of the Company's securities is an
underwritten secondary registration on behalf of holders of the Company's Common
Stock, and the managing underwriters advise the Company in writing that in their
reasonable opinion based upon market conditions the number of securities
requested to be included in such registration exceeds the number which can be
sold in such offering, the Company will include in such registration, (i) first,
the securities requested to be included therein by the holders requesting such
registration pursuant to a demand registration right, (ii) second, the Warrant
Securities on a pro-rata basis among such holders, and (iii) third, other
securities to be included in such registration.
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 six (6) months after the effective
date of the Registration Statement 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) 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
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"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.
(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).
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(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 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 forty-five (45) 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).
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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 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
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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.
(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
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<PAGE>
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).
(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, other than a registration statement
that has been declared effective, 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).
(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
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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 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
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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 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%)
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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.
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.
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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 reclassification 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.
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
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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 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.
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 date representing in the aggregate the
right to purchase the same number of Shares 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
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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 upon the exercise of 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 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,
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. 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 to be listed (subject to
official notice of issuance) on all securities exchanges on which the Common
Stock 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
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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 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
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subscription rights, options or warrants, or any proposed dissolution,
liquidation, winding up or sale.
13. 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.
14. 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.
15. 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.
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16. 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.]
17. 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 13 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
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.
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18. Entire Agreement; Modification. This Agreement (including
the Underwriting Agreement to the extent portions thereof are referred to
herein) 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.
19. 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.
20. 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.
21. 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.
22. 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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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 to Purchase ____
Shares of Common Stock
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 ______________ fully paid and non-assessable shares
of common stock, $.065 par value ("Common Stock") of CTI INDUSTRIES CORPORATION,
a Delaware corporation (the "Company"), at the initial exercise price, subject
to adjustment in certain events (the "Exercise Price"), of $_____________ [135%
of the public offering price per share] per share 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.
1
<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 number of unexercised Warrants.
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.
2
<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
Attest:
_________________________
Secretary
3
<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 _____________ Shares
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 ____________ Shares
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)
6
<PAGE>
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
---------------------------------
Primary Fully Diluted
---------------- ---------------
<S> <C> <C>
Line
AVERAGE SHARES OUTSTANDING
1 Weighted average number of shares of common stock outstanding
during the period 1,089,689 1,089,689
2 Net additional shares assuming stock options and warrants
exercised and proceeds used to purchase treasury shares 239,263 239,263
3 Additional shares issued upon conversion of preferred stock -- --
------------ ------------
4 Weighted average number of shares and equivalent shares of
common stock outstanding during the period 1,328,952 1,328,952
============ ============
EARNINGS (LOSS)
5 Loss applicable to common shares ($ 2,893,175) ($ 2,893,175)
6 Add back dividends applicable to convertible preferred stock -- --
------------ ------------
7 Amount for per share computation ($ 2,893,175) ($ 2,893,175)
============ ============
PER SHARE AMOUNTS
Loss applicable to common shares
(line 7/line 4) ($ 2.18) ($ 2.18)
============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended October 31, 1996
-------------------------------
Primary Fully Diluted
-------------- ---------------
<S> <C> <C>
Line
AVERAGE SHARES OUTSTANDING
1 Weighted average number of shares of common stock outstanding
during the period 1,026,572 1,026,572
2 Net additional shares assuming stock options and warrants
exercised and proceeds used to purchase treasury shares 239,263 239,263
3 Additional shares issued upon conversion of preferred stock -- --
---------- ----------
4 Weighted average number of shares and equivalent shares of
common stock outstanding during the period 1,265,835 1,265,835
========== ==========
EARNINGS (LOSS)
5 Loss applicable to common shares ($ 183,040) ($ 183,040)
6 Add back dividends applicable to convertible preferred stock (74,211) (74,211)
---------- ----------
7 Amount for per share computation ($ 257,251) ($ 257,251)
========== ==========
PER SHARE AMOUNTS
Loss applicable to common shares
(line 7/line 4) ($ 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 warrants) outstanding
during the period.
<PAGE>
EXHIBIT 11.2
CTI Industries Corporation
Computation of Earnings (Loss) Per Share
And Equivalent Share of Common Stock
for the Nine months ended July 31, 1996 and 1997
<TABLE>
<CAPTION>
Nine Months Ended July 31, 1996
-------------------------------
Primary Fully Diluted
-------------- ---------------
<S> <C> <C>
Line
AVERAGE SHARES OUTSTANDING
1 Weighted average number of shares of common stock outstanding
during the period 1,038,407 1,038,407
2 Net additional shares assuming stock options and warrants
exercised and proceeds used to purchase treasury shares 239,263 239,263
3 Additional shares issued upon conversion of preferred stock -- --
---------- ----------
4 Weighted average number of shares and equivalent shares of
common stock outstanding during the period 1,277,670 1,277,670
========== ==========
EARNINGS (LOSS)
5 Net earnings (loss) ($ 128,121) ($ 128,121)
6 Less dividends applicable to convertible preferred stock (41,711) (41,711)
---------- ----------
7 Earnings (loss) applicable to common shares (169,832) (169,832)
8 Add back dividends applicable to convertible preferred stock -- --
---------- ----------
9 Amount for per share computation ($ 169,832) ($ 169,832)
========== ==========
PER SHARE AMOUNTS
Earnings (loss) applicable to common shares
(line 9/line 4) ($ 0.13) ($ 0.13)
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended July 31,
1997
------------------------------
Primary Fully Diluted
------------- ---------------
<S> <C> <C>
Line
AVERAGE SHARES OUTSTANDING
1 Weighted average number of shares of common stock outstanding
during the period 996,363 996,363
2 Net additional shares assuming stock options and warrants
exercised and proceeds used to purchase treasury shares 239,263 239,263
3 Additional shares issued upon conversion of preferred stock -- 1,002,747
----------- -----------
4 Weighted average number of shares and equivalent shares of
common stock outstanding during the period 1,235,626 1,235,626
=========== ===========
EARNINGS (LOSS)
5 Net earnings (loss) $ 347,133 $ 347,133
6 Less dividends applicable to convertible preferred stock (97,500) (97,500)
----------- -----------
7 Earnings (loss) applicable to common shares 249,633 249,633
8 Add back dividends applicable to convertible preferred stock -- 97,500
----------- -----------
9 Amount for per share computation $ 249,633 $ 347,633
=========== ===========
PER SHARE AMOUNTS
Earnings (loss) applicable to common shares
(line 9/line 4) $ 0.20 $ 0.16
=========== ===========
</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 warrants and
convertible preferred stock) outstanding during the period.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in the registration statement on Form SB-2 (File No.
333-31969) 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 in the "Summary Financial Information," "Selected Financial Data" and
under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
---------------------------
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
October 2, 1997
