SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended October 31, 1998
Commission File Number
000-23115
CTI INDUSTRIES CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 36-2848943
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
22160 North Pepper Road
Barrington, Illinois 60010
(Address of principal executive offices) (Zip Code)
(847) 382-1000
Registrant's telephone number, including area code
Securities registered pursuant to Sections 12(b) and 12(g) of the Act:
Name of each exchange
Title of Class on which registered:
-------------- --------------------
Common Stock, .065 par value NASDAQ SmallCap Market
Check whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
|X| Yes |_| No
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated in Part III of the Form 10-KSB or any amendment to the Form 10-KSB.
|_|
The Registrant's revenues for the fiscal year ended October 31, 1998,
were $19,953,000.
Based upon the closing price of $2.188 per share of Registrant's Common
Stock as reported on NASDAQ SmallCap Market at January 15, 1999, the aggregate
market value of the voting stock held by non-affiliates of the Registrant was
then approximately $4,496,331.25. (Determination of stock ownership by
non-affiliates was made solely for the purpose of responding to the requirements
of the Form and the Registrant is not bound by this determination for any other
purpose).
The number of shares of the Registrant's Common Stock outstanding as of
January 15, 1999 was 2,735,831 (excluding treasury shares) and the number of
shares of Class B Common Stock outstanding as of that date was 1,098,901.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the 1999 Annual Meeting of
Stockholders to be filed with the Commission within 120 days of the end of
Registrant's last fiscal year is incorporated by reference into Part III.
Transitional Small Business Disclosure Format (check one): |_| Yes |X| No
<PAGE>
PART I
Item No. 1 Description of Business
Background.
CTI Industries Corporation (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. 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.
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.
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 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 conversion was effective upon the closing of an
initial public offering of 1,725,000 shares of the Company's Common Stock on
November 5, 1997. 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, initial public offering and related
transactions were approved by written consent of the shareholders.
1
<PAGE>
Business Overview
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, Safeway and Winn Dixie grocery chains, card and gift
shops, such as Hallmark and Factory Card Outlet stores, and party goods stores,
as well as through florists and balloon decorators.
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(R) characters, Garfield(R), Precious Moments(R)
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 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 has recently entered into an agreement
with the Mexican supplier whereby the Company has acquired an equity interest in
and has made loans to the Mexican firm. 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 the printing of
latex balloons.
The Industry
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
2
<PAGE>
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.
There are presently at least seven manufacturers of mylar balloons
whose products are sold in the United States. Six 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.
Products
Mylar Balloons. The mylar balloon is actually composed of a base nylon
material which is coated on one side with a metal deposit and on the other with
polyethylene. Typically, the balloon film is printed with graphic designs and
messages.
The Company manufactures over 380 balloon designs, in different shapes
and sizes, including the following:
o Superloons(R) 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(R) are 34" balloons made to be filled with helium
3
<PAGE>
o Miniloons(R) are 9" balloons made to be air-filled and sold on
holder-sticks or for use in decorations.
o Card-B-Loons(R) (4 1/2") and Pixiloons(TM) (2 1/2") are
air-filled balloons, often sold on a stick, used in floral
arrangements or with a container of candy.
o Shape-A-Loons(R) 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(R) are helium filled shaped balloons with attached
arms and legs.
o Smackers(R) are helium filled red lip-shaped balloons.
o You Name It(R) 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(R),
Garfield(R), Precious Moments(R), Hallmark, Ziggy(R), Grimmy(R), Elephantz(R),
Paddington(R), Gibson Greetings(R), Postman Pat(R), NASCAR(R), Betty Boop(R),
and several others. See "Patent, Trademarks and Copyrights" below.
Latex Balloons. The Company sells a high end line of latex balloons
under the product line name Hi-Tex(R) and a standard line of latex balloons
marketed under the name Partyloons(R).
Toys and Novelty. The Company also manufactures or sells additional and
related novelty items including mugs and banners. With its standard line of
latex balloons, punch balls and water bombs, the Company has made entry into the
toy market.
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, 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 bags for the storage of clothing items.
4
<PAGE>
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
15 individuals and a customer service department of 14 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. 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.
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. During the 1998 fiscal year, Eckerd Drug Stores accounted
for approximately 15.2% of the Company's total sales revenues. The Company also
sells its balloons to individual retail outlets generally through coordinated
efforts with its distributors.
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.
The Company markets its custom film products, including its "dunnage"
bags (inflatable film products) directly. During the 1998 fiscal year, a single
customer of the Company's custom film product business accounted for
approximately 11.06% of the Company's total sales revenues.
5
<PAGE>
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. At the Barrington facility, the Company also owns and operates
laminating machines.
A new extruder machine was custom made for the Company in 1998, and
increased the Company's capacity to produce enough film to make as many as
85,000 metallized balloons per hour as opposed to previously existing equipment,
which afforded the Company the capacity to produce 12,000 metallized balloons
per hour.
The Company also maintains a graphic arts and development department
which designs its balloon products and graphics. The Creative Department
operates a networked, computerized graphic arts system for the production of
these designs and of printed materials including catalogues, advertisements and
other promotional materials.
The Barrington facility also includes a computerized customer service
department which receives and fulfills over 50,000 orders annually.
Pulidos et Terminados Finos. The Company's latex balloons are
manufactured for it by Pulidos et Terminados Finos S.A. de C.V. ("P&TF"), a
Guadalajara, Mexico company engaged principally in the manufacture of latex
balloons. 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 (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(R).
On January 26, 1998, the Company and P&TF entered into an agreement
whereby, (i) the Company subscribed for 45% of the outstanding capital stock of
P&TF for $800,000, (ii) the Company loaned to P&TF $850,000, which loan is
collateralized by certain latex balloon manufacturing equipment and (iii) the
1995 equipment purchase agreement between the parties
6
<PAGE>
was cancelled with respect to 2 pieces of latex balloon manufacturing equipment,
which equipment is now owned by CTI and leased to P&TF. The purchase of the
capital stock was consummated on February 1, 1998, and the purchase price for
the capital stock was paid by (i) applying$400,000 of advances made to P&TF
prior to closing and (ii) a cash payment for the balance. The $400,000 debt
owing to the Company from the 1995 acquisition was extinguished as a result of
the cancellation of the sale of the two pieces of equipment to P&TF.
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.
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. In 1998, Anagram International, Inc. was
acquired by Amscan.
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.
7
<PAGE>
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(R) characters for over 11 years,
on Garfield(R) 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 fiscal years 1997 and 1998, the
Company estimates that the total amount spent on research and development
activities was approximately $238,000 and $252,000, respectively.
Employees
As of October 31, 1998, the Company had 186 full-time employees in the
United States, of whom 11 are executive or supervisory, 29 are in sales, 134 are
in manufacturing and 12 are clerical. As of that same date, the Company had 12
full time employees in England, of whom 2 are executive or supervisory, 3 are in
sales, 6 are in warehousing and 1 is 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.
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
8
<PAGE>
the handling and disposal of hazardous materials. As the Company's 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.
Item No. 2 Description of 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.
In August, 1998, the Company also purchased a building that is adjacent
to its principal plant and offices. The new facility includes approximately
29,000 square feet of combined office and warehouse space. The Company is
presently leasing approximately 11,000 square feet of this office and warehouse
space to a tenant for $ 7,000 in monthly rent under a lease that expires in
November of 1999.
In addition, the Company leases approximately 62,500 square feet of
space in Cary, Illinois expiring December 31, 1999. The Company has subleased
approximately 90% of this space through December, 1999. The Company's monthly
rent (net of subleases) is approximately $1,000. The facility is utilized as a
warehouse.
The Company also 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.
Item No. 3 Legal Proceedings
Not Applicable.
Item No. 4 Submission of Matters to a Vote of Security Holders
Not Applicable.
9
<PAGE>
PART II
Item No. 5 Market for Registrant's Common Equity and Related Stockholder
Matters
Market Information. The Company's Common Stock was admitted to trading
on the NASDAQ SmallCap Market under the symbol CTIB on November 5, 1997. Prior
to that time, there was no established public trading market for the Company's
Common Stock. As a result there is no available trading information for fiscal
year 1997 or prior years. There is no public market for the Company's Class B
Common Stock which is convertible into Common Stock on a share per share basis.
The high and low sales prices for the last four fiscal quarters,
according to the NASDAQ Stock Market's Stock Price History report, were:
High Low
---- ---
November 5, 1997 to January 31, 1998 6.719 5.000
February 1, 1998 to April 30, 1998 6.156 4.250
May 1, 1998 to July 31, 1998 5.625 3.750
August 1, 1998 to October 31, 1998 4.250 2.188
As of January 15, 1999, there were approximately 45 holders of record
of the Company's Common Stock and 2 holders of record of Class B Common Stock.
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.
Recent Sales of Unregistered Securities. In March and May of 1996, a
group of investors made an equity investment of $1,000,000 in the Company in
return for 1,098,901 shares of Preferred Stock, $.91 par value. CTI Investors,
L.L.C., an Illinois limited liability company, invested $900,000 in the shares
of Preferred Stock. Members of CTI Investors, L.L.C. include Howard W. Schwan,
John H. Schwan and Stephen M. Merrick, members of management, and one other
accredited investor. One other accredited investor invested the remaining
$100,000. The sale was exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act") as a transaction not
involving a public offering 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. The shares of Preferred Stock were
subsequently converted into 1,098,901 shares of Class B Common Stock.
10
<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 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.
In July, 1998, John H. Schwan and Stephen M. Merrick exercised a total
of 19,396 of their warrants to purchase shares of the Company's Common Stock at
an exercise price of $.91 per share (15,000 and 4,396 warrants, respectively).
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, purchased $50,000, $350,000, $315,000 and $150,000, respectively,
of the notes and warrants. 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.
11
<PAGE>
Item No. 6 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)
formulating and implementing plans and programs to increase revenues, (ii)
achieving liquidity, (iii) reducing costs of operations and (iv) achieving
profitability. While net sales decreased 39% in fiscal 1996 to $13,910,000 from
$22,784,000 in fiscal 1995, net sales for fiscal 1997 increased 18% to
$16,431,000. In fiscal 1998, net sales increased an additional 21% to
$19,953,000. Operating expenses were reduced from 1995 to 1996 by over $5
million, a reduction of approximately 50% and the Company was able to maintain
the lower operating cost figures in fiscal 1997.1 In fiscal 1998, operating
expenses increased by $1,523,000, primarily from an increase in advertising and
marketing costs of $822,000 and an increase in administrative costs of $489,000.
While the increase in marketing costs contributed to the growth of sales in
1998, the Company anticipates reducing marketing expenses and administrative
expenses in 1999. A portion of these expenses were of a non-recurring nature as
described in greater detail below. The net loss of the Company was reduced from
the 1995 level of $2,893,0002 to $183,000 for fiscal 1996 and for fiscal 1997,
the Company had net income of $1,140,000. Included in income for fiscal 1997,
was a tax benefit of $550,000 resulting from the reversal of a tax valuation
allowance created in prior years.3 Despite increased sales, as a result of
higher than expected operating costs, net income for fiscal 1998 was $122,000.
Working capital increased from $347,000 on October 31, 1996 to $942,000 on
October 31, 1997 and to $3,313,000 on October 31, 1998.
In November of 1997, the Company completed an initial public offering
of 1,725,000 shares of its Common Stock, for net proceeds of approximately
$5,500,000. The Company applied the proceeds to capital items and operations to
improve the products, production capacity, marketing efforts, product
development and operations of the Company. Specifically, the Company made
capital investments of approximately $5.3 million, a portion of which was
financed through equipment loans or otherwise, in plant improvements and
equipment which will increase production capacity in the mylar product line and
the laminated and printed films business. A new extruder has been custom made
- ----------------------
1. Included in the expense reduction in 1996, was a $200,000 decrease in
depreciation expense related to a change in accounting estimate of the useful
life of certain equipment.
2. $1,672,000 of the loss in fiscal 1995 related to the shutdown and sale
of the Company's latex balloon manufacturing operation.
3. The reversal was based upon management's determination that it was
more likely than not that the deferred tax benefits would be utilized.
12
<PAGE>
for the Company, and has the capacity to produce enough film to make 85,000
metallized balloons per hour as opposed to existing equipment which produces
12,000 metallized balloons per hour. The Company has purchased additional office
and warehouse space adjacent to its headquarters located in Barrington, Illinois
allowing for increases in production and growth. During fiscal 1998, the Company
invested $1,350,000 in its Mexican supplier of latex balloons and has engaged in
active marketing of latex balloons. The Company has invested a portion of the
proceeds of the offering for the hiring of personnel in marketing, product
design and development and sales to enhance the Company's product design and
development efforts, its product line, marketing, customer service and support
and sales effort. These commitments in the Company's three principal sales
areas, mylar balloons, latex balloons, and laminations and specialty packaging
will allow the Company to continue to expand sales.
The following table sets forth selected financial data of the Company
for the three years ended October 31, 1998, 1997 and 1996 (in thousands, except
per share data):
Year Ended October 31,
--------------------------------
1996 1997 1998
------- ------- -------
Considated Statement of Operations Data:
Net sales................................. $ 13,910 $ 16,431 $ 19,953
Cost of sales............................. 8,558 10,265 12,707
------- ------- -------
Gross profit.............................. 5,352 6,166 7,246
Operating Expenses:
General and administrative............... 2,055 1,864 2,353
Selling.................................. 2,387 2,375 2,587
Advertising and marketing................ 592 983 1,805
------- ------- -------
Total operating expenses.............. 5,034 5,222 6,745
------- ------- -------
Operating income (loss)................... 318 944 501
------- ------- -------
Other income (expense).................... (495) (354) (319)
------- ------- -------
Income (loss) before income taxes......... (177) 590 182
Income tax benefit (expense).............. (6) 550 (60)
------- ------- -------
Net income (loss)......................... (183) 1,140 122
Dividends applicable to Convertible
Preferred Stock.......................... (74) (98) ---
------- ------- -------
Net income (loss) applicable to
common shares............................ $ (257) $ 1,042 $ 122
======= ======= =======
Net income (loss) per share
Basic ............................... $ (.25) $ 1.04 $ .03
======= ======= =======
Diluted ............................. $ (.25) $ .51 $ .03
======= ======= =======
Weighted average number of common and
common equivalent shares outstanding
Basic ............................... 1,026,572 999,625 3,798,010
========= ========= =========
Diluted ............................. 1,026,572 2,225,335 4,121,366
========= ========= =========
13
<PAGE>
Results of Operation
Net Sales. For the fiscal year ended October 31, 1998, net sales
increased to $19,953,000 from $16,431,000 for fiscal 1997, an increase of
approximately 21%. This increase in net sales was a reflection principally of
increases in the sales of latex balloons and laminations and specialty
packaging. Sales also increased as a result of the Company's continued efforts
to solidify and expand its distribution network. For fiscal 1998, international
sales were $2,498,000 or 12.5% of net sales, as compared to $2,622,000, or 16%
of net sales for fiscal 1997.
During fiscal 1998, mylar balloons represented 71% of sales, latex
balloons 12% of sales and laminated and printed films 17% of sales. During
fiscal 1997, mylar balloons represented 77% of sales, latex balloons 10% of
sales and laminated and printed films 13% of sales. The Company anticipates that
the percentage of sales represented by latex balloons and laminated and printed
films will continue to increase during fiscal 1999. For fiscal 1998, the profit
margins on mylar balloons, latex balloons and laminated and printed materials
were 35%, 27%, and 39%, respectively.
Cost of Sales. For fiscal 1998, cost of sales increased slightly to
63.9% of net sales as compared to 62.5% of net sales in fiscal 1997. The
increase was the result of a number of items including an increase in overhead
in connection with the acquisition and operation of an additional facility
purchased in August, 1998, including increased real estate taxes.
Administrative. For fiscal 1998, administrative expenses were
$2,353,000 or 11.8% of sales as compared to $1,864,000, or 11.3% of sales for
fiscal 1997. Administrative expenses increased in 1998 as a result of a medical
insurance expense of $120,000, which is not expected to recur. The Company also
incurred higher professional costs in 1998, principally accounting fees, due in
part to the Company's status as a public company, and other costs as a result of
being publicly held.
Selling. For fiscal 1998, selling expenses were $2,587,000 or 13% of
net sales, as compared to $2,375,000, or 14.5% of net sales for fiscal 1997. The
increase was due primarily to increased costs associated with the holding of
certain licenses.
Advertising and Marketing. For fiscal 1998, advertising and marketing
expenses were $1,806,000 or 9.1% of sales as compared to $983,000 or 6% of sales
for fiscal 1997. The increase in these expenses in 1998 was a result of service
fees and promotional costs paid on certain national accounts. The Company
expects to reduce advertising and marketing costs both in dollars and as a
percentage of net sales in 1999. The Company has already reduced its servicing
and promotional costs on certain national account programs.
14
<PAGE>
Other Income and Expenses. The Company had lease income of $86,000 and
interest income of $161,000 in fiscal 1998, areas of income it did not have in
1997. For fiscal 1998, interest expense was $765,000 as compared to $667,000 for
fiscal 1997. The increase in interest expense for fiscal 1998, as compared to
1997, is a result of interest paid on the new facility, new extruder, and a
higher balance on the revolving line of credit.
Net Income or Loss. For fiscal 1998, the Company had net income before
income taxes of $182,000, as compared to net income before income taxes of
$589,000 in fiscal 1997. Net income for fiscal 1998, was $122,000 as compared to
net income of $1,140,000 for 1997. Included in income for 1997 was $550,000 of
tax benefit resulting from a reversal of a tax valuation allowance created in
prior periods. The reversal was based upon management's determination that it
was more likely than not that the deferred tax benefits would be utilized. The
Company anticipates that its advertising and marketing efforts will generate
increased sales in 1999. As a result of increased balloon production in 1998,
the Company experienced reduced unit costs which should result in improved
margins during the first two fiscal quarters of 1999.
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 year ended October 31, 1998 was
$2,384,000. This resulted primarily from increased sales and resulting increases
in accounts receivable and inventory of $3,170,000. During fiscal 1997, the
Company used cash flows from operations of $537,000 mainly as a result of
increases in accounts receivable and inventory of $2,161,000.
At October 31, 1998, the Company maintained a cash balance of $235,000.
The Company's current cash management strategy includes maintaining minimal cash
balances and utilizing the revolving line of credit for liquidity. At October
31, 1997, the Company had cash and cash equivalents of $237,000. At October 31,
1998, the Company had working capital of $3,313,000. Working capital as of
October 31, 1997 was $942,000.
In November of 1997, the Company sold 1,725,000 shares of its Common
Stock at $4.00 per share in an initial public offering. The net proceeds from
the offering to the Company were approximately $5,500,000.
During the eighteen months preceding the completion of the Company's
initial public offering of Common Stock in November of 1997, the Company 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
15
<PAGE>
Stock included a cumulative preferred dividend at the rate of 13%. The shares of
Preferred Stock were converted into 1,098,901 shares of Class B Common Stock
upon the closing of the public offering.
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 (increased to $4,500,000 in September, 1998), of which $322,000 was
unused at October 31, 1998. The second term loan is due on September 1, 2001 and
bears an interest rate of 8.25%. The revolving line of credit, bearing an
interest rate of prime plus 1/2%, was due on July 1, 1998, and has been renewed
until May 1, 1999. During 1998, the Company restructured its debt with the Bank.
The first term loan was consolidated with two other term loans, forming a new
term loan bearing an interest rate of 8.25%, due May 1, 2002. In May 1998, the
Company's bank provided a term loan in the amount of $2,258,000 for the purchase
of new extrusion equipment. This term loan bears an interest rate of 8.25% and
is due February 1, 2004. In August 1998, the bank provided financing of
$1,268,000 for the purchase of the facility adjacent to the Company's Barrington
headquarters. The term loan bears an interest rate of 8.25% and matures on
September 1, 2003. All these loans are secured by all assets of the Company.
Three principal shareholders of the Company, John H. Schwan, Howard W. Schwan
and Stephen M. Merrick have guaranteed these obligations.
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.
During fiscal 1998, the Company invested $5,254,000 in machinery and
equipment, a new facility, and merchandise displays at customer locations. The
Company also invested in and made advances of $1,419,000 to its Mexican supplier
of latex balloons. During fiscal 1997, the Company invested $838,000 in
machinery and equipment and made advances to its Mexican supplier of latex
balloons in the amount of $300,000.
During fiscal 1998, the Company generated $9,082,000 in financing
activities, primarily as a result of the proceeds of the Company's initial
public offering of its Common Stock in November 1997, and the proceeds of
long-term debt. Cash flow provided by financing activities for fiscal 1997 was
$1,857,000, resulting primarily from the proceeds of a private placement of
notes to related parties, and advances on the line of credit.
The Company believes that existing capital resources and cash generated
from operations will be sufficient to meet the Company's requirements for at
least 12 months.
16
<PAGE>
Seasonality
In the mylar product line, sales have historically been seasonal with
approximately 20% to 30% of annual sales of mylar being generated in December
and January and 11% to 13% 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.
Year 2000 Issues
Most computer databases, as well as embedded microprocessors in
computer systems and industrial equipment, have been programmed to use a
two-digit number to represent the year. Computer programs that recognize a date
using "00" as the year 1900 rather than the year 2000 could result in errors or
system failures. Accordingly, all companies must analyze their systems and make
the necessary changes to ensure that automated processes will correctly
distinguish between years before and after the year 2000.
Based on a recent assessment, the Company does not believe the Year
2000 issue will have a material effect on its operations. The Company's current
computer hardware and software systems are Year 2000 compliant. The Company is
in the process of initiating communications with the manufacturers of its
manufacturing and warehouse equipment to ensure this equipment will be Year 2000
ready.
Formal communications will be made with all significant suppliers and
large customers of the Company during the balance of 1999 to determine the
extent to which the Company may be vulnerable to those third parties' failure to
remediate their own potential Year 2000 problems. If the Company's most
significant vendors of goods and services, or the suppliers of the Company's
necessary energy, telecommunications and transportation needs, fail to provide
the Company with the materials and services which are necessary to produce,
distribute and sell its products, such failure could have a material adverse
effect on the results of operations, liquidity and financial condition of the
Company. There can be no guarantee that the systems of these suppliers, vendors
and customers of the Company will be timely converted to year 2000 compliance.
Nor is there any guarantee that the Company would experience no material adverse
effects should any of the significant vendors, suppliers or customers of the
Company fail to remediate their potential year 2000 problems. The Company has
determined it has no exposure to contingencies related to the Year 2000 for the
products it sells.
The cost of attaining Year 2000 compliance will not be material for the
Company. It is anticipated that no warehouse or manufacturing equipment will
need to be replaced. The Company is currently assessing its telephone system and
will decide in the second quarter of 1999 whether to replace the current system.
The Company will primarily utilize internal resources to manage the Year 2000
issue.
Safe Harbor Provision of the Private Securities Litigation Act of 1995 and
Forward Looking Statements
The Company operates in a dynamic and rapidly changing environment that
involves numerous risks and uncertainties. The market for mylar and latex
balloon products is generally characterized by intense competition, frequent new
product introductions and changes in customer tastes which can render existing
products unmarketable. The statements contained in
17
<PAGE>
Item 1 (Description of Business) and Item 6 (Management's Discussion and
Analysis of Financial Condition and Results of Operations) that are not
historical facts may be forward- looking statements (as such term is defined in
the rules promulgated pursuant to the Securities Exchange Act of 1934) that are
subject to a variety of risks and uncertainties more fully described in the
Company's filings with the Securities and Exchange Commission including, without
limitation, those described under "Risk Factors" in the Company's Form SB-2
Registration Statement (File No. 333-31969) effective November 5, 1997. The
forward-looking statements are based on the beliefs of the Company's management,
as well as assumptions made by, and information currently available to the
Company's management. Accordingly, these statements are subject to significant
risks, uncertainties and contingencies which could cause the Company's actual
growth, results, performance and business prospects and opportunities in 1999
and beyond to differ materially from those expressed in, or implied by, any such
forward-looking statements. Wherever possible, words such as "anticipate,"
"plan," "expect," "believe," "estimate," and similar expressions have been used
to identify these forward-looking statements, but are not the exclusive means of
identifying such statements. These risks, uncertainties and contingencies
include, but are not limited to, the Company's limited operating history on
which expectations regarding its future performance can be based, competition
from, among others, national and regional balloon, packaging and custom film
product manufacturers and sellers that have greater financial, technical and
marketing resources and distribution capabilities than the Company, the
availability of sufficient capital, the maturation and success of the Company's
strategy to develop, market and sell its products, risks inherent in conducting
international business, risks associated with securing licenses, changes in the
Company's product mix and pricing, the effectiveness of the Company's efforts to
control operating expenses, general economic and business conditions affecting
the Company and its customers in the United States and other countries in which
the Company sells and anticipates selling its products and services and the
Company's ability to (i) adjust to changes in technology, customer preferences,
enhanced competition and new competitors; (ii) protect its intellectual property
rights from infringement or misappropriation; (iii) maintain or enhance its
relationships with other businesses and vendors; and (iv) attract and retain key
employees. There can be no assurance that the Company will be able to identify,
develop, market, sell or support new products successfully, that any such new
products will gain market acceptance, or that the Company will be able to
respond effectively to changes in customer preferences. There can be no
assurance that the Company will not encounter technical or other difficulties
that could delay introduction of new or updated products in the future. If the
Company is unable to introduce new products and respond to industry changes or
customer preferences on a timely basis, its business could be materially
adversely affected. The Company is not obligated to update or revise these
forward-looking statements to reflect new events or circumstances.
Item No. 7 Financial Statements
Reference is made to the Consolidated Financial Statements attached
hereto.
Item No. 8 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Not Applicable.
18
<PAGE>
PART III
Item No. 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Information called for by Item No. 9 of Part III is incorporated by
reference to the definitive Proxy Statement for the 1999 Annual Meeting of
Stockholders to be filed with the Commission within 120 days of the end of the
Company's last fiscal year.
Item No. 10 Executive Compensation
Information called for by Item No. 10 of Part III is incorporated by
reference to the definitive Proxy Statement for the 1999 Annual Meeting of
Stockholders to be filed with the Commission within 120 days of the end of the
Company's last fiscal year.
Item No. 11 Security Ownership of Certain Beneficial Owners and Management
Information called for by Item No. 11 of Part III is incorporated by
reference to the definitive Proxy Statement for the 1999 Annual Meeting of
Stockholders to be filed with the Commission within 120 days of the end of the
Company's last fiscal year.
Item No. 12 Certain Relationships and Related Transactions
Information called for by Item No. 12 of Part III is incorporated by
reference to the definitive Proxy Statement for the 1999 Annual Meeting of
Stockholders to be filed with the Commission within 120 days of the end of the
Company's last fiscal year.
Item No. 13 Exhibits and Reports on Form 8-K
Exhibits
Exhibit
Number Description
------ -----------
* 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
*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
19
<PAGE>
Exhibit
Number Description
------ -----------
*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 Amended and Restated Loan and Security Agreement dated May 1,
1998 between the Company and First American Bank
10.16 First Term Note in the sum of $1,788,328 dated May 1, 1998
made by CTI Industries Corporation to First American Bank.
10.17 First Amendment to Second Term Note dated May 1, 1998 made by
CTI Industries Corporation to First American Bank.
10.18 Third Term Note in the sum of $2,258,000 dated May 1, 1998
made by CTI Industries Corporation to First American Bank.
10.19 Revolving Note in the sum of $4,000,000 dated May 1, 1998 made
by the Company to First American Bank.
10.20 First Amendment to Loan and Security Agreement dated August
24, 1998, between CTI Industries Corporation and First
American Bank.
10.21 Fourth Term Note in the sum of $1,268,000 dated August 24,
1998 made by CTI Industries Corporation and First American
Bank.
10.22 Mortgage dated August 24, 1998 for benefit of First American
Bank.
10.23 Second Amendment to Loan and Security Agreement dated August
27, 1998 between CTI Industries Corporation and First American
Bank.
10.24 Third Amendment to Loan and Security Agreement dated September
1, 1998 between CTI Industries Corporation and First American
Bank.
10.25 First Amendment to Third Term Note dated September 1, 1998
made by CTI Industries Corporation to First American Bank.
10.26 Revolving Note in the sum of $4,500,000 dated September 1,
1998 made by CTI Industries Corporation to First American
Bank.
10.27 Guaranty dated September 1, 1998, by Stephen M. Merrick,
Howard W. Schwan and John H. Schwan for benefit of First
American Bank.
*10.28 Form of Financial Advisory and Consulting Agreement.
**10.29 Subscription and Loan Agreement dated January 26, 1998,
between CTI Industries Corporation and Pulidos & Terminados
Finos S.A. de C.V.
20
<PAGE>
Exhibit
Number Description
------ -----------
21 Subsidiaries (incorporate description in Form 10-KSB under
Item No. 1)
27 Financial Data Schedule
* Incorporated by reference to Exhibits, contained in Registrant's Form
SB-2 Registration Statement (File No. 333-31969) effective November 5,
1997.
** Incorporated by reference to Exhibit contained in Registrant's Form 10
KSB Annual Report, for year ended October 31, 1997.
Reports on Form 8-K
There were no Reports on Form 8-K filed by the Company during the last
quarter of fiscal 1998.
21
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act the
Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized on February 16, 1999.
CTI INDUSTRIES CORPORATION
By: /s/ Howard W. Schwan
---------------------------
Howard W. Schwan, President
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant in the capacities and on
the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/ Howard W. Schwan President and Director February 16, 1999
- -----------------------
Howard W. Schwan
/s/ John H. Schwan Chairman and Director February 16, 1999
- -----------------------
John H. Schwan
/s/ Stephen M. Merrick Chief Executive Officer, February 16, 1999
- -----------------------
Stephen M. Merrick Secretary, Chief Financial
Officer and Director
/s/ John C. Davis Vice President and Director February 16, 1999
- -----------------------
John C. Davis
/s/ Stanley M. Brown Director February 16, 1999
- -----------------------
Stanley M. Brown
/s/ Bret Tayne Director February 16, 1999
- -----------------------
Bret Tayne
22
<PAGE>
CTI Industries Corporation and Subsidiary
Table of Contents
Page(s)
Report of Independent Accountants F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of October 31, 1997 and 1998 F-3 - F-4
Consolidated Statements of Operations for the
years ended October 31, 1997 and 1998 F-5
Consolidated Statements of Stockholders' Equity
for the years ended October 31, 1997 and 1998 F-6 - F-8
Consolidated Statements of Cash Flows for the years
ended October 31, 1997 and 1998 F-9
Notes to Consolidated Financial Statements F-10 - F-25
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Shareholders of CTI Industries Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of CTI
Industries Corporation and its subsidiary at October 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the two years in
the period ended October 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Chicago, Illinois
February 16, 1999
F-2
<PAGE>
CTI Industries Corporation and Subsidiary
Consolidated Balance Sheet
as of October 31, 1997 and 1998
<TABLE>
<CAPTION>
ASSETS 1997 1998
<S> <C> <C>
Current assets:
Cash $ 237,230 $ 235,333
Accounts receivable (less allowance for doubtful accounts
of $136,050 and $132,211 at October 31, 1997 and 1998) 3,045,696 3,276,894
Inventories 5,073,861 7,641,381
Deferred tax assets 327,035 176,549
Other 483,652 1,089,058
------------ ------------
Total current assets 9,167,474 12,419,215
------------ ------------
Property and equipment:
Machinery and equipment 5,481,380 6,812,069
Building 2,175,713 3,503,801
Office furniture and equipment 1,058,150 1,556,742
Land 250,000 535,000
Leasehold improvements 147,128 161,885
Fixtures and equipment at customer locations 1,230,598 1,907,358
Projects under construction 402,714 1,522,893
------------ ------------
10,745,683 15,999,748
Less: accumulated depreciation (6,851,148) (7,674,299)
------------ ------------
Total property and equipment, net 3,894,535 8,325,449
------------ ------------
Other assets:
Deferred IPO costs 445,067 --
Deferred financing costs, net 56,671 44,383
Investment in joint venture 81,816 77,975
Investment in subsidiary -- 879,800
Note receivable 300,000 715,422
Deferred tax assets 272,063 391,377
------------ ------------
1,155,617 2,108,957
------------ ------------
Total assets $ 14,217,626 $ 22,853,621
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CTI Industries Corporation and Subsidiary
Consolidated Balance Sheet, Continued
as of October 31, 1997 and 1998
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1998
Current liabilities:
<S> <C> <C>
Accounts payable $ 3,725,500 $ 3,070,545
Line of credit 3,017,940 4,178,246
Stock redemption contract payable - current portion 30,533 --
Advances from related parties 3,750 --
Notes payable - current portion 580,097 817,569
Accrued liabilities 867,432 1,039,742
------------ ------------
Total current liabilities 8,225,252 9,106,102
------------ ------------
Notes payable 2,885,151 5,280,692
Subordinated debt 865,000 865,000
------------ ------------
Total long-term liabilities 3,750,151 6,145,692
------------ ------------
Redeemable common stock 450,000 413,406
Stockholders' equity:
Convertible Preferred stock - $.91 par value,
2,000,000 shares authorized, 1,098,901 shares
issued and outstanding, including accumulated
dividends of $63,917 (October 31, 1997) 1,063,917 --
Common stock - $.065 par value,
11,000,000 shares authorized,
1,154,584 (October 31, 1997),
2,898,980 (October 31, 1998) shares
issued, 1,010,202 (October 31, 1997),
2,735,831 (October 31, 1998) shares outstanding 75,048 188,434
Class B Common stock - $.91 par value, 1,100,000 shares
authorized, 1,098,901 shares issued and outstanding -- 1,000,000
Paid-in-capital 248,348 5,554,332
Retained earnings 1,179,274 1,301,134
Foreign currency translation adjustment 51,036 26,377
Less:
Treasury stock - 144,382 (October 31, 1997) and
163,149 (October 31, 1998) (370,700) (407,294)
Redeemable common stock (450,000) (413,406)
Stock subscription receivable (4,700) (4,700)
Notes receivable from stockholders -- (56,456)
------------ ------------
Total stockholders' equity 1,792,223 7,188,421
------------ ------------
Total liabilities and stockholders' equity $ 14,217,626 $ 22,853,621
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CTI Industries Corporation and Subsidiary
Consolidated Statements of Operations
for the years ended October 31, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Net sales $ 16,431,418 $ 19,952,823
Cost of sales 10,265,117 12,706,460
------------ ------------
Gross profit on sales 6,166,301 7,246,363
------------ ------------
Operating expenses:
Administrative 1,864,304 2,352,959
Selling 2,375,293 2,586,798
Advertising and marketing 983,161 1,805,603
------------ ------------
Total operating expenses 5,222,758 6,745,360
------------ ------------
Income from operations 943,543 501,003
------------ ------------
Other income (expense):
Interest expense (667,060) (765,425)
Interest income -- 161,201
Other 312,911 285,094
------------ ------------
Total other expense (354,149) (319,130)
------------ ------------
Income before income taxes 589,394 181,873
Income tax expense (benefit) (550,184) 60,013
------------ ------------
Net income 1,139,578 121,860
Dividends applicable to convertible preferred stock (97,500) --
------------ ------------
Income applicable to common shares $ 1,042,078 $ 121,860
============ ============
Basic income per common and common equivalent shares $ 1.04 $ 0.03
============ ============
Diluted income per common and common equivalent shares $ 0.51 $ 0.03
============ ============
Weighted average number of shares and
equivalent shares of common stock outstanding:
Basic 999,625 3,798,010
============ ============
Diluted 2,225,335 4,121,366
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CTI Industries Corporation and Subsidiary
Consolidated Statements of Stockholders' Equity
for the years ended October 31, 1997 and 1998
<TABLE>
<CAPTION>
Less
---------------------------------------
Common Stock Preferred Stock Treasury Stock Redeemable Stock
--------------- Paid-In ---------------- Retained Translation ------------- Common Subscription
Shares Amount Capital Shares Amount Earnings Adjustment Shares Amount Stock Receivable Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
October 31,
1996 1,131,507 $73,548 $230,348 1,098,901 $1,027,625 $ 137,194 144,382 $(370,700)$(450,000)$(167,200) $480,815
Payment on
stock
subscription
receivable 162,500 162,500
Common stock
warrants
exercised 23,077 1,500 18,000 19,500
Accumulated
preferred
stock
dividends 36,292 36,292
Net income 1,139,580 1,139,580
Foreign
currency
translation
adjustment $51,036 51,036
Dividends
paid (97,500) (97,500)
--------- ------ -------- --------- ---------- ---------- ------- ------- -------- -------- ------- ----------
Balance,
October 31,
1997 1,154,584 75,048 248,348 1,098,901 1,063,917 1,179,274 51,036 144,382 (370,700) (450,000) (4,700) 1,792,223
--------- ------- -------- --------- ---------- ---------- ------- ------- -------- -------- ------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
CTI Industries Corporation and Subsidiary
Consolidated Statements of Stockholders' Equity, Continued
for the years ended October 31, 1997 and 1998
<TABLE>
<CAPTION>
Class B Paid-In
Common Stock Common Stock Capital Preferred Stock
------------------ ------------------- ------- ---------------- Retained Translation
Shares Amount Shares Amount Shares Amount Earnings Adjustment
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
October 31,
1997 1,154,584 75,048 - - 248,348 1,098,901 1,063,917 1,179,274 51,036
Conversion of
preferred
stock into
Class B
common 1,098,901 $1,000,000 (1,098,901)(1,063,917)
Issuance of
common stock 1,725,000 112,125 5,289,594
Common stock
warrant
exercised 19,396 1,261 16,390
Acquisition
of treasury
stock
Notes
receivable
from
stockholders
Foreign
currency
Translation
adjustment (24,659)
Net income 121,860
--------- -------- --------- --------- ----------- --------- ------- ---------- -------
Balance,
October 31,
1998 2,898,980 $188,434 1,098,901 $1,000,000 $5,554,332 - - $1,301,134 $26,377
========= ======== ========= ========== ========== ======== ======= ========== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
CTI Industries Corporation and Subsidiary
Consolidated Statements of Stockholders' Equity, Continued
for the years ended October 31, 1997 and 1998
<TABLE>
<CAPTION>
Less
----------------------------------------- Notes
Treasury Stock Redeemable Stock Receivable
----------------- Common Subscription From
Shares Amount Stock Receivable Stockholders Total
<S> <C> <C> <C> <C> <C> <C>
Balance,
October 31,
1997 144,382 (370,700) (450,000) (4,700) 1,792,223
Conversion of
preferred
stock into
Class B
common (63,917)
Issuance of
common stock 5,401,719
Common stock
warrant
exercised 17,651
Acquisition
of treasury
stock 18,767 36,594 (36,594) -
Notes
receivable
from
stockholders (56,456) (56,456)
Foreign
currency
Translation
adjustment (24,659)
Net income 121,860
-------- --------- --------- ------- -------- ---------
Balance,
October 31,
1998 125,615 $(334,106)$(486,594) $(4,700) $(56,456) $7,188,421
======== ========= ========= ======= ======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
CTI Industries Corporation and Subsidiary
Consolidated Statements of Cash Flows
for the years ended October 31, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,139,580 $ 121,860
Adjustments to reconcile net income
(loss) to cash provided
by (used in) operating activities:
Depreciation and amortization 575,434 835,439
Gain on sale of property and equipment (42,942) --
Equity in loss of subsidiary and joint venture -- 9,466
Gain on settlement of legal claim (188,768) --
Provision for losses on accounts receivable and inventory 289,537 371,569
Deferred income taxes (599,098) 27,963
Change in assets and liabilities:
Accounts receivable (1,458,699) (305,645)
Inventories (702,706) (2,864,641)
Other assets (709,841) (96,795)
Accounts payable and accrued expenses 1,160,540 (483,351)
------------ ------------
Net cash used in operating activities (536,963) (2,384,135)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of property and equipment 2,942 --
Purchases of property and equipment (838,491) (5,254,065)
Investment in joint venture (81,816) (1,529)
Investment in and advances to P&TF (300,000) (1,419,318)
------------ ------------
Net cash used in investing activities (1,217,365) (6,674,912)
------------ ------------
Cash flows from financing activities:
Stock redemption contract payments (77,375) (30,533)
Advances on line of credit 8,408,078 19,235,217
Repayments on line of credit (7,448,954) (18,074,747)
Proceeds from issuance of long-term debt 440,465 4,158,959
Repayment of long-term debt (431,188) (1,525,946)
Proceeds from issuance of short-term debt -- 850,000
Repayment of short-term debt -- (850,000)
Proceeds from debt issued to related parties 865,000 --
Proceeds from issuance of preferred stock 160,000 --
Proceeds from issuance of common stock -- 5,401,719
Proceeds from warrants exercised -- 17,650
Purchase of treasury stock -- (36,594)
Payment on stock subscription receivable 2,500 --
Dividends paid (61,208) (63,917)
------------ ------------
<S> <C> <C>
Net cash provided by financing activities 1,857,318 9,081,808
------------ ------------
Effect of exchange rate changes on cash 3,422 (24,658)
------------ ------------
Net increase (decrease) in cash 106,412 (1,897)
Cash at beginning of period 130,818 237,230
------------ ------------
Cash at end of period $ 237,230 $ 235,333
============ ============
Supplemental disclosures:
Cash paid for interest $ 606,040 $ 750,565
Cash paid for income taxes -- $ 215,000
Noncash financing activities:
Assets exchanged for settlement of debt $ 40,000 --
Common stock warrants exercised in exchange for contractual
services received $ 19,500 --
Conversion of preferred stock into Class B common stock -- $ 1,000,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
CTI Industries and Corporation and Subsidiary
Notes to Consolidated Financial Statements
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.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of CTI
Industries Corporation and its wholly owned subsidiary CTI Balloons
Limited. All significant intercompany accounts and transactions have been
eliminated upon consolidation.
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. Expenditures for maintenance
and repairs are charged to operations as incurred. Depreciation is
computed using the straight-line and declining-balance methods over
estimated useful lives of the related assets. 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 $525,880 and $823,151 for the years ended
October 31, 1997 and 1998, respectively.
F-10
<PAGE>
CTI Industries and Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
2. Summary of Significant Accounting Policies, continued
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 $49,554 and $12,288 for the years
ended October 31, 1997 and 1998, respectively.
Income Taxes
Income taxes are accounted for as prescribed in SFAS No. 109 - Accounting
for Income Taxes. Under the asset and liability method of Statement No.
109, the Company recognizes the amount of income taxes currently payable
and deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities, and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years these
temporary differences are expected to be recovered or settled.
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 limited due to the number of entities comprising the Company's
customer base. The Company performs ongoing credit evaluations and
provides an allowance for potential credit losses against the portion of
accounts receivable which is estimated to be uncollectible. Such losses
have historically been within management's expectations. For the year
ended October 31, 1998, the Company had two customers that accounted for
approximately 15.2% and 11.06%, respectively, of consolidated net sales.
Corresponding percentages of consolidated net sales generated by these
customers for the year ended October 31, 1997, were less than 10%,
respectively. At October 31, 1998, the outstanding account receivable
balances due from these two customers were $428,760 and $781,292,
respectively.
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 and disclosures of
contingent 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.
F-11
<PAGE>
CTI Industries and Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
2. Summary of Significant Accounting Policies, continued
Stock-Based Compensation
Effective for the fiscal year ending October 31, 1997, the Company
adopted SFAS No. 123, "Accounting for Stock-Based Compensation". The
pronouncement 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. The
Company did not adopt the new fair value accounting, but instead chose to
comply with the disclosure requirements of SFAS No. 123. Accordingly, the
adoption of SFAS No. 123 did not have a material impact on the Company's
financial statements.
Earnings Per Share
The Company adopted SFAS No. 128, "Earnings Per Share" for the year ended
October 31, 1998. The pronouncement specifies the computation,
presentation, and disclosure requirements for earnings per share.
Adoption of this pronouncement, which was applied to prior periods
presented, did not have a material impact on the Company's financial
statements.
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 cash flows, undiscounted and without interest charges, is
less than the carrying amounts of the related assets.
3. Inventory
Inventory is comprised of the following:
October 31, October 31,
1997 1998
Raw materials $ 243,858 $ 223,530
Work in process 1,008,296 874,994
Finished goods 3,821,707 6,542,857
------------ ------------
Total inventory $ 5,073,861 $ 7,641,381
============ ============
F-12
<PAGE>
CTI Industries and Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
4. Line of Credit
During 1998, the Company increased its bank line of credit from
$3,250,000 to $4,500,000 of which, $230,061 and $321,754 was available at
October 31, 1997 and 1998, 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 .5% (prime was 8.5%
and 8.0% at October 31, 1997 and 1998, respectively). The line of credit
is collateralized by all assets of the Company. The line of credit
agreement is due on May 1, 1999 and contains, among other provisions,
certain financial covenants relating to the maintenance of tangible net
worth and the ratio of debt to equity.
5. Notes Payable
During the year ended October 31, 1998, the Company restructured its
existing debt agreements with its principal lender resulting in the
consolidation of certain term loans as well as the issuance of new term
loans.
Long-term debt at October 31, 1998 consists of:
<TABLE>
<CAPTION>
<S> <C>
First Term Loan, payable in monthly installments of
$43,979 including interest at 8.25% due May, 2002
Collateralized by all assets of the Company. $ 1,628,934
Second Term Loan, payable in monthly installments of
$19,617 including interest at 8.25% due September,
2001. Collateralized by all assets of the Company. 2,100,291
Third Term Loan, payable in monthly installments of
$46,195 including interest at 8.25% due February, 2004
Collateralized by all assets of the Company. 1,092,000
Fourth Term Loan, payable in monthly installments of
$10,919 including interest at 8.25% due September,
2003. Collateralized by all assets of the Company. 1,268,000
Installment Loan, payable in monthly installments
of $565 including interest at 7.99% due March, 2000
Collateralized by company vehicle. 9,036
-----------
Total 6,098,261
Less current portion (817,569)
-----------
Total long-term debt $ 5,280,692
===========
</TABLE>
F-13
<PAGE>
CTI Industries and Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
5. Notes Payable, continued
Future minimum principal payments for amounts outstanding under these
long-term debt agreements are as follows for the years ended October:
1999 $ 817,569
2000 1,049,924
2001 2,748,719
2002 332,517
2003 and thereafter 1,149,532
------------
$ 6,098,261
============
The loan agreements contain, among other provisions, certain financial
covenants relating to the maintenance of tangible net worth and the ratio
of debt to equity. The agreements impose limitations on the Company with
respect to dividends and also contains a clause allowing for the
subjective acceleration of amounts due under the loan agreement.
Additionally, the Company received a waiver of the investments covenant
which enabled the Company to comply with the loan agreement covenants at
October 31, 1998. Borrowings under the line of credit (Note 4) and the
respective term loans have been guaranteed by three of the principal
officers of the Corporation.
6. 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 redeem shares at $1.95 per share. The number of shares
required to be redeemed quarterly is based on the sum of (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 with a contra equity account on the balance sheet. As of the
date of this report, 121,331 shares of Common Stock have been redeemed
under the Stock Redemption Agreement.
F-14
<PAGE>
CTI Industries and Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
7. Income Taxes
The income tax provisions (benefits) as of October 31, are comprised of
the following:
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Current:
Federal $ 3,209 $ --
State -- --
Foreign 45,705 32,208
-------- --------
48,914 32,208
-------- --------
Deferred:
Federal (551,630) 22,672
State (47,468) 5,133
-------- --------
(599,098) 27,805
-------- --------
Total income tax provision (benefit) $(550,184) $ 60,013
======== ========
</TABLE>
The components of the net deferred tax asset (liability) are as follows:
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Deferred tax assets:
Accounts receivable allowance $ 51,369 $ 50,349
Inventory valuation 78,519 56,784
Accrued liabilities 150,294 49,979
Net operating loss carryforwards 570,542 695,062
Alternative minimum tax credit carry forwards 341,979 338,612
----------- -----------
Total deferred tax assets 1,192,703 1,190,786
Deferred tax liabilities:
Book over tax basis of capital assets 593,605 622,859
----------- -----------
Net deferred tax asset $ 599,098 $ 567,927
=========== ===========
</TABLE>
At October 31, 1997 and 1998 the Company has net operating loss
carryforwards for tax purposes of approximately $1,500,000 and
$1,800,000. These carryforwards expire in the years 2011 and 2012. In
addition, the Company has approximately $342,000 and $339,000 of
alternative minimum tax credits as of October 31, 1997 and 1998 which
have no expiration date. Unremitted earnings of foreign subsidiaries have
been indefinitely reinvested. A valuation allowance against the deferred
tax asset at October 31, 1998 is not considered necessary because it is
more likely than not that the deferred tax asset will be fully utilized.
F-15
<PAGE>
CTI Industries and Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
7. Income Taxes, continued
Income tax provisions differed from the taxes calculated at the statutory
federal tax rate as follows:
Years Ended
---------------------
1997 1998
Taxes at statutory rate $ 200,395 $ 61,838
State income taxes (31,455) 3,388
Foreign taxes paid 45,705 32,208
Foreign income (68,078) (51,194)
Increase (decrease)
in valuation allowance (564,276) --
Correction of prior estimates (141,592) --
Other 9,117 13,773
-------- --------
Income tax provision (benefit) $(550,184) $ 60,013
======== ========
8. Research and Development
The Company conducts product development and research activities which
includes (I) creative product development, (ii) creative marketing, and
(iii) engineering development. During the years ended October 31, 1997
and 1998, the Company estimates that the total amount spent on research
and development activities was approximately $238,000 and $252,000,
respectively.
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 $52,903 and $58,188
for the years ended October 31, 1997 and 1998, respectively. The total
expense charged to operations relating to this plan amounted to $6,050
and $9,995 for the years ended October 31, 1997 and 1998, respectively.
F-16
<PAGE>
CTI Industries and Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
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
$236,071 and $195,200 for the years ended October 31, 1997 and 1998.
The Company purchases packaging materials from entities in which
shareholders of the Company maintain an ownership interest. Purchases
from these affiliates were $233,842 and $458,347 for the years ended
October 31, 1997 and 1998.
In 1998 the Company advanced funds totaling $81,352 to officers of the
Company. $56,456 of these funds were used to purchase common stock of the
Company and is reflected as a contra equity account at October 31, 1998.
11. Joint Venture
Effective September 16, 1996, the Company entered into a joint venture
agreement with a manufacturer in Mexico. The joint venture was formed to
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, 1998, the Company has made a total capital investment in the
joint venture of $77,975 and accounts for its proportionate share of
income or loss using the equity method.
12. Investment in Subsidiary
On January 26, 1998, the Company and Pulidos of Terminados Finos S.A. de
C.V. ("P&TF") entered into an agreement under which (i) the Company
subscribed for 45% of the outstanding capital stock of P&TF for $800,000,
(ii) the Company loaned to P&TF $850,000 collateralized by certain latex
balloon manufacturing equipment, and (iii) the 1995 equipment purchase
agreement between the parties was cancelled with respect to 2 pieces of
latex balloon manufacturing equipment, which is now owned by CTI and
leased to P&TF. The purchase of the capital stock was effective February
1, 1998. The Company accounts for the investment using the equity method.
F-17
<PAGE>
CTI Industries and Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
13. 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 90% of this facility through December 31,
1999. The Company's United Kingdom subsidiary also maintains a lease for
office and warehouse space which expires in 2019.
The Company leases a office equipment and automobiles under operating
leases which expire on various dates between November 1998 and September
2002.
The net rent expense of all leases was $401,242 in 1997 and $115,519 in
1998.
The future aggregate minimum net lease payments under existing agreements
as of October 31, are as follows:
Lease Sublease
Payments Income Net
1999 $ 343,631 $ 244,590 $ 99,041
2000 116,608 38,834 77,774
2001 71,044 71,044
2002 71,044 71,044
2003 51,700 51,700
Therefter 827,200 827,200
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:
1999 $ 660,510
2000 558,352
2001 516,643
2002 84,396
F-18
<PAGE>
CTI Industries and Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
14. 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. The conversion was effective
upon the closing of an initial public offering of 1,500,000 shares of the
Company's Common Stock on November 5, 1997. 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.
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 Securities
In November of 1997, the Company issued 1,500,000 shares of common stock
to the public at $4.00 per share. The underwriting discounts and
commissions against the sale were $868,443 and the direct costs incurred
by the Company were $445,067.
Also in November of 1997, in connection with the underwriting option to
purchase additional shares to cover over-allotments, the Company issued
225,000 additional shares of common stock to the public at $4.00 per
share. The underwriting discount and commissions against the sale were
$117,000 with the net proceeds to the Company amounting to $783,000.
F-19
<PAGE>
CTI Industries and Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
17. Stock Options
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. Options to purchase 121,000 and 299,000 shares of
Common Stock have been granted as of October 31, 1997 and 1998,
respectively. The options are exercisable immediately upon grant and have
a term of ten years. The Plan provides for the award of options, which
may either be incentive stock options ("ISOs") within the meaning of
Section 422A of the Internal Revenue Code of 1986, as amended (the
"Code") or non-qualified options ("NQOs") which are not subject to
special tax treatment under the Code. The Plan is administered by the
Board or a committee appointed by the Board (the "Administrator").
Officers, directors, and employees of, and consultants to, the Company or
any parent or subsidiary corporation selected by the Administrator are
eligible to receive options under the Plan. Subject to certain
restrictions, the Administrator is authorized to designate the number of
shares to be covered by each award, the terms of the award, the date on
which and the rates at which options or other awards may be exercised,
the method of payment and other terms.
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.
In September, 1998 the Company issued an option to purchase 30,000 shares
of the Company's Common Stock at an exercise price of $2.50 per share to
Thornhill Capital LLC in consideration for services. The option has a
term of 10 years.
In December, 1996, certain members of company management were issued
warrants to purchase 230,769 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.
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.
F-20
<PAGE>
CTI Industries and Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
17. Stock Options, continued
The following is a summary of the activity in the Company's stock option
plans and other options issued for the year ended October 31, 1997 and
1998, respectively.
1997 1998
Outstanding, beginning of period -- 629,013
Granted 629,013 212,000
Exercised -- (19,396)
Canceled -- (4,000)
-------- --------
Outstanding at the end of period 629,013 817,617
======== ========
Weighted average exercise price per share $ 2.57 $ 2.33
======== ========
Exercisable at end of period 629,013 817,617
======== ========
Available for grant at end of period 179,000 1,000
======== ========
The Company applies 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.
The Company recognizes compensation cost for stock-based compensation
awards equal to the difference between the quoted market price of the
stock at the date of grant or award and the price to be paid by the
employee upon exercise in accordance with the provisions of APB No. 25.
Based upon the terms of Company's current stock option plans, the stock
price on the date of grant and price paid upon exercise are the same,
thus no compensation charges is required to be recognized.
As allowed by SFAS No. 123, the Company will continue to apply the
provisions of APB No. 25 in accounting for its stock-based employee
compensation arrangements and will disclose pro forma net income and
earnings per share information in its footnotes as if the fair value
method suggested in SFAS No. 123 had been applied.
F-21
<PAGE>
CTI Industries and Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
17. Stock Options, continued
If compensation cost based on fair value method of the options had been
used, the Company's net income and earnings per common share (EPS) would
have been as follows:
1997 1998
Net income (loss) As reported $ 1,140 $ 122
Pro Forma (312) (89)
EPS As reported $ 1.04 $ 0.03
Pro Forma (0.31) (0.02)
The fair value of each option was estimated as of the date of the grant
using the Black-Scholes option pricing model based on the following
assumptions:
1997 1998
Expected life (years) 5 5
Volatility 20% 20%
Risk-free interest rate 6.5% 5.0%
Dividend yield - -
The weighted average fair value of options granted during the years
ending October 31, 1998 and 1997 was $1.00 and $2.21 per share,
respectively.
Significant option and warrant groups outstanding at October 31, 1998 and
related weighted average price and remaining life information are as
follows:
Remaining
Exercise Life
Grant Date Outstanding Exercisable Price (Years)
September 1998 212,000 212,000 $ 2.59 9
September 1997 117,000 117,000 $ 2.57 8
June 1997 277,244 277,244 $ 3.12 4
December 1996 211,373 211,373 $ .91 3
F-22
<PAGE>
CTI Industries and Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
18. Earnings Per Share
The Company adopted SFAS No. 128, "Earnings per Share," for the year
ended October 31, 1998. Adoption of this pronouncement, which was applied
to prior periods presented, did not have a material impact on the
Company's financial statements.
Basic earnings per share is computed by dividing the income available to
common shareholders, net earnings, less redeemable preferred stock
dividends and redeemable common stock accretion, by the weighted average
number of shares of common stock outstanding during each period.
Diluted earnings per share is computed by dividing net earnings by the
weighted average number of shares of common stock and common stock
equivalents (stock options and warrants), unless anti-dilutive, during
each period.
Earnings per share for each of the two fiscal years in the period ended
October 31, 1998 was computed as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
October 31, 1997 October 31, 1998
------------------------- ------------------------
Basic Diluted Basic Diluted
<S> <C> <C> <C> <C>
Average shares outstanding:
Weighted average shares
outstanding 999,625 999,625 3,798,010 3,798,010
Common stock
equivalents (options/
warrants) -- 1,225,710 -- 323,356
---------- ------------ ---------- ----------
999,625 2,225,335 3,798,010 4,121,366
Earnings:
Net income $1,139,578 $1,139,578 $ 121,860 $ 121,860
Dividends applicable to
redeemable preferred
stock 97,500 -- -- --
---------- ------------ ---------- ----------
Income available to
common stockholders $1,042,078 $ 1,139,578 $ 121,860 $ 121,860
========== ============ ========== ==========
Net earnings applicable
to common shares $1.04 $ .51 $0.03 $0.03
========== ============ ========== ==========
</TABLE>
F-23
<PAGE>
CTI Industries and Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
19. Future Adoption of Recently Issued Accounting Standards
During 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information.
SFAS No. 130 establishes standards for reporting comprehensive income to
present a measurement 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 desegregates the entity for making internal operating
decisions. These statements are effective for fiscal years beginning
after December 15, 1997 and are not applicable to the Company's financial
statements as of October 31, 1998.
In February 1998 the FASB issued SFAS No. 132 "Employer's Disclosures
about Pensions and Other Post-Retirement Benefits". SFAS No. 132
standardizes the disclosure requirements for pension and other
post-retirement benefits. The statement is effective for fiscal years
beginning after December 15, 1997.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments and
requires recognition of all derivatives as assets or liabilities in the
statement of financial position and measurement of those instruments at
fair value. The statement is effective for fiscal years beginning after
June 15, 1999. Management has not determined what impact this standard,
when adopted, will have on the Company's financial statements.
F-24
<PAGE>
CTI Industries and Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
20. Geographic Segment Data
The Company's operations consist of a 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, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
United
United States Kingdom Eliminations Consolidated
<S> <C> <C> <C> <C>
1997
Revenues $ 15,435,746 $ 1,934,451 $ (938,779) $ 16,431,418
Operating income 815,771 127,772 943,543
Net income 985,055 154,523 1,139,578
Total assets 13,814,872 1,057,963 (655,209) 14,217,626
1998
Revenues $ 19,008,359 $ 1,751,131 $ (806,667) $ 19,952,823
Operating income 363,115 137,888 501,003
Net income 3,509 118,351 121,860
Total assets 22,454,142 769,092 (369,613) 22,853,621
</TABLE>
21. Fourth Quarter Adjustments to Financial Results
During the fourth quarter of the year ended October 31, 1998, the Company
recorded net charges against pre-tax income of approximately $581,000
primarily related to a revaluation of inventory.
F-25
Exhibit 10.15
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
THIS AGREEMENT is made as of May 1, 1998, by and between CTI
Industries Corporation, a Delaware corporation (the "Borrower"), and First
American Bank, an Illinois banking corporation (the "Bank").
Whereas, the Borrower and the Bank are parties to a Loan and
Security Agreement dated as of August 22, 1996, as it has been amended from time
to time and the parties wish to restate the terms and conditions under which the
Bank will make loans to the Borrower; and
In consideration of the mutual covenants, conditions, and
agreements herein contained, the parties hereto agree as follows:
Section 1. THE BANK'S AGREEMENT TO LEND.
1.1. Loan Amount. Subject to and upon the terms and conditions
set forth in this Agreement, the Bank agrees to lend to the Borrower, from time
to time, such sums as may be requested by the Borrower and which the Bank in its
discretion agrees to lend from time to time, the total of which shall not
exceed, in the aggregate, $10,224,651.16, subject to the further limits
hereinafter set forth (the "Loan") pursuant to the First Term Loan, the Second
Term Loan, Third Term Loan, Fourth Term Loan and the Revolving Loan hereinafter
provided.
1.1.1. First Term Loan (Loan No. 600804665-63). The Bank
agrees to lend to the Borrower, subject to and upon the terms and conditions
herein set forth, the sum of One Million Seven Hundred Eighty Eight Thousand
Three Hundred Twenty Eight and 39/100 Dollars ($1,788,328.39) (herein referred
to as the "First Term Loan"). The First Term Loan shall be evidenced by and be
repayable with interest in accordance with the terms of this Agreement and a
promissory note payable to the order of the Bank in the original principal
amount of $1,788,328.39, which shall be dated on or before the initial
disbursement of the First Term Loan and shall be duly executed and delivered by
the Borrower (the "First Term Note").
1.1.2. Second Term Loan (Loan No. 600804665-56). The Bank
agrees to lend to the Borrower, subject to and upon the terms and conditions
herein set forth, the sum of Two Million One Hundred Twenty Eight Thousand Three
Hundred Twenty Two and 80/100 Dollars ($2,128,322.80)(herein referred to as the
"Second Term Loan"). The Second Term Loan shall be evidenced by and be repayable
with interest in accordance with the terms of this Agreement and a promissory
note payable to the order of the Bank in the original principal amount of
$2,200,000.00, dated August 22, 1996 and having been duly executed and delivered
by the Borrower (the "Second Term Note").
1.1.3. Third Term Loan (Loan No. 600804665-64). The Bank
agrees to lend to the Borrower, subject to and upon the terms and conditions
herein set forth, the sum of Two Million Two Hundred Fifty Eight Thousand and
No/100 Dollars ($2,258,000.00) (herein referred to as the "Third Term Loan").
The Third Term Loan shall be evidenced by and be repayable with interest in
accordance with the terms of this Agreement and a promissory note payable to the
order of the Bank in the original principal amount of $2,258,000.00, which shall
be dated on or before the initial disbursement of the Third Term Loan and shall
be duly executed and delivered by the Borrower (the "Third Term Note").
-1-
<PAGE>
1.1.4. Fourth Term Loan (Loan No. 600804665-60). The Bank
agrees to lend to the Borrower, subject to and upon the terms and conditions
herein set forth, the sum of Forty Nine Thousand Nine Hundred Ninety Nine and
97/100 Dollars ($49,999.67)(herein referred to as the "Fourth Term Loan"). The
Fourth Term Loan shall be evidenced by and be repayable with interest in
accordance with the terms of this Agreement and a promissory note payable to the
order of the Bank in the original principal amount of $200,000.00, dated July 1,
1997 and having been duly executed and delivered by the Borrower (the "Fourth
Term Note").
1.1.5. Revolving Loan (Loan No. 600804665-65) The Bank agrees
to lend to the Borrower, subject to and upon the terms and conditions set forth
herein, at any time or from time to time on or after the date hereof and on or
before May 1, 1999, such amounts (each such loan and all such loans,
collectively, as the context requires being herein referred to as the "Revolving
Loan") as may be requested by the Borrower and which the Bank in its discretion
agrees to lend from time to time, subject to the limitations hereinafter set
forth. Within the limits and subject to and upon the terms and conditions herein
set forth, amounts under the Revolving Loan may be borrowed and repaid and
reborrowed from time to time. Except as otherwise permitted by the Bank, the
aggregate unpaid principal amount of the Revolving Loan outstanding at any time
shall not exceed the lesser of Four Million and No/100 Dollars ($4,000,000.00)
or the Advance Limit (as hereinafter defined). The Revolving Loan shall be
evidenced by and be repayable with interest in accordance with the terms of this
Agreement and a promissory note payable to the order of the Bank in the original
principal amount of $4,000,000.00 which shall be dated on or before the initial
disbursement of the Revolving Loan and shall be duly executed and delivered by
the Borrower (the "Revolving Note"). For purposes of this Agreement, the Advance
Limit shall be equal to the sum of: (i) 80% of the Eligible Accounts (as
hereinafter defined) or $4,000,000.00, whichever is less; and (ii) 25% of
Eligible Inventory (as hereinafter defined) or $1,300,000.00, whichever is less.
For purposes of this Agreement the Eligible Accounts shall
mean all Accounts Receivable (as defined in Section 4.1(a) hereof) created by
the Borrower in the ordinary course of business arising out of the sale or lease
of goods or the rendition of services by the Borrower and which are and at all
times shall continue to be (to the effect that any Eligible Account that at any
subsequent time fails to meet the requirements to be an Eligible Account shall
cease to be an Eligible Account) acceptable to the Bank in all respects as the
Bank shall from time to time determine in its discretion, but excluding in all
events:
(a) any Accounts Receivable unpaid for more than
90 days fromthe date of invoice;
(b) any Accounts Receivable against the payment of
which the account debtor claims to have, may have, or has a defense,
set-off, or counterclaim;
(c) any Accounts Receivable as to which the account
debtor is located outside the United States, unless supported by a
letter of credit or other security deemed to be acceptable by the Bank;
(d) any Accounts Receivable as to which the account
debtor is a parent, subsidiary, or affiliate of the Borrower;
-2-
<PAGE>
(e) any Accounts Receivable with respect to which
goods are placed on consignment, guaranteed sale, or other terms which
are conditions precedent to payment by the account debtor;
(f) any Accounts Receivable as to which an account
debtor is the United States of America or any department, agency, or
instrumentality of the United States of America, unless appropriate
assignment of claims forms are executed in advance;
(g) any Accounts Receivable not arising out of the
Borrower's ordinary course of trade or business;
(h) any Accounts Receivable not evidenced by an
invoice;
(i) any Accounts Receivable arising out of a contract
or order that, by its terms, forbids or makes void or unenforceable the
assignment by the Borrower to the Bank of the Accounts Receivable
arising with respect thereto; and
(j) any Accounts Receivable that the Bank elects to
exclude from eligibility due to any actual or potential liens, claims,
or risks, including unsatisfactory financial responsibility, payment
record, or reputation of the account debtor.
For purposes of this Agreement, the Eligible Inventory shall
mean the lower of cost or market value (as determined in accordance with
generally accepted accounting principles consistently applied) of the Inventory
(as defined in Section 4.1(b) hereof) of the Borrower and which is and at all
times shall continue to be (to the effect that any Inventory that at any
subsequent time fails to meet the requirements to be Eligible Inventory shall
cease to be Eligible Inventory) acceptable to the Bank in all respects as the
Bank shall from time to time determine in its discretion, but excluding in all
events:
(a) any Inventory that is subject to any prior
assignment, claim, lien, security interest, or encumbrance, other than
the security interest in favor of the Bank;
(b) any Inventory that is not new and unused, except
as the Bank may otherwise consent in writing;
(c) any Inventory that is stored with a bailee,
warehouseman, or similar party, unless such bailee, warehouseman, or
similar party shall issue and deliver to the Bank, in form and
substance acceptable to the Bank, an agreement or other instrument
acknowledging the Bank's prior security interest therein; and
(d) any Inventory that the Bank elects to exclude
from eligibility due to any actual or potential liens, claims, or
risks, including age, type, category, and/or quantity of the Inventory.
1.2. Loan Disbursements.
-3-
<PAGE>
1.2.1. First Term Loan Disbursements. The First Term Loan
shall be disbursed, as the Borrower shall direct, upon the satisfaction of the
conditions set forth in Sections 2 and 3 hereof.
1.2.2. Second Term Loan Disbursements. The Second Term Loan
has already been disbursed as Borrower requested.
1.2.3. Third Term Loan Disbursements. The Third Term Loan
shall be disbursed, as the Borrower shall direct, upon the satisfaction of the
conditions set forth in Sections 2 and 3 hereof.
1.2.4. Fourth Term Loan Disbursements. The Fourth Term Loan
has already been disbursed as Borrower requested.
1.2.5. Revolving Loan Disbursements. The Revolving Loan shall
be disbursed, as the Borrower shall direct, upon the submission of such evidence
as the Bank shall request to verify the Advance Limit and the satisfaction of
the conditions set forth in Sections 2 and 3 hereof. Whenever the Borrower
desires to make a borrowing of the Revolving Loan, the Borrower shall give the
Bank written or telephonic notice thereof not later than 1:00 p.m. Chicago time
on the borrowing date. Each notice of borrowing required under this section
shall specify the amount of the proposed borrowing and the proposed borrowing
date.
1.3. Interest and Penalties.
1.3.1. First Term Loan Interest and Penalties The First Term
Loan shall bear interest on its principal amount outstanding from time to time
at a rate per annum equal to eight and one-quarter percent (8.25%) per annum.
Upon and after the occurrence of an Event of Default, the First Term Loan shall
bear interest on its principal amount outstanding from time to time at a rate
per annum (the "First Term Loan Default Rate") equal to eleven and one-quarter
percent (11.25%) per annum. Interest accruing prior to maturity of the First
Term Loan (whether by lapse of time, acceleration, or otherwise) shall be due
and payable on the first day of each calendar month, commencing with the month
following the date on which the first disbursement of the First Term Loan is
made. After maturity of the First Term Loan (whether by lapse of time,
acceleration, or otherwise) accrued interest shall be due and payable upon
demand. The Borrower shall pay a late charge of five percent (5%) of the amount
of any sum payable to the Bank under this Agreement or any of the Notes that is
received by the Bank more than 10 days after the date on which it is due. Such
late charges shall be due and payable on the due date of the next installment of
principal or interest, together with the regular installment then due.
1.3.2. Second Term Loan Interest and Penalties The Second Term
Loan shall bear interest on its principal amount outstanding from time to time
at a rate per annum equal to eight and one-quarter percent (8.25%) per annum.
Upon and after the occurrence of an Event of Default, the Second Term Loan shall
bear interest on its principal amount outstanding from time to time at a rate
per annum (the "Second Term Loan Default Rate") equal to eleven and one-quarter
percent (11.25%) per annum. Interest accruing prior to maturity of the Second
Term Loan (whether by lapse of time, acceleration, or otherwise) shall be due
and payable on the first day of each calendar month, commencing with the month
following the date on which the first disbursement of the Second Term Loan is
made. After maturity of the Second Term Loan (whether by lapse of time,
-4-
<PAGE>
acceleration, or otherwise) accrued interest shall be due and payable upon
demand.
1.3.3. Third Term Loan Interest and Penalties The Third Term
Loan shall bear interest on its principal amount outstanding from time to time
at a rate per annum equal to eight and one-quarter percent (8.25%) per annum.
Upon and after the occurrence of an Event of Default, the Third Term Loan shall
bear interest on its principal amount outstanding from time to time at a rate
per annum (the "Third Term Loan Default Rate") equal to eleven and one-quarter
percent (11.25%) per annum. Interest accruing prior to maturity of the Third
Term Loan (whether by lapse of time, acceleration, or otherwise) shall be due
and payable on the first day of each calendar month, commencing with the month
following the date on which the first disbursement of the Third Term Loan is
made. After maturity of the Third Term Loan (whether by lapse of time,
acceleration, or otherwise) accrued interest shall be due and payable upon
demand.
1.3.4. Fourth Term Loan Interest and Penalties The Fourth Term
Loan shall bear interest on its principal amount outstanding from time to time
at a rate per annum equal to one percent (1%) per annum over the Prime Rate
announced from time to time by the Bank (the "Bank's Prime Rate," which may not
be the Bank's lowest rate of interest) which shall be adjusted daily when and as
the Bank's Prime Rate changes. Upon and after the occurrence of an Event of
Default, the Fourth Term Loan shall bear interest on its principal amount
outstanding from time to time at a rate per annum (the "Fourth Term Loan Default
Rate") equal to five percent (5%) per annum over the Bank's Prime Rate, which
shall be adjusted daily when and as the Bank's Prime Rate changes. Interest
accruing prior to maturity of the Fourth Term Loan (whether by lapse of time,
acceleration, or otherwise) shall be due and payable on the first day of each
calendar month, commencing with the month following the date on which the first
disbursement of the Fourth Term Loan is made. After maturity of the Fourth Term
Loan (whether by lapse of time, acceleration, or otherwise) accrued interest
shall be due and payable upon demand.
1.3.5. Revolving Loan Interest and Penalties The Revolving
Loan shall bear interest on its principal amount outstanding from time to time
at a rate per annum equal to one-half of one percent (.5%) per annum over the
Prime Rate announced from time to time by the Bank (the "Bank's Prime Rate,"
which may not be the Bank's lowest rate of interest) which shall be adjusted
daily when and as the Bank's Prime Rate changes. Upon and after the occurrence
of an Event of Default, the Revolving Loan shall bear interest on its principal
amount outstanding from time to time at a rate per annum (the "Revolving Loan
Default Rate") equal to three and one-half percent (3.5%) per annum over the
Bank's Prime Rate, which shall be adjusted daily when and as the Bank's Prime
Rate changes. Interest accruing prior to maturity of the Revolving Loan (whether
by lapse of time, acceleration, or otherwise) shall be due and payable on the
first day of each calendar month, commencing with the month following the date
on which the first disbursement of the Revolving Loan is made. After maturity of
the Revolving Loan (whether by lapse of time, acceleration, or otherwise)
accrued interest shall be due and payable upon demand.
1.4. Maturity of the Loan.
1.4.1. First Term Loan Maturity. The First Term Loan shall be
due and payable in equal monthly installments of $43,978.98 of principal and
interest,
-5-
<PAGE>
commencing on June 1, 1998, and a like sum on the first day of each calendar
month thereafter until the principal of and accrued and unpaid interest on the
First Term Loan is paid in full, provided that the outstanding principal of and
accrued and unpaid interest on the First Term Loan, if not sooner paid in full,
shall be due and payable in full on May 1, 2002 (or earlier as provided in this
Agreement or the First Term Note).
1.4.2. Second Term Loan Maturity. The Second Term Loan shall
be due and payable in equal monthly installments of $19,617.26 of principal and
interest, commencing on May 1, 1998, and a like sum on the first day of each
calendar month thereafter until the principal of and accrued and unpaid interest
on the Second Term Loan is paid in full, provided that the outstanding principal
of and accrued and unpaid interest on the Second Term Loan, if not sooner paid
in full, shall be due and payable in full on September 1, 2001 (or earlier as
provided in this Agreement or the Second Term Note).
1.4.3. Third Term Loan Maturity. The Third Term Loan shall be
due and payable in equal monthly installments of $46,194.61 of principal and
interest, commencing on September 1, 1998, and a like sum on the first day of
each calendar month thereafter until the principal of and accrued and unpaid
interest on the Third Term Loan is paid in full, provided that the outstanding
principal of and accrued and unpaid interest on the Third Term Loan, if not
sooner paid in full, shall be due and payable in full on August 1, 2003 (or
earlier as provided in this Agreement or the Third Term Note).
1.4.4. Fourth Term Loan Maturity. The Fourth Term Loan shall
be due and payable in monthly installments of $16,666.67 of principal,
commencing on May 1, 1998, and a like sum on the first day of each calendar
month thereafter until the principal of and accrued and unpaid interest on the
Fourth Term Loan is paid in full, provided that the outstanding principal of and
accrued and unpaid interest on the Fourth Term Loan, if not sooner paid in full,
shall be due and payable in full on July 1, 1998 (or earlier as provided in this
Agreement or the Fourth Term Note).
1.4.5. Revolving Loan Maturity. The Revolving Loan shall be
prepayable as provided in this Agreement and, if not sooner paid in full, shall
be due and payable on May 1, 1999 (or earlier as provided in this Agreement or
the Revolving Note).
1.5. Mandatory and Optional Prepayments. The Borrower shall
prepay the Revolving Loan if and to the extent that the outstanding principal
amount of the Revolving Loan shall from time to time exceed the limits therefor.
In addition, the Revolving Loan may be prepaid at any time at the option of the
Borrower without premium or penalty. All prepayments required or permitted
hereunder shall be applied first to prepayment of accrued and unpaid interest on
the Revolving Loan and then to the prepayment of the outstanding principal of
the Revolving Loan in the inverse order of maturity thereof.
1.6 Second Term Loan Prepayment Fee. The Second Term Note may
be prepaid at any time and from time to time prior to maturity, without premium,
penalty, or discount, but only to the extent that the source of such prepayment
is not derived, directly or indirectly, from money borrowed by the Borrower, any
Guarantor, or any Affiliate (as hereinafter defined) of the Borrower or any
Guarantor. The Borrower agrees to pay the Bank, on demand, in addition to the
-6-
<PAGE>
payment of all other obligations of the Borrower to the Bank that are then due
and payable, a fee (the "Second Term Loan Prepayment Fee") determined as
hereinafter provided if the Second Term Note is prepaid in whole or in part at
any time or from time to time prior to maturity, but only to the extent that the
source of such prepayment is derived, directly or indirectly, from money
borrowed by the Borrower, any Guarantor, or any Affiliate of the Borrower or any
Guarantor. The Second Term Loan Prepayment Fee shall be equal to the applicable
Loan Prepayment Percentage provided below, multiplied by the outstanding
principal amount of the Second Term Note so prepaid. For any year in which a
prepayment of the Second Term Note occurs, the applicable Second Term Loan
Prepayment Percentage shall be the percentage set forth opposite such year in
the following schedule:
Second Term Loan
Year Prepayment Percentage
---- ---------------------
May 1, 1998 to September 1, 1999 3%
May 2, 1999 to September 1, 2000 2%
May 2, 2000 to September 1, 2001 1%
All payments shall be applied first to accrued and unpaid interest on the Second
Term Note then, at the Bank's election, to any Second Term Loan Prepayment Fee
due by reason of any prepayment, and then to the outstanding principal of the
Second Term Note in the inverse order of maturity thereof. For purposes of this
Section the term "Affiliate" shall mean: any director, officer, or stockholder
of the Borrower, or any partnership or corporate entity controlled by the
Guarantors.
Section 2. CONDITIONS PRECEDENT TO THE BANK'S OBLIGATION TO
MAKE THE INITIAL LOAN DISBURSEMENT. Prior to the initial disbursement by the
Bank of any monies pursuant to this Agreement the following conditions must be
satisfied:
2.1. Delivery of Loan Documents. The Borrower shall execute
and deliver or cause to be executed and delivered to the Bank, as evidence of
and as security for all obligations under this Agreement, the following
documents (the "Loan Documents"), all to be in form and content as specified by
the Bank:
(a) the First Term Note, the Second Term Note, the
Third Term Note, the Fourth Term Note and the Revolving Note
(collectively, the "Notes");
(b) a first mortgage (the "Mortgage") on the real
estate commonly known as 22160 N. Pepper Rd., Barrington, IL 60010 (the
"Premises") owned by American National Bank and Trust Company of
Chicago, not personally, but solely as Trustee under Trust Agreement
dated September 19, 1984 and known as Trust No. 61978 (the "Trust") to
secure the obligations of the Borrower under this Agreement and the
Second Term Note;
(c) a collateral assignment of beneficial interest in
the Trust;
(d) the filing with the Secretary of State of the
State of Illinois and the recording with the Recorder's Office of Lake
County, Illinois duly executed U.C.C. Financing Statements showing the
Bank as secured party;
(e) guaranties of the obligations of the Borrower
under this Agreement and the Notes, executed and delivered by Stephen
M. Merrick, Howard
-7-
<PAGE>
W. Schwan and John H. Schwan (together with any other persons obligated
at any time with respect to all or any part of the Borrower's
obligations to the Bank, the "Guarantors"); and
(f) subordination agreements in the amount of
$315,000.00 executed by Steven M. Merrick; $350,000.00 executed by John
H. Schwan; and $50,000.00 executed Howard W. Schwan.
2.2. Liens on Property. The Bank shall have received evidence
satisfactory to the Bank that all real and personal property, fixtures and
equipment in which the Bank is taking a security interest will be free and clear
of all liens and encumbrances of every nature and description other than: the
security interest in favor of the Bank; the Permitted Exceptions (as defined in
Section 2.3); security interests disclosed in the search, conducted on behalf of
the Bank in July, 1996, for financing statements on file with the Illinois
Secretary of State naming the Borrower as debtor for XL/Datacomp, Inc., Suburban
National Bank of Palatine, Fathom Technologies, AT & T Credit Corporation, and
Xerox Corporation; and security interests and liens permitted under this
Agreement or to which the Bank shall have otherwise consented in writing
(collectively, the "Permitted Liens").
2.3. Title Insurance. The Borrower shall have furnished the
Bank with an ALTA Mortgage Loan Policy issued by Real Estate Index Inc. (the
"Title Company") (such policy being referred to herein as the "Title Policy"),
in the aggregate amount of $2,200,000.00. The Title Policy shall insure the
Mortgage (for its full amount) as a first lien on the Premises. The Title Policy
shall be subject only to the exceptions approved by the Bank (the "Permitted
Exceptions") and shall contain no exceptions for mechanic's or materialmen's
liens.
2.4. Insurance. The Borrower shall have delivered to the Bank
insurance policies with premiums prepaid, with issuing companies, coverages and
amounts satisfactory to the Bank, insuring the Premises and other properties of
the Borrower against loss or damage by fire and such other hazards as may be
required by the Bank, including, but not limited to, extended coverage,
vandalism, malicious mischief, and comprehensive public liability insurance as
required by the Bank. Each policy shall contain standard mortgage clauses
satisfactory to the Bank and loss payable clauses satisfactory to the Bank with
respect to such other insurance and shall provide that the policy may not be
canceled by any party for any reason whatsoever without first giving the Bank at
least thirty (30) days' prior written notice of any proposed cancellation. The
Borrower shall provide the Bank with fully paid valid policies each year as long
as any sums are owed the Bank. All policies shall name the Bank as mortgagee,
additional insured and loss payee with endorsements acceptable to the Bank.
2.5. Authority. The Borrower shall have furnished to the Bank
such documents, in form and content satisfactory to the Bank, as the Bank may
request as evidence of the due organization and good standing of the Borrower
and the due authorization and execution of the Loan Documents by the Borrower.
Section 3. ADDITIONAL CONDITIONS PRECEDENT TO THE BANK'S
OBLIGATIONS TO MAKE DISBURSEMENTS OF THE LOAN. Prior to and as a condition to
each disbursement of the Loan by the Bank:
-8-
<PAGE>
3.1. Accuracy of Representations and Warranties. The
representations and warranties of the Borrower made herein shall be true and
correct as though made on and as of the date of such disbursement.
3.2. No Material Adverse Change. There shall have been no
material adverse change in the financial condition of the Borrower from the
financial condition reflected on the financial statements of the Borrower last
furnished to the Bank.
3.3. No Default. There shall exist no Event of Default and no
event or condition which, with the giving of notice or lapse of time, or both,
would constitute an Event of Default.
Section 4. SECURITY INTEREST.
4.1. Grant of Security Interest. In order to secure the timely
and full performance of the obligations of the Borrower to the Bank under this
Agreement and the Notes and any and all interest accruing thereon, and any and
all extensions, renewals, or refinancings thereof, and all other present and
future obligations of the Borrower to the Bank, the Borrower hereby grants to
the Bank a security interest in the following property (collectively, the
"Collateral"):
(a) all present and future accounts, accounts
receivable, other receivables and claims for money due, instruments,
documents, chattel paper, contract rights, and general intangibles (the
"Accounts Receivable");
(b) all raw materials, supplies, work-in-process,
finished goods, and all other inventory of whatsoever kind or nature,
wherever located, whether now owned or hereafter acquired (the
"Inventory");
(c) all machinery, equipment, vehicles, furniture,
tools, and trade fixtures and all substitutions and replacements
thereof wherever located, and all attachments, accessions, parts, and
additions thereto, whether now owned or hereafter acquired;
(d) all of the Borrower's deposit accounts (whether
checking, savings, or otherwise) with the Bank or any other depositary
institution, whether now or hereafter existing and including accounts
held jointly with others;
(e) all monies, securities, drafts, notes, and other
property of the Borrower and the proceeds thereof, now or hereafter
held or received by or on behalf of the Bank from or for the Borrower,
whether for custody, pledge, transmission or otherwise;
(f) all books, records, and general intangibles
evidencing or relating to any of the foregoing; and
(g) any and all proceeds and products of the
foregoing.
4.2. Filing and Recording; Perfection. The Borrower shall
execute and deliver to the Bank financing statements and take whatever other
actions are requested by the Bank to perfect and continue the Bank's security
interest in the Collateral. Upon the request of the Bank, the Borrower will
deliver to the Bank
-9-
<PAGE>
any and all of the documents and instruments evidencing or constituting the
Collateral or any part thereof, together with an appropriate endorsement or
assignment thereof satisfactory to the Bank, and the Borrower will note the
Bank's security interest upon any and all chattel paper included in the
Collateral. The Borrower irrevocably appoints the Bank as the agent and
attorney-in-fact of the Borrower to execute such documents and take such actions
as the Bank deems necessary to preserve and perfect the Bank's security interest
in the Collateral.
4.3. Collections of Accounts. The Borrower hereby authorizes
the Bank, now and at any time or times hereafter, to (a) notify any or all
account debtors that the Accounts Receivable have been assigned to the Bank and
that the Bank has a security interest therein and (b) direct such account
debtors to make all payments due from them to the Borrower upon the Accounts
Receivable directly to the Bank or to a lockbox designated by the Bank. Until
such time as the Bank shall exercise such rights, the Borrower shall collect and
enforce all of its Accounts Receivable. The costs of collection and enforcement
of the Accounts Receivable shall be borne by the Borrower, whether such costs
are incurred by the Borrower or the Bank. All collections and proceeds of the
Accounts Receivable and other Collateral shall be held in trust for the Bank,
separate and apart from other funds and properties of the Borrower, and shall be
promptly delivered by the Borrower to the Bank in the form in which they are
received by the Borrower (except for any necessary endorsement in favor of the
Bank) by mailing or delivering the same to the Bank not later than the business
day following receipt thereof by the Borrower. The Bank will, within two (2)
business days after receipt of checks and one business day after receipt of cash
and cash equivalents, apply the whole or any part of such collections against
the Borrower's liabilities to the Bank. All checks, drafts, instruments, and
other items of payment or proceeds of Collateral shall be endorsed by the
Borrower to the order of the Bank. The Borrower irrevocably constitutes and
appoints the Bank and all persons designated by the Bank as the true and lawful
agent and attorney-in-fact to endorse the Borrower's name to any payment or
proceeds of Collateral.
Section 5. GENERAL COVENANTS. The Borrower agrees that so long
as any of the Notes shall be outstanding, unless waived in writing by the Bank:
5.1. Financial Information, Reports. The Borrower will
maintain a standard and modern system of accounting in accordance with generally
accepted practice and will furnish to the Bank and its duly authorized
representatives such information with respect to the business, affairs,
operations, and financial condition of the Borrower as may be reasonably
requested from time to time. The Borrower shall furnish to the Bank:
(a) as soon as available, and in any event not more
than 45 days after the close of each quarterly fiscal period of the
Borrower, a copy of the balance sheet and profit and loss statement of
the Borrower for the period from the beginning of the current fiscal
year to the end of such quarterly period, prepared by an independent
public accounting firm of recognized standing selected by the Borrower;
(b) as soon as available, and in any event within 30
days after the close of each monthly fiscal period of the Borrower, a
copy of the balance sheet and profit and loss statement for the
Borrower (of its domestic
-10-
<PAGE>
operations only) prepared by the Borrower and signed by a principal
officer of the Borrower for such monthly period and the period from the
beginning of the current fiscal year to the end of such monthly period;
(c) as soon as practicable and in any event within
120 days after the end of each fiscal year of the Borrower, a profit
and loss statement and a reconciliation of surplus accounts of the
Borrower for such year, and a balance sheet of the Borrower as of the
end of such year, setting forth in each case in comparative form
corresponding figures from the preceding fiscal year, all in reasonable
detail and satisfactory to the Bank and certified by an independent
certified public accounting firm of recognized standing selected by the
Borrower;
(d) within 15 days after the close of each monthly
fiscal period of the Borrower, and otherwise from time to time as the
Bank may request, a schedule of the Eligible Accounts and Eligible
Inventory and an aging of the Accounts Receivable and accounts payable,
and a report of Inventory in form acceptable to the Bank, signed by a
principal officer of the Borrower, together with copies of invoices, if
requested by the Bank pertaining to the Eligible Accounts arising since
the previous such report to the Bank;
(a) promptly upon receipt thereof, copies of any
detailed reports submitted to the Borrower by independent accountants
in connection with each annual audit or any annual or interim review of
the books and records of the Borrower made by such accountants; and
(b) with reasonable promptness, such other financial
information, including annual financial statements of the Guarantors,
as the Bank may reasonably request.
All financial statements of the Borrower specified in the preceding clauses (a)
and (c) shall be furnished in consolidated and consolidating form for the
Borrower and all subsidiaries that the Borrower may at any time have. Together
with each delivery of financial statements required by the preceding clauses
(a), (b) and (c), the Borrower will deliver to the Bank a certificate of a
principal officer of the Borrower stating that there exists no Event of Default
or any event or condition that, with notice or lapse of time, or both, would
constitute an Event of Default, or, if any such Event of Default or event or
condition exists, specifying the nature thereof, the period of existence
thereof, and what action the Borrower proposes to take with respect thereto. The
Borrower will permit any person designated by the Bank to visit and inspect any
of the properties, corporate books, and financial records of the Borrower, and
to discuss the affairs, finances, and accounts of the Borrower, all at such
reasonable times and as often as the Bank may reasonably request.
5.2. Taxes. The Borrower shall cause to be paid on a timely
basis all taxes and assessments, special or otherwise, and any other such
charges which are due and payable. In the event the Borrower fails to pay taxes
as required herein, the Bank reserves the right to require the Borrower to make
monthly deposits into an escrow account established for the payment of taxes in
an amount satisfactory to the Bank. The Borrower may contest in good faith and
through appropriate proceedings any tax or assessment or other charge due and
payable provided that the Borrower shall have deposited with the Bank a cash sum
sufficient to discharge such tax assessment or charge.
-11-
<PAGE>
5.3. Insurance. The Borrower will maintain insurance coverage
by reputable insurance companies in such forms and amounts, and against such
hazards, as are ordinarily carried by other companies similarly situated in
operating like businesses and properties. Without limiting the generality of the
foregoing, property and casualty insurance shall be in amounts and forms
insuring the full replacement cost of fixed assets of the Borrower.
5.4. Liens and Encumbrances. The Borrower shall not create,
assume, or suffer to exist any mortgage, deed of trust, pledge, encumbrance,
lien, or charge of any kind (including the charge upon the property purchased
under conditional sales or other title retention agreements) upon any of the
property or assets of the Borrower, whether now owned or hereafter acquired,
except: (a) liens for taxes not yet due or which are being contested in good
faith by appropriate proceedings; (b) other liens, charges, and encumbrances
incidental to the conduct of the Borrower's business or the ownership of its
property and assets which are not incurred in connection with the borrowing of
money or the obtaining of advances of credit and which do not in the aggregate
materially impair the use of such property or assets in the operation of the
Borrower's business; (c) Permitted Liens; and (d) purchase money mortgages and
other purchase money liens or security interests (including finance leases) upon
any fixed or capital assets hereafter acquired by the Borrower, provided that no
such mortgage, lien, or security interest shall extend to or cover any other
property of the Borrower, and further provided that the principal amount of the
aggregate of all such indebtedness secured by all such mortgages, liens, and
security interests shall not exceed $50,000.00.
5.5. Maintenance of Properties. The Borrower will maintain,
keep, and preserve all of its properties (tangible and intangible) necessary or
useful in the proper conduct of its business in good working order and
condition, ordinary wear and tear excepted. The Borrower shall from time to time
make or cause to be made all necessary and proper repairs, renewals,
replacements, additions, and improvements to its properties so that the business
carried on by the Borrower may be properly and advantageously conducted at all
times in accordance with prudent business management.
5.6. Compliance With Laws. The Borrower shall comply in all
material respects with all laws, ordinances, regulations, and orders of all
governmental authorities applicable to its business or the use of its
properties. The Borrower may contest, in good faith, any such law, ordinance,
regulation, or order and withhold compliance during any proceeding, including
appropriate appeals, so long as the Bank's security interest in the Collateral
or lien in the Premises, in the opinion of the Bank, is not jeopardized.
5.7. Location of Collateral. All Collateral now owned by the
Borrower is and will be, and all Collateral hereafter acquired by the Borrower
will be, and to the extent the Collateral consists of intangible property such
as accounts, the records concerning the Collateral will be, kept at the
Borrower's facilities at either 22160 North Pepper Road, Barrington, IL 60010 or
675 Industrial Drive, Cary, Illinois. Except in the ordinary course of its
business, the Borrower shall not remove the Collateral from its existing
locations. To the extent the Collateral consists of vehicles or other property,
the ownership of which is evidenced by a certificate of title, the Borrower
shall not take or
-12-
<PAGE>
permit any action that would require registration of such Collateral outside the
State of Illinois.
5.8. Mergers, Sales of Assets. The Borrower shall not merge or
consolidate with any other corporation or sell, lease, transfer, or otherwise
dispose of all or any substantial part of the assets of the Borrower or enter
into any sale and leaseback transaction or arrangement with respect to any
properties of the Borrower, change the name of the Borrower, or wind up,
liquidate, or dissolve, or agree to do any of the foregoing, except that the
Borrower may sell in the ordinary course of business assets or properties no
longer necessary for the proper conduct of the business of the Borrower having a
value amounting, in any single transaction, to not more than $50,000.00.
5.9. Bank Account. The Borrower shall maintain its principal
deposit relationship, including its corporate operating checking account and
money market deposit account, with the Bank.
5.10. Tangible Net Worth. The Borrower shall at all times
maintain a Tangible Net Worth in an amount greater than $6,000,000.00. For
purposes of this Agreement, Tangible Net Worth shall mean the total of all
assets appearing on a balance sheet of the Borrower prepared in accordance with
generally accepted accounting principles consistently applied, less the total
liabilities of the Borrower, as determined in accordance with generally accepted
accounting principles consistently applied, less the amount of any intangible
assets as determined by the Bank in its discretion.
5.11 Debt to Worth Ratio. At the end of each fiscal quarter of
the Borrower, the Borrower shall achieve a ratio of total debt to tangible net
worth of no more than 3 to 1. For purposes of this Agreement total debt shall
mean all items that, in accordance with generally accepted accounting
principles, would be included in determining total liabilities as shown on the
liabilities side of a balance sheet as of the date the amount of total
liabilities is to be determined and, in any event, shall include (without
duplication) capitalized lease obligations, letters of credit, and all
obligations relating thereto, any liabilities secured by any mortgage, pledge,
lien, or security interest on property owned or acquired, whether or not such
liabilities shall have been assumed and guaranties and endorsements (other than
for collection in the ordinary course of business) and other contingent
obligations. Tangible net worth shall mean the total of all assets appearing on
a balance sheet prepared in accordance with generally accepted accounting
principles consistently applied, less total liabilities, as determined in
accordance with generally accepted accounting principles consistently applied,
less the amount of any intangible assets as determined by the Bank in its
discretion.
5.12 Permitted Debt. The Borrower shall not create, incur,
assume, or suffer to exist any funded or current debt, or guarantee, endorse or
otherwise be or become contingently liable in connection with the obligations,
stock, or dividends of any person, except: (a) debt represented by the Notes;
(b) funded or current debt secured by mortgages and other liens and retentions
permitted under Section 5.4 hereof; (c) contingent liabilities arising out of
the endorsement in the ordinary course of business of negotiable instruments in
the course of collection thereof; (d) current liabilities arising in the
ordinary course of business of the Borrower and which are not incurred for money
borrowed; and (e) debt subordinated to the Bank.
-13-
<PAGE>
5.13 Leases and Purchases. The Borrower shall not incur or
have outstanding any obligations for the payment for purchases of property or
for rentals on account of the use or possession of real or personal property
(whether or not any express or implied arrangement is made for the acquisition
by the Borrower of title thereto at any time) if after giving effect thereto the
maximum aggregate amount of rentals for which the Borrower is obligated in any
fiscal year on all leases having a term in excess of three years would exceed
$50,000.00.
5.14 Investments. Except for investments in PTF and CTF (which
will not exceed $500,000.00 in the aggregate), the Borrower shall not make or
permit to remain outstanding any loan or advance to, or own, purchase, or
acquire any stock or securities of, any person, excepting loans to employees not
exceeding, at any time, in the aggregate, $50,000.00 outstanding.
5.15 Restricted Payments. The Borrower shall not pay or
declare any dividend on any shares of any class of its capital stock or make any
other distribution on account of any shares of any class of its stock, or
redeem, pur chase, or otherwise acquire, directly or indirectly, any shares of
any class of its capital stock in excess of $250,000.00 in any year.
5.16 Transactions with Affiliates. The Borrower shall not,
directly or indirectly, purchase, acquire, or lease any material property or
service from, or sell, transfer, or lease any material property or service to,
any Affiliate (as hereinafter defined) except in the usual, regular, and
ordinary course of business of the Borrower and upon fair and reasonable terms
no less favorable to the Borrower than would result from arm's-length bargaining
with an unaffiliated person. For purposes of this Agreement, "Affiliate" shall
mean: any person or entity, directly or indirectly, through one or more
intermediaries, controlling, controlled by, or under common control with the
Borrower; or any director, officer, trustee, or shareholder of the Borrower or
any entity, directly or indirectly, through one or more intermediaries,
controlling, controlled by, or under common control with the Borrower.
Section 6. DEFAULT AND REMEDIES.
6.1. Events of Default. Each of the following shall constitute
an "Event of Default" under this Agreement:
(a) The Borrower fails to pay, within ten (10) days
after the date on which payment thereof is due, any installment of
principal or interest on any of the Notes or any other sum due and
payable under this Agreement, any of the Notes, or the Mortgage; or
(b) the Borrower fails to keep or perform any
agreement, undertaking, obligation, covenant or condition set forth in
Section 5.2, 5.3 or 5.4 of this Agreement; or
(c) the Borrower fails to keep or perform any other
agreement, undertaking, obligation, covenant, or condition set forth in
this Agreement or any of the Loan Documents or any other agreement
between the Borrower and the Bank within thirty (30) days after notice
that such performance is due and such performance remains uncured
within that period; or
-14-
<PAGE>
(d) if default shall occur in the payment of any
principal, interest, or premium with respect to any indebtedness of the
Borrower or any Guarantor for borrowed money and such default shall
continue for more than the period of grace, if any, therein specified
and shall not have been effectively waived, or if any such indebtedness
shall be declared due and payable prior to the stated maturity thereof;
or
(e) (i) any representation, warranty or
certification, made or given in or pursuant to this Agreement by the
Borrower or otherwise made by the Borrower in writing in connection
with this Agreement, proves to be untrue in any respect when such
representation, warranty or certification is made or given hereunder;
or (ii) any representation, warranty or certification, made or given in
or pursuant to this Agreement by the Borrower or otherwise made by the
Borrower in writing in connection with this Agreement, although true in
all respects when such representation, warranty or certification was
made or given, proves to be untrue in any material respect at any
subsequent time when such representation, warranty or certification is
operative or applicable and such representation, warranty or
certification continues to be untrue ten (10) days after written notice
from the Bank to the Borrower; or
(f) the Collateral or the Premises, or any material
part thereof, is damaged or destroyed by fire or other casualty and the
cost to rebuild or reconstruct exceeds the face amount of insurance
actually collected or in the process of collection through diligent
efforts of the Borrower, and if the Borrower fails to deposit or to
cause to be deposited with the Bank the deficiency within ten (10) days
after the Bank's written request therefor, unless such deficiency is
less than $50,000.00; or
(g) an order of condemnation by eminent domain
proceedings is entered with respect to the Premises or any part thereof
and is not dismissed or stayed; or
(h) any petition is filed or proceeding is commenced
for any attachment, levy, or seizure of any property of the Borrower
subject to a lien in favor of the Bank; or any judgment or judgments,
writ or writs, warrant or warrants of attachment, or any similar
process or processes in an aggregate amount in excess of $50,000.00
shall be entered or filed against the Borrower or against any property
or assets of the Borrower and remains unvacated, unbonded or unstayed
for a period of sixty (60) days; or
(i) if the Borrower or any Guarantor: shall be unable
to pay its debts as they become due; files a petition to take advantage
of any insolvency act; makes an assignment for the benefit of its
creditors; commences a proceeding for or consents to the appointment of
a receiver, trustee, liquidator, or conservator of itself or of the
whole or any substantial part of its property; files a petition to a
petition under any chapter of the Bankruptcy Reform Act of 1994, as
amended, or files a petition or seeks relief under or takes advantage
of any other reorganization, arrangement or readjustment of debt,
insolvency, or receivership law or statute of the United States of
America or any state thereof; or if there is commenced against the
Borrower or any Guarantor any proceeding for any of the foregoing
relief which is not dismissed or withdrawn within 90 days after the
filing thereof; or if
-15-
<PAGE>
the Borrower or any Guarantor by any act indicates its consent to, or
approval or authorization of, any such proceeding or petition; or
(j) if Stephen M. Merrick shall cease to own of
record and beneficially at least 406,401 shares of common stock
representing 14.34% of 2,833,188 shares of common stock, if Stephen M.
Merrick, John H. Schwan and Howard W. Schwan shall cease to have
beneficial interest in shares of preferred stock as follows: 571,429,
857,143 and 428,571. There are a total of 5,690,331 shares of common
and preferred outstanding of which Stephen M. Merrick owns 17.18%, John
H. Schwan 15.06% and Howard W. Schwan 7.53%; or
(k) if either Stephen M. Merrick, John H. Schwan or
Howard W. Schwan ceases to be actively employed in their respective
offices and positions held as of the date hereof; or
(l) if any Guarantor shall die or be declared
incompetent; or
(m) if, in the reasonable opinion of the Bank, there
shall be any material adverse change in the financial condition of the
Borrower or any Guarantor.
6.2. Remedies. After the occurrence of any Event of Default,
the Bank shall have the right in addition to all the remedies conferred upon the
Bank by law or equity or the terms of any of the Loan Documents, to do any or
all of the following, concurrently or successively, without notice to the
Borrower:
(a) Declare the Notes to be, and the Notes shall
thereupon become, immediately due and payable, provided that if an
Event of Default described in Section 6.1(i) shall occur or exist, the
Notes shall automatically become immediately due and payable, in each
case without presentment, demand, protest or notice of any kind, all of
which are hereby expressly waived, anything contained herein or in the
Loan Documents to the contrary notwithstanding;
(b) terminate the Bank's obligations under this
Agreement to extend credit of any kind or to make any disbursement,
whereupon the commitment and obligations of the Bank to extend credit
or to make disbursements hereunder shall terminate; and
(c) exercise all rights and remedies of a secured
party under the Uniform Commercial Code and otherwise, including,
without limitation, the right to foreclose the security interest
granted herein by any available judicial or other procedure and/or to
take possession of any or all of the Collateral and the books and
records relating thereto with or without judicial process, for which
purpose the Bank may enter on any or all of the premises where any of
the Collateral or books or records may be situated and take possession
and remove the same therefrom; proceed to protect and enforce its
rights or remedies either by suit in equity or by action at law, or
both; require the Borrower to assemble any or all of the Collateral and
any or all certificates of title and other documents relating to the
Collateral at a place designated by the Bank; charge or set off all
sums owing to the Bank by the Borrower against any and all of the
Borrower's accounts (including accounts held jointly with others) and
credit balances at the Bank, regardless of the stated maturity thereof;
and exercise in the Borrower's name all rights with
-16-
<PAGE>
respect to the Collateral, including the right to collect any and all
money due or to become due, endorse checks, notes, drafts, instruments,
or other evidences of payment, receive and open mail addressed to the
Borrower, and settle, adjust, or compromise any dispute with respect to
any item of Collateral.
6.3. Rights and Remedies Cumulative. All of the Bank's rights
and remedies, whether evidenced by this Agreement or by any other writing, shall
be cumulative and may be exercised singularly or concurrently. Election by the
Bank to pursue any remedy shall not exclude pursuit of any other remedy, and an
election to make expenditures or to take action to perform an obligation of the
Borrower under this Agreement, after the failure of the Borrower to perform,
shall not affect the Bank's right to declare a default and to exercise its
remedies.
Section 7. REPRESENTATIONS AND WARRANTIES. The Borrower
represents and warrants to the Bank as follows:
7.1. Power and Authority. The Borrower is a corporation duly
organized and validly existing and in good standing under the laws of its state
of incorporation. The Borrower has the requisite authority to execute, deliver
and carry out the terms and provisions of this Agreement, and the Loan Documents
and other documents to be executed and delivered by it in connection with this
Agreement. This Agreement constitutes, and the Loan Documents and other
documents to be executed and delivered in connection with this Agreement, when
executed and delivered pursuant hereto will constitute, the duly authorized
obligations of the party or parties (other than the Bank) executing the same and
will be enforceable in accordance with their respective terms.
7.2. No Violation of Agreements, Etc. The Borrower is not in
default under any agreement to which it is a party, the effect of which will
materially adversely affect performance by the Borrower of its obligations
pursuant to and as contemplated by the terms and provisions of this Agreement or
any of the Loan Documents. Neither the execution and delivery of this Agreement,
the Loan Documents or other documents to be executed and delivered by the
Borrower, or the performance of its obligations under this Agreement (a) violate
any presently existing provisions of law or any presently existing applicable
order, writ, injunction or decree of any court or government department,
commission, board, bureau, agency or instrumentality, or (b) conflict or are
inconsistent with or result in any breach of any of the terms, covenants,
conditions or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, instrument, document, agreement or contract of any kind
which creates, represents, evidences or provides for any lien, charge or
encumbrance upon any of the assets of the Borrower, or any other indenture,
mortgage, deed of trust, instrument, document, agreement or contract of any kind
to which the Borrower is a party or by which the Borrower may be bound.
7.3. Financial Statements, Financial Condition. The Borrower
has furnished the Bank with financial statements of the Borrower as of and for
the fiscal year ended October 31 in each of the years 1995, 1996, and 1997 and a
balance sheet as of January 31, 1998 and statement of operations for the seven
month period then ended. Such financial statements are true and correct,
subject, as to the interim statements, to changes resulting from year-end
reviews and adjustments, and have been prepared in accordance with generally
accepted
-17-
<PAGE>
accounting principles consistently followed throughout the periods involved. The
balance sheets included therein fairly present the condition of the Borrower as
at the dates thereof, and the profit and loss and surplus statements included
therein fairly present the results of operations of the Borrower for the periods
indicated. There has been no material adverse change in the condition, financial
or otherwise, of the Borrower since January 31, 1998.
7.4. No Litigation. Except for an action filed by NRS for
services performed by NRS in the aggregate of approximately $105,000.00, there
are no actions, suits or proceedings pending or, to the knowledge of the
Borrower, threatened against or affecting the Borrower before any court or any
governmental, administrative, regulatory, adjudicatory or arbitrational body or
agency of any kind which will materially adversely affect performance by any of
such parties of its obligations pursuant to and as contemplated by the terms and
provisions of this Agreement or the Loan Documents.
7.5. Taxes. The Borrower has filed all state and federal
income tax returns that are required to be filed, and has paid all taxes shown
to be due on such returns and such assessments received by the Borrower to the
extent that the same had become due.
7.6. Title to Property. The Borrower holds and will hold all
right, title, and interest in and to its properties, including the Collateral,
free and clear of all liens, claims and encumbrances, except as permitted under
this Agreement. The Trust holds and will hold all right, title, and interest in
and to its properties, including the Premises, free and clear of all liens,
claims and encumbrances, except as permitted under this Agreement. The Borrower
has no subsidiaries.
7.7. Accounts Receivable. With respect to the Accounts
Receivable, the Borrower represents and warrants that, unless otherwise
indicated in writing by the Borrower:
(a) all Accounts Receivable are genuine, are in all
respects what they purport to be, are not evidenced by a judgment and
are evidenced by only one, if any, executed original instrument,
agreement, contract, or document;
(b) all Accounts Receivable represent undisputed bona
fide transactions completed in accordance with the terms and provisions
contained in any documents or agreements related thereto;
(c) the face amount shown on any schedule of Accounts
Receivable heretofore or hereafter provided to the Bank and all
invoices and statements delivered to the Bank with respect to any
Accounts Receivable are or will be actually and absolutely owing to the
Borrower and are not contingent for any reason;
(d) to the best of the Borrower's knowledge, there
are no set-offs, counterclaims, or disputes existing or asserted with
respect to the Accounts Receivable, and the Borrower has not made any
agreement with any account debtor for any deduction therefrom, except
for discounts and allowances allowed by the Borrower in the ordinary
course of its business for prompt payment, all of which discounts or
allowances are reflected in the calculation
-18-
<PAGE>
of the face amount of the invoices to which such discounts or
allowances relate;
(e) to the best of the Borrower's knowledge, there
are no facts, events, or conditions which in any way impair the
validity or enforcement of the Accounts Receivable or tend to reduce
the amount payable thereunder from the invoice face amount shown on any
schedule of Accounts Receivable delivered to the Bank;
(f) the Borrower has no knowledge of any fact or
circumstance that would impair the validity or collectibility of the
Accounts Receivable; and
(g) the Accounts Receivable that the Borrower shall,
expressly or by implication, request the Bank to treat as Eligible
Accounts will, as of the time such request is made, conform in all
requests to the conditions to be treated as Eligible Accounts.
7.8. Inventory. With respect to the Inventory, the Borrower
represents and warrants that, unless otherwise indicated in writing by the
Borrower:
(a) all inventory is located at the location set
forth in Section 5.7 hereof or is Inventory that is in transit;
(b) no Inventory is, or shall at any time or times
hereafter be, stored with a bailee, warehouseman, or similar party
without the prior written consent of the Bank;
(c) no Inventory is under consignment to or from any
person;
(d) all Inventory is currently usable and salable in
the normal course of the Borrower's business; and
(e) the Inventory that the Borrower shall, expressly
or by implication, request the Bank to treat as Eligible Inventory
will, as of the time such request is made, conform in all respects to
the conditions to be treated as Eligible Inventory.
7.9. Compliance with Environmental Laws. Except as disclosed
in writing to the Bank on or before the date hereof, the Premises and its
present use complies, and at all times shall comply, with all applicable laws
and govern mental regulations including, without limitation, all applicable
federal, state and local laws pertaining to air and water quality, hazardous
waste, waste disposal, air emissions and other environmental matters, all zoning
and other land use matters, and utility availability. Except as disclosed in
writing to the Bank on or before the date hereof, neither the Borrower nor, to
the best of the Borrower's knowledge, any previous owner or occupier of the
Premises, used, generated, stored or disposed of, on, under or about the
Premises any Hazardous Materials. For purposes of this Agreement, Hazardous
Materials shall mean and include any hazardous substance or any pollutant or
contaminant defined as such in (or for purposes of) the Comprehensive
Environmental Response, Compensation, and Liability Act, any so-called
applicable "Superfund" or "Superlien" or "Non- priority Lien" law, the Toxic
Substances Control Act, or the Resource Conservation and Recovery Act, all as
amended from time to time. Further, to the
-19-
<PAGE>
best of the Borrower's knowledge, except as disclosed in writing to the Bank on
or before the date hereof, the Premises does not contain any underground tanks
and does not contain and has not in the past contained any asbestos-containing
material in friable form.
7.10. Material Facts. Neither this Agreement nor any document,
financial statement, credit information, certificate or statement furnished to
the Bank by the Borrower contains, or will contain, any untrue statement of a
material fact or omits, or will omit, to state a material fact necessary to make
the statements made not misleading.
7.11. Representations and Warranties to be Continuing. All of
the foregoing representations and warranties will be true at the date of the
initial disbursement and at the dates of all subsequent disbursements of the
Loan. All representations, warranties, covenants, and agreements made herein or
in any certificate or other document delivered to the Bank by or on behalf of
the Borrower shall be deemed to have been relied upon by the Bank
notwithstanding any investigation heretofore or hereafter made by the Bank or on
its behalf, and shall survive the making of any or all of the disbursements
contemplated hereby and shall continue in full force and effect as long as there
remains unperformed any obligation to the Bank hereunder or under any of the
Loan Documents.
Section 8. MISCELLANEOUS PROVISIONS.
8.1. Notices. Any communications, requests or notices required
or appropriate to be given under this Agreement shall be in writing and deemed
given when delivered in person or when mailed by certified mail, return receipt
requested, deposited in the United States mail postage pre-paid, addressed to
the party for whom the notice is intended as follows:
BORROWER: CTI Industries Corporation
22160 North Pepper Road
Barrington, IL 60010
Attention: Stephen M. Merrick
hief Executive Officer
BANK: First American Bank
1650 Louis Avenue
Elk Grove Village, Illinois 60007
Attention: Martin J. Carmody
Exec. Vice President
These addresses may be changed by notice as provided herein.
8.2. No Waiver. No failure by the Bank to exercise, or delay
by the Bank in exercising, any right, power or privilege hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of any right,
power or privilege hereunder preclude any other or further exercise thereof, or
the exercise of any other right, power or privilege. The rights and remedies
provided in this Agreement are cumulative and not exclusive of any right or
remedy provided by law. No notice to or demand on the Borrower in any case
shall, in itself, entitle the Borrower to any other or further notice or demand
in similar or other circumstances or constitute a waiver of the rights of the
-20-
<PAGE>
Bank to any other or further action in any circumstances without notice or
demand.
8.3. Binding Effect. This Agreement and the Loan Documents
shall be binding upon and inure to the benefit of the respective parties hereto
and their respective successors and assigns. This Agreement is made for the sole
benefit of the Borrower and the Bank and no other person or persons shall have
any bene fits, rights or remedies under or by reason of this Agreement.
8.4. Further Assurances. The Borrower agrees that, at any time
or from time to time, upon the written request of the Bank, it will execute and
deliver all such further documents and do all such other acts and things as the
Bank may reasonably request to give effect to this Agreement and the Loan
Documents.
8.5. Time of the Essence. Time is of the essence of this
Agreement and of every part hereof.
8.6. Fees and Expenses. The Borrower shall promptly pay or
reimburse the Bank for all reasonable expenses, regardless of whether the Loan
is disbursed in whole or in part, incurred in connection with the issuance of
the Bank's commitment letter and the making of the Loan, including, but not
limited to, examination and insurance of title by the Title Company, preparation
and review of all Loan Documents by the Bank's outside counsel, taxes of any
kind, appraisal, surveys, recording costs, escrow disbursement costs, inspection
costs and attorney's fees. The Borrower shall also pay promptly to the Bank on
demand the customary fees and out-of-pocket expenses of the Bank in connection
with the Bank's periodic examinations of the Collateral and inspections of books
and records of the Borrower. The Borrower shall pay promptly to the Bank on
demand reasonable attorneys' fees and all costs and other expenses paid or
incurred by the Bank in duly enforcing or exercising its rights or remedies
created by, connected with or provided in this Agreement, the Notes, the
Mortgage or the other Loan Documents or as a result of any litigation or
threatened litigation or the preparation therefor in which the Bank is a party
or threatened to be made a party and which in any way whatsoever relates to this
Agreement.
8.7. Indemnity Agreement. The Borrower agrees to indemnify,
defend, and hold the Bank harmless from and against any and all losses, damages,
liabilities, and expenses (including reasonable attorneys' fees) the Bank may
sustain as a consequence of the occurrence of any Event of Default or the breach
or inaccuracy of any representation and warranty made by the Borrower in this
Agreement or any document, financial statement, credit information, certificate,
or statement furnished to the Bank. The Borrower agrees to indemnify, defend,
and hold the Bank harmless from and against any and all losses, damages,
liabilities, and expenses (including reasonable attorneys' fees) that at any
time or from time to time may be paid, incurred, or suffered by, or asserted
against, the Bank for, with respect to, or as a direct or indirect result of the
presence on or under, or the escape, seepage, leakage, spillage, discharge,
emission, or release from, the Premises or any part thereof, into or upon any
land, the atmosphere, or any water course, body of water, or wet lands, of any
Hazardous Material occurring during or prior to the period of ownership of the
Premises or any part thereof by the Borrower or as a result of conditions
existing during such period (including, without limitation, any losses,
liabilities, damages, or expenses asserted or arising under any applicable law
or regulation). The provisions of and undertakings and indemnifications set
forth in this Section shall survive the payment of the Notes and the other
obligations of the Borrower
-21-
<PAGE>
to the Bank and shall not be affected by the Bank's acquisition of any interest
in the Premises, whether by foreclosure or otherwise.
8.8. Security for Disbursements and Payments. Any and all
disbursements, payments and amounts expended by the Bank pursuant to this
Agreement, and all other expenses reimbursable by the Borrower, shall, as and
when advanced or incurred, be and become evidenced and secured by this Agreement
and the Loan Documents and shall bear interest from the date of advance or
expenditure at the rate provided in this Agreement or, if no such rate is
provided, then at the highest applicable interest rate provided in the Notes.
Any Event of Default which may occur under this Agreement shall constitute a
default under the Loan Documents.
8.9. Entire Agreement. This Agreement and the Loan Documents
constitute the entire agreement between the parties hereto and may not be
modified or amended in any manner other than by supplemental written agreement
executed by the parties hereto. This Agreement supersedes any other agreement
made by the Bank with or for the benefit of the Borrower.
8.10. Governing Law. This Agreement shall be a contract
governed by and construed in accordance with the laws of the State of Illinois.
IN WITNESS WHEREOF, the parties hereto caused this Agreement
to be executed as of the day and year first written above.
BORROWER: CTI Industries Corporation
BY:______________________
Stephen M. Merrick
Chief Executive Officer
BANK: First American Bank
BY:_______________________
Martin J. Carmody
Exec. Vice President
-22-
Exhibit 10.16
FIRST TERM NOTE
$1,788,328.39 Elk Grove Village, Illinois
May 1, 1998
Loan No. 600804665-63
FOR VALUE RECEIVED, the undersigned, CTI Industries
Corporation, a Delaware corporation (the "Borrower"), hereby promises to pay to
the order of First American Bank, an Illinois banking corporation (the "Bank"),
the principal sum of One Million Seven Hundred Eighty Eight Thousand Three
Hundred Twenty Eight and 39/100 Dollars ($1,788,328.39) on May 1, 2002 (or
earlier as hereinafter provided), or so much thereof as may be advanced by the
Bank and evidenced by this Note under the Amended and Restated Loan and Security
Agreement dated May 1, 1998 between the Borrower and the Bank (the "Loan
Agreement"), together with interest to maturity (whether by lapse of time,
acceleration, or otherwise) on the balance of principal remaining from time to
time outstanding at a fixed rate per annum equal to eight and one-quarter
percent (8.25%) per annum. Interest shall be calculated on the basis of a
360-day year and actual days.
Unless accelerated as hereinafter provided or as otherwise
provided in the Loan Agreement, the principal sum outstanding shall be payable
in equal installments of $43,978.98 of principal and interest per month payable
on the first day of each calendar month commencing with the month of June, 1998
and on the first day of each succeeding month until this Note is fully paid
except that the final payment of principal, if not sooner paid, shall be due on
May 1, 2002. If an Event of Default (as defined in the Loan Agreement) shall
occur, the outstanding principal of and accrued and unpaid interest on this Note
shall become immediately due and payable as provided in the Loan Agreement
without notice.
All payments on account of the indebtedness evidenced by this
Note (other than required prepayments which shall be applied as provided in the
Loan Agreement and optional prepayments which shall be applied as provided in
this Note) shall be applied first to accrued and unpaid interest and the
remainder to principal. Payments on this Note shall be made at the offices of
the Bank or at such other office as the legal holder of this Note may, from time
to time, designate in writing.
Notwithstanding anything to the contrary contained herein, the
undersigned agrees to pay a late charge of five percent (5%) of the amount of
any monthly installment received more than 10 days after the installment is due.
Late charges shall be due and payable on the due date of the next installment of
principal or interest, together with the regular installment then due.
Upon and after the occurrence of an Event of Default, the
undersigned shall pay interest at the rate (the "Default Rate") of eleven and
one-quarter percent (11.25%) per annum.
Except as otherwise provided in the Loan Agreement, this Note
may be prepaid in whole or in part without premium or penalty at any time at the
option of the undersigned in accordance with the Loan Agreement. Any partial
prepayment made at the option of the undersigned shall be applied against the
principal amount outstanding and shall not postpone the due date of any
subsequent monthly installment or change the amount of such installment unless
the Bank shall otherwise agree in writing.
<PAGE>
First Term Note
Page Two
This Note is secured by the Loan Agreement and other
documents, agreements, and instruments executed by the Borrower. This Note is
made and delivered pursuant to the Loan Agreement and is subject to the further
terms and conditions thereof, including the right of the holder to accelerate
payment of the principal of and accrued and unpaid interest on this Note and
other remedies upon the occurrence of an Event of Default, all of which are
hereby incorporated and made a part of this Note by reference.
Any waiver of any payment due hereunder or the acceptance by
the Bank of partial payments hereunder shall not, at any other time, be taken to
be a waiver of the terms of this Note or the Loan Agreement or any other
agreement between the Borrower and the Bank.
The makers, sureties, guarantors, and endorsers of this Note,
if any, jointly and severally hereby waive notice of and consent to any and all
extensions of this Note or any part thereof without notice, and each hereby
waives demand, presentment for payment, notice of nonpayment, and protest and
any and all notice of whatever kind or nature and the exhaustion of legal
remedies herein, or any release of liability or any other indulgences or
forbearances whatsoever, without releasing or in any way affecting the personal
liability of any other party hereunder.
This Note shall be the joint and several obligation of all
makers, sureties, guarantors, and endorsers and shall be binding upon them,
their heirs, personal representatives, and assigns.
In the event the holder of this Note shall refer this Note to
an attorney for collection, the undersigned agrees to pay, in addition to unpaid
principal and interest, all of the costs and expenses incurred in attempting or
effecting collection, including reasonable attorneys' fees, whether or not suit
is instituted.
IN WITNESS WHEREOF, the undersigned has executed this Note as
of the date first written above.
CTI Industries Corporation
BY:________________________
Stephen M. Merrick
Chief Executive Officer
Exhibit 10.17
FIRST AMENDMENT TO SECOND TERM NOTE
Loan No. 600804665-56
The undersigned, CTI Industries Corporation, a Delaware corporation
(the "Borrower"), hereby agrees with First American Bank, an Illinois banking
corporation (the "Bank"), that the Second Term Note dated August 22, 1996, made
by the Borrower payable to the order of the Bank in the original principal
amount of $2,200,000.00 (the "Note"), shall be and hereby is amended as follows:
Notwithstanding any contrary provision of the Note:
1. Commencing May 1, 1998 until maturity, the rate of interest
on the Note shall be amended from a rate equal to eight and
three-quarters percent (8.75%) per annum to a rate equal to eight and
one-quarter percent (8.25%) per annum.
All references in the Note to this "Note" or the like, shall be deemed
to be references to the Note as amended by this Amendment.
The Borrower hereby authorizes the Lender to affix this Amendment to
the Note. Except as herein amended, the Note is ratified and confirmed and shall
remain in full force and effect in accordance with its terms.
IN WITNESS WHEREOF, the undersigned has executed this Amendment to the
Note this 1st day of May, 1998.
CTI INDUSTRIES CORPORATION
By:_______________________
Stephen M. Merrick,
Chief Executive Officer
Agreed to as of this 1st day of May, 1998.
First American Bank
By:_______________________
Martin J. Carmody,
Exec. Vice President
Exhibit 10.18
THIRD TERM NOTE
$2,258,000.00 Elk Grove Village, Illinois
May 1, 1998
Loan No. 600804665-64
FOR VALUE RECEIVED, the undersigned, CTI Industries
Corporation, a Delaware corporation (the "Borrower"), hereby promises to pay to
the order of First American Bank, an Illinois banking corporation (the "Bank"),
the principal sum of Two Million Two Hundred Fifty Eight Thousand and No/100
Dollars ($2,258,000.00) on August 1, 2003 (or earlier as hereinafter provided),
or so much thereof as may be advanced by the Bank and evidenced by this Note
under the Amended and Restated Loan and Security Agreement dated May 1, 1998
between the Borrower and the Bank (the "Loan Agreement"), together with interest
to maturity (whether by lapse of time, acceleration, or otherwise) on the
balance of principal remaining from time to time outstanding at a fixed rate per
annum equal to eight and one-quarter percent (8.25%) per annum. Interest shall
be calculated on the basis of a 360-day year and actual days.
Unless accelerated as hereinafter provided or as otherwise
provided in the Loan Agreement, the principal sum outstanding shall be payable
in equal installments of $46,194.61 of principal and interest per month payable
on September 1, 1998 and on the first day of each succeeding month until this
Note is fully paid except that the final payment of principal, if not sooner
paid, shall be due on August 1, 2003. Accrued interest shall also be due and
payable on the first day of each calendar month commencing with the month
following the date on which the first disbursement of the Note is made except
that the final payment of accrued and unpaid interest shall be due on August 1,
2003. If an Event of Default (as defined in the Loan Agreement) shall occur, the
outstanding principal of and accrued and unpaid interest on this Note shall
become immediately due and payable as provided in the Loan Agreement without
notice.
All payments on account of the indebtedness evidenced by this
Note (other than required prepayments which shall be applied as provided in the
Loan Agreement and optional prepayments which shall be applied as provided in
this Note) shall be applied first to accrued and unpaid interest and the
remainder to principal. Payments on this Note shall be made at the offices of
the Bank or at such other office as the legal holder of this Note may, from time
to time, designate in writing.
Notwithstanding anything to the contrary contained herein, the
undersigned agrees to pay a late charge of five percent (5%) of the amount of
any monthly installment received more than 10 days after the installment is due.
Late charges shall be due and payable on the due date of the next installment of
principal or interest, together with the regular installment then due.
Upon and after the occurrence of an Event of Default, the
undersigned shall pay interest at the rate (the "Default Rate") of eleven and
one-quarter percent (11.25%) per annum.
Except as otherwise provided in the Loan Agreement, this Note
may be prepaid in whole or in part without premium or penalty at any time at the
option of the undersigned in accordance with the Loan Agreement. Any partial
prepayment made at the option of the undersigned shall be applied against the
principal amount outstanding and shall not postpone the due date of any
subsequent monthly
<PAGE>
Third Term Note
Page Two
installment or change the amount of such installment unless the Bank shall
otherwise agree in writing.
This Note is secured by the Loan Agreement and other
documents, agreements, and instruments executed by the Borrower. This Note is
made and delivered pursuant to the Loan Agreement and is subject to the further
terms and conditions thereof, including the right of the holder to accelerate
payment of the principal of and accrued and unpaid interest on this Note and
other remedies upon the occurrence of an Event of Default, all of which are
hereby incorporated and made a part of this Note by reference.
Any waiver of any payment due hereunder or the acceptance by
the Bank of partial payments hereunder shall not, at any other time, be taken to
be a waiver of the terms of this Note or the Loan Agreement or any other
agreement between the Borrower and the Bank.
The makers, sureties, guarantors, and endorsers of this Note,
if any, jointly and severally hereby waive notice of and consent to any and all
extensions of this Note or any part thereof without notice, and each hereby
waives demand, presentment for payment, notice of nonpayment, and protest and
any and all notice of whatever kind or nature and the exhaustion of legal
remedies herein, or any release of liability or any other indulgences or
forbearances whatsoever, without releasing or in any way affecting the personal
liability of any other party hereunder.
This Note shall be the joint and several obligation of all
makers, sureties, guarantors, and endorsers and shall be binding upon them,
their heirs, personal representatives, and assigns.
In the event the holder of this Note shall refer this Note to
an attorney for collection, the undersigned agrees to pay, in addition to unpaid
principal and interest, all of the costs and expenses incurred in attempting or
effecting collection, including reasonable attorneys' fees, whether or not suit
is instituted.
IN WITNESS WHEREOF, the undersigned has executed this Note as
of the date first written above.
CTI Industries Corporation
BY:_______________________
Stephen M. Merrick
Chief Executive Officer
Exhibit 10.19
REVOLVING NOTE
$4,000,000.00 Elk Grove Village, Illinois
May 1, 1998
Loan No. 600804665-67
FOR VALUE RECEIVED, the undersigned, CTI Industries
Corporation, a Delaware corporation (the "Borrower"), hereby promises to pay to
the order of First American Bank, an Illinois banking corporation (the "Bank"),
the principal sum of Four Million and No/100 Dollars ($4,000,000.00), or so much
thereof as may be advanced by the Bank and evidenced by this Note under the
Amended and Restated Loan and Security Agreement dated May 1, 1998 between the
Borrower and the Bank (the "Loan Agreement"), on May 1, 1999 (or earlier as
hereinafter provided), together with interest to maturity (whether by lapse of
time, acceleration, or otherwise) on the balance of principal remaining from
time to time outstanding at a fluctuating rate per annum equal to one-half of
one percent (.5%) per annum over the Prime Rate announced from time to time by
the Bank (which may not be the Bank's lowest rate of interest) which shall be
adjusted daily when and as the Bank's Prime Rate changes. Interest shall be
calculated on the basis of a 360- day year and actual days.
Unless accelerated or prepayable as hereinafter provided or as
otherwise provided in the Loan Agreement, the principal sum outstanding shall be
payable on May 1, 1999. Accrued interest shall be paid on the first day of the
month following the month in which the first disbursement evidenced by this Note
is made under the Loan Agreement and thereafter on the first day of each
succeeding month until this Note is fully paid, except that the final payment of
interest, if not sooner paid, shall be due on May 1, 1999. If an Event of
Default (as defined in the Loan Agreement) shall occur, the outstanding
principal of and accrued and unpaid interest on this Note shall become
immediately due and payable as provided in the Loan Agreement without notice.
All payments on account of the indebtedness evidenced by this
Note (other than required prepayments which shall be applied as provided in the
Loan Agreement) shall be applied first to accrued and unpaid interest and the
remainder to principal. Payments on this Note shall be made at the offices of
the Bank or at such other office as the legal holder of this Note may, from time
to time, designate in writing.
Notwithstanding anything to the contrary contained herein, the
undersigned agrees to pay a late charge of five percent (5%) of the amount of
any monthly installment received more than 10 days after the installment is due.
Late charges shall be due and payable on the due date of the next installment of
interest, together with the regular installment then due.
Upon and after the occurrence of an Event of Default, the
undersigned shall pay interest at the rate (the "Default Rate") of three and
one-half percent (3.5%) per annum over the Bank's Prime Rate then in effect,
which shall be adjusted daily when and as the Bank's Prime Rate changes.
Except as otherwise provided in the Loan Agreement, this Note
may be prepaid in whole or in part without premium or penalty at any time at the
option of the undersigned in accordance with the Loan Agreement.
<PAGE>
Revolving Note
Page Two
This Note is secured by the Loan Agreement and other
documents, agreements, and instruments executed by the Borrower. This Note is
made and delivered pursuant to the Loan Agreement and is subject to the further
terms and conditions thereof, including the right of the holder to accelerate
payment of the principal of and accrued and unpaid interest on this Note and
other remedies upon the occurrence of an Event of Default and the required
prepayment of the principal of this Note upon certain other events or
conditions, all of which are hereby incorporated and made a part of this Note by
reference.
Any waiver of any payment due hereunder or the acceptance by
the Bank of partial payments hereunder shall not, at any other time, be taken to
be a waiver of the terms of this Note or the Loan Agreement or any other
agreement between the Borrower and the Bank.
The makers, sureties, guarantors, and endorsers of this Note,
if any, jointly and severally hereby waive notice of and consent to any and all
extensions of this Note or any part thereof without notice, and each hereby
waives demand, presentment for payment, notice of nonpayment, and protest and
any and all notice of whatever kind or nature and the exhaustion of legal
remedies herein, or any release of liability or any other indulgences or
forbearances whatsoever, without releasing or in any way affecting the personal
liability of any other party hereunder.
This Note shall be the joint and several obligation of all
makers, sureties, guarantors, and endorsers and shall be binding upon them,
their heirs, personal representatives, and assigns.
In the event the holder of this Note shall refer this Note to
an attorney for collection, the undersigned agrees to pay, in addition to unpaid
principal and interest, all of the costs and expenses incurred in attempting or
effecting collection, including reasonable attorneys' fees, whether or not suit
is instituted.
IN WITNESS WHEREOF, the undersigned has executed this Note as
of the date first written above.
CTI Industries Corporation
BY:__________________________
Stephen M. Merrick
Chief Executive Officer
Exhibit 10.20
FIRST AMENDMENT TO AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
This Agreement is made as of August 24, 1998 among CTI Industries
Corporation, a Delaware corporation (the "Borrower"), and First American Bank,
an Illinois banking corporation (the "Bank"), and Stephen M. Merrick, John H.
Schwan, and Howard W. Schwan (hereinafter referred to as the "Guarantors").
Whereas, the Borrower and the Bank are parties to an Amended and
Restated Loan and Security Agreement dated as of May 1, 1998, as it may be
amended from time to time (the "Loan Agreement"), and the Borrower is the maker
of the First Term Loan dated May 1, 1998 payable to the order of the Bank in the
original principal amount of $1,788,328.39 (the "First Term Note"), the Second
Term Loan dated August 22, 1996 payable to the order of the Bank in the original
principal amount of $2,128,322.80 (the "Second Term Note"), the Third Term Loan
dated May 1, 1998 payable to the order of the Bank in the original principal
amount of $2,258,000.00 (the "Third Term Note"), and the Revolving Loan dated
May 1, 1998 payable to the order of the Bank in the original principal amount of
$4,000,000.00 (the "Revolving Note") each delivered by the Borrower to the Bank
(the first Term Note, the Second Term Note, the Third Term Note, and the
Revolving Note are hereinafter collectively referred to as the "Notes"); and
Whereas, the obligations of the Borrower are secured by, among other
things: a security interest in all of Borrower's assets to secure the
obligations of the Borrower under this Agreement and the First Term Loan, the
Third Term Loan, and the Revolving Note; a mortgage (the "Mortgage I") on the
property commonly known as 22160 North Pepper Road, Barrington, IL owned by
American National Bank and Trust Company of Chicago, not personally but solely
as Trustee, under Trust Agreement dated September 19, 1984 and known as Trust
No. 61978 (the "Trust I") to secure the obligations of the Borrower under this
Agreement and the Second Term Note; and a mortgage (the "Mortgage II") on the
property commonly known as 22222 North Pepper Road, Barrington, IL (the
"Premises") owned by the First American Bank, not personally but solely as
Trustee, under Trust Agreement dated August 14, 1998 and known as Trust No.
1-98-134 (the "Trust II" together with the Trust I are hereinafter collectively
referred to as the "Trust") to secure the obligations of the Borrower under this
Agreement and the Fourth Term Note (Mortgage I and Mortgage II are hereinafter
collectively referred to as the "Mortgage"); an assignment of rents on the
Premises owned by the Trust II (the "Assignment"); a collateral assignment of
beneficial interest in the Trust II (the "ABI"); and separate subordination
agreements executed by the Guarantors (hereinafter collectively referred to as
the "Subordination"); and
Whereas, the Guarantors have guaranteed the obligations of the Borrower
to the Bank pursuant to separate guaranties dated August 22, 1996 and May 1,
1998 (hereinafter collectively referred to as the "Guaranty"); and
Whereas, the Borrower, the Bank and the Guarantors desire to enter into
this Agreement in order to increase the amount of indebtedness under a new
Fourth Term Note and otherwise confirm the obligations of the Borrower under the
Loan Agreement, the Notes, the Guaranty, the Mortgage, the Assignment, the ABI,
the Subordination, and all other documents and instruments at any time
evidencing, creating, or securing the obligations of the Borrower to the Bank
(collectively, the "Loan Documents").
Now, therefore, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
-1-
<PAGE>
1. Defined Terms. Capitalized words used in this Agreement as defined
terms are used herein with the same meanings as in the Loan Agreement, unless
otherwise defined herein.
2. Amendment to Loan Agreement. Section 1.1 of the Loan Agreement is
hereby amended and restated in its entirety and as amended, reads as follows:
1.1 Loan Amount. Subject to and upon the terms and conditions
set forth in this Agreement, the Bank agrees to lend to the Borrower,
from time to time, such sums as may be requested by the Borrower and
which the Bank in its discretion agrees to lend from time to time, the
total of which shall not exceed, in the aggregate, $9,617,499.22,
subject to the further limits hereinafter set forth (the "Loan")
pursuant to the First Term Loan, the Second Term Loan, Third Term Loan,
Fourth Term Loan and the Revolving Loan hereinafter provided.
3. Amendment to Loan Agreement. The first paragraph of Section 1.1 of
the Loan Agreement is hereby amended and restated in its entirety and, as
amended, reads as follows:
1.1.6 Fourth Term Loan (Loan No. 600804665-66) The Bank agrees
to lend to the Borrower, subject to and upon the terms and conditions
set forth herein the sum of $1,268,000.00 herein referred to as the
fourth Term Note. The Fourth Term Note shall be evidenced by and be
repayable with interest in accordance with the terms of this Agreement
and promissory note payable to the order of the bank in the original
amount of $1,268,000.00 dated August 24, 1998 and having been duly
executed and delivered by the Borrower ("the Fourth Term Note").
4. Amendment to Loan Agreement. Section 1.4 of the Loan Agreement is
hereby amended and restated in its entirety and, as amended, reads as follows:
1.4.6 Fourth Term Loan Maturity. The Fourth Term Loan shall be
due and payable in equal monthly installments of $10,919.15 of
principal and interest, commencing on October 1, 1998, and a like sum
on the first day of each calendar month thereafter until the principal
of and accrued and unpaid interest on the Fourth Term Loan is paid in
full, provided that the outstanding principal of and accrued and unpaid
interest on the Fourth Term Loan, if not sooner paid in full, shall be
due and payable in full on September 1, 2003 (or earlier as provided in
this Agreement or the Fourth Term Note).
5. Delivery of Loan Documents. The Borrower shall execute and deliver
to the Bank the following:
(a) a Fourth Note dated August 24, 1998 in the original
principal amount of $4,500,000.00;
(b) an Officer's Certificate dated August 24, 1998;
(c) separate Guaranties, each dated August 24, 1998 and
executed by the Guarantors;
(d) a mortgage dated August 24, 1998 executed by the Trust II;
(e) an assignment of rents dated August 24, 1998 executed by
the Trust II; and
-2-
<PAGE>
(f) a collateral assignment of beneficial interest in the
Trust II.
6. Validity of Agreements. Except as specifically provided in this
Agreement, all of the terms, provisions, and covenants of the Borrower and
Guarantors in the Loan Agreement, the Notes, and the other Loan Documents are
now and shall remain in full force and effect and have not been and shall not be
modified in any way and are hereby affirmed, confirmed, and ratified in all
respects. The Borrower and the Guarantors hereby acknowledge that they have no
claims or offsets against, or defenses or counterclaims to, the enforcement by
the Bank of the Loan Agreement, the Notes and the Amendment, or any of the other
Loan Documents. After the date hereof, all references to "Agreement", "hereof",
"herein", or the like appearing in the Loan Agreement shall be deemed to be
references to the Loan Agreement as herein amended or modified; all references
to the "Notes" or the "First Term Note" or the "Second Term Note" or the "Third
Term Note" or the "Fourth Term Note" or the "Revolving Note" in the Loan
Agreement, the Notes, or any other Loan Documents shall be deemed to refer to
the Notes as amended by the Third Amendment to Amended and Restated Loan and
Security Agreement and any extension, renewal, refinancing, modification,
amendment, or restructuring thereof.
7. Miscellaneous Provisions.
a. This Agreement shall be governed by the internal laws of
the State of Illinois.
b. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which, when
taken together, shall constitute one and the same instrument.
c. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and assigns.
d. This Agreement represents the complete agreement of the
parties with respect to the subject matter hereof and supersedes all prior
negotiations and Agreements with respect to the subject matter hereof.
-3-
<PAGE>
In Witness hereof, the parties have executed this Agreement on the date
first written above.
BORROWER:
CTI Industries Corporation
By:________________________
Stephen M. Merrick,
Chief Executive Officer
BANK:
First American Bank
By:________________________
Jodi Krass,
Asst. Vice President
GUARANTORS:
_________________________________
Stephen M. Merrick, Individually
_________________________________
John H. Schwan, Individually
_________________________________
Howard W. Schwan, Individually
-4-
Exhibit 10.21
Fourth Term Note
$1,268,000.00 Elk Grove Village, IL
August 24, 1998
Loan No. 600804665-66
FOR VALUE RECEIVED, the undersigned, CTI Industries
Corporation, a Delaware corporation (the "Borrower"), hereby promises to pay to
the order of First American Bank, an Illinois banking corporation (the "Bank"),
the principal sum of One Million Two Hundred Sixty Eight Thousand and No/100
Dollars ($1,268,000.00) on September 1, 2003 (or earlier as hereinafter
provided), or so much thereof as may be advanced by the Bank and evidenced by
this Note under the Amended and Restated Loan and Security Agreement dated May
1, 1998, between the Borrower and the Bank (the "Loan Agreement"), together with
interest to maturity (whether by lapse of time, acceleration, or otherwise) on
the balance of principal remaining from time to time outstanding at a rate per
annum equal to eight and one-quarter percent (8.25%). Interest shall be
calculated on the basis of a 360-day year and actual days.
Unless accelerated as hereinafter provided or as otherwise
provided in the Loan Agreement, the principal sum outstanding shall be payable
in equal installments of $10,919.15 of principal and interest per month payable
on the first day of each calendar month commencing with the month of October,
1998 and on the first day of each succeeding month until this Note is fully
paid, except that the final payment of principal and interest, if not sooner
paid, shall be due on September 1, 2003. If an Event of Default (as defined in
the Loan Agreement) shall occur, the outstanding principal of and accrued and
unpaid interest on this Note shall become immediately due and payable as
provided in the Loan Agreement without notice.
All payments on account of the indebtedness evidenced by this
Note (other than required prepayments which shall be applied as provided in the
Loan Agreement and optional prepayments which shall be applied as provided in
this Note) shall be applied first to accrued and unpaid interest and the
remainder to principal. Payments on this Note shall be made at the offices of
the Bank or at such other office as the legal holder of this Note may, from time
to time, designate in writing.
Notwithstanding anything to the contrary contained herein, the
undersigned agrees to pay a late charge of five percent (5%) of the amount of
any monthly installment received more than 10 days after the installment is due.
Late charges shall be due and payable on the due date of the next installment of
principal or interest, together with the regular installment then due.
Upon and after the occurrence of an Event of Default, the
undersigned shall pay interest at the rate (the "Default Rate") of twelve and
one-quarter percent (12.25%) per annum.
Except as otherwise provided in Section 1.6.1 of the Loan
Agreement, this Note may be prepaid in whole or in part without premium or
penalty at any time at the option of the undersigned in accordance with the Loan
Agreement. Any partial prepayment made at the option of the undersigned which is
applied against the principal amount outstanding and shall not postpone the due
date of any subsequent monthly installment or change the amount of such
installment unless the Bank shall otherwise agree in writing.
<PAGE>
Fourth Term Note
Page Two
This Note is secured by the Loan Agreement, the Mortgage and other
documents, agreements, and instruments executed by the Borrower. This Note is
made and delivered pursuant to the Loan Agreement and is subject to the further
terms and conditions thereof, including the right of the holder to accelerate
payment of the principal of and accrued and unpaid interest on this Note and
other remedies upon the occurrence of an Event of Default, all of which are
hereby incorporated and made a part of this Note by reference.
Any waiver of any payment due hereunder or the acceptance by
the Bank of partial payments hereunder shall not, at any other time, be taken to
be a waiver of the terms of this Note or the Loan Agreement or any other
agreement between the Borrower and the Bank.
The makers, sureties, guarantors, and endorsers of this Note,
if any, jointly and severally hereby waive notice of and consent to any and all
extensions of this Note or any part thereof without notice, and each hereby
waives demand, presentment for payment, notice of nonpayment, and protest and
any and all notice of whatever kind or nature and the exhaustion of legal
remedies herein, or any release of liability or any other indulgences or
forbearances whatsoever, without releasing or in any way affecting the personal
liability of any other party hereunder.
This Note shall be the joint and several obligation of all
makers, sureties, guarantors, and endorsers and shall be binding upon them,
their heirs, personal representatives, and assigns.
In the event the holder of this Note shall refer this Note to
an attorney for collection, the undersigned agrees to pay, in addition to unpaid
principal and interest, all of the costs and expenses incurred in attempting or
effecting collection, including reasonable attorneys' fees, whether or not suit
is instituted.
IN WITNESS WHEREOF, the undersigned has executed this Note as
of the date first written above.
CTI Industries Corporation
By:_____________________
Stephen M. Merrick
President
Exhibit 10.22
THIS INSTRUMENT WAS )
PREPARED BY AND AFTER )
RECORDING RETURN TO: )
Krysha X. Donoso )
First American Bank )
1650 Louis Avenue )
Elk Grove Village, )
Illinois 60007 )
)
PERMANENT INDEX #: )
13-21-400-019 )
)
STREET ADDRESS: )
22222 North Pepper Road )
Barrington, IL 60010 )
MORTGAGE
THIS MORTGAGE, made August 24, 1998, by and between First
American Bank, not personally, but solely as Trustee under Trust Agreement,
dated August 14, 1998 and known as Trust No. 1-98-134 (hereinafter referred to
as "Mortgagor"), and First American Bank, an Illinois banking corporation
(hereinafter referred to as "Mortgagee");
WITNESSETH:
WHEREAS, CTI Industries, a Delaware corporation (the
"Borrower") is justly indebted to Mortgagee in the principal sum of One Million
Two Hundred Sixty Eight Thousand and 00/100 Dollars ($1,268,000.00), evidenced
by the certain Fifth Term Note of even date herewith (the "Note"), made by the
Borrower pursuant to the Amended and Restated Loan and Security Agreement, dated
May 1, 1998, between the Borrower and Mortgagee (the "Loan Agreement"), and made
payable to the order of and delivered to Mortgagee, in and by which Note the
Borrower promised to pay the principal sum and interest as set forth in the Note
in installments as provided in the Note, with a final maturity date occurring on
September 1, 2003 (or earlier as so provided in the Note); and
WHEREAS, the Borrower, as beneficiary of Mortgagor, has
directed Mortgagor to execute and deliver this Mortgage;
NOW, THEREFORE, the Mortgagor, to secure the payment of the
principal sum of money and the interest and other charges and income due in
accordance with the terms, provisions and limitations of this Mortgage, the Note
(and all extensions, renewals, refinancings, modifications, amendments, and
replacements thereof), and the Loan Agreement and the performance of the
covenants and agreements herein contained by Mortgagor to be performed, and the
performance of the covenants and agreements contained in the Loan Agreement to
be performed by the Borrower, and also in consideration of the sum of One Dollar
($1.00) in hand paid, the receipt of which is hereby acknowledged, does by these
presents MORTGAGE and CONVEY unto Mortgagee, its successors and assigns, the
real estate described on Exhibit A attached hereto and all of its estate, right,
title and interest therein, situated, lying and being in the City of Barrington,
County of Lake, and State of Illinois, which, with the property hereinafter
described, is referred to herein as the "Premises";
-1-
<PAGE>
TOGETHER with all improvements, tenements, easements,
fixtures, and appurtenances thereto belonging, and all rents, issues, profits
and monies for so long and during all such times as Mortgagor may be entitled
thereto (which are pledged primarily and on a parity with the real estate and
not secondarily), including, without limiting the foregoing, if and to the
extent owned by Mortgagor or the Borrower: (a) all fixtures, fittings,
furnishings, appliances, apparatus, equipment and machinery including, without
limitation, all gas and electric fixtures, radiators, heaters, engines and
machinery, boilers, ranges, ovens, elevators and motors, bathtubs, sinks, water
closets, basins, pipes, faucets and other air-conditioning, plumbing and heating
fixtures, mirrors, mantles, refrigerating plants, refrigerators, iceboxes,
dishwashers, carpeting, furniture, laundry equipment, cooking apparatus and
appurtenances, and all building material, supplies and equipment now or
hereafter delivered to the Premises and intended to be installed therein; all
other fixtures and personal property of whatever kind and nature at present
contained in or hereafter placed in any building standing on the Premises; such
other goods, equipment, chattels and personal property as are usually furnished
by landlords in letting other premises of the character of the Premises; and all
renewals or replacements thereof or articles in substitution thereof; and all
proceeds and profits thereof and all of the estate, right, title and interest of
the Mortgagor in and to all property of any nature whatsoever, now or hereafter
situated on the Premises or intended to be used in connection with the operation
thereof; (b) all of the right, title and interest of Mortgagor or the Borrower
in and to any fixtures or personal property subject to a lease agreement,
conditional sale agreement, chattel mortgage, or security agreement, and all
deposits made thereon or therefor, together with the benefit of any payments now
or hereafter made thereon; (c) all leases and use agreements of machinery,
equipment and other personal property of Mortgagor or the Borrower in the
categories hereinabove set forth, under which Mortgagor is the lessee of, or
entitled to use, such items; (d) all rents, income, profits, revenues, receipts,
leases, tenancies, licenses or other use agreements or arrangements now existing
or hereafter created of the Premises or any part thereof including any business
conducted thereon) with the right to receive and apply the same to indebtedness
due Mortgagee and Mortgagee may demand, sue for and recover such payments but
shall not be required to do so; (e) all judgments, awards of damages and
settlements hereafter made as a result of or in lieu of any taking of the
Premises of any part thereof or interest therein under the power of eminent
domain, or for any damage (whether caused by such taking or otherwise) to the
Premises or the improvements thereon or any part thereof or interest therein,
including any award for change of grade of streets; (f) all proceeds of the
conversion, voluntary or involuntary of any of the foregoing into cash or
liquidated claims; (g) any monies on deposit for the payment of real estate
taxes or special assessments against the Premises or for the payment of premiums
on policies of fire and other hazard insurance covering the collateral described
hereunder or the Premises, and all proceeds paid for damage done to the
collateral described hereunder or the Premises; and (h) all substitutions,
replacements, additions and proceeds, including insurance and condemnation award
proceeds, of any of the foregoing property; it being understood that the
enumeration of any specific articles of property shall in no way exclude or be
held to exclude any items of property not specifically mentioned. All of the
land, estate and property hereinabove described, real, personal and mixed,
whether affixed or annexed or not (except where otherwise hereinabove specified)
and all rights hereby conveyed and mortgaged are intended so to be as a unit and
are hereby understood, agreed and declared to form a part and parcel of the real
estate and to be appropriated to the use of the real estate, and shall be for
the purposes of this Mortgage deemed to be real estate
-2-
<PAGE>
and conveyed and mortgaged hereby. As to any of the property aforesaid which
(notwithstanding the aforesaid declaration and agreement) does not so form a
part and parcel of the real estate, this Mortgage is hereby deemed to be, as
well, a security agreement under the Uniform Commercial Code in effect in the
jurisdiction in which the Premises are located (hereinafter referred to as the
"UCC") for the purpose of creating a security interest in such property, which
Mortgagor hereby grants to Mortgagee as Secured Party (as defined in the UCC),
securing the indebtedness and obligations of Mortgagor and/or Borrower, and
Mortgagee shall have in addition to its rights and remedies hereunder all rights
and remedies of a Secured Party under the UCC. As to above personal property
which the UCC classifies as fixtures, this instrument shall constitute a fixture
filing and financing statement under the UCC.
Mortgagor covenants (a) that it is lawfully seized of the
Premises, (b) that the same are subject only to (i) the liens, encumbrances,
conditions, restrictions, easements, leases, and other matters, rights or
interests disclosed in Schedule B (or an equivalent section or portion) of the
mortgage loan title insurance policy delivered to Mortgagee, and (ii) matters
disclosed in writing by Mortgagor to Mortgagee, and (c) that it has good right,
full power and lawful authority to convey and mortgage the same and that it will
forever defend the Premises and the quiet and peaceful possession of the same
against the lawful claims of all persons whomsoever.
TO HAVE AND TO HOLD the Premises unto the Mortgagee, its
successors and assigns, forever, for the purposes and uses herein set forth.
IT IS FURTHER UNDERSTOOD AND AGREED THAT:
2. Maintenance, Repair and Restoration of Improvements,
Payment of Prior Liens. Mortgagor shall (a) promptly repair, restore or rebuild
any buildings or improvements now or hereafter on the Premises which may become
damaged or be destroyed; (b) keep the Premises in good condition and repair,
without waste, and free from mechanics' liens or other liens or claims for lien
not expressly subordinated to the lien hereof (except for mechanics' liens being
contested in good faith and as to which adequate reserves have been set aside in
conformity with generally accepted accounting principles consistently maintained
by the Borrower); (c) pay when due any indebtedness which may be secured by a
lien or charge on the Premises superior to the lien hereof, and upon request
exhibit satisfactory evidence of the discharge of such prior lien to Mortgagee;
(d) complete within a reasonable time all public improvements and any building
or buildings now or at any time in process of construction upon the Premises;
(e) comply with all requirements of law, municipal ordinances, or restrictions
of record with respect to the Premises and the use thereof; (f) make alterations
in the Premises only in accordance with plans and specifications duly approved
by Mortgagee; (g) suffer or permit no change in the general nature of the
occupancy of the Premises, without Mortgagee's written consent; (h) initiate or
acquiesce in no zoning variation or reclassification, without Mortgagee's
written consent; (i) pay the indebtedness secured hereby when due according to
the terms hereof or of the Loan Agreement and the Note.
3. Payment of Taxes. Mortgagor shall pay, before any penalty
attaches (except to the extent diligently contested in good faith by appropriate
proceedings and provided proper reserves are established on the books of the
Borrower), all general taxes, and shall pay special taxes, special assessments,
water charges, sewer service charges, and other charges against the Premises
when
-3-
<PAGE>
due, and shall furnish to Mortgagee paid tax receipts within sixty (60) days
after the final due date of such taxes. Mortgagee reserves the right to require
Mortgagor to make monthly deposits into an escrow account established and
controlled by Mortgagee for the payment of taxes under terms and in an amount
satisfactory to Mortgagee.
4. Insurance. Mortgagor shall cause all buildings and
improvements now or hereafter situated on the Premises to be insured against
loss or damage by fire and such other hazards as may be requested from time to
time by Mortgagee, including, but not limited to, hazards ordinarily insured
against by other companies similarly situated in operating like businesses and
properties, and including comprehensive public liability insurance as required
by Mortgagee and flood insurance if the Premises is within an area designated by
any government agency as a flood risk area. All policies of insurance to be
furnished hereunder shall be in forms, companies and amounts satisfactory to
Mortgagee, with mortgagee clauses attached to all policies in favor of and in
form satisfactory to Mortgagee, including a provision requiring that the
coverage evidenced thereby shall not be terminated or materially modified
without thirty (30) days' prior written notice to Mortgagee. Without limiting
the generality of the foregoing, property and casualty insurance shall be in
amounts and forms insuring the full replacement cost of fixed assets of the
Borrower. All policies shall name Mortgagee as an additional insured and as loss
payee. Mortgagor shall deliver all policies, including additional and renewal
policies, to Mortgagee, and, in the case of insurance about to expire, shall
deliver renewal policies not less than ten (10) days prior to their respective
dates of expiration. Mortgagor shall not take out separate insurance concurrent
in form or contributing in the event of loss with that required to be maintained
hereunder unless Mortgagee is included thereon under a standard mortgagee clause
acceptable to Mortgagee. Mortgagor shall immediately notify Mortgagee whenever
any such separate insurance is taken out and shall promptly deliver to Mortgagee
the policy or policies of such insurance.
5. Adjustment of Losses With Insurer and Application of
Proceeds of Insurance. In case of loss or damage by fire or other casualty,
Mortgagee is authorized to (a) settle and adjust any claim under insurance
policies which insure against such risks, or (b) allow Mortgagor to agree with
the insurance company or companies on the amount to be paid in regard to such
loss. In either case, Mortgagee is authorized to collect and issue a receipt for
any such insurance money. At the option of Mortgagee, such insurance proceeds
may be applied in reduction of the indebtedness secured hereby, whether due or
not, or may be held by Mortgagee and used to reimburse Mortgagor for the cost of
the rebuilding or restoration of buildings or improvements on the Premises. Irre
spective of whether such insurance proceeds are used to reimburse Mortgagor for
the cost of said rebuilding or restoration or not, and irrespective of whether
such insurance proceeds are or are not adequate for such purpose, the buildings
and improvements shall be so restored or rebuilt so as to be of at least equal
value and substantially the same character as prior to such damage or destruc
tion. If the cost of rebuilding, repairing or restoring the building and
improvements can reasonably exceed the sum of TWENTY-FIVE THOUSAND AND 00/100
DOLLARS ($25,000.00), then Mortgagor shall obtain Mortgagee's approval of plans
and specifications for such work before such work shall be commenced. In any
case, where the insurance proceeds are made available for rebuilding and
restoration, such proceeds shall be disbursed in the manner and under the
conditions that Mortgagee may require and upon Mortgagee being furnished with
satisfactory evidence of the estimated cost of completion thereof and with
-4-
<PAGE>
architect's certificates, waivers of lien, contractor's and subcontractors'
sworn statements and other evidence of cost and payments so that Mortgagee can
verify that the amounts disbursed from time to time are represented by completed
and in place work and that the work is free and clear of mechanics' lien claims.
If the estimated cost of completion exceeds the amount of the insurance proceeds
available, Mortgagor immediately shall, on written demand of Mortgagee, deposit
with Mortgagee in cash the amount of such estimated excess cost. No payment made
prior to the final completion of the work shall exceed ninety percent (90%) of
the value of the work performed from time to time, and at all times the
undisbursed balance of the proceeds remaining in the hands of the disbursing
party shall be at least sufficient to pay for the cost of completion of the work
free and clear of liens. Any surplus which may remain out of the insurance
proceeds after payment of the cost of building or restoration shall, at the
option of Mortgagee, be applied on account of the indebtedness secured hereby or
be paid to any party entitled thereto, without interest.
6. Condemnation. Mortgagor hereby assigns, transfers and sets
over unto Mortgagee the entire proceeds of any award or any claim for damages
for any of the Premises taken or damaged under the power of eminent domain or by
condemnation. Mortgagee may elect to apply the proceeds of the award upon or in
reduction of the indebtedness secured hereby, whether due or not, or make the
proceeds available for restoration or rebuilding of the Premises. Irrespective
of whether such proceeds are made available for restoration or rebuilding, and
irrespective of whether such proceeds are adequate for such purpose, the
buildings and improvements shall be restored or rebuilt in accordance with plans
and specifications to be submitted to and approved by Mortgagee. In the event
said proceeds are made available for rebuilding or restoration, the proceeds of
the award shall be disbursed in the manner and under the conditions that
Mortgagee may require and paid out in the same manner as provided in Section 4
hereof for the payment of insurance proceeds toward the cost of rebuilding or
restoration. In such event, if the estimated cost to complete rebuilding or
restoration exceeds the proceeds of the condemnation awards, Mortgagor
immediately shall, on written demand of Mortgagee, deposit with Mortgagee in
cash the amount of such excess cost. Any surplus which may remain out of any
such award after payment of such cost of building or restoration shall, at the
option of Mortgagee, be applied on account of the indebtedness secured hereby or
be paid to any party entitled thereto, without interest.
7. Effect of Extensions of Time. If the payment of the
indebtedness secured hereby or any part thereof is extended or varied or if any
part of any security for the payment of the indebtedness secured hereby is
released or additional security is taken, all persons now or at any time
hereafter liable therefor, or interested in the Premises, shall be held to
assent to such extension, variation, or taking of additional security or
release, and their liability and the lien and all provisions of this Mortgage
shall continue in full force, the right of recourse against all such persons
being expressly reserved by Mortgagee, notwithstanding such extension,
variation, taking of additional security or release.
8. Effect of Changes in Laws Regarding Taxation. In the event
of the enactment after this date of any law of the state in which the Premises
is located deducting from the value of the land for the purpose of taxation any
lien thereon, or imposing upon Mortgagee the payment of the whole or any part of
the taxes or assessments or charges or liens herein required to be paid by
Mortgagor, or changing in any way the laws relating to the taxation of mortgages
or debts
-5-
<PAGE>
secured by mortgages or Mortgagee's interest in the Premises, or the manner of
collection of taxes, so as to affect this Mortgage or the indebtedness secured
hereby or the holders thereof, then, and in any event, Mortgagor, upon demand by
Mortgagee, shall pay such taxes or assessments, or reimburse Mortgagee therefor,
provided, however, that if in the opinion of counsel for Mortgagee (a) it might
be unlawful to require Mortgagor to make such payment or (b) the making of such
payment might result in the imposition of interest beyond the maximum amount
permitted by law, then and in such event, Mortgagee may elect, by notice in
writing given to Mortgagor, to declare all of the indebtedness secured hereby to
be and become due and payable sixty (60) days after the giving of such notice.
9. Mortgage as Security. The proceeds of the loan secured
hereby are to be disbursed by Mortgagee to Mortgagor and its beneficiaries, in
accordance with the provisions contained in the Loan Agreement. All advances and
indebtedness arising and accruing under the Loan Agreement from time to time,
whether or not the total amount thereof may exceed the face amount of the Note,
shall be secured hereby to the same extent as though the Loan Agreement were
fully incorporated in this Mortgage. In the event of any inconsistencies or
conflicts between this Mortgage and the Loan Agreement, the terms of the Loan
Agreement shall govern and control.
10. Mortgagee's Performance of Defaulted Acts. In case of
default herein, Mortgagee may, but need not, make any payment or perform any act
herein required of Mortgagor in any form and manner deemed expedient, and may,
but need not, make full or partial payments of principal or interest on prior
encumbrances, if any, and purchase, discharge, compromise or settle any tax lien
or other prior lien or title or claim thereof, or redeem from any tax sale or
forfeiture affecting the Premises or consent to any tax or assessment or cure
any default of the Landlord in any lease of the Premises. All monies paid for
any of the purposes herein authorized and all expenses paid or incurred in
connection therewith, including attorneys' fees, and any other monies advanced
by Mortgagee in regard to any tax or any leases of the Premises or to protect
the Premises and the lien of this Mortgage, shall be so much additional
indebtedness secured hereby, and shall become immediately due and payable on
demand and with interest thereon at the rate per annum applicable under the Note
upon and after an Event of Default under the Loan Agreement. Inaction of
Mortgagee shall never be considered as a waiver of any right accruing to it on
account of any default on the part of Mortgagor.
11. Mortgagee's Reliance on Tax Bills. Mortgagee in making any
payment hereby authorized: (a) relating to taxes and assessments, may do so
according to any bill, statement or estimate procured from the appropriate
public office without inquiry into the accuracy of such bill, statement or
estimate or into the validity of any tax, assessment, sale, forfeiture, tax lien
or title or claim thereof; or (b) for the purchase, discharge, compromise or
settlement of any other prior lien, may do so without inquiry as to the validity
or amount of any claim for lien which may be asserted.
12. Acceleration of Indebtedness in Case of Default. If (a)
default is made in the due and punctual payment of the principal (or any part(s)
thereof) of the Note, or the Mortgagor or the Borrower fails to pay, within (10)
days after the date on which payment thereof is due, any installment of interest
on the Note or any other sum due and payable under the Loan Agreement, the Note,
or this Mortgage; or (b) default shall be made in the due observance or
performance of any other of the covenants, agreements or conditions herein
contained,
-6-
<PAGE>
required to be kept or performed or observed by Mortgagor or the Borrower; or
(c) default shall be made in the due observance or performance of any of the
covenants, agreements or conditions contained, required to be kept or observed
by Mortgagor or the Borrower in any other instrument given at any time to secure
the payment of the Note; or (d) an Event of Default shall occur under the Loan
Agreement; or (e) Mortgagor or the Borrower or any guarantor of the indebtedness
secured hereby becomes insolvent or bankrupt or admits in writing its inability
to pay its debts as they mature, or makes an assignment for the benefit of
creditors, or applies for or consents to the appointment of a trustee or
receiver for a major portion of its property or business; or (f) any petition is
filed or proceeding is commenced for any attachment, levy, or seizure of any
property of Mortgagor or the Borrower or any guarantor of the indebtedness
subject to a lien in favor of Mortgagee; or any judgment or judgments, writ or
writs, warrant or warrants of attachment, or any similar process or processes in
an aggregate amount in excess of $25,000.00 shall be entered or filed against
Mortgagor or the Borrower or any guarantor of the indebtedness or against any
property or assets of Mortgagor or the Borrower or any guarantor of the
indebtedness and remains unvacated, unbonded or unstayed for a period of sixty
(60) days; or (g) bankruptcy, reorganization, arrangement, insolvency or
liquidation proceedings or other proceedings for relief under any bankruptcy law
or similar law for the relief of debtors is instituted by or against Mortgagor
or the Borrower or any guarantor of the indebtedness and, if instituted against
Mortgagor or the Borrower or any guarantor of the indebtedness secured hereby,
are allowed against Mortgagor or the Borrower or any guarantor of the
indebtedness or are consented to or are not dismissed within sixty (60) days
after such institution, then and in every such case if default shall be contin
uing the whole of the indebtedness secured hereby shall, at once, at the option
of Mortgagee, become immediately due and payable without notice to Mortgagor.
13. Due on Sale -- Due on Encumbrance. Mortgagee may at its
option accelerate the maturity date of the indebtedness evidenced by the Note,
whereupon the whole of the indebtedness secured hereby shall at once become
immediately due and payable (without any cure or grace period), if Mortgagor
shall (whether voluntarily or by operation of law), without the prior written
consent of Mortgagee, sell, mortgage, encumber, hypothecate or otherwise
transfer the Premises or any part thereof, or otherwise cease to own the
Premises, or if the Borrower shall (whether voluntarily or by operation of law),
without the prior written consent of Mortgagee, sell, mortgage, encumber,
hypothecate, or otherwise transfer the beneficial interest in Mortgagor of any
portion thereof, or otherwise cease to own the beneficial interest in Mortgagor
or the full power of direction over Mortgagor.
14. Application of Funds. If while any insurance proceeds or
condemna tion awards are being held by Mortgagee to reimburse Mortgagor for the
cost of rebuilding or restoration of buildings or improvements on the Premises,
as set forth in Sections 4 or 5 hereof, or while Mortgagor is holding deposits
for the payment of taxes, Mortgagee shall be or become entitled to, and shall
accelerate the indebtedness secured hereby, then and in such event, Mortgagee
shall be entitled to apply all such insurance proceeds and condemnation awards
and deposits then held by it in reduction of the indebtedness secured hereby,
and any excess held by it over the amount of indebtedness then due shall be
returned to Mortgagor or any party entitled thereto, without interest.
15. Foreclosure; Expense of Litigation. When the indebtedness
hereby secured, or any part thereof, shall become due, whether by acceleration
or
-7-
<PAGE>
otherwise, Mortgagee shall have the right to foreclose the lien of this Mortgage
for such indebtedness or part thereof. In any civil action to foreclose the lien
of this Mortgage, there shall be allowed and included as additional indebtedness
in the order or judgment for sale all expenditures and expenses which may be
paid or incurred by or on behalf of Mortgagee for attorneys' fees, appraiser's
fees, outlays for documentary and expert evidence, stenographers' charges,
publication costs, and costs (which may be estimated as to items to be expended
after entry of the order or judgment) of procuring all such abstracts of title,
title searches and examinations, title insurance policies, Torrens certificates,
and similar data and assurances with respect to title as Mortgagee may deem
reasonably necessary either to prosecute such civil actions or to evidence to
bidders at any sale which may be had pursuant to such order or judgment the true
condition of the title to or the value of the Premises. All expenditures and
expenses of the nature mentioned in this Section, and such expenses and fees as
may be incurred in the protection of the Premises and maintenance of the lien of
this Mortgage, including the fees of any attorney employed by Mortgagee in any
litigation or proceeding affecting this Mortgage, the Note or the Premises,
including probate, bankruptcy and appellate proceedings, or in preparations for
the commencement or defense of any proceeding or threatened civil actions or
proceeding shall be immediately due and payable by Mortgagor, with interest
thereon at the rate of interest applicable under the Note upon the occurrence of
an Event of Default under the Loan Agreement, and shall be secured by this
Mortgage.
16. Application of Proceeds of Foreclosure Sale. The proceeds
of any foreclosure sale of the Premises shall be distributed and applied in the
following order of priority: first, on account of all costs and expenses
incident to the foreclosure proceedings, including all such items as are
mentioned in Section 14 hereof; second, all other items which may under the
terms hereof or the Loan Agreement constitute secured indebtedness additional to
that evidenced by the Note, with interest thereon as provided herein or in the
Loan Agreement; third, all principal and interest remaining unpaid on the Note;
and fourth, any overplus to Mortgagor, its successors or assigns, as their
rights may appear.
17. Appointment of Receiver. Upon, or at any time after the
filing of a complaint to foreclose this Mortgage, the court in which such
complaint is filed may appoint a receiver of the Premises. Such appointment may
be made either before or after sale, without notice, without regard to the
solvency or insolvency of Mortgagor at the time of application for such receiver
and without regard to the then value of the Premises or whether the same shall
be then occupied as a homestead, and Mortgagee or any holder of the Note may be
appointed as such receiver. Such receiver shall have power to collect the rents,
issues and profits of the Premises during the pendency of such foreclosure suit
and during the full statutory period of redemption, whether there be redemption
or not, as well as during any further times when Mortgagor, except for the
intervention of such receiver, would be entitled to collect such rents, issues
and profits, and all other powers which may be necessary or are usual in such
cases for the protection, possession, control, management and operation of the
Premises during the whole of such period. The court from time to time may
authorize the receiver to apply the net income in his hands to the payment in
whole or in part of: (a) the indebtedness secured hereby, or by any judgment or
order foreclosing this Mortgage, or any tax, special assessment or other lien
which may be or become superior to the lien hereof or of such decree, provided
-8-
<PAGE>
such application is made prior to foreclosure sale; and (b) the deficiency in
case of a sale and deficiency.
18. Mortgagee's Right of Possession in Case of Default. In any
case in which under the provisions of this Mortgage, Mortgagee has a right to
institute foreclosure proceedings, whether before or after the whole
indebtedness secured hereby is declared to be immediately due, or whether before
or after the institution of legal proceedings to foreclose the lien hereof or
before or after sale thereunder, forthwith, upon demand of Mortgagee, Mortgagor
shall surrender to Mortgagee and Mortgagee shall be entitled to take actual
possession of the Premises or any part thereof personally, or by its agent or
attorneys. In such event Mortgagee in its discretion may, in accordance with
law, enter upon and take and maintain possession of all or any part of the
Premises, together with all documents, books, records, papers and accounts of
Mortgagor or the then owner of the Premises relating thereto, and may exclude
Mortgagor, its agents or servants, wholly therefrom and may as attorney in fact
or agent of Mortgagor, or in its own name as Mortgagee and under the powers
herein granted, hold, operate, manage and control the Premises and conduct the
business, if any, thereof, either personally or by its agents, and with full
power to use such measures, legal or equitable, as in its discretion or in the
discretion of its successors or assigns may be deemed proper or necessary to
enforce the payment or security of the avails, rents, issues, and profits of the
Premises, including actions for the recovery of rent, actions in forcible
detainer and actions in distress for rent, and with full power to: (a) cancel or
terminate any lease or sublease for any cause or on any ground which would
entitle Mortgagor to cancel the same; (b) elect to disaffirm any lease or
sublease which is then subordinate to the lien hereof; (c) extend or modify any
then existing leases and to make new leases, which extensions, modifications and
new leases may provide for terms to expire, or for options to lessees to extend
or renew terms to expire, beyond the maturity date of the indebtedness hereunder
and beyond the date of the issuance of a deed or deeds to a purchaser or
purchasers at a foreclosure sale, it being understood and agreed that any such
leases, and the options or other such provisions to be contained therein, shall
be binding upon Mortgagor and all persons whose interests in the Premises are
subject to the lien of this Mortgage and upon the purchaser or purchasers at any
foreclosure sale, notwithstanding any redemption from a foreclosure of this
Mortgage, discharge of the indebtedness secured hereby, satisfaction of any
foreclosure decree, or issuance of any certificate of sale or deed to any
purchaser; (d) make all necessary or proper repairs, decorating, renewals,
replacements, alterations, additions, betterments and improvements to the
Premises as to it may seem judicious; (e) insure and reinsure the same and all
risks incidental to Mortgagee's possession, operation and management thereof;
and (f) receive all of such avails, rents, issues and profits, hereby granting
full power and authority to exercise each and every of the rights, privileges
and powers herein granted at any and all times hereafter, without prior notice
to Mortgagor provided that Mortgagor shall give subsequent notice thereof.
Mortgagee shall not be obligated to perform or discharge, nor does it hereby
undertake to perform or discharge, any obligation, duty or liability under any
leases. Mortgagor shall and does hereby agree to indemnify and hold Mortgagee
harmless of and from any and all liability, loss, damage, or expense (including
reasonable attorneys' fees) which Mortgagee may or might incur under said leases
or under or by reason of the assignment thereof and of and from any and all
claims and demands whatsoever which may be asserted against it by reason of any
alleged obligations or undertakings on its part to perform or dis charge any of
the terms, covenants or agreements contained in said leases. Should Mortgagee
incur any such liability, loss or damage, under said leases or
-9-
<PAGE>
under or by reason of the assignment thereof, or in the defense of any claims or
demands, the amount thereof, including costs, expenses and reasonable attorneys'
fees, shall be secured hereby, and Mortgagor shall reimburse Mortgagee therefor
immediately upon demand.
19. Application of Income Received by Mortgagee. Mortgagee, in
the exercise of the rights and powers conferred herein, shall have full power to
use and apply the avails, rents, issues and profits of the Premises to the
payment of or on account of the following, in such order as Mortgagee may
determine:
(a) to the payment of the operating expenses of the
Premises, including cost of management, established claims for damages,
if any, and premiums on insurance hereinabove authorized;
(b) to the payment of taxes and special assessments
now due or which may hereafter become due on the Premises;
(c) to the payment of all repairs, replacements,
alterations, additions, betterments, and improvements of the Premises
and of placing the Premises in such condition as will, in the judgment
of Mortgagee, make it readily marketable;
(d) to the payment of any indebtedness secured hereby
or any deficiency which may result from any foreclosure sale.
20. Rights Cumulative. Each right, power and remedy herein
conferred upon Mortgagee is cumulative and in addition to every other right,
power or remedy, express or implied, given now or hereafter existing, at law or
in equity, and each and every right, power and remedy herein set forth or
otherwise so existing may be exercised from time to time as often and in such
order as may be deemed expedient by Mortgagee, and the exercise or the beginning
of the exercise of one right, power or remedy shall not be a waiver of the right
to exercise at the same time or thereafter any other right, power or remedy, and
no delay or omission of the Mortgagee in the exercise of any right, power or
remedy accruing hereunder or arising otherwise shall impair any such right,
power or remedy, or be construed to be a waiver of any default or acquiescence
therein.
21. Compliance With Illinois Mortgage Foreclosure Law. In the
event that any provision in this Mortgage shall be inconsistent with any
provision of the Illinois Mortgage Foreclosure Law (Sections 735 ILCS 5/15-1101
et seq., Illinois Compiled Statutes) (herein called the "Act"), the provisions
of the Act shall take precedence over the provisions of this Mortgage, but shall
not invalidate or render unenforceable any other provision of this Mortgage that
can be construed in a manner consistent with the Act. If any provision of this
Mortgage shall grant to Mortgagee any rights or remedies upon default of
Mortgagor which are more limited than the rights that would otherwise be vested
in Mortgagee under the Act in the absence of said provision, Mortgagee shall be
vested with the rights granted in the Act to the full extent permitted by law.
Without limiting the generality of the foregoing, all expenses incurred by
Mortgagee to the extent reimbursable under Sections 735 ILCS 5/15-1510 and 15-
1512 of the Act, whether incurred before or after any decree or judgment of
foreclosure, and whether enumerated in Section 14 of this Mortgage, shall be
added to the indebtedness secured by this Mortgage or by the judgment of foreclo
sure.
-10-
<PAGE>
22. Waiver of Statutory Rights. Mortgagor shall not apply for
or avail itself of any appraisal, valuation, stay, extension or exemption laws,
or any so-called "Moratorium Laws," now existing or hereafter enacted, in order
to prevent or hinder the enforcement or foreclosure of this Mortgage, but hereby
waives the benefit of such laws. Mortgagor, for itself, and all who may claim
through or under it, waives any and all right to have the property and estates
comprising the Premises marshaled upon any foreclosure of the lien hereof and
agrees that any court having jurisdiction to foreclose such lien may order the
Premises sold as an entirety. Mortgagor does hereby expressly waive any and all
rights of redemption from any order, judgment or decree of foreclosure of this
Mortgage on behalf of Mortgagor, the trust estate and all persons beneficially
interested therein, and each and every person acquiring any interest in or title
to the Premises subsequent to the date of this Mortgage. Mortgagor hereby
represents and warrants to Mortgagee that it has been directed in writing by the
appropriate beneficiaries and holders of the power of direction of the trust
estate to expressly waive all rights of redemption to the Premises and
reinstatement of the loan secured hereby in the manner herein set forth.
Mortgagor does hereby further expressly waive, to the extent now or hereafter
permitted by law, all rights of reinstatement of this Mortgage pursuant to
Section 15-1602 of the Act.
23. Waiver of Notice. No action for the enforcement of the
lien or of any provision hereof shall be subject to any defense which would not
be good and available to the party interposing same in an action at law upon the
Note.
24. Release upon Payment and Discharge of Mortgagor's
Obligations. Mortgagee shall release this Mortgage and the lien thereof by
proper instrument upon payment and discharge of all indebtedness secured hereby,
in accordance with the terms and conditions in the Note and the Loan Agreement,
and including a reasonable fee to Mortgagee for the execution of such release.
25. Filing and Recording Fees. Mortgagor will pay all filing,
registration or recording fees, and all expenses incident to the execution and
acknowledgment of this Mortgage and all federal, state, county, and municipal
taxes, and other taxes, duties, imposts, assessments and charges arising out of
or in connection with the execution and delivery of the Note and this Mortgage.
26. Compliance With Laws. Except as disclosed in writing to
Mortgagee on or before the date hereof, the Premises and its present use
complies, and at all times shall comply, with all applicable laws and
governmental regulations including, without limitation, all applicable federal,
state and local laws pertaining to air and water quality, hazardous waste, waste
disposal, air emissions and other environmental matters, all zoning and other
land use matters, and utility availability. Except as disclosed in writing to
Mortgagee on or before the date hereof, neither Mortgagor nor, to the best of
Mortgagor's knowledge, any previous owner or occupier of the Premises, used,
generated, stored or disposed of, on, under or about the Premises any Hazardous
Materials. For purposes of this Mortgage, Hazardous Materials shall mean and
include any hazardous substance, hazardous material, toxic substance, solid
waste, or any pollutant or contaminant now or hereafter defined as such in (or
for purposes of) the Comprehensive Environmental Response, Compensation, and
Liability Act, any so-called applicable "Superfund" or "Superlien" or
"Non-priority lien" law, the Toxic Substances Control Act, or the Resource
Conservation and Recovery Act, all as amended from time to time. Further, to the
best of Mortgagor's knowledge, except as disclosed in writing to Mortgagee on or
before the date hereof, the Premises does not contain any underground tanks and
does not contain and has not
-11-
<PAGE>
in the past contained any asbestos-containing material in friable form. Mortga
gor shall protect, indemnify and hold harmless Mortgagee, its directors,
officers, employees, agents, successors and assigns, from and against any and
all loss, damage, cost, expense or liability (including attorneys' fees and
costs) directly or indirectly arising out of or attributable to the use,
generation, manufacture, production, storage, release, threatened release,
discharge, disposal or presence of Hazardous Materials or asbestos on, under or
about the Premises including without limitation (a) all foreseeable
consequential damages; and (b) the costs of any required or necessary repair,
cleanup or detoxification of the Premises and the preparation and implementation
of any closure, remedial or other required plans. This indemnity shall survive
the payment of the Note and the reconveyance or release of the lien of this
Mortgage, or the extinguishment of the lien by foreclosure or action in
reconveyance or extinguishment or deed in lieu of foreclosure. This indemnity
shall not apply to any claims, losses, liabilities, damages, penalties, and
expenses which are incurred by Mortgagee solely as a direct result of any act or
omission of the Mortgagee and which are not the result, in whole or in part, of
any pre-existing condition or event. In the event that any investigation, site
monitoring, containment, clean-up, removal, restoration or other remedial work
of any kind or nature (the "Remedial Work") is reasonably necessary or desirable
under any applicable local, state or federal law or regulation, any judicial
order, or by any governmental entity or person because of, or in connection
with, the current or future presence, suspected presence, release or suspected
release of any Hazardous Materials in or about the air, soil, ground water,
surface water or soil vapor at, on, about, under or within the Premises (or any
portion thereof), Mortgagor shall within thirty (30) days after written demand
for performance thereof by Mortgagee (or such shorter period of time as may be
required under any applicable law, regulation, order or agreement), commence and
thereafter diligently prosecute to completion, all the Remedial Work. All
Remedial Work shall be performed by contractors approved in advance by
Mortgagee, and under the supervision of a consulting engineer approved by
Mortgagee. All costs and expenses of Remedial Work shall be paid by Mortgagor
including, without limitation, Mortgagee's reasonable attorneys' fees and costs
incurred in connection with monitoring or review of the Remedial Work. In the
event Mortgagor shall fail to timely prosecute to completion, the Remedial Work,
Mortgagee may, but shall not be required to, cause the Remedial Work to be
performed and all costs and expenses thereof, or incurred in connection
therewith, shall become part of the indebtedness secured hereby.
27. Indemnity. Mortgagor agrees to indemnify and hold harmless
Mortgagee from and against any and all losses, liabilities, suits, obligations,
fines, damages, judgments, penalties, claims, charges, costs and expenses
(including attorneys' fees and disbursements) which may be imposed on, incurred
or paid by or asserted against Mortgagee by reason or on account of, or in
connection with, (a) any willful misconduct of Mortgagor or any default by
Mortgagor hereunder or under any other documents executed at any time to secure
the payment of the Note, (b) Mortgagee's good faith and commercially reasonable
exercise of any of its rights and remedies, or the performance of any of its
duties, hereunder or under any other documents executed at any time to secure
payment of the Note, (c) the construction, reconstruction or alteration of the
Premises, (d) any negligence of Mortgagor, or any negligence or willful
misconduct of any lessee of the Premises, or any of their respective agents,
contractors, subcontractors, servants, employees, licensees or invitees or (e)
any accident, injury, death or damage to any person or property occurring in, on
or about the Premises or any street, drive, sidewalk, curb or passageway
-12-
<PAGE>
adjacent thereto, except for the willful misconduct or gross negligence of the
indemnified person. Any amount payable to Mortgagee under this Section shall be
due and payable within ten (10) days after demand therefor and receipt by
Mortgagor of a statement from Mortgagee setting forth in reasonable detail the
amount claimed and the basis therefor, and such amounts shall bear interest,
from and after the date such amounts are paid by Mortgagee until paid in full by
Mortgagor, at the rate of interest applicable under the Note upon the occurrence
of an Event of Default under the Loan Agreement. Mortgagor's obligations under
this Section shall not be affected by the absence or unavailability of insurance
covering the same or by the failure or refusal by any insurance carrier to
perform any obligation on its part under any such policy of covering insurance.
If any claim, action or proceeding is made or brought against Mortgagor and/or
Mortgagee which is subject to the indemnity set forth in this Section, Mortgagor
shall resist or defend against the same, if necessary, in the name of Mortgagee,
by attorneys for Mortgagor's insurance carrier (if the same is covered by
insurance) or otherwise by attorneys approved by Mortgagee. Notwithstanding the
foregoing, Mortgagee, in its discretion, may engage its own attorneys to resist
or defend, or assist therein, and Mortgagor shall pay, or, on demand, shall
reimburse Mortgagee for the payment of, the reasonable fees and disbursements of
Mortgagee's attorneys.
28. Giving of Notice. Any notice which either party hereto may
desire or be required to give to the other party shall be in writing and shall
be given in person or by the mailing thereof by certified mail addressed to
Mortgagor at: First American Bank, 218 W. Main Street, West Dundee, IL 60118 or
to Mortgagee at: First American Bank, 1650 Louis Avenue, Elk Grove Village,
Illinois 60007, or at such other place as any party hereto may by notice in
writing designate as a place for service of notice.
29. Miscellaneous.
(a) This Mortgage, and all provisions hereof, shall
extend to and be binding upon Mortgagor and its successors, grantees
and assigns, any subsequent owner or owners of the Premises and all
persons claiming under or through Mortgagor, and the word "Mortgagor"
when used herein shall include all such persons and all persons liable
for the payment of the indebtedness secured hereby or any part thereof,
whether or not such persons shall have executed the Note or this
Mortgage. The word "Mortgagee" when used herein shall include the
successors and assigns of Mortgagee named herein, and the holder or
holders, from time to time, of the Note. The word "indebtedness" when
used herein shall include the principal sum evidenced by the Note,
together with all interest, additional interest, and late charges
thereon and other sums due thereunder and all other sums due to
Mortgagee under the Loan Agreement or this Mortgage. The word "Note"
when used herein shall include all extensions, renewals, refinancings,
modifications, amendments, and replacements thereof.
(b) In the event one or more of the provisions
contained in this Mortgage or the Note or in any other security
documents given to secure the payment of the Note shall for any reason
be held to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall, at the option of
Mortgagee, not affect any other provision of this Mortgage, and this
Mortgage shall be construed as if such invalid, illegal or
unenforceable provision had never been contained herein or therein.
This Mortgage shall be construed and governed by the laws of the State
of Illinois.
-13-
<PAGE>
(c) At all times, regardless of whether any loan
proceeds have been disbursed, this Mortgage secures (in addition to any
loan proceeds disbursed from time to time) the payment of any and all
expenses and advances due to or incurred by Mortgagee in connection
with the indebtedness secured hereby, provided, however,
notwithstanding anything to the contrary herein, the total aggregate
indebtedness secured by this Mortgage shall not exceed an amount equal
to two (2) times the face amount of the Note.
(d) No offset or claim that Mortgagor now has or may
have in the future against Mortgagee shall relieve Mortgagor from
paying any amounts due under the Note or from performing any other
obligations contained herein or secured hereby.
(e) Mortgagor shall not by act or omission permit any
building or other improvement on the Premises not subject to the lien
of this Mortgage to rely on the Premises or any part thereof or any
interest therein to fulfill any municipal or governmental requirement,
and Mortgagor hereby assigns to Mortgagee any and all rights to give
consent for all or any portion of the Premises or any interest therein
to be used. Similarly, no building or other improvement on the Premises
shall rely on any premises not subject to the lien of this Mortgage or
any interest therein to fulfill any governmental or municipal
requirement. Mortgagor shall not by act or omission impair the
integrity of the Premises as zoned for its present or intended use. Any
act or omission by Mortgagor which would result in a violation of any
of the provi sions of this Section shall be void.
(f) Mortgagee shall have the right to inspect the
Premises at all reasonable times and access thereto shall be permitted
for that purpose.
30. Exculpatory. This Mortgage is executed by First American
Bank, not personally but as Trustee as aforesaid in the exercise of the power
and authority conferred upon and vested in it as Trustee, and it is expressly
understood and agreed that nothing herein or in the Note contained shall be
construed as creating any liability on First American Bank personally to pay the
Note or any interest that may accrue thereon, or any indebtedness, or to perform
any covenant, either express or implied, herein contained, all such liability,
if any, being expressly waived by Mortgagee and by every person now or hereafter
claiming any right or security hereunder, and that so far as First American Bank
personally is concerned, the legal holder or holders of the Note and the owner
or owners of any indebtedness shall look solely to the Premises hereby conveyed
for the payment thereof, by the enforcement of the lien hereby created, in the
manner herein provided, by action against any other security given at any time
to secure the payment of the Note and by action to enforce the personal
liability of the guarantors, if any.
IN WITNESS WHEREOF, the Mortgagor has executed this instrument
the day and year first written above.
First American Bank
not personally but as Trustee
as aforesaid
BY:__________________________
Its:______________________
ATTEST:________________________
____________________________
Its:________________________
-14-
<PAGE>
STATE OF ILLINOIS )
) SS
COUNTY OF _______ )
I___________________________, a Notary Public in and for said
County in the State aforesaid, DO HEREBY CERTIFY THAT __________________________
and __________________________, personally known to me and known by me to be the
__________________________and __________________________, respectively, of First
American Bank, in whose name, as Trustee, the above and foregoing instrument is
executed, appeared before me this day in person and acknowledged that they
signed and delivered the said instrument as their free and voluntary act and as
the free and voluntary act of said First American Bank, as Trustee as aforesaid,
for the uses and purposes therein set forth, and the said then and there
acknowledged that he, as custodian of the corporate seal of said First American
Bank did affix the said corporate seal to said instrument as his free and
voluntary act and as the free and voluntary act of said First American Bank, as
Trustee as aforesaid, for the uses and purposes therein set forth.
GIVEN under my hand and Notarial Seal this ___ day of _______,
19___.
____________________________
Notary Public
My Commission Expires:
____________________________
-15-
<PAGE>
EXHIBIT A
Legal Description
THAT PART OF THE SOUTH 1/2 OF SECTION 21, TOWNSHIP 43 NORTH, RANGE 9, EAST OF
THE THIRD PRINCIPAL MERIDIAN, DESCRIBED AS FOLLOWS: COMMENCING AT A POINT IN THE
EAST LINE OF THE WEST 1/2 OF THE SOUTH EAST 1/4 OF SAID SECTION 21, 983.62 FEET
NORTH OF THE SOUTHEAST CORNER THEREOF; THENCE WEST PARALLEL WITH THE SOUTH LINE
OF SAID SOUTH EAST 1/4, 699.98 FEET; THENCE NORTHERLY 332.59 FEET TO A POINT
323.17 FEET NORTH AND 648.28 FEET WEST OF THE POINT OF BEGINNING; THENCE
EASTERLY PARALLEL TO THE SOUTH LINE OF SAID SOUTH EAST 1/4, 648.28 FEET TO THE
EAST LINE OF THE WEST 1/2 OF SAID SOUTH EAST 1/4; THENCE SOUTH 323.17 FEET TO
THE POINT OF BEGINNING, (EXCEPTING THEREFROM THE EAST 33 FEET THEREOF) IN LAKE
COUNTY, ILLINOIS.
PIN: 13-21-400-019
COMMONLY KNOWN AS: 22222 NORTH PEPPER ROAD, BARRINGTON, ILLINOIS 60010
<PAGE>
JOINDER
FOR GOOD AND VALUABLE CONSIDERATION, the receipt and
sufficiency of which are hereby acknowledged, the undersigned, being the owner
of 100% of the beneficial interest in the land trust known as First American
Bank ("Mortgagor"), hereby joins in the Mortgage made by Mortgagor in favor of
First American Bank ("Mortgagee") for purposes of: (a) conveying, mortgaging,
warranting, granting, transferring, setting over, and assigning to Mortgagee,
all of its right, title, and interest in and to the real property described
therein, including, without limitation, all of the buildings, structures, and
improvements now or at any time hereafter erected, constructed, or situated on
such real property or any part thereof and all machinery, apparatus, equipment,
personal property, and fixtures of every kind and nature whatsoever now or at
any time hereafter located in, on, or about such real property or any part
thereof, and any and all rents, issues, income, and profits of and from such
real property and all other property that, if owned by Mortgagee, would form a
portion of the Premises subject to the lien of the Mortgage; and (b) agreeing
that to the extent the undersigned has the right, power, or obligation to
perform or cause the performance of any act that Mortgagor is required to
perform in the Mortgage or has the right, power, or obligation to prohibit or
limit or cause the prohibition or limitation of any act that is prohibited or
limited under the Mortgage, the undersigned shall act to cause the compliance
with the provisions thereof.
IN WITNESS WHEREOF, the undersigned has joined in the
foregoing Mortgage by executing and delivering this Joinder as of August 24,
1998.
CTI Industries
By:____________________________
Stephen M. Merrick,
Chief Executive Officer
<PAGE>
STATE OF ILLINOIS )
) SS
COUNTY OF _______ )
The undersigned, a notary public in and for the county and
state aforesaid, do hereby certify that Stephen M. Merrick, the Chief Executive
Officer of CTI Industries, who is personally known to me to be the same person
whose name is subscribed to the foregoing instrument as such officer appeared
before me this day in person and acknowledged that he signed and delivered the
said instrument as such officer as his own free and voluntary act and as the
free and voluntary act of said corporation, for the uses and purposes therein
set forth, and caused the corporate seal of said corporation to be affixed
thereto.
Given under my hand and notarial seal on _____________, 19__.
_________________________
Notary Public
<PAGE>
THIS INSTRUMENT WAS )
PREPARED BY AND AFTER )
RECORDING RETURN TO: )
Krysha X. Donoso )
First American Bank )
1650 Louis Avenue )
Elk Grove Village, )
Illinois 60007 )
)
PERMANENT INDEX #: )
13-21-400-019 )
)
STREET ADDRESS: )
22222 North Pepper Road )
Barrington, IL 60010 )
Exhibit 10.23
SECOND AMENDMENT TO AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
This Agreement is made as of August 27, 1998 among CTI Industries
Corporation, a Delaware corporation (the "Borrower"), and First American Bank,
an Illinois banking corporation (the "Bank"), and Stephen M. Merrick, John H.
Schwan, and Howard W. Schwan (hereinafter referred to as the "Guarantors").
Whereas, the Borrower and the Bank are parties to an Amended and
Restated Loan and Security Agreement dated as of May 1, 1998, as it may be
amended from time to time (the "Loan Agreement"), and the Borrower is the maker
of the First Term Loan dated May 1, 1998 payable to the order of the Bank in the
original principal amount of $1,788,328.39 (the "First Term Note"), the Second
Term Loan dated August 22, 1996 payable to the order of the Bank in the original
principal amount of $2,128,322.80 (the "Second Term Note"), the Third Term Loan
dated May 1, 1998 payable to the order of the Bank in the original principal
amount of $2,258,000.00 (the "Third Term Note"), the Fourth Term Loan dated
August 24, 1998 payable to the order of the Bank in the original principal
amount of $1,268,000.00 (the "Fourth Term Note"), and the Revolving Loan dated
May 1, 1998 payable to the order of the Bank in the original principal amount of
$4,000,000.00 (the "Revolving Note") each delivered by the Borrower to the Bank
(the first Term Note, the Second Term Note, the Third Term Note, the Fourth Term
Note and the Revolving Note are hereinafter collectively referred to as the
"Notes"); and
Whereas, the obligations of the Borrower are secured by, among other
things: a security interest in all of Borrower's assets to secure the
obligations of the Borrower under this Agreement and the First Term Loan, the
Third Term Loan, and the Revolving Note; a mortgage (the "Mortgage I") on the
property commonly known as 22160 North Pepper Road, Barrington, IL owned by
American National Bank and Trust Company of Chicago, not personally but solely
as Trustee, under Trust Agreement dated September 19, 1984 and known as Trust
No. 61978 (the "Trust I") to secure the obligations of the Borrower under this
Agreement and the Second Term Note; and a mortgage (the "Mortgage II") on the
property commonly known as 22222 North Pepper Road, Barrington, IL (the
"Premises") owned by the First American Bank, not personally but solely as
Trustee, under Trust Agreement dated August 14, 1998 and known as Trust No.
1-98-134 (the "Trust II" together with the Trust I are hereinafter collectively
referred to as the "Trust") to secure the obligations of the Borrower under this
Agreement and the Fourth Term Note (Mortgage I and Mortgage II are hereinafter
collectively referred to as the "Mortgage"); an assignment of rents on the
Premises owned by the Trust II (the "Assignment"); a collateral assignment of
beneficial interest in the Trust II (the "ABI"); and separate subordination
agreements executed by the Guarantors (hereinafter collectively referred to as
the "Subordination"); and
Whereas, the Guarantors have guaranteed the obligations of the Borrower
to the Bank pursuant to separate guaranties dated August 22, 1996, May 1, 1998,
and August 24, 1998 (hereinafter collectively referred to as the "Guaranty");
and
Whereas, on August 24, 1998, the Borrower and the Bank executed a First
Amendment to Amended and Restated Loan and Security Agreement whereby the Bank
extended additional indebtedness to the Borrower in the form of a Fourth Term
Note; and
<PAGE>
Whereas, the Borrower, the Bank and the Guarantors desire to enter into
this Agreement in order to change the advance rate under Eligible Inventory, and
otherwise confirm the obligations of the Borrower under the Loan Agreement, the
Notes, the Guaranty, the Mortgage, the Assignment, the ABI, the Subordination,
and all other documents and instruments at any time evidencing, creating, or
securing the obligations of the Borrower to the Bank (collectively, the "Loan
Documents").
Now, therefore, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Defined Terms. Capitalized words used in this Agreement as defined
terms are used herein with the same meanings as in the Loan Agreement, unless
otherwise defined herein.
2. Amendment to Loan Agreement. The first paragraph of Section 1.1.5 of
the Loan Agreement is hereby amended and restated in its entirety and, as
amended, reads as follows:
1.1.5 Revolving Loan (Loan No. 600804665-65) The Bank agrees
to lend to the Borrower, subject to and upon the terms and conditions
set forth herein, at any time or from time to time on or after the date
hereof and on or before May 1, 1999, such amounts (each such loan and
all such loans, collectively, as the context requires being herein
referred to as the "Revolving Loan") as may be requested by the
Borrower and which the Bank in its discretion agrees to lend from time
to time, subject to the limitations hereinafter set forth. Within the
limits and subject to and upon the terms and conditions herein set
forth, amounts under the Revolving Loan may be borrowed and repaid and
reborrowed from time to time. Except as otherwise permitted by the
Bank, the aggregate unpaid principal amount of the Revolving Loan
outstanding at any time shall not exceed the lesser of Four Million and
No/100 Dollars ($4,000,000.00) or the Advance Limit (as hereinafter
defined). The Revolving Loan shall be evidenced by and be repayable
with interest in accordance with the terms of this Agreement and a
promissory note payable to the order of the Bank in the original
principal amount of $4,000,000.00 which shall be dated on or before the
initial disbursement of the Revolving Loan and shall be duly executed
and delivered by the Borrower (the "Revolving Note"). For purposes of
this Agreement, the Advance Limit shall be equal to the sum of: (i) 80%
of the Eligible Accounts (as defined in the Loan Agreement) or
$4,000,000.00, whichever is less; and (ii) for the period commencing
August 27, 1998 until January 1, 1999, 30% of Eligible Inventory (as
defined in the Loan Agreement) or $2,400,000.00, whichever is less.
3. Validity of Agreements. Except as specifically provided in this
Agreement, all of the terms, provisions, and covenants of the Borrower and
Guarantors in the Loan Agreement, the Notes, and the other Loan Documents are
now and shall remain in full force and effect and have not been and shall not be
modified in any way and are hereby affirmed, confirmed, and ratified in all
respects. The Borrower and the Guarantors hereby acknowledge that they have no
claims or offsets against, or defenses or counterclaims to, the enforcement by
<PAGE>
the Bank of the Loan Agreement, the Notes and the Amendment, or any of the other
Loan Documents. After the date hereof, all references to "Agreement", "hereof",
"herein", or the like appearing in the Loan Agreement shall be deemed to be
references to the Loan Agreement as herein amended or modified; all references
to the "Notes" or the "First Term Note" or the "Second Term Note" or the "Third
Term Note" or the "Fourth Term Note" or the "Revolving Note" in the Loan
Agreement, the Notes, or any other Loan Documents shall be deemed to refer to
the Notes as amended by the Second Amendment to Amended and Restated Loan and
Security Agreement and any extension, renewal, refinancing, modification,
amendment, or restructuring thereof.
4. Miscellaneous Provisions.
a. This Agreement shall be governed by the internal laws of
the State of Illinois.
b. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which, when
taken together, shall constitute one and the same instrument.
c. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and assigns.
d. This Agreement represents the complete agreement of the
parties with respect to the subject matter hereof and supersedes all prior
negotiations and Agreements with respect to the subject matter hereof.
In Witness hereof, the parties have executed this Agreement on the date
first written above.
BORROWER:
CTI Industries Corporation
By:____________________________
John H. Schwan
Chairman
BANK:
First American Bank
By:____________________________
Jodi Krass,
Asst. Vice President
Exhibit 10.24
THIRD AMENDMENT TO AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
This Agreement is made as of September 1, 1998 among CTI Industries
Corporation, a Delaware corporation (the "Borrower"), and First American Bank,
an Illinois banking corporation (the "Bank"), and Stephen M. Merrick, John H.
Schwan, and Howard W. Schwan (hereinafter referred to as the "Guarantors").
Whereas, the Borrower and the Bank are parties to an Amended and
Restated Loan and Security Agreement dated as of May 1, 1998, as it may be
amended from time to time (the "Loan Agreement"), and the Borrower is the maker
of the First Term Loan dated May 1, 1998 payable to the order of the Bank in the
original principal amount of $1,788,328.39 (the "First Term Note"), the Second
Term Loan dated August 22, 1996 payable to the order of the Bank in the original
principal amount of $2,128,322.80 (the "Second Term Note"), the Third Term Loan
dated May 1, 1998 payable to the order of the Bank in the original principal
amount of $2,258,000.00 (the "Third Term Note"), the Fourth Term Loan dated
August 24, 1998 payable to the order of the Bank in the original principal
amount of $1,268,000.00 (the "Fourth Term Note"), and the Revolving Loan dated
May 1, 1998 payable to the order of the Bank in the original principal amount of
$4,000,000.00 (the "Revolving Note") each delivered by the Borrower to the Bank
(the first Term Note, the Second Term Note, the Third Term Note, the Fourth Term
Note and the Revolving Note are hereinafter collectively referred to as the
"Notes"); and
Whereas, the obligations of the Borrower are secured by, among other
things: a security interest in all of Borrower's assets to secure the
obligations of the Borrower under this Agreement and the First Term Loan, the
Third Term Loan, and the Revolving Note; a mortgage (the "Mortgage I") on the
property commonly known as 22160 North Pepper Road, Barrington, IL owned by
American National Bank and Trust Company of Chicago, not personally but solely
as Trustee, under Trust Agreement dated September 19, 1984 and known as Trust
No. 61978 (the "Trust I") to secure the obligations of the Borrower under this
Agreement and the Second Term Note; and a mortgage (the "Mortgage II") on the
property commonly known as 22222 North Pepper Road, Barrington, IL (the
"Premises") owned by the First American Bank, not personally but solely as
Trustee, under Trust Agreement dated August 14, 1998 and known as Trust No.
1-98-134 (the "Trust II" together with the Trust I are hereinafter collectively
referred to as the "Trust") to secure the obligations of the Borrower under this
Agreement and the Fourth Term Note (Mortgage I and Mortgage II are hereinafter
collectively referred to as the "Mortgage"); an assignment of rents on the
Premises owned by the Trust II (the "Assignment"); a collateral assignment of
beneficial interest in the Trust II (the "ABI"); and separate subordination
agreements executed by the Guarantors (hereinafter collectively referred to as
the "Subordination"); and
Whereas, the Guarantors have guaranteed the obligations of the Borrower
to the Bank pursuant to separate guaranties dated August 22, 1996, dated May 1,
1998, August 24, 1998, and September 1, 1998 (hereinafter collectively referred
to as the "Guaranty"); and
Whereas, on August 24, 1998, the Borrower and the Bank executed a First
Amendment to Amended and Restated Loan and Security Agreement whereby the Bank
extended additional indebtedness to the Borrower in the form of a Fourth Term
Note; and
-1-
<PAGE>
Whereas, on August 28, 1998, the Borrower and the Bank executed a
Second Amendment to Amended and Restated Loan and Security Agreement whereby the
Bank changed the advance rate under Eligible Inventory; and
Whereas, the Borrower, the Bank and the Guarantors desire to enter into
this Agreement in order to increase the amount of indebtedness under the
Revolving Note, extend the maturity of the Third Term Note and otherwise confirm
the obligations of the Borrower under the Loan Agreement, the Notes, the
Guaranty, the Mortgage, the Assignment, the ABI, the Subordination, and all
other documents and instruments at any time evidencing, creating, or securing
the obligations of the Borrower to the Bank (collectively, the "Loan
Documents").
Now, therefore, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Defined Terms. Capitalized words used in this Agreement as defined
terms are used herein with the same meanings as in the Loan Agreement, unless
otherwise defined herein.
2. Amendment to Loan Agreement. Section 1.1 of the Loan Agreement is
hereby amended and restated in its entirety and as amended, reads as follows:
1.1 Loan Amount. Subject to and upon the terms and conditions
set forth in this Agreement, the Bank agrees to lend to the Borrower,
from time to time, such sums as may be requested by the Borrower and
which the Bank in its discretion agrees to lend from time to time, the
total of which shall not exceed, in the aggregate, $10,663,499.22,
subject to the further limits hereinafter set forth (the "Loan")
pursuant to the First Term Loan, the Second Term Loan, Third Term Loan,
Fourth Term Loan and the Revolving Loan hereinafter provided.
3. Amendment to Loan Agreement. The first paragraph of Section 1.1.5 of
the Loan Agreement is hereby amended and restated in its entirety and, as
amended, reads as follows:
1.1.5 Revolving Loan (Loan No. 600804665-67) The Bank agrees
to lend to the Borrower, subject to and upon the terms and conditions
set forth herein, at any time or from time to time on or after the date
hereof and on or before May 1, 1999, such amounts (each such loan and
all such loans, collectively, as the context requires being herein
referred to as the "Revolving Loan") as may be requested by the
Borrower and which the Bank in its discretion agrees to lend from time
to time, subject to the limitations hereinafter set forth. Within the
limits and subject to and upon the terms and conditions herein set
forth, amounts under the Revolving Loan may be borrowed and repaid and
reborrowed from time to time. Except as otherwise permitted by the
Bank, the aggregate unpaid principal amount of the Revolving Loan
outstanding at any time shall not exceed the lesser of Four Million
Five Hundred Thousand and No/100 Dollars ($4,500,000.00) or the Advance
Limit (as hereinafter defined). The Revolving Loan shall be evidenced
by and be repayable with interest in accordance with the terms of this
Agreement and a promissory note payable to the order of the Bank in the
original principal amount of $4,000,000.00
-2-
<PAGE>
which shall be dated on or before the initial disbursement of the
Revolving Loan and shall be duly executed and delivered by the Borrower
(the "Revolving Note"). For purposes of this Agreement, the Advance
Limit shall be equal to the sum of: (i) 80% of the Eligible Accounts
(as defined in the Loan Agreement) or $4,500,000.00, whichever is less;
(ii) for the period commencing September 1, 1998 until January 1, 1999,
30% of Eligible Inventory (as defined in the Loan Agreement) or
$2,400,000.00, whichever is less; (iii) for the period commencing
January 2, 1999 until February 1, 1999, 25% of Eligible Inventory or
$2,000,000.00, whichever is less; (iv) for the period commencing
February 2, 1999 until March 1, 1999, 20% of Eligible Inventory or
$1,600,000.00, whichever is less; and (v) for the period commencing
March 2, 1999 until maturity, 15% of Eligible Inventory or
$1,300,000.00, whichever is less.
4. Amendment to Loan Agreement. Section 1.4.3 of the Loan Agreement is
hereby amended and restated in its entirety and, as amended, reads as follows:
1.4.3 Third Term Loan Maturity. The Third Term Loan shall be
due and payable in equal monthly installments of $46,194.61 of
principal and interest, commencing on March 1, 1999, and a like sum on
the first day of each calendar month thereafter until the principal of
and accrued and unpaid interest on the Third Term Loan is paid in full,
provided that the outstanding principal of and accrued and unpaid
interest on the Third Term Loan, if not sooner paid in full, shall be
due and payable in full on February 1, 2004 (or earlier as provided in
this Agreement or the Third Term Note).
5. Delivery of Loan Documents. The Borrower shall execute and deliver
to the Bank the following:
(a) a Revolving Note dated September 1, 1998 in the original
principal amount of $4,500,000.00;
(b) a First Amendment to Third Term Note in the form attached
as Appendix A hereto providing that the Third Term Note shall be due
and payable in full on March 1, 2004 (or earlier as provided in the
First Amendment to Third Term Note, the Notes, or the Loan Agreement).
(c) an Officer's Certificate dated September 1, 1998; and
(d) separate Guaranties, each dated September 1, 1998 and
executed by the Guarantors;
6. Validity of Agreements. Except as specifically provided in this
Agreement, all of the terms, provisions, and covenants of the Borrower and
Guarantors in the Loan Agreement, the Notes, and the other Loan Documents are
now and shall remain in full force and effect and have not been and shall not be
modified in any way and are hereby affirmed, confirmed, and ratified in all
respects. The Borrower and the Guarantors hereby acknowledge that they have no
claims or offsets against, or defenses or counterclaims to, the enforcement by
the Bank of the Loan Agreement, the Notes and the Amendment, or any of the other
Loan Documents. After the date hereof, all references to "Agreement", "hereof",
"herein", or the like appearing in the Loan Agreement shall be deemed to be
-3-
<PAGE>
references to the Loan Agreement as herein amended or modified; all references
to the "Notes" or the "First Term Note" or the "Second Term Note" or the "Third
Term Note" or the "Fourth Term Note" or the "Revolving Note" in the Loan
Agreement, the Notes, or any other Loan Documents shall be deemed to refer to
the Notes as amended by the Third Amendment to Amended and Restated Loan and
Security Agreement and any extension, renewal, refinancing, modification,
amendment, or restructuring thereof.
7. Miscellaneous Provisions.
a. This Agreement shall be governed by the internal laws of
the State of Illinois.
b. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which, when
taken together, shall constitute one and the same instrument.
c. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and assigns.
d. This Agreement represents the complete agreement of the
parties with respect to the subject matter hereof and supersedes all prior
negotiations and Agreements with respect to the subject matter hereof.
In Witness hereof, the parties have executed this Agreement on the date
first written above.
BORROWER:
CTI Industries Corporation
By:________________________________
Stephen M. Merrick,
Chief Executive Officer
BANK:
First American Bank
By:________________________________
Jodi Krass,
Asst. Vice President
GUARANTORS:
________________________________
Stephen M. Merrick, Individually
________________________________
John H. Schwan, Individually
________________________________
Howard W. Schwan, Individually
-4-
Exhibit 10.25
FIRST AMENDMENT TO THIRD TERM NOTE
Loan No. 600804665-64
The undersigned, CTI Industries Corporation, a Delaware corporation
(the "Borrower"), hereby agrees with First American Bank, an Illinois banking
corporation (the "Bank"), that the Third Term Note dated May 1, 1998, made by
the Borrower payable to the order of the Bank in the original principal amount
of $2,258,000.00 (the "Note"), shall be and hereby is amended as follows:
Notwithstanding any contrary provision of the Note:
1. The principal and accrued interest sum outstanding, if not
sooner paid in full and unless accelerated as provided in the Note or
prepayable as hereinafter provided, shall be due and payable in full on
February 1, 2004.
2. Commencing September 1, 1998, Borrower shall make regular
monthly payments of accrued unpaid interest and on the first day of
each month thereafter, until March 1, 1999, when Borrower shall make
regular monthly payments of $46,194.61 of principal and accrued unpaid
interest and on the first day of each month thereafter, until February
1, 2004 when the Note shall be paid in full.
All references in the Note to this "Note" or the like, shall be deemed
to be references to the Note as amended by this Amendment.
The Borrower hereby authorizes the Bank to affix this Amendment to the
Note. Except as herein amended, the Note is ratified and confirmed and shall
remain in full force and effect in accordance with its terms.
IN WITNESS WHEREOF, the undersigned has executed this Amendment to the
Note this 1st day of September, 1998.
CTI Industries Corporation
By:______________________
Stephen M. Merrick,
Chief Executive Officer
Agreed to as of this 1st day of September, 1998.
First American Bank
By:__________________________
Jodi Krass,
Asst. Vice President
Exhibit 10.26
REVOLVING NOTE
$4,500,000.00 Elk Grove Village, Illinois
September 1, 1998
Loan No. 600804665-67
FOR VALUE RECEIVED, the undersigned, CTI Industries
Corporation, a Delaware corporation (the "Borrower"), hereby promises to pay to
the order of First American Bank, an Illinois banking corporation (the "Bank"),
the principal sum of Four Million Five Hundred Thousand and No/100 Dollars
($4,500,000.00), or so much thereof as may be advanced by the Bank and evidenced
by this Note under the Amended and Restated Loan and Security Agreement dated
May 1, 1998 between the Borrower and the Bank (the "Loan Agreement"), on May 1,
1999 (or earlier as hereinafter provided), together with interest to maturity
(whether by lapse of time, acceleration, or otherwise) on the balance of
principal remaining from time to time outstanding at a fluctuating rate per
annum equal to one-half of one percent (.5%) per annum over the Prime Rate
announced from time to time by the Bank (which may not be the Bank's lowest rate
of interest) which shall be adjusted daily when and as the Bank's Prime Rate
changes. Interest shall be calculated on the basis of a 360-day year and actual
days.
Unless accelerated or prepayable as hereinafter provided or as
otherwise provided in the Loan Agreement, the principal sum outstanding shall be
payable on May 1, 1999. Accrued interest shall be paid on the first day of the
month following the month in which the first disbursement evidenced by this Note
is made under the Loan Agreement and thereafter on the first day of each
succeeding month until this Note is fully paid, except that the final payment of
interest, if not sooner paid, shall be due on May 1, 1999. If an Event of
Default (as defined in the Loan Agreement) shall occur, the outstanding
principal of and accrued and unpaid interest on this Note shall become
immediately due and payable as provided in the Loan Agreement without notice.
All payments on account of the indebtedness evidenced by this
Note (other than required prepayments which shall be applied as provided in the
Loan Agreement) shall be applied first to accrued and unpaid interest and the
remainder to principal. Payments on this Note shall be made at the offices of
the Bank or at such other office as the legal holder of this Note may, from time
to time, designate in writing.
Notwithstanding anything to the contrary contained herein, the
undersigned agrees to pay a late charge of five percent (5%) of the amount of
any monthly installment received more than 10 days after the installment is due.
Late charges shall be due and payable on the due date of the next installment of
interest, together with the regular installment then due.
Upon and after the occurrence of an Event of Default, the
undersigned shall pay interest at the rate (the "Default Rate") of three and
one-half percent (3.5%) per annum over the Bank's Prime Rate then in effect,
which shall be adjusted daily when and as the Bank's Prime Rate changes.
Except as otherwise provided in the Loan Agreement, this Note
may be prepaid in whole or in part without premium or penalty at any time at the
option of the undersigned in accordance with the Loan Agreement.
<PAGE>
Revolving Note
Page Two
This Note is secured by the Loan Agreement and other
documents, agreements, and instruments executed by the Borrower. This Note is
made and delivered pursuant to the Loan Agreement and is subject to the further
terms and conditions thereof, including the right of the holder to accelerate
payment of the principal of and accrued and unpaid interest on this Note and
other remedies upon the occurrence of an Event of Default and the required
prepayment of the principal of this Note upon certain other events or
conditions, all of which are hereby incorporated and made a part of this Note by
reference.
Any waiver of any payment due hereunder or the acceptance by
the Bank of partial payments hereunder shall not, at any other time, be taken to
be a waiver of the terms of this Note or the Loan Agreement or any other
agreement between the Borrower and the Bank.
The makers, sureties, guarantors, and endorsers of this Note,
if any, jointly and severally hereby waive notice of and consent to any and all
extensions of this Note or any part thereof without notice, and each hereby
waives demand, presentment for payment, notice of nonpayment, and protest and
any and all notice of whatever kind or nature and the exhaustion of legal
remedies herein, or any release of liability or any other indulgences or
forbearances whatsoever, without releasing or in any way affecting the personal
liability of any other party hereunder.
This Note shall be the joint and several obligation of all
makers, sureties, guarantors, and endorsers and shall be binding upon them,
their heirs, personal representatives, and assigns.
In the event the holder of this Note shall refer this Note to
an attorney for collection, the undersigned agrees to pay, in addition to unpaid
principal and interest, all of the costs and expenses incurred in attempting or
effecting collection, including reasonable attorneys' fees, whether or not suit
is instituted.
IN WITNESS WHEREOF, the undersigned has executed this Note as
of the date first written above.
CTI Industries Corporation
BY:__________________________
Stephen M. Merrick
Chief Executive Officer
Exhibit 10.27
GUARANTY
FOR VALUE RECEIVED and in consideration of any loan or other financial
accommodation heretofore or hereafter at any time made or granted to CTI
Industries Corporation, a Delaware corporation (hereinafter called the
"Borrower") by First American Bank, an Illinois banking corporation (hereinafter
called the "Bank"), the undersigned hereby unconditionally guarantee(s) the full
and prompt payment when due, whether by acceleration or otherwise, and at all
times thereafter, of all obligations of the Borrower to the Bank, howsoever
created, arising or evidenced, whether direct or indirect, absolute or
contingent, or now or hereafter existing, or due or to become due (all such
obligations being hereinafter collectively called the "Obligations"), and the
undersigned further agree(s) to pay all expenses (including attorneys' fees and
legal expenses) paid or incurred by the Bank in endeavoring to collect the
Obligations, or any part thereof, and in enforcing this Guaranty.
1. Each of the undersigned agrees that, in the event of the death,
incompetency, dissolution or insolvency of the Borrower or such undersigned, or
the inability of the Borrower or such undersigned to pay debts as they mature,
or an assignment by the Borrower or such undersigned for the benefit of
creditors, or the institution of any proceeding against the Borrower or such
undersigned alleging that the Borrower or such undersigned is insolvent or
unable to pay debts as they mature (and such proceeding is not dismissed or
withdrawn within 90 days after the filing thereof), and if such event shall
occur at a time when any of the Obligations may not then be due and payable,
such undersigned will pay to the Bank forthwith the full amount that would be
payable hereunder by such undersigned if all Obligations were then due and
payable.
2. This Guaranty shall in all respects be a continuing, absolute and
unconditional guaranty, and shall remain in full force and effect
(notwithstanding, without limitation, the death, incompetency or dissolution of
any of the undersigned or that at any time or from time to time all Obligations
may have been paid in full).
3. The undersigned further agree(s) that, if at any time all or any
part of any payment theretofore applied by the Bank to any of the Obligations is
or must be rescinded or returned by the Bank for any reason whatsoever
(including, without limitation, the insolvency, bankruptcy or reorganization of
the Borrower), such Obligations shall, for the purposes of this Guaranty, to the
extent that such payment is or must be rescinded or returned be deemed to have
continued in existence, notwithstanding such application by the Bank, and this
Guaranty shall continue to be effective or be reinstated, as the case may be, as
to such Obligations, all as though such application by the Bank had not been
made. The undersigned shall indemnify and defend the Bank and hold the Bank
harmless from and against any and all loss, damage, cost, or expense, (including
reasonable attorney's fees) arising out of any claim for rescission or return of
all or any part of any payment theretofore applied by the Bank to any of the
Obligations.
4. The Bank may, from time to time, at its sole discretion and without
notice to the undersigned (or any of them), take any or all of the following
actions: (a) retain or obtain a security interest in any property to secure any
of the Obligations or any obligation hereunder, (b) retain or obtain the primary
or secondary obligation of any obligor or obligors, in addition to the
undersigned, with respect to any of the Obligations, (c) extend or renew for one
or more periods (whether or not longer than the original period), alter or
<PAGE>
exchange any of the Obligations, or release or compromise any obligation of any
of the undersigned hereunder or any obligation of any nature of any other
obligor with respect to any of the Obligations, (d) release its security
interest in, or surrender, release, or permit any substitution or exchange for,
all or any part of any property securing any of the Obligations or any
obligation hereunder, or extend or renew for one or more periods (whether or not
longer than the original period) or release, compromise, alter or exchange any
obligations of any nature of any obligor with respect to any such property, and
(e) resort to the undersigned (or any of them) for payment of any of the
Obligations, whether or not the Bank shall have resorted to any property
securing any of the Obligations or any obligation hereunder or shall have
proceeded against any other of the undersigned or any other obligor primarily or
secondarily obligated with respect to any of the Obligations.
5. Any amounts received by the Bank from whatsoever source on account
of the Obligations may be applied by it toward the payment of such of the
Obligations, and in such order of application, as the Bank may from time to time
elect. Notwithstanding any payments made by or for the account of the
undersigned pursuant to this Guaranty, the undersigned shall not be subrogated
to any rights of the Bank. The undersigned hereby waive all rights of
subrogation, indemnity, contribution, exoneration, reimbursement or other claim
which the undersigned now or may hereafter have or claim against the Borrower or
any other person liable in any way with respect to the Obligations.
6. The undersigned hereby expressly waive(s): (a) notice of the
acceptance by the Bank of this Guaranty, (b) notice of the existence or creation
or non-payment of all or any of the Obligations, (c) presentment, demand, notice
of dishonor, protest, and all other notices whatsoever, and (d) all diligence in
collection or protection of or realization upon the Obligations or any thereof,
any obligation hereunder, or any security for or guaranty of any of the
foregoing.
7. The Bank may, from time to time, without notice to the undersigned
(or any of them), assign or transfer any or all of the Obligations or any
interest therein; and, notwithstanding any such assignment or transfer or any
subsequent assignment or transfer thereof, such Obligations shall be and remain
Obligations for the purposes of this Guaranty, and each and every immediate and
successive assignee or transferee of any of the Obligations or of any interest
therein shall, to the extent of the interest of such assignee or transferee in
the Obligations, be entitled to the benefits of this Guaranty to the same extent
as if such assignee or transferee were the Bank; provided, however, that, unless
the Bank shall otherwise consent in writing, the Bank shall have an unimpaired
right, prior and superior to that of any such assignee or transferee, to enforce
this Guaranty, for the benefit of the Bank, as to those of the Obligations which
the Bank has not assigned or transferred.
8. No delay on the part of the Bank in the exercise of any right or
remedy shall operate as a waiver thereof, and no single or partial exercise by
the Bank of any right or remedy shall preclude other or further exercise thereof
or the exercise of any other right or remedy; nor shall any modification or
waiver of any of the provisions of this Guaranty be binding upon the Bank except
as expressly set forth in a writing duly signed and delivered on behalf of the
Bank. No action of the Bank permitted hereunder shall in any way affect or
impair the rights of the Bank and the obligation of the undersigned under this
Guaranty. For the purposes of this Guaranty, the Obligations shall include all
<PAGE>
obligations of the Borrower to the Bank, notwithstanding any right or power of
the Borrower or anyone else to assert any claim or defense as to the invalidity
or unenforceability of any such obligation, and no such claim or defense shall
affect or impair the obligations of the undersigned hereunder.
9. This Guaranty shall be binding upon the undersigned, and upon the
heirs, legal representatives, successors and assigns of the undersigned; and to
the extent that the Borrower or any of the undersigned is either a partnership
or a corporation, all references herein to the Borrower and to the undersigned,
respectively, shall be deemed to include any successor or successors, whether
immediate or remote, to such partnership or corporation. If more than one party
shall execute this Guaranty, the term "undersigned" as used herein shall mean
all parties executing this Guaranty and each of them, and all such parties shall
be jointly and severally obligated hereunder. This Guaranty shall inure to the
benefit of the Bank and its successors and assigns, and all references herein to
the Bank shall be deemed to include its successors and assigns.
10. This Guaranty has been delivered in the State of Illinois and shall
be construed in accordance with and governed by the laws of the State of
Illinois. Wherever possible each provision of this Guaranty shall be interpreted
in such manner as to be effective and valid under applicable law, but if any
provision of this Guaranty shall be prohibited by or invalid under such law,
such provision shall be ineffective to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Guaranty.
11. To secure all obligations of each of the undersigned hereunder, the
Bank shall have a lien upon and security interest in (and may, without demand or
notice of any kind, at any time and from time to time when any amount shall be
due and payable by such undersigned hereunder, appropriate and apply toward the
payment of such amount, in such order of application as the Bank may elect) any
and all balances, credits, deposits, accounts, or monies of or in the name of
such undersigned now or hereafter with the Bank and any and all property of any
kind or description of or in the name of such undersigned now or hereafter, for
any reason or purpose whatsoever, in the possession or control of, or in transit
to, the Bank or any agent or bailee for the Bank.
12. During such period that the Borrower's ratio of total debt to
tangible net worth is less that 3 to 1, in accordance with Section 5.11 of the
Amended and Restated Loan and Security Agreement dated May 1, 1998, the right of
recovery against the undersigned under this Guaranty is limited to the amount of
One Million and No/100 Dollars ($1,000,000.00), plus interest on such amount and
all expenses of collecting and enforcing the Obligations and this Guaranty. The
creation or existence from time to time of Obligations in excess of the amount
to which the right of recovery under this Guaranty is limited is hereby
authorized, without notice to the undersigned (or any of them), and shall in no
way affect or impair the rights of the Bank and the obligations of the
undersigned under this Guaranty.
<PAGE>
Signed and delivered September 1, 1998.
______________________________
Stephen M. Merrick
<PAGE>
GUARANTY
FOR VALUE RECEIVED and in consideration of any loan or other financial
accommodation heretofore or hereafter at any time made or granted to CTI
Industries Corporation, a Delaware corporation (hereinafter called the
"Borrower") by First American Bank, an Illinois banking corporation (hereinafter
called the "Bank"), the undersigned hereby unconditionally guarantee(s) the full
and prompt payment when due, whether by acceleration or otherwise, and at all
times thereafter, of all obligations of the Borrower to the Bank, howsoever
created, arising or evidenced, whether direct or indirect, absolute or
contingent, or now or hereafter existing, or due or to become due (all such
obligations being hereinafter collectively called the "Obligations"), and the
undersigned further agree(s) to pay all expenses (including attorneys' fees and
legal expenses) paid or incurred by the Bank in endeavoring to collect the
Obligations, or any part thereof, and in enforcing this Guaranty.
1. Each of the undersigned agrees that, in the event of the death,
incompetency, dissolution or insolvency of the Borrower or such undersigned, or
the inability of the Borrower or such undersigned to pay debts as they mature,
or an assignment by the Borrower or such undersigned for the benefit of
creditors, or the institution of any proceeding against the Borrower or such
undersigned alleging that the Borrower or such undersigned is insolvent or
unable to pay debts as they mature (and such proceeding is not dismissed or
withdrawn within 90 days after the filing thereof), and if such event shall
occur at a time when any of the Obligations may not then be due and payable,
such undersigned will pay to the Bank forthwith the full amount that would be
payable hereunder by such undersigned if all Obligations were then due and
payable.
2. This Guaranty shall in all respects be a continuing, absolute and
unconditional guaranty, and shall remain in full force and effect
(notwithstanding, without limitation, the death, incompetency or dissolution of
any of the undersigned or that at any time or from time to time all Obligations
may have been paid in full).
3. The undersigned further agree(s) that, if at any time all or any
part of any payment theretofore applied by the Bank to any of the Obligations is
or must be rescinded or returned by the Bank for any reason whatsoever
(including, without limitation, the insolvency, bankruptcy or reorganization of
the Borrower), such Obligations shall, for the purposes of this Guaranty, to the
extent that such payment is or must be rescinded or returned be deemed to have
continued in existence, notwithstanding such application by the Bank, and this
Guaranty shall continue to be effective or be reinstated, as the case may be, as
to such Obligations, all as though such application by the Bank had not been
made. The undersigned shall indemnify and defend the Bank and hold the Bank
harmless from and against any and all loss, damage, cost, or expense, (including
reasonable attorney's fees) arising out of any claim for rescission or return of
all or any part of any payment theretofore applied by the Bank to any of the
Obligations.
4. The Bank may, from time to time, at its sole discretion and without
notice to the undersigned (or any of them), take any or all of the following
actions: (a) retain or obtain a security interest in any property to secure any
of the Obligations or any obligation hereunder, (b) retain or obtain the primary
or secondary obligation of any obligor or obligors, in addition to the
undersigned, with respect to any of the Obligations, (c) extend or renew for one
<PAGE>
or more periods (whether or not longer than the original period), alter or
exchange any of the Obligations, or release or compromise any obligation of any
of the undersigned hereunder or any obligation of any nature of any other
obligor with respect to any of the Obligations, (d) release its security
interest in, or surrender, release, or permit any substitution or exchange for,
all or any part of any property securing any of the Obligations or any
obligation hereunder, or extend or renew for one or more periods (whether or not
longer than the original period) or release, compromise, alter or exchange any
obligations of any nature of any obligor with respect to any such property, and
(e) resort to the undersigned (or any of them) for payment of any of the
Obligations, whether or not the Bank shall have resorted to any property
securing any of the Obligations or any obligation hereunder or shall have
proceeded against any other of the undersigned or any other obligor primarily or
secondarily obligated with respect to any of the Obligations.
5. Any amounts received by the Bank from whatsoever source on account
of the Obligations may be applied by it toward the payment of such of the
Obligations, and in such order of application, as the Bank may from time to time
elect. Notwithstanding any payments made by or for the account of the
undersigned pursuant to this Guaranty, the undersigned shall not be subrogated
to any rights of the Bank. The undersigned hereby waive all rights of
subrogation, indemnity, contribution, exoneration, reimbursement or other claim
which the undersigned now or may hereafter have or claim against the Borrower or
any other person liable in any way with respect to the Obligations.
6. The undersigned hereby expressly waive(s): (a) notice of the
acceptance by the Bank of this Guaranty, (b) notice of the existence or creation
or non-payment of all or any of the Obligations, (c) presentment, demand, notice
of dishonor, protest, and all other notices whatsoever, and (d) all diligence in
collection or protection of or realization upon the Obligations or any thereof,
any obligation hereunder, or any security for or guaranty of any of the
foregoing.
7. The Bank may, from time to time, without notice to the undersigned
(or any of them), assign or transfer any or all of the Obligations or any
interest therein; and, notwithstanding any such assignment or transfer or any
subsequent assignment or transfer thereof, such Obligations shall be and remain
Obligations for the purposes of this Guaranty, and each and every immediate and
successive assignee or transferee of any of the Obligations or of any interest
therein shall, to the extent of the interest of such assignee or transferee in
the Obligations, be entitled to the benefits of this Guaranty to the same extent
as if such assignee or transferee were the Bank; provided, however, that, unless
the Bank shall otherwise consent in writing, the Bank shall have an unimpaired
right, prior and superior to that of any such assignee or transferee, to enforce
this Guaranty, for the benefit of the Bank, as to those of the Obligations which
the Bank has not assigned or transferred.
8. No delay on the part of the Bank in the exercise of any right or
remedy shall operate as a waiver thereof, and no single or partial exercise by
the Bank of any right or remedy shall preclude other or further exercise thereof
or the exercise of any other right or remedy; nor shall any modification or
waiver of any of the provisions of this Guaranty be binding upon the Bank except
as expressly set forth in a writing duly signed and delivered on behalf of the
Bank. No action of the Bank permitted hereunder shall in any way affect or
impair the rights of the Bank and the obligation of the undersigned under this
<PAGE>
Guaranty. For the purposes of this Guaranty, the Obligations shall include all
obligations of the Borrower to the Bank, notwithstanding any right or power of
the Borrower or anyone else to assert any claim or defense as to the invalidity
or unenforceability of any such obligation, and no such claim or defense shall
affect or impair the obligations of the undersigned hereunder.
9. This Guaranty shall be binding upon the undersigned, and upon the
heirs, legal representatives, successors and assigns of the undersigned; and to
the extent that the Borrower or any of the undersigned is either a partnership
or a corporation, all references herein to the Borrower and to the undersigned,
respectively, shall be deemed to include any successor or successors, whether
immediate or remote, to such partnership or corporation. If more than one party
shall execute this Guaranty, the term "undersigned" as used herein shall mean
all parties executing this Guaranty and each of them, and all such parties shall
be jointly and severally obligated hereunder. This Guaranty shall inure to the
benefit of the Bank and its successors and assigns, and all references herein to
the Bank shall be deemed to include its successors and assigns.
10. This Guaranty has been delivered in the State of Illinois and shall
be construed in accordance with and governed by the laws of the State of
Illinois. Wherever possible each provision of this Guaranty shall be interpreted
in such manner as to be effective and valid under applicable law, but if any
provision of this Guaranty shall be prohibited by or invalid under such law,
such provision shall be ineffective to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Guaranty.
11. To secure all obligations of each of the undersigned hereunder, the
Bank shall have a lien upon and security interest in (and may, without demand or
notice of any kind, at any time and from time to time when any amount shall be
due and payable by such undersigned hereunder, appropriate and apply toward the
payment of such amount, in such order of application as the Bank may elect) any
and all balances, credits, deposits, accounts, or monies of or in the name of
such undersigned now or hereafter with the Bank and any and all property of any
kind or description of or in the name of such undersigned now or hereafter, for
any reason or purpose whatsoever, in the possession or control of, or in transit
to, the Bank or any agent or bailee for the Bank.
12. During such period that the Borrower's ratio of total debt to
tangible net worth is less that 3 to 1, in accordance with Section 5.11 of the
Amended and Restated Loan and Security Agreement dated May 1, 1998, the right of
recovery against the undersigned under this Guaranty is limited to the amount of
One Million and No/100 Dollars ($1,000,000.00), plus interest on such amount and
all expenses of collecting and enforcing the Obligations and this Guaranty. The
creation or existence from time to time of Obligations in excess of the amount
to which the right of recovery under this Guaranty is limited is hereby
authorized, without notice to the undersigned (or any of them), and shall in no
way affect or impair the rights of the Bank and the obligations of the
undersigned under this Guaranty.
<PAGE>
Signed and delivered September 1, 1998.
_____________________________
John H. Schwan
<PAGE>
GUARANTY
FOR VALUE RECEIVED and in consideration of any loan or other financial
accommodation heretofore or hereafter at any time made or granted to CTI
Industries Corporation, a Delaware corporation (hereinafter called the
"Borrower") by First American Bank, an Illinois banking corporation (hereinafter
called the "Bank"), the undersigned hereby unconditionally guarantee(s) the full
and prompt payment when due, whether by acceleration or otherwise, and at all
times thereafter, of all obligations of the Borrower to the Bank, howsoever
created, arising or evidenced, whether direct or indirect, absolute or
contingent, or now or hereafter existing, or due or to become due (all such
obligations being hereinafter collectively called the "Obligations"), and the
undersigned further agree(s) to pay all expenses (including attorneys' fees and
legal expenses) paid or incurred by the Bank in endeavoring to collect the
Obligations, or any part thereof, and in enforcing this Guaranty.
1. Each of the undersigned agrees that, in the event of the death,
incompetency, dissolution or insolvency of the Borrower or such undersigned, or
the inability of the Borrower or such undersigned to pay debts as they mature,
or an assignment by the Borrower or such undersigned for the benefit of
creditors, or the institution of any proceeding against the Borrower or such
undersigned alleging that the Borrower or such undersigned is insolvent or
unable to pay debts as they mature (and such proceeding is not dismissed or
withdrawn within 90 days after the filing thereof), and if such event shall
occur at a time when any of the Obligations may not then be due and payable,
such undersigned will pay to the Bank forthwith the full amount that would be
payable hereunder by such undersigned if all Obligations were then due and
payable.
2. This Guaranty shall in all respects be a continuing, absolute and
unconditional guaranty, and shall remain in full force and effect
(notwithstanding, without limitation, the death, incompetency or dissolution of
any of the undersigned or that at any time or from time to time all Obligations
may have been paid in full).
3. The undersigned further agree(s) that, if at any time all or any
part of any payment theretofore applied by the Bank to any of the Obligations is
or must be rescinded or returned by the Bank for any reason whatsoever
(including, without limitation, the insolvency, bankruptcy or reorganization of
the Borrower), such Obligations shall, for the purposes of this Guaranty, to the
extent that such payment is or must be rescinded or returned be deemed to have
continued in existence, notwithstanding such application by the Bank, and this
Guaranty shall continue to be effective or be reinstated, as the case may be, as
to such Obligations, all as though such application by the Bank had not been
made. The undersigned shall indemnify and defend the Bank and hold the Bank
harmless from and against any and all loss, damage, cost, or expense, (including
reasonable attorney's fees) arising out of any claim for rescission or return of
all or any part of any payment theretofore applied by the Bank to any of the
Obligations.
4. The Bank may, from time to time, at its sole discretion and without
notice to the undersigned (or any of them), take any or all of the following
actions: (a) retain or obtain a security interest in any property to secure any
of the Obligations or any obligation hereunder, (b) retain or obtain the primary
or secondary obligation of any obligor or obligors, in addition to the
undersigned, with respect to any of the Obligations, (c) extend or renew for one
<PAGE>
or more periods (whether or not longer than the original period), alter or
exchange any of the Obligations, or release or compromise any obligation of any
of the undersigned hereunder or any obligation of any nature of any other
obligor with respect to any of the Obligations, (d) release its security
interest in, or surrender, release, or permit any substitution or exchange for,
all or any part of any property securing any of the Obligations or any
obligation hereunder, or extend or renew for one or more periods (whether or not
longer than the original period) or release, compromise, alter or exchange any
obligations of any nature of any obligor with respect to any such property, and
(e) resort to the undersigned (or any of them) for payment of any of the
Obligations, whether or not the Bank shall have resorted to any property
securing any of the Obligations or any obligation hereunder or shall have
proceeded against any other of the undersigned or any other obligor primarily or
secondarily obligated with respect to any of the Obligations.
5. Any amounts received by the Bank from whatsoever source on account
of the Obligations may be applied by it toward the payment of such of the
Obligations, and in such order of application, as the Bank may from time to time
elect. Notwithstanding any payments made by or for the account of the
undersigned pursuant to this Guaranty, the undersigned shall not be subrogated
to any rights of the Bank. The undersigned hereby waive all rights of
subrogation, indemnity, contribution, exoneration, reimbursement or other claim
which the undersigned now or may hereafter have or claim against the Borrower or
any other person liable in any way with respect to the Obligations.
6. The undersigned hereby expressly waive(s): (a) notice of the
acceptance by the Bank of this Guaranty, (b) notice of the existence or creation
or non-payment of all or any of the Obligations, (c) presentment, demand, notice
of dishonor, protest, and all other notices whatsoever, and (d) all diligence in
collection or protection of or realization upon the Obligations or any thereof,
any obligation hereunder, or any security for or guaranty of any of the
foregoing.
7. The Bank may, from time to time, without notice to the undersigned
(or any of them), assign or transfer any or all of the Obligations or any
interest therein; and, notwithstanding any such assignment or transfer or any
subsequent assignment or transfer thereof, such Obligations shall be and remain
Obligations for the purposes of this Guaranty, and each and every immediate and
successive assignee or transferee of any of the Obligations or of any interest
therein shall, to the extent of the interest of such assignee or transferee in
the Obligations, be entitled to the benefits of this Guaranty to the same extent
as if such assignee or transferee were the Bank; provided, however, that, unless
the Bank shall otherwise consent in writing, the Bank shall have an unimpaired
right, prior and superior to that of any such assignee or transferee, to enforce
this Guaranty, for the benefit of the Bank, as to those of the Obligations which
the Bank has not assigned or transferred.
8. No delay on the part of the Bank in the exercise of any right or
remedy shall operate as a waiver thereof, and no single or partial exercise by
the Bank of any right or remedy shall preclude other or further exercise thereof
or the exercise of any other right or remedy; nor shall any modification or
waiver of any of the provisions of this Guaranty be binding upon the Bank except
as expressly set forth in a writing duly signed and delivered on behalf of the
Bank. No action of the Bank permitted hereunder shall in any way affect or
impair the rights of the Bank and the obligation of the undersigned under this
<PAGE>
Guaranty. For the purposes of this Guaranty, the Obligations shall include all
obligations of the Borrower to the Bank, notwithstanding any right or power of
the Borrower or anyone else to assert any claim or defense as to the invalidity
or unenforceability of any such obligation, and no such claim or defense shall
affect or impair the obligations of the undersigned hereunder.
9. This Guaranty shall be binding upon the undersigned, and upon the
heirs, legal representatives, successors and assigns of the undersigned; and to
the extent that the Borrower or any of the undersigned is either a partnership
or a corporation, all references herein to the Borrower and to the undersigned,
respectively, shall be deemed to include any successor or successors, whether
immediate or remote, to such partnership or corporation. If more than one party
shall execute this Guaranty, the term "undersigned" as used herein shall mean
all parties executing this Guaranty and each of them, and all such parties shall
be jointly and severally obligated hereunder. This Guaranty shall inure to the
benefit of the Bank and its successors and assigns, and all references herein to
the Bank shall be deemed to include its successors and assigns.
10. This Guaranty has been delivered in the State of Illinois and shall
be construed in accordance with and governed by the laws of the State of
Illinois. Wherever possible each provision of this Guaranty shall be interpreted
in such manner as to be effective and valid under applicable law, but if any
provision of this Guaranty shall be prohibited by or invalid under such law,
such provision shall be ineffective to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Guaranty.
11. To secure all obligations of each of the undersigned hereunder, the
Bank shall have a lien upon and security interest in (and may, without demand or
notice of any kind, at any time and from time to time when any amount shall be
due and payable by such undersigned hereunder, appropriate and apply toward the
payment of such amount, in such order of application as the Bank may elect) any
and all balances, credits, deposits, accounts, or monies of or in the name of
such undersigned now or hereafter with the Bank and any and all property of any
kind or description of or in the name of such undersigned now or hereafter, for
any reason or purpose whatsoever, in the possession or control of, or in transit
to, the Bank or any agent or bailee for the Bank.
12. During such period that the Borrower's ratio of total debt to
tangible net worth is less that 3 to 1, in accordance with Section 5.11 of the
Amended and Restated Loan and Security Agreement dated May 1, 1998, the right of
recovery against the undersigned under this Guaranty is limited to the amount of
One Million and No/100 Dollars ($1,000,000.00), plus interest on such amount and
all expenses of collecting and enforcing the Obligations and this Guaranty. The
creation or existence from time to time of Obligations in excess of the amount
to which the right of recovery under this Guaranty is limited is hereby
authorized, without notice to the undersigned (or any of them), and shall in no
way affect or impair the rights of the Bank and the obligations of the
undersigned under this Guaranty.
<PAGE>
Signed and delivered September 1, 1998.
_________________________
Howard W. Schwan
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-KSB FOR THE
YEAR ENDED OCTOBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FORM 10-KSB.
</LEGEND>
<CIK> 0001042187
<NAME> CTI Industries Corporation
<MULTIPLIER> 1,000
<CURRENCY> dollars
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<EXCHANGE-RATE> 1.000
<CASH> 235,333
<SECURITIES> 0
<RECEIVABLES> 3,409,105
<ALLOWANCES> 132,211
<INVENTORY> 7,641,381
<CURRENT-ASSETS> 12,419,215
<PP&E> 15,999,748
<DEPRECIATION> 7,674,299
<TOTAL-ASSETS> 22,853,621
<CURRENT-LIABILITIES> 9,106,102
<BONDS> 0
0
0
<COMMON> 188,434
<OTHER-SE> 6,999,987
<TOTAL-LIABILITY-AND-EQUITY> 22,853,621
<SALES> 19,952,823
<TOTAL-REVENUES> 19,952,823
<CGS> 12,706,460
<TOTAL-COSTS> 12,706,460
<OTHER-EXPENSES> 6,299,065
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 765,425
<INCOME-PRETAX> 181,873
<INCOME-TAX> 60,013
<INCOME-CONTINUING> 60,013
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 121,860
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
