-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IjCJmGrMAzqpcMxSSoQBxSwa4rzxLY5RWUws6zfJRd/8M8anVqjfsfDvEGVud5Ld TN0JJeBvdXZnyBNJjP1siQ== 0000891554-01-502073.txt : 20010417 0000891554-01-502073.hdr.sgml : 20010417 ACCESSION NUMBER: 0000891554-01-502073 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010416 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CTI INDUSTRIES CORP CENTRAL INDEX KEY: 0001042187 STANDARD INDUSTRIAL CLASSIFICATION: FABRICATED RUBBER PRODUCTS, NEC [3060] IRS NUMBER: 362848943 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-23115 FILM NUMBER: 1602674 BUSINESS ADDRESS: STREET 1: 22160 N PEPPER RD CITY: BARRINGTON STATE: IL ZIP: 60010 MAIL ADDRESS: STREET 1: 22160 N PEPPER RD CITY: BARRINGTON STATE: IL ZIP: 60010 10KSB 1 d25424_form10-ksb.txt ANNUAL REPORT 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 December 31, 2000 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 Identification Number) incorporation or organization) 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, $.195 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 December 31, 2000, were $22,978,000. Based upon the closing price of $2.125 per share of Registrant's Common Stock as reported on NASDAQ SmallCap Market at March 30, 2001, the aggregate market value of the voting stock held by non-affiliates of the Registrant was then approximately $1,657,236 (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 March 30, 2001 was 841,644 (excluding treasury shares) and the number of shares of Class B Common Stock outstanding as of that date was 366,300. Transitional Small Business Disclosure Format (check one): [_] Yes [X] No PART I Item No. 1 Description of Business Business Overview CTI Industries Corporation is engaged in the development, manufacture, sale and distribution of two principal lines of products: o Novelty products, principally balloons, including "mylar" balloons, latex balloons, punch balls and other inflatable toy items. o Specialty and printed films, for food packaging, specialized consumer uses and various commercial applications. The Company was organized in 1976 and initially was principally engaged in the business of manufacturing bag-in-box plastic packaging systems. In 1978, the Company began manufacturing metalized ("mylar") balloons, a balloon made of nylon based material with vacuum deposited aluminum and polyethylene coatings. These balloons remain buoyant when filled with helium for much longer periods than latex balloons and permit the printing of graphic designs on the surface. They grew in popularity quickly and the Company's sales of mylar balloons expanded rapidly during the 1980's. In 1985, the Company began marketing latex balloons and began manufacturing latex balloons in 1988. In 1994, the Company sold its latex balloon manufacturing equipment to a company in Mexico and entered into an arrangement with that company to manufacture latex balloons for the Company. The Company since has acquired majority ownership of the Mexican latex manufacturing company. The Company's mylar and latex balloon and toy products are sold throughout the United States and in 30 foreign countries through a wide variety of retail outlets including general merchandise and drugstore chains, grocery chains, card and gift shops, and party goods stores, as well as through florists and balloon decorators. Most mylar balloons contain printed characters, designs and social expression messages. The Company maintains licenses on numerous characters and designs, including, for example, Peanuts(R) characters, Garfield(R), Precious Moments(R) and Hallmark. In order 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 inks, in particular, has enabled the Company to expand its business to include the production of film for packaging of consumables. The Company produces, laminates and prints films for food packaging companies and provides custom film products for other commercial uses. 1 These uses include a consumer storage system with a patented zip-lock closure, packaging systems and other commercial applications. 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 to the Company refer to the Company, its predecessor Creative Technology, Inc. its wholly-owned subsidiaries, CTI Balloons, CTF International, S.A. de C.V., and its majority-owned subsidiary, CTI Mexico, S.A. de C.V. In March and May of 1996, a group of investors made an equity investment of $1,000,000 in the Company in return for 366,300 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 366,300 shares of Class B Common Stock. The conversion was effective upon the closing of an initial public offering of 575,000 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. On October 15, 1999, the Company's Board of Directors approved a 1 for 3 reverse split of the Company's Common Stock and Class B Common Stock. The 1 for 3 reverse stock split became effective at the close of business on November 4, 1999, upon the approval and consent of a majority of Common and Class B Common 2 Stockholders voting together as a single class. As a result of the reverse stock split, every three shares of the Company's Common Stock were reclassified and changed into one share of the Company's Common Stock with a new par value of $.195 per share, and every three shares of the Company's Class B Common Stock were reclassified and changed into one share of the Company's Class B Common Stock, with a new par value of $2.73 per share. Except as otherwise indicated, share figures in this document have been restated to reflect the stock splits described above. CTI Mexico. The Company's latex balloons are manufactured for it by CTI Mexico S.A. de C.V. ("CTI Mexico"), formerly known as Pulidos y Terminados Finos S.A. de C.V., a Guadalajara, Mexico company engaged principally in the manufacture of latex balloons. In 1995, the Company entered into an agreement with CTI Mexico under which (i) the Company sold to CTI Mexico all of its latex balloon manufacturing equipment (for the manufacture of decorator balloons) and (ii) CTI Mexico agreed for a period of 10 years to supply balloons exclusively to the Company for sale in the United States and Canada manufactured on such equipment and (iii) for such 10 year period, CTI Mexico agreed to supply to the Company, exclusively in the United States except as to two other companies, all balloons manufactured by CTI Mexico. Commencing in 1996, CTI Mexico began manufacturing latex balloons for the Company. In January, 1998, the Company and CTI Mexico entered into an agreement whereby (i) the Company subscribed for 45% of the outstanding capital stock of CTI Mexico for $800,000, (ii) the Company loaned to CTI Mexico $850,000, which loan was collateralized by certain latex balloon manufacturing equipment, and (iii) the 1995 equipment purchase agreement between the parties was cancelled with respect to two pieces of latex balloon manufacturing equipment, which equipment was owned by CTI and leased to CTI Mexico. The purchase of the capital stock was consummated in February, 1998, and the purchase price for the capital stock was paid by (i) applying $400,000 of advances made to CTI Mexico 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 CTI Mexico. In November, 1999, the Company acquired additional shares of capital stock of CTI Mexico, resulting in the Company's ownership of approximately 72% of CTI Mexico's total outstanding capital stock. The November, 1999 acquisition was concluded through an agreement with a principal shareholder of CTI Mexico and the approval of the requisite number of CTI Mexico shareholders at a shareholders' meeting held on November 12, 1999. In the November, 1999 acquisition transaction, the Company allowed CTI Mexico to capitalize certain of CTI Mexico's outstanding indebtedness to the Company, amounting to approximately $989,000, and contributed certain equipment with a total value of approximately $855,000, in exchange for capital stock of CTI Mexico. In addition, in May of 2000, the Company purchased additional shares of stock from certain of CTI Mexico's shareholders, resulting in the Company's ownership of approximately 76% of CTI Mexico's total outstanding capital stock. The Company also 3 has the right to acquire substantially all of the remaining outstanding capital stock of CTI Mexico from another shareholder. Through CTI Mexico, the Company 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 CTI Mexico entered into a joint venture agreement to organize and operate CTF International, a Mexican corporation ("CTF"). The joint venture was initially owned in equal measure by the Company and CTI Mexico. CTF engaged in the packaging of balloons for the Company and CTI Mexico and in the printing of latex balloons. In July, 1999, the Company purchased CTI Mexico's stock in CTF for $40,000 in cash, and the assignment to CTI Mexico of three of the Company's manual latex silk screening machines. The functions of CTF have now been incorporated into the business of CTI Mexico. Products Mylar Balloons. The "mylar" balloon is actually composed of a base nylon material which is coated on one side with a vacuum deposited aluminum coating and on the other with polyethylene. Typically, the balloon film is printed with graphic designs and messages. The Company manufactures over 450 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 and remain buoyant. 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. 4 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, Shoebox(R), Card Captors(R), Max Steel(R) Elephantz(R), Paddington(R), Postman Pat(R), Betty Boop(R), Monster Trucks(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). The Company also manufactures toy balloon products including punch balls and water bombs. Packaging Films. The Company fabricates and prints films for use in food packaging. The Company has developed sophisticated methods for the printing of films, including the use of water-based ink. These techniques have proven desirable for companies engaged in packaging food products, particularly candy and snack items, with the result that the Company now provides printed packaging films for several food packaging companies. 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 and personal items. The Industries Mylar Balloons 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. Mylar balloons remain buoyant when filled with helium for extended periods of time and they permit the printing and display of graphics and messages. As a result, the product has significant appeal as a novelty and message item. Mylar balloons became part of the "social expression" industry, carrying graphics designs, characters and messages like greeting cards. In the mid-1980s, the 5 Company and other participants in the market began licensing character and cartoon images for printing on the balloons and directed marketing of the balloons to retail outlets including grocery, general merchandise and drug store chains, card and gift shops, party goods stores as well as florists and balloon decorators. These outlets now represent the principal means for the sale of mylar balloons throughout the United States and in a number of other countries. 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, candy containers, mugs, plush toys, baskets and a variety of party goods. 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. Latex Balloons There are several latex balloon product lines: (i) high quality decorator balloons, (ii) standard novelty balloons; (iii) printed balloons and (iv) toy categories. 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. "Toy" balloons include novelty balloons sold in toy departments or stores, punch balls, water bombs and other specialty designs. Latex balloons are sold through many of the same outlets as mylar balloons including grocery, general merchandise and drug store chains, card and gift shops, party goods stores, florists and balloon decorators. Latex balloons are sold in retail stores in packaged form as well as inflated. Also, certain latex items are sold in retail stores, generally in packaged form, as toy items. There are at least seven manufacturers of latex balloons whose products are sold in the United States. 6 Printed and Specialty Films The industry and market for printed and specialty films is highly fragmented and includes many participants. There are literally hundreds of manufacturers of printed and specialty film products in the United States and in other markets. In many cases, companies produce films and film packages for the packaging of products manufactured and sold by those companies. Many of these film products are utilized for packaging of a variety of goods, including foods. Films are utilized for a wide variety of specialized uses - including for medical applications, "dunnage" in packages and containers for consumer and other uses. The total volume of products manufactured and sold in this industry is estimated to be well in excess of $1 billion. 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 21 individuals and a customer service department of 13 individuals. European sales are conducted by CTI Balloons, the Company's subsidiary located in Rugby, England. CTI Mexico conducts sales and marketing activities for the sale of balloon products in Mexico, Latin America, and certain other markets. Sales in other foreign countries are made generally to distributors in those countries and are managed at the Company's principal offices. The Company sells and distributes its products principally through a network of approximately 750 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. Most sales are on an individual order basis. The Company also sells balloons and related products to certain retail outlets including some chain stores. The Company's largest chain store customer is Eckerd Drug Stores. During the 2000 fiscal year, Eckerd Drug Stores accounted for approximately 8% of the Company's total sales revenues. The Company has established independent sales representatives for the sale of its toy/novelty line which include the standard quality latex balloon, punch balls and water bombs. These products constitute a separate product class requiring a different distribution network. 7 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 catalog 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 and coffee. The Company markets its custom film products, including its "dunnage" bags (inflatable film products) directly. During the 2000 fiscal year, a single customer of the Company's custom film product business accounted for approximately 19.8% of the Company's total sales revenues. Manufacturing Production and Operations. At the Barrington, Illinois headquarters, the Company owns and operates a modern facility. The facility includes converting machines of the Company's own design and construction which fabricate mylar balloons 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 packaging 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. The Company owns and operates two extrusion coating and lamination machines to produce films for use in mylar balloons, packaging films and specialty film products. A new extrusion coating and laminating machine was acquired in 1999 which significantly increased the Company's production capacity and capabilities. The Company 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. 8 The Barrington facility also includes a computerized customer service department which receives and fulfills over 61,000 orders annually. The Company maintains a finished goods inventory of all balloon products at the Barrington facility and provides fulfillment for orders throughout the United States and in a number of foreign countries. CTI Mexico. Through CTI Mexico, the Company operates several facilities in Guadalajara, Mexico, comprising approximately 95,000 square feet of production, warehouse and office space. At these locations, the Company produces all of its latex balloon products and also prints and packages latex balloons. CTI Mexico owns and operates, or leases, seven latex balloon manufacturing machines, two high-speed latex printing machines and several other latex printing machines. Balloon products are warehoused at this facility and order fulfillment is provided for Mexico and Latin America, as well as to the United States and United Kingdom facilities of the Company. CTI Mexico also conducts sales and marketing activities for the sale of balloon products in Mexico, Latin America and certain other markets. CTI Balloons Ltd. Through its wholly-owned subsidiary, CTI Balloons Ltd, the Company conducts a warehouse, fulfillment and sales operation in Rugby, United Kingdom. Sales and fulfillment for all of the United Kingdom, Europe and the Middle East are conducted from this facility. Competition The balloon and novelty industry is highly competitive, with numerous competitors. There are presently seven principal 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 and in 2000 M&D Balloons was acquired by American Greetings. There are at least seven manufacturers of latex balloons whose products are sold in the United States. 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 9 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. 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 14 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. Trademarks. The Company is the owner of 14 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. 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, (ii) a patent on a combination of a greeting card and balloon connected by a ribbon contained in single package and (iii) a patent on a method of inserting and affixing a zipper-closure system in a bag. 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 the fiscal years ended October 31, 1999 and December 31, 2000, the Company estimates that the total amount spent on research and development activities was approximately $257,000 and $291,000, respectively. Employees As of December 31, 2000, the Company had 137 full-time employees in the United States, of whom 9 are executive or supervisory, 21 are in sales, 98 are in manufacturing and 9 are clerical. As of that same date, the Company had 7 full-time employees in England, of whom one is executive or supervisory, 2 are in sales, 2 are in warehousing and 2 are clerical. In Mexico, as of 10 December 31, 2000, the Company had 350 full-time employees, of whom 6 are executive or supervisory, 3 are in sales, 323 are in manufacturing and 18 are clerical. The Company is not a party to any collective bargaining agreement, has not experienced any work stoppages and believes that its relationship with its employees is satisfactory. Regulatory Matters The Company's manufacturing operations are subject to the U.S. Occupational Safety and Health Act ("OSHA"). The Company believes it is in material compliance with OSHA. The Environmental Protection Agency regulates the handling and disposal of hazardous materials. As the Company'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. Several 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 purchased a building that is adjacent to its principal plant and offices. This facility includes approximately 29,000 square feet of combined office and warehouse space. In November, 1999, the Company sold this building to a related party, and entered into a 10 year lease for the building at a monthly rental cost of $17,404. The Company is presently subleasing approximately 50% of the total square feet of this office and warehouse space to two separate subtenants. One sublease expires in March, 2002, and has a monthly rent of $3,605; the other sublease expires in May, 2002, and has a monthly rent of $7,570. All rents due under these subleases are paid directly to the Company. The Company also leases approximately 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. Through CTI Mexico, the Company leases four buildings with approximately 95,000 total square feet of production, warehouse and office space in Guadalajara, Mexico. One plant, consisting of three buildings, has a one-year lease at a monthly lease rate of $5,500, and the other plant, consisting of one building, has a three-year lease at a monthly lease rate of $4,500. 11 Item No. 3 Legal Proceedings Not Applicable. Item No. 4 Submission of Matters to a Vote of Security Holders Not Applicable. 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. 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 eight fiscal quarters (retroactively adjusted to reflect post-reverse split share values), according to the NASDAQ Stock Market's Stock Price History Report, were: High Low ----- ----- January 1, 1999 to March 31, 1999 8.625 3.469 April 1, 1999 to June 30, 1999 4.875 2.156 July 1, 1999 to September 30, 1999 3.750 1.219 High Low ----- ----- October 1, 1999 to December 31, 1999 2.625 1.406 January 1, 2000 to March 31, 2000 3.750 1.375 April 1, 2000 to June 30, 2000 3.313 1.688 July 1, 2000 to September 30, 2000 2.000 1.250 October 1, 2000 to December 31, 2000 2.125 .875 As of March 30, 2001, there were approximately 42 holders of record of the Company's Common Stock and two 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 is restricted from declaring any dividends or other distributions on its shares unless certain minimum financial performance levels 12 are maintained. The Company expects it to be likely that it will be required to agree to restrictions on the payment of dividends or other distributions 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. These shares of Class B Common Stock were reverse-split on a 1-for-3 basis along with the Company's Common Stock on November 4, 1999, resulting in a total of 366,300 shares of Class B Common Stock being presently outstanding. In December, 1996, Howard W. Schwan, John H. Schwan and Stephen M. Merrick, members of management, were each issued warrants to purchase up to 25,641 shares of the Company's Common Stock at an exercise price of $2.73 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 6,465 of their warrants to purchase shares of the Company's Common Stock at an exercise price of $2.73 per share (5,000 and 1,465 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 92,415 shares of the Company's Common Stock at an exercise price of $9.36 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. In June, 1999, Mr. Davis' June, 1997, $150,000 note was cancelled and reissued in the same principal amount with a new maturity date of February 28, 2001. Mr. Davis' June, 1997, warrant to purchase up to 16,026 shares of the Company's Common Stock at an exercise price of $9.36 per share was cancelled in September, 1999, and a new warrant to purchase up to 16,026 shares of the 13 Company's Common Stock at an exercise price of $1.688 per share, with an expiration date of June 30, 2003, was issued in its place. Mr. Davis' June, 1999, Note was paid in full by the Company in February, 2001. In June, 1999, the June, 1997, $50,000, $350,000 and $315,000 notes of Messrs. H. Schwan, J. Schwan and Merrick, respectively, came due. On November 9, 1999, new notes in the same principal amounts were issued to Messrs. H. Schwan, J. Schwan and Merrick, in payment and replacement of the prior notes with maturity dates for each of November 9, 2001. In November, 1999, the June, 1997 warrants of Messrs. H. Schwan, J. Schwan and Merrick to purchase up to (respectively) 5,342, 37,393 and 33,653 shares of the Company's Common Stock at an exercise price of $9.36 per share were cancelled. At that time, new warrants to purchase up to 29,621, 207,346 and 186,612 shares of the Company's Common Stock at an exercise price of $1.688 per share were issued to Messrs. H. Schwan, J. Schwan and Merrick, respectively. These warrants expire on November 9, 2004. The 1999 notes and 1999 warrants issued to Messrs. Davis, H. Schwan, J. Schwan and Merrick were issued in a private offering which was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a transaction not involving a public offering as all participants were sophisticated investors who had access to information about the Company. 14 Item No. 6 Management's Discussion and Analysis of Financial Condition and Results of Operations General The following table sets forth selected financial data of the Company for the years ended October 31, 1998 and 1999, the two months ended December 31, 1999, and the year ended December 31, 2000 (in thousands, except per share data):
Two months Year ended Year ended ended Year ended October 31, October 31, December 31, December 31, 1998 1999 1999 2000 ------------------------------------------------------------------- Consolidated Statement of Operations Data: Net sales $ 19,953 $ 18,717 $ 3,906 $ 22,978 Cost of sales 12,707 13,781 2,676 16,375 ------------------------------------------------------------------ Gross profit 7,246 4,936 1,230 6,603 Operating Expenses: General and administrative 2,353 2,350 645 3,584 Selling 2,587 2,448 343 1,840 Advertising 1,805 1,504 225 966 ------------------------------------------------------------------ Total operating expenses 6,745 6,302 1,213 6,390 ------------------------------------------------------------------ Operating income (loss) 501 (1,366) 17 213 Other income (expense) (319) (796) (192) (1,070) ------------------------------------------------------------------ Income (loss) before income taxes and minority interest 182 (2,162) (175) (857) Income tax benefit (expense) (60) 380 (5) (107) ------------------------------------------------------------------ Income (loss) before minority interest 122 (1,782) (180) (964) Minority interest in profit (loss) of subsidiary -- -- (11) (87) ------------------------------------------------------------------ Net income (loss) $ 122 $ (1,782) $ (169) $ (877) ================================================================== Net income (loss) applicable to common shares $ 122 $ (1,782) $ (169) $ (877) ================================================================== Net income (loss) per share: Basic $ 0.10 $ (1.40) $ (0.14) $ (0.73) ================================================================== Diluted $ 0.09 $ (1.40) $ (0.14) $ (0.73) ================================================================== Weighted average number of common and common equivalent shares outstanding: Basic 1,266,003 1,269,984 1,222,549 1,207,944 ================================================================== Diluted 1,373,789 1,269,984 1,222,549 1,207,944 ==================================================================
15 The discussion of operations and liquidity and capital resources includes comparisons of the year ended December 31, 2000 ("fiscal 2000") with the year ended October 31, 1999 ("fiscal 1999"), and the two month transition period ended December 31, 1999 with the two month period ended December 31, 1998. As previously reported, the Company changed its fiscal year from October 31 to December 31, and the Company filed a Transition Report on Form 10-QSB for the two month period ended December 31, 1999. Year ended December 31, 2000 compared to year ended October 31, 1999 Results of Operations Net Sales. For the fiscal year ended December 31, 2000, net sales increased to $22,978,000 from $18,717,000 for the fiscal year ended October 31, 1999, an increase of approximately 22.8%. The increase in net sales is the net result of a increase in the sales of latex balloons and laminated and printed films, partially offset by a decrease in mylar balloon sales. Latex balloons sales also increased due to the acquisition of a majority equity interest in, and resulting consolidation of, CTI Mexico Corporation, S.A. de C.V. ("CTI Mexico"), a manufacturer of latex balloons. For fiscal 2000, international sales were $4,872,000, or 21.2% of net sales, as compared to $2,436,000, or 13.0% of net sales for the fiscal year ended October 31, 1999. During fiscal 2000, mylar balloons represented 50% of sales, latex balloons 25% of sales, and laminated and printed films 25% of sales. For the fiscal year ended October 31, 1999, mylar balloons represented 67% of sales, latex balloons 12% of sales, and laminated and printed films 21% of sales. The Company anticipates that the percentage of sales represented by latex balloons and laminated and printed films will increase during fiscal 2001. For fiscal 2000, profit margins on mylar balloons, latex balloons, and laminated and printed materials were 30.2%, 15.4%, and 28.9%, respectively. Cost of Sales. For fiscal 2000, cost of sales decreased to 71.3% of net sales as compared to 73.6% of net sales in the fiscal year ended October 31, 1999. The decrease was a result of higher units of production, and increased gross margins in domestic operations. Administrative. For fiscal 2000, administrative expenses were $3,585,000, or 15.6% of net sales, as compared to $2,350,000 or 12.6% of net sales for the fiscal year ended October 31, 1999. The primary increase in administrative expenses came from the acquisition of CTI Mexico and the subsequent consolidation of administrative expenses. Domestically, administrative expenses increased due to costs associated with the November, 1999 reverse stock split, and consulting fees incurred in a corporate wide project to improve cost accounting procedures. 16 Selling. For fiscal 2000, selling expenses were $1,840,000, or 8.0% of net sales, as compared to $2,448,000, or 13.1% of net sales for the fiscal year ended October 31, 1999. The decline in selling expense dollars is primarily related to the re-negotiation of certain licensing agreements, reducing royalty expenses. Advertising and Marketing. For fiscal 2000, advertising and marketing expenses were $966,000, or 4.2% of net sales, as compared to $1,504,000. or 8.0% of sales for fiscal year ended October 31, 1999. The decrease in advertising and marketing expense dollars came from several items, mainly reduced servicing costs on several national account programs, and reduced expenditures related to the Company's attendance at fewer trade shows. Other Income and Expense. Interest income for fiscal 2000 was $14,000, compared to $92,000 in the fiscal year ended October 31, 1999. The decrease was due to a smaller amount of funds held for investment purposes. For fiscal 2000, interest expense was $1,099,000, as compared to $942,000 for the fiscal year ended October 31, 1999. The increase was primarily due to the consolidation of CTI Mexico, whose interest expense totaled $130,000 for the year ended December 31, 2000. Net Income or Loss. For the fiscal year ended December 31, 2000, the Company had a loss before taxes and minority interest of $857,000, as compared to a loss before taxes of $2,162,000 for the fiscal year ended October 31, 1999. The net loss for fiscal 2000 was $877,000, as compared to a net loss of $1,782,000 for the year ended October 31, 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 and Mexico 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 provided by operations for the fiscal year ended December 31, 2000, was $1,447,000. This resulted primarily from non-cash depreciation and amortization expenses of $1,751,000. During the fiscal year ended October 31, 1999, the Company's cash flow provided by operations was $2,192,000, the result of a $2,199,000 reduction in inventory and non-cash depreciation and amortization expenses of $1,382,000. During fiscal 2000, the Company invested $637,000 in machinery and equipment, and in the year ending October 31, 1999, the Company invested $2,053,000 in machinery and equipment. Cash flow used in financing activities for the fiscal year ended December 31, 2000, was $410,000. The primary use was to paydown existing long-term and short-term debt. In the year ended October 31, 1999, cash flow provided 17 by financing activities was $94,000. This resulted from the issuance of long-term and short-term debt. In January, 2001, the Company entered into a Loan and Security Agreement with a new bank under which the bank has provided the Company with a credit facility in the amount of $9,500,000, secured by equipment, inventory, receivables and other assets of the Company. The credit facility includes a term loan of $1,426,000, at an interest rate of prime plus 0.75% per annum, which is based upon the appraised value of the equipment of the Company, and a revolving line of credit at an interest rate of prime plus 0.5% per annum, the amount of which is based on advances of up to 85% of eligible receivables and 50% of the value of the Company's inventory. The term loan and revolving line of credit are secured by substantially all assets of the Company. The term of this credit facility is for a period of three years, which may be extended by either party for an additional year. Also in January, 2001, another bank loaned to the Company the sum of $2,873,000 in a refinance of the Company's principal office building and property situated in Barrington, Illinois. This loan is secured by the aforementioned building and property, and has been made in the form of two notes: one note is in the principal amount of $2,700,000, bears interest of 9.75% per annum, and has a term of five years with a 25 year amortization, and the second note is in the principal amount of $173,000, bears interest at 10% per annum, and has a term of three years. Approximately $7,500,000 in proceeds from the foregoing January, 2001, loan transactions was used to pay off outstanding loans and a line of credit of the Company. At December 31, 2000, the Company maintained a cash balance of $393,000. The Company's current cash management strategy includes maintaining minimal cash balances and utilizing the revolving line of credit for liquidity. At December 31, 1999, the Company had cash and cash equivalents of $130,000. Working capital at December 31, 2000, was ($3,862,000), compared to working capital of ($1,217,000) at December 31, 1999. 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. Two months ended December 31, 1999 compared to two months ended December 31, 1999 Results of Operations Net Sales. For the two months ended December 31, 1999, net sales were $3,906,000, as compared to sales of $3,151,000 for the two months ended December 31, 1998, an increase of 24.0%. Sales increased over all product lines - mylar balloons, latex balloons and laminated and printed films. Net sales grew over $700,000 in the laminations and printed films product line, and latex balloon sales increased through the acquisition of CTI Mexico. 18 Cost of Sales. For the two months ended December 31, 1999, cost of sales increased to 68.5% of net sales as compared to 62.1% of net sales for the same period in 1998. The increase was primarily the result of consolidating the results of CTI Mexico's operations which currently operate with a higher cost of goods sold percentage than domestic operations. Administrative. For the two months ended December 31, 1999, administrative expenses were $646,000 or 16.5% of sales as compared to $353,000, or 11.2% of sales for the same period in 1998. The primary increase in administrative expenses came from the acquisition and subsequent consolidation of CTI Mexico. Domestically, administrative expenses increased due to costs associated with the reverse stock split, and consulting fees incurred in a corporate wide project to improve cost accounting procedures. Selling. For the two months ended December 31, 1999, selling expenses were $343,000 or 8.8% of sales, as compared to $426,0000, or 13.5% of net sales for the same period in 1998. The decline in selling expense dollars is primarily related to the re-negotiation of certain licensing agreements, reducing royalty expenses in the current year. Advertising and Marketing. For the two months ended December 31, 1999, advertising and marketing expenses were $225,000 or 5.8% of net sales as compared to $325,000 or 10.3% of net sales in the same period 1998. The decrease in advertising and marketing expense dollars came from several items, mainly reduced servicing costs on several national account programs, and reduced expenditures related to the Company's attendance at fewer trade shows. Other Income or Expense. Interest expense increased to $231,000 for the two months ended December 31, 1999, as compared to $148,000 for the two months ended December 31, 1998. The increase was primarily due to the consolidation of CTI Mexico, whose interest expense totalled $80,000 for the two month period in 1999. During the two months ended December 31, 1999, the Company sold its building located next to its headquarters in Barrington, Illinois, and entered into an agreement to lease back the facility. The building is owned by an entity in which officers/shareholders of the Company have a controlling interest. The gain realized on the sale was deferred and is being recognized into income over the 10 year lease term. Net Income or Loss. For the two months ended December 31, 1999, the Company had a loss before taxes and minority interest of $175,000, as compared to a loss before taxes of $30,000 for the same two month period in 1998. The provision for income taxes for the two month period ended December 31, 1999 was $5,000, resulting in a net loss of $169,000. The tax benefit for the two month period ended December 31, 1998 was $18,000, resulting in a net loss of $12,000. 19 Financial Condition Liquidity and Capital Resources. Cash flow used in operations during the two months ended December 31, 1999 was $352,000, which was due to increasing accounts receivable and inventory levels driven by increasing sales volume. During the two months ended December 31, 1998, cash flows provided by operations was $163,000, mainly as a result of non-cash depreciation expense and lower inventory levels. Investment Activities. During the two months ended December 31, 1999 cash flow provided by investing activities was $1,763,000. The cash inflow was provided by the proceeds from the sale of the building located next to the Company's headquarters. Investments in machinery and equipment were $133,000 for the two months ended December 31, 1999. In the two months ended December 31, 1998, $910,000 was used in investing activities, primarily for the purchase of machinery and equipment. Financing Activities. For the two months ended December 31, 1999, the Company used $1,589,000 in financing activities, primarily to pay off the long-term mortgage loan that existed on the building which was sold. Cash flow provided by financing activities for the two months ended December 31, 1998 was $776,000, resulting from the proceeds of long-term debt and use of the short-term revolving line of credit. 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 as sales in these products lines increase as a percentage of total sales, the seasonality of the Company's total net sales should decrease. 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 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. 20 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 2000 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 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 Effective July 27, 1999, the Company engaged Grant Thornton LLP as the Company's principal accountants to audit the Company's financial statements for the year ending October 31, 1999. Grant Thornton LLP replaced PricewaterhouseCoopers LLP ("PwC") who had previously been engaged for the same purpose, and whose dismissal was effective July 27, 1999. The decisions to change the Company's principal accountants was approved by the Company's Board of Directors on July 23, 1999. 21 The reports of PwC on the Company's financial statements for the two fiscal years ended October 31, 1997, and October 31, 1998 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. During the Company's two fiscal years ended October 31, 1997, and October 31, 1998, and in the subsequent interim periods through July 27, 1999, there were no disagreements with PwC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PwC, would have caused it to make reference to the subject matter of the disagreements in connection with its reports on the financial statements for such periods. PwC did not inform the Company of any reportable events during the Company's two fiscal years ended October 31, 1997, and October 31, 1998, and in subsequent interim periods through July 27, 1999. PART III Item No. 9 Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act Directors and Executive Officers The Company's current directors and executive officers and their ages, as of March 23, 2001, are as follows: Name Age Position with the Company John H. Schwan 56 Chairman and Director Stephen M. Merrick 59 Executive Vice President, Secretary Howard W. Schwan 46 President and Director Sharon Konny 42 Manager of Finance and Administration Brent Anderson 34 Vice President of Manufacturing Stanley M. Brown 54 Director Bret Tayne 42 Director 22 All directors hold office until the annual meeting of stockholders next following their election and/or until their successors are elected and qualified. Officers are elected annually by the Board of Directors and serve at the discretion of the Board. Information with respect to the business experience and affiliation of the directors and the executive officers of the Company is set forth below. John H. Schwan, Chairman. Mr. Schwan has been an officer and director of the Company since January, 1996. Mr. Schwan has been the President and principal executive officer of Packaging Systems, Inc. and affiliated companies for over the last 13 years. Mr. Schwan has over 20 years of general management experience, including manufacturing, marketing and sales. Mr. Schwan served in the U.S. Army Infantry in Vietnam from 1966 to 1969, where he attained the rank of First Lieutenant. Stephen M. Merrick, Executive Vice President and Secretary. Mr. Merrick was President of the Company from January, 1996 to June, 1997 when he became Chief Executive Officer of the Company. In October, 1999, Mr. Merrick became Executive Vice President. Mr. Merrick is a principal of the law firm of Merrick & Klimek, P.C. of Chicago, Illinois and has been engaged in the practice of law for more than 30 years. He is also Senior Vice President, Director and a member of the Management Committee of Reliv International, Inc. (NASDAQ), a manufacturer and direct marketer of nutritional supplements and food products. Howard W. Schwan, President. Mr. Schwan has been associated with the Company for 20 years principally in the management of the production and engineering operations of the Company. Mr. Schwan was appointed as Vice President of Manufacturing in November, 1990, was appointed as a director in January, 1996, and was appointed as President in June, 1997. Mr. Schwan manages administration, production and engineering functions as well as the sales function for latex balloons and custom and created films. Sharon Konny, Manager of Finance and Administration. Ms. Konny has been Manager of Finance and Administration at the Company since October, 1996. From November of 1992 to 1996, she was an Assistant Vice President of First Chicago Corporation, initially as Loan Servicing Manager of the Mortgage Services Division and in December, 1994, achieving the position of Manager of Financial Administration for the First Card Division. She became a Certified Public Accountant in 1992. Brent Anderson, Vice President of Manufacturing. Mr. Anderson has been employed by the Company since January, 1989, and has held a number of engineering positions with the Company including Plant Engineer and Plant Manager. In such capacities Mr. Anderson was responsible for the design and manufacture of much of the Company's manufacturing equipment. Mr. Anderson was appointed Vice President of Manufacturing in June, 1997. Stanley M. Brown, Director. Mr. Brown was appointed as a director of the Company in January, 1996. Mr. Brown has been President of Inn-Room Systems, Inc., a manufacturer and lessor of in-room vending systems for hotels 23 since March, 1996. From 1968 to 1989, Mr. Brown was with the United States Navy as a naval aviator, achieving the rank of Captain. Bret Tayne, Director. Mr. Tayne was appointed as a director of the Company in December, 1997. Mr. Tayne has been President of Everede Tool Company, a manufacturer of industrial cutting tools, since January, 1992. Prior to that, Mr Tayne was Executive Vice President of Unifin, a commercial finance company, since 1986. Mr. Tayne received a Bachelor of Science Degree from Tufts University and an MBA from Northwestern University. John H. Schwan and Howard W. Schwan are brothers. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and with the NASDAQ SmallCap Stock Market. Officers, directors and greater than ten-percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. Based solely on a review of such forms furnished to the Company, or written representations that no Form 5's were required, the Company believes that during calendar year 2000, all Section 16(a) filing requirements applicable to the officers, directors and ten-percent beneficial shareholders were complied with; except that Mr. John Schwan failed to timely report three transactions on Form 4 for May, 2000 (which transactions were reported on Form 4 in July, 2000). Item No. 10 Executive Compensation Executive Compensation The following table sets forth certain information with respect to the compensation paid or accrued by the Company to its President, Chief Executive Officer and any other officer who received compensation in excess of $100,000 ("Named Executive Officers"). 24 Summary Compensation Table
Long Term Annual Compensation Compensation ------------------------------------------------- ------------ Name and Other Securities All Other Principal Salary Annual Underlying Compensation Position Year ($) Compensation Options ($) --------- ---- -------- ---------- -------- ---------- Howard W. Schwan 2000 $135,000 $ 9,719(1) 20,000(2) $ 1,650(6) President 1999 $129,900 $ 13,675(1) -- $ 1,650(6) 1998 $135,000 $ 6,145(1) 13,333(3) $ 1,115(6) Stephen M. Merrick 2000 $ 75,000 -- 20,000(4) -- Executive 1999 $ 53,750 -- -- -- Vice-President 1998 $ 75,000 -- 13,333(5) --
- ---------- (1) Perquisites include country club membership of $5,000 in 1998, $7,360 in 1999 and $3,950 in 2000. (2) Stock options to purchase up to 20,000 shares of the Company's Common Stock at $2.25 per share. (3) Stock options to purchase up to 13,333 shares of the Company's Common Stock at $7.50 per share. (4) Stock options to purchase up to 20,000 shares of the Company's Common Stock at $2.475 per share. (5) Stock options to purchase up to 13,333 shares of the Company's Common Stock at $8.25 per share. (6) Company contribution to the Company 401(k) Plan as pre-tax salary deferral. Certain Named Executive Officers have received warrants to purchase Common Stock of the Company in connection with their guarantee of certain bank loans secured by the Company and in connection with their participation in a private offering of notes and warrants conducted by the Company. See Item 12. In connection with their employment in the fiscal year ending December 31, 2000, the following executive officers were granted incentive stock options on March 6, 2000: 25 Option Grants in Last Fiscal Year Individual Grants
Number of Securities % of Total Options Underlying Granted to Employees Exercise Price Name Options Granted in Fiscal Year ($/share) Expiration Date ---- --------------- -------------- --------- --------------- Stephen M. Merrick 20,000 20.3% $2.475 3/6/2005 Howard W. Schwan 20,000 20.3% $2.25 3/6/2010
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
Number of Securities Underlying Value of Unexercised In- Shares Value Unexercised Options at the-Money Options Acquired on Realized Year End (#) at Fiscal Year End ($) Name Exercise (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable - ---- ------------ --- ------------------------- ------------------------- Stephen M. Merrick 0 0 33,333/0 $0/0(1) Howard W. Schwan 0 0 33,333/0 $0/0(1)
- ---------- (1) The value of unexercised in-the-money options is based on the difference between the exercise price and the fair market value of the Company's Common Stock on December 31, 2000. Employment Agreements In April, 1996, the Company entered into an employment agreement with John C. Davis as Executive Vice President-Sales, which provided for an annual salary of $150,000. The term of the agreement was through January 31, 1998. On June 27, 1997, the agreement was amended to extend the term through January 31, 2000, and to provide for an annual salary of $120,000 per year. Effective February 1, 1999, Mr. Davis retired from his position as Executive Vice President-Sales with the Company. In June, 1997, the Company entered into an Employment Agreement with Howard W. Schwan as President, which provides for an annual salary of not less than $135,000. The term of the Agreement is through June 30, 2002. The Agreement contains covenants of Mr. Schwan with respect to the use of the Company's confidential information, establishes the Company's right to inventions created by Mr. Schwan during the term of his employment, and includes a covenant 26 of Mr. Schwan not to compete with the Company for a period of three years after the date of termination of the Agreement. Director Compensation John Schwan was compensated in the amount of $44,000 in fiscal 2000 for his services as Chairman of the Board of Directors. Except for John Schwan, directors received no cash compensation for their services as directors. In connection with their services as directors, Stanley M. Brown and Bret Tayne were each compensated with options to purchase up to 3,000 shares of the Company's Common Stock at an exercise price of $2.25 per share, expiring in March, 2010, and in connection with his services as Chairman of the Company's Board of Directors, John Schwan was compensated with options to purchase up to 20,000 shares of the Company's Common Stock at an exercise price of $2.475 per share, expiring in March, 2005. All options issued to Messrs. Brown, Tayne and John Schwan in fiscal year 2000 were issued under the Company's 1999 Stock Option Plan. Item No. 11 Security Ownership of Certain Beneficial Owners and Management Principal Stockholders The following table sets forth certain information with respect to the beneficial ownership of the Company's capital stock, as of March 30, 2001 by (i) each stockholder who is known by the Company to be the beneficial owner of more than 5% of the Company's Common Stock or Class B Common Stock, (ii) each director and executive officer of the Company who owns any shares of Common Stock or Class B Common Stock, and (iii) all executive officers and directors as a group. Except as otherwise indicated, the Company believes that the beneficial owners of the shares listed below have sole investment and voting power with respect to such shares. 27 Shares of Shares of Class B Common Common Stock Stock Beneficially Beneficially Percent of Name and Address Owned(2)(3) Owned(2) Common Stock(4) ---------------- ----------- -------- --------------- John H. Schwan 109,890 302,688(4) 34.02(5) Stephen M. Merrick 73,260 296,095(6) 31.87(5) Howard W. Schwan 54,945 91,463(7) 14.86(5) Sharon Konny -- 11,000(8) 1.31 Brent Anderson -- 11,400(8) 1.35 Stanley M. Brown -- 6,952(9) * 747 Glenn Avenue Wheeling, IL 60010 Bret Tayne -- 5,837(10) * 6834 N. Kostner Avenue Lincolnwood, IL 60712 Michael Schrimmer -- 102,000 12.12 1161 Lake Cook Road Suite B Deerfield, IL 60015 Frances Ann Rohlen 91,575 51,170 15.30(5) c/o Cheshire Partners 1504 N. Wells Street Chicago, IL 60610 Philip W. Colburn 36,630 39,422(11) 8.66(5) All directors and executive 238,095 725,435 56.45(5) officers as a group (7 persons) - ---------- *less than one percent (1) Except as otherwise indicated, the address of each stockholder listed above is c/o CTI Industries Corporation, 22160 North Pepper Road, Barrington, Illinois 60010. (footnotes continued on next page) 28 (2) A person is deemed to be the beneficial owner of securities that can be acquired within 60 days from the date set forth above through the exercise of any option, warrant or right. Shares of Common Stock subject to options, warrants or rights that are currently exercisable or exercisable within 60 days are deemed outstanding for purposes of computing the percentage ownership of the person holding such options, warrants or rights, but are not deemed outstanding for purposes of computing the percentage (3) Figures below represent all Class B Common Stock outstanding. Beneficial ownership of shares of Class B Common Stock for Messrs. Merrick, John Schwan, Howard Schwan and Ms. Rohlen include indirect ownership of such shares through CTI Investors, L.L.C. See "Certain Transactions." (4) Includes warrants to purchase up to 20,641 shares of Common Stock at $2.73 per share, warrants to purchase up to 207,346 shares of Common Stock at $1.688 per share, options to purchase up to 13,333 shares of Common Stock at $8.25 per share granted under the Company's 1997 Stock Option Plan and options to purchase up to 20,000 shares of Common Stock at $2.475 per share granted under the Company's 1999 Stock Option Plan. (5) Assumes conversion of all shares of Class B Common Stock owned by the named person or collective into shares of Common Stock. (6) Includes warrants to purchase up to 24,176 shares of Common Stock at $2.73 per share, warrants to purchase up to 186,612 shares of Common Stock at $1.688 per share, options to purchase up to 13,333 shares of Common Stock at $8.25 per share granted under the Company's 1997 Stock Option Plan and options to purchase up to 20,000 shares of Common Stock at $2.475 per share granted under the Company's 1999 Stock Option Plan. (7) Includes warrants to purchase up to 25,641 shares of Common Stock at $2.73 per share, warrants to purchase up to 29,621 shares of Common Stock at $1.688 per share, options to purchase up to 13,333 shares of Common Stock at $7.50 per share granted under the Company's 1997 Stock Option Plan and options to purchase up to 20,000 shares of Common Stock at $2.25 per share granted under the Company's 1999 Stock Option Plan. (8) Includes options to purchase up to 4,000 shares of Common Stock at $7.50 per share granted under the Company's 1997 Stock Option Plan and options to purchase up to 7,000 shares of Common Stock at $2.25 per share granted under the Company's 1999 Stock Option Plan. (footnotes continued on next page) 29 (9) Includes options to purchase up to 1,667 shares of Common Stock at $7.50 per share, options to purchase up to 1,667 shares of Common Stock at $12.00 per share, both granted under the Company's 1997 Stock Option Plan and options to purchase up to 3,000 shares of Common Stock at $2.25 per share granted under the Company's 1999 Stock Option Plan. (10) Includes options to purchase up to 1,667 shares of Common Stock at $7.50 per share granted under the Company's 1997 Stock Option Plan and options to purchase up to 3,000 shares of Common Stock at $2.25 per share granted under the Company's 1999 Stock Option Plan. (11) Includes shares held by immediate family members. Item No. 12 Certain Relationships and Related Transactions Certain Transactions In March 1996, the Company entered into a Stock Redemption Agreement with John C. Davis which was subsequently amended June 27, 1997. Under the amended Stock Redemption Agreement the Company was obligated to redeem 34,188 shares of Common Stock and has the right, but not the obligation, to redeem up to an additional 76,923 shares of Common Stock owned by Mr. Davis at the price of $5.85 per share at any time through January 31, 1998. Commencing March 1, 1998 through February 28, 2000, the Company was obligated to pay to Mr. Davis, for the redemption of shares at $5.85 per share (i) an amount equal to 2% of the Company's pretax profits each fiscal quarter (beginning with the fiscal quarter ended February 28, 1998) and (ii) an amount equal to 2% (but not to exceed $8,000) of the amount by which latex and mylar balloon revenues exceed $1.3 million in any month. The Company's obligations terminated once a total of 111,111 shares of Common Stock have been redeemed under the Stock Redemption Agreement. The Company also had the right to redeem additional shares of Common Stock from Mr. Davis during this period at $5.85 per share, provided that the total number of shares subject to redemption under the Stock Redemption Agreement did not exceed 111,111. As of February 28, 2000, 40,444 shares of Common Stock were redeemed pursuant to the Stock Redemption Agreement. In March and May of 1996, a group of investors made an equity investment of $1,000,000 in the Company in return for 366,300 shares of Preferred Stock, $2.73 par value. Each share of Preferred Stock was entitled to an annual cumulative dividend of 13% of the purchase price, and was convertible into one share of Common Stock. The shares of Preferred Stock, voting separately as a class, were entitled to elect four of the Company's directors. CTI Investors, L.L.C., an Illinois limited liability company, invested $900,000 in the shares of Preferred Stock. Members of CTI Investors, L.L.C. include Howard W. Schwan, John H. Schwan and Stephen M. Merrick, members of management, and Frances Ann Rohlen. In December, 1996, Howard W. Schwan, John H. Schwan and Stephen M. Merrick were each issued warrants to purchase 25,641 shares of the Company's Common 30 Stock at an exercise price of $2.73 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 July, 1998, John H. Schwan and Stephen M. Merrick exercised 5,000 and 1,465 of these 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 92,415 shares of the Company's Common Stock at an exercise price of $9.36 per share. The warrants had a term of five years. Howard W. Schwan, John H. Schwan, Stephen M. Merrick and John C. Davis, members of management, purchased $50,000, $350,000 and $315,000 and $150,000, respectively, of the notes and warrants. Mr. John Schwan and Mr. Merrick applied advances of $200,000 each, made to the Company in January, 1997, toward the purchase of the notes and warrants. In June, 1999, Mr. Davis' June, 1997, $150,000 Note was cancelled, and reissued in the same principal amount with a new maturity date of February 28, 2001. Mr. Davis' June, 1997, warrant to purchase up to 16,026 shares of the Company's Common Stock at an exercise price of $9.36 per share was cancelled in September, 1999, and a new warrant to purchase up to 16,026 shares of the Company's Common Stock at an exercise price of $1.688 per share, with an expiration date of June 30, 2003 was issued in its place. Mr. Davis' June, 1999, note was paid in full by the Company in February, 2001. In June, 1999, the June, 1997, $50,000 $350,000 and $315,000 notes of Messrs. H. Schwan, J. Schwan and Merrick, respectively came due. On November 9, 1999, new notes in the same principal amounts were issued to these persons, in payment and replacement of the prior notes, with maturity dates for each of November 9, 2001. In November, 1999, the June, 1997, warrants of Messrs. H. Schwan, J. Schwan and Merrick to purchase up to (respectively) 5,342, 37,393 and 33,653 shares of the Company's Common Stock at an exercise price of $9.36 per share were cancelled. At that time, new warrants to purchase up to 29,621, 207,346, and 186,612 shares of the Company's Common Stock at an exercise price of $1.688 per share were issued to Messrs. H. Schwan, J. Schwan and Merrick, respectively. These warrants expire on November 9, 2004. Stephen M. Merrick, Executive Vice President of the Company, is a principal of the law firm of Merrick & Klimek, P.C., which serves as general counsel of the Company. Mr. Merrick was a principal in the law firm of Fishman, Merrick, Miller, Genelly, Springer, Klimek & Anderson, P.C., which served as general counsel to the Company until December 1, 1998. In addition, Mr. Merrick is a principal stockholder of the Company. (See Item No. 11). Other principals of the firm of Merrick & Klimek, P.C. own less than 1% of the Company's outstanding Common Stock. Legal fees paid to the firm of Fishman, Merrick, Miller, Genelly, Springer, Klimek & Anderson, P.C. were $10,380 and $-0- for the fiscal years ended October 31, 1999, and December 31, 2000. Legal fees incurred from the firm of Merrick & Klimek, P.C. for the fiscal years ended October 31, 1999, and December 31, 2000 were $90,634 and $124,308, respectively. Mr. Merrick is also an officer and director of Reliv International, Inc. (NASDAQ-RELV). 31 John H. Schwan is President of Packaging Systems and affiliated companies. The Company made purchases of packaging materials from these entities in the amount of $251,203 and $235,299 during each of the years ended October 31, 1999, and December 31, 2000, respectively. The Company believes that each of the transactions set forth above were entered into, and any future related party transactions will be entered into, on terms as fair as those obtainable from independent third parties. All related party transactions, including loans and forgiveness of debt, must be approved by a majority of disinterested directors. Item No. 13 Exhibits and Reports on Form 8-K Exhibits Exhibit Number Description ------ ----------- * 3.1 Third 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 **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 Loan and Security Agreement dated January 12, 2001, between the Company and Congress Financial Corporation (Central) 32 10.15 Term Note in the sum of $1,426,000 dated January 12, 2001 made by CTI Industries Corporation to Congress Financial Corporation (Central) 10.16 Mortgage dated January 12, 2001 for the benefit of Banco Popular, N.A. 10.17 Secured Promissory Note in the sum of $2,700,000 dated December 15, 2000 made by CTI Industries Corporation to Banco Popular, N.A. 10.18 Secured Promissory Note in the sum of $173,000 dated December 15, 2000, made by CTI Industries Corporation to Banco Popular, N.A. 10.19 Guaranties dated January 12, 2001, by Stephen M. Merrick and John H. Schwan for benefit of Congress Financial Corporation (Central) 10.20 Guaranties dated January 12, 2001, by John H. Schwan, Stephen M. Merrick and Howard W. Schwan for the benefit of Banco Popular, N.A. **10.21 Form of Financial Advisory and Consulting Agreement *****10.22 Subscription and Loan Agreement dated January 26, 1998, between CTI Industries Corporation and Pulidos & Terminados Finos S.A. de C.V. 11.1 Computation of Earnings Per Share - Annual 21 Subsidiaries (incorporate description in Form 10-KSB under Item No. 1) 27 Financial Data Schedule * Incorporated by reference to Exhibit A contained in Registrant's Schedule 14A Definitive Proxy Statement for solicitation of written consent of shareholders, as filed with the Commission on October 25, 1999. ** 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 Schedule 14A Definitive Proxy Statement, as filed with the Commission on March 26, 1999. **** Incorporated by reference to Exhibits contained in Registrant's Form 10KSB Annual Report, for the fiscal year ended October 31, 1998. ***** 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 The Company did not file a report on Form 8-K during the last quarter of fiscal 2000. 33 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 April 16, 2001. 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 April 16, 2001 - ------------------------ Howard W. Schwan /s/ John H. Schwan Chairman and Director April 16, 2001 - ------------------------ John H. Schwan /s/ Stephen M. Merrick Executive Vice President, April 16, 2001 - ------------------------ Secretary, Chief Financial Stephen M. Merrick Officer and Director /s/ Stanley M. Brown Director April 16, 2001 - ------------------------ Stanley M. Brown /s/ Bret Tayne Director April 16, 2001 - ------------------------ Bret Tayne 34 CTI Industries Corporation and Subsidiaries Table of Contents Page(s) Report of Independent Accountants F-1 Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 1999 and 2000 F-2 F-3 Consolidated Statements of Operations for the year ended October 31, 1999, the two months ended December 31, 1999, and the year ended December 31, 2000 F-4 Consolidated Statements of Stockholders' Equity for the year ended October 31, 1999, the two months ended December 31, 1999, and the year ended December 31, 2000 F-5 Consolidated Statements of Cash Flows for the year ended October 31, 1999, the two months ended December 31, 1999, and the year ended December 31, 2000 F-6 Notes to Consolidated Financial Statements F-7 F-20 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Shareholders and Board of Directors CTI Industries Corporation We have audited the accompanying balance sheets of CTI Industries Corporation and Subsidiaries as of December 31, 1999 and 2000 and the related statements of operations, stockholders' equity, and cash flows for the two months ended December 31, 1999 and the year ended December 31, 2000. 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 audit. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CTI Industries Corporation and Subsidiaries as of December 31, 1999 and 2000 and the results of their operations and their cash flows for the two months ended December 31, 1999 and the year ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. GRANT THORNTON LLP March 2, 2001 F-1 CTI Industries Corporation and Subsidiaries Consolidated Balance Sheets
December 31 ---------------------------- 1999 2000 ------------ ------------ ASSETS Current assets: Cash $ 130,103 $ 392,534 Accounts receivable (less allowance for doubtful accounts of $336,078 and $312,572 at December 31, 1999 and 2000, respectively) 4,179,265 2,573,577 Inventories 6,521,488 7,060,996 Deferred tax assets 208,926 65,700 Other 682,187 659,371 ------------ ------------ Total current assets 11,721,969 10,752,178 Property and equipment: Machinery and equipment 12,862,936 13,472,187 Building 2,363,744 2,370,644 Office furniture and equipment 1,650,737 1,652,823 Land 250,000 250,000 Leasehold improvements 161,885 161,885 Fixtures and equipment at customer locations 2,031,919 2,202,743 Projects under construction 557,892 405,748 ------------ ------------ 19,879,113 20,516,030 Less : accumulated depreciation (9,698,350) (11,342,792) ------------ ------------ Total property and equipment, net 10,180,763 9,173,238 Other assets: Deferred financing costs, net 26,629 11,412 Goodwill associated with acquisition of CTI Mexico, net 1,203,185 1,199,771 Deferred tax assets 691,298 812,591 Other assets 283,682 269,600 ------------ ------------ Total other assets 2,204,794 2,293,374 ------------ ------------ TOTAL ASSETS $ 24,107,526 $ 22,218,790 ============ ============
See accompanying notes F-2 CTI Industries Corporation and Subsidiaries Consolidated Balance Sheets
December 31 ---------------------------- 1999 2000 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,957,791 $ 5,045,773 Line of credit 3,849,203 3,609,541 Notes payable - current portion 1,327,056 4,176,934 Accrued liabilities 2,805,113 1,781,984 ------------ ------------ Total current liabilities 12,939,163 14,614,232 Long-term liabilities: Other liabilities 327,961 802,596 Notes payable 4,206,366 1,301,022 Subordinated debt 840,000 496,640 ------------ ------------ Total long-term liabilities 5,374,327 2,600,258 Redeemable common stock 413,406 -- Minority interest 351,926 238,787 Stockholders' equity: Common stock - $.195 par value, 5,000,000 shares authorized, 966,327 shares issued, 841,644 shares outstanding 188,434 188,434 Class B Common stock - $2.73 par value, 500,000 shares authorized, 366,300 shares issued and outstanding 1,000,000 1,000,000 Paid-in-capital 5,554,332 5,554,332 Warrants issued in connection with subordinated debt -- 228,360 Accumulated deficit (649,869) (1,526,829) Accumulated other comprehensive earnings (14,247) (42,244) Less: Treasury stock-124,683 shares (575,384) (575,384) Redeemable common stock (413,406) -- Stock subscription receivable (4,700) (4,700) Notes receivable from stockholders (56,456) (56,456) ------------ ------------ Total stockholders' equity 5,028,704 4,765,513 ------------ ------------ TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 24,107,526 $ 22,218,790 ============ ============
See accompanying notes F-3 CTI Industries Corporation and Subsidiaries Consolidated Statements of Operations
Two months Year Ended Ended Year Ended October 31 December 31 December 31 1999 1999 2000 ------------ ----------- ------------ Net Sales $ 18,717,119 $ 3,905,896 $ 22,978,117 Cost of Sales 13,781,107 2,676,110 16,374,720 ------------ ----------- ------------ Gross profit on sales 4,936,012 1,229,786 6,603,397 Operating expenses: Administrative 2,349,531 645,592 3,584,516 Selling 2,448,276 342,957 1,839,906 Advertising and marketing 1,503,819 224,663 965,981 ------------ ----------- ------------ Total operating expenses 6,301,626 1,213,212 6,390,403 ------------ ----------- ------------ Income (loss) from operations (1,365,614) 16,574 212,994 Other income (expense): Interest expense (942,301) (230,605) (1,099,194) Interest income 91,899 5,448 14,238 Gain on sale of assets 366 5,008 30,046 Other 54,129 28,466 (14,977) ------------ ----------- ------------ Total other income (expense) (795,907) (191,683) (1,069,887) ------------ ----------- ------------ Loss before income taxes and minority interest (2,161,521) (175,109) (856,893) Income tax expense (benefit) (379,251) 5,383 106,910 ------------ ----------- ------------ Loss before minority interest (1,782,270) (180,492) (963,803) Minority interest in profit (loss) of subsidiary -- (11,759) (86,843) ------------ ----------- ------------ Net loss $ (1,782,270) $ (168,733) $ (876,960) ============ =========== ============ Income (loss) applicable to common shares $ (1,782,270) $ (168,733) $ (876,960) ============ =========== ============ Basic income (loss) per common and common equivalent shares $ (1.40) $ (0.14) $ (0.73) ============ =========== ============ Diluted income (loss) per common and common equivalent shares $ (1.40) $ (0.14) $ (0.73) ============ =========== ============ Weighted average number of shares and equivalent shares of common stock outstanding: Basic 1,269,984 1,222,549 1,207,944 ============ =========== ============ Diluted 1,269,984 1,222,549 1,207,944 ============ =========== ============
See accompanying notes F-4 CTI Industries Corporation and Subsidiaries Consolidated Statements of Stockholders' Equity
Warrants issued in Common Stock Class B Common Stock connection with ----------------------- ----------------------- Paid-in subordinated Retained Shares Amount Shares Amount Capital debt Earnings ------- ----------- ------- ----------- ----------- --------- ----------- Balance, October 31, 1998 966,327 $ 188,434 366,300 $ 1,000,000 $ 5,554,332 $ -- $ 1,301,134 Acquisition of treasury stock on open market Net loss (1,782,270) Other comprehensive income Foreign currency translation Total comprehensive loss ---------------------------------------------------------------------------------------------------- Balance, October 31, 1999 966,327 $ 188,434 366,300 $ 1,000,000 $ 5,554,332 $ -- $ (481,136) Acquisition of treasury stock on open market Net loss $ (168,733) Other comprehensive income Foreign currency translation Total comprehensive loss ---------------------------------------------------------------------------------------------------- Balance, December 31, 1999 966,327 $ 188,434 366,300 $ 1,000,000 $ 5,554,332 $ -- $ (649,869) Expiration of stock redemption period Warrants issued in connection with subordinated debt $ 228,360 Net loss $ (876,960) Other comprehensive income Foreign currency translation Total comprehensive loss ---------------------------------------------------------------------------------------------------- Balance, December 31, 2000 966,327 $ 188,434 366,300 $ 1,000,000 $ 5,554,332 $ 228,360 $(1,526,829) ====================================================================================================
Less Accumulated ------------------------------------------------------------------- Other Treasury Stock Comprehensive --------------------- Redeemable Stock Notes Recvble Earnings Shares Amount Common Stock Sub Recvble Shareholders TOTAL ----------- ------ ----------- ----------- ----------- ------------ ----------- Balance, October 31, 1998 $ 26,377 54,383 $ 407,294 $ 413,406 $ 4,700 $ 56,456 $ 7,188,421 Acquisition of treasury stock on open market 41,000 105,827 $ (105,827) Net loss $(1,782,270) Other comprehensive income Foreign currency translation (11,829) $ (11,829) ----------- Total comprehensive loss $(1,794,099) ---------------------------------------------------------------------------------------------------- Balance, October 31, 1999 $ 14,548 95,383 $ 513,121 $ 413,406 $ 4,700 $ 56,456 $ 5,288,495 Acquisition of treasury stock on open market 29,300 $ 62,263 $ (62,263) Net loss $ (168,733) Other comprehensive income Foreign currency translation $ (28,795) $ (28,795) ----------- Total comprehensive loss $ (197,528) ---------------------------------------------------------------------------------------------------- Balance, December 31, 1999 $ (14,247) 124,683 $ 575,384 $ 413,406 $ 4,700 $ 56,456 $ 5,028,704 Expiration of stock redemption period $ (413,406) $ 413,406 Warrants issued in connection with subordinated debt $ 228,360 Net loss $ (876,960) Other comprehensive income Foreign currency translation $ (27,997) $ (27,997) ----------- Total comprehensive loss $ (904,957) ---------------------------------------------------------------------------------------------------- Balance, December 31, 2000 $ (42,244) 124,683 $ 575,384 $ -- $ 4,700 $ 56,456 $ 4,765,513 ===================================================================================================-
See accompanying notes F-5 CTI Industries Corporation and Subsidiaries Consolidated Statements of Cash Flows
Two months Year Ended Ended Year Ended October 31 December 31 December 31 1999 1999 2000 ----------- ----------- ----------- Cash flows from operating activities: Net loss $(1,782,270) $ (168,733) $ (876,960) Adjustment to reconcile net loss to cash provided by operating activities: Depreciation and amortization 1,381,663 264,616 1,751,318 Equity in loss of subsidiary and joint venture 115,360 -- Minority interest in loss of subsidiary -- (11,759) (86,843) Gain on sale of fixed assets -- (5,008) (30,046) Provision for losses on accounts receivable & inventory 332,988 32,760 317,856 Deferred income taxes (407,000) -- 21,933 Change in assets and liabilities: Accounts receivable (114,240) (319,898) 1,455,886 Inventory 2,199,461 (732,686) (707,564) Other assets 403,418 (577,567) 31,906 Accounts payable and accrued expenses 62,630 1,166,550 (430,466) ----------- ----------- ----------- Net cash provided by (used in) operating activities 2,192,010 (351,725) 1,447,020 Cash flows from investing activities: Proceeds from sale of property and equipment -- 1,841,984 -- Purchases of property and equipment (2,052,777) (133,490) (636,917) Investment in and advances to CTI Mexico (45,515) -- -- Acquisition of CTF International (74,024) -- -- Cash acquired in acquisition of CTI Mexico -- 54,029 -- Purchase additional interest in CTI Mexico -- -- (109,547) ----------- ----------- ----------- Net cash provided by (used in) investing activities (2,172,316) 1,762,523 (746,464) Cash flows from financing activities: Net change in revolving line of credit (604,223) 275,180 (239,662) Proceeds from issuance of long-term debt 1,202,281 -- -- Proceeds from issuance of short-term debt 570,000 -- 1,470,000 Repayment of long-term debt (778,597) (1,396,649) (970,493) Repayment of short-term debt (190,000) (380,000) (554,973) Repayment of subordinated debt -- (25,000) (115,000) Purchase of treasury stock (105,827) (62,263) -- ----------- ----------- ----------- Net cash provided by (used in) financing activities 93,634 (1,588,732) (410,128) Effect of exchange rate changes on cash (11,829) (28,795) (27,997) ----------- ----------- ----------- Net increase (decrease) in cash 101,499 (206,729) 262,431 Cash and Equivalents at Beginning of Period 235,333 336,832 130,103 ----------- ----------- ----------- Cash and Equivalents at End of Period $ 336,832 $ 130,103 $ 392,534 =========== =========== =========== Supplemental disclosures: Cash paid for interest $ 905,218 $ 184,377 $ 1,079,548 Cash paid for income taxes $ -- $ -- $ -- Noncash investing activities: Acquisition of additional equity interest in CTI Mexico in exchange for indebtedness of CTI Mexico to CTI Industries Corporation in the amount of $989,400, and equipment valued at $855,600. $ -- $ 1,845,000 $ --
See accompanying notes F-6 CTI Industries Corporation and Subsidiaries Notes to the Consolidated Financial Statements 1. Nature of Operations CTI Industries Corporation (the "Company"), its United Kingdom subsidiary (CTI Balloons Limited), and Mexican subsidiaries (CTI Mexico Corporation, S.A. de C.V. and CTF International S.A. de C.V.) 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, its wholly owned subsidiaries CTI Balloons Limited and CTF International S.A. de C.V., and its majority owned subsidiary CTI Mexico Corporation, S.A. de C.V. 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 separate 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 - 30 years Machinery and equipment 3 - 15 years Office furniture and equipment 5 - 8 years Leasehold improvements 5 - 8 years Furniture & equipment at customer locations 2 - 3 years Depreciation expense was $1,366,446 for the year ended October 31, 1999, $248,561 for the two months ended December 31, 1999, and $1,649,437 for the year ended December 31, 2000. F-7 CTI Industries Corporation and Subsidiaries Notes to the Consolidated Financial Statements 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 $15,217 for the year ended October 31, 1999, $2,536 for the two months ended December 31, 1999, and $15,217 for the year ended December 31, 2000. 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. Comprehensive Income Comprehensive income is defined as the change in equity of a business enterprise from non-stockholder transactions impacting stockholders' equity which are not included in the statement of income and are reported as a separate component of equity. For all periods presented, other comprehensive income includes only one component, which is the change in the foreign currency translation adjustment. Revenue Recognition The Company recognizes revenue using the accrual method of accounting when title transfers upon shipment. Shipping and Handling Fees and Costs In September 2000, the Emerging Issues Task Force ("EITF") released Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs". The Issue requires that shipping and handling costs be classified as costs of goods sold, and shipping and handling fees billed to customers be classified as revenues. Previously, the Company had netted its revenues from shipping and handling fees billed to customers against the related costs, and included the net amount as a component of cost of goods sold. Effective December 31, 2000, the Company has reclassified all shipping and handling fees billed to customers from cost of goods sold to net sales for all periods presented. This reclassification had the effect of increasing net sales and cost of goods sold from the October 31, 1999 amounts previously reported with no effect on gross margins. F-8 CTI Industries Corporation and Subsidiaries Notes to the Consolidated Financial Statements 2. Summary of Significant Accounting Policies, continued 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 December 31, 2000, the Company had two customers that accounted for approximately 19.7% and 7.8%, respectively, of consolidated net sales. Corresponding percentages of consolidated net sales generated by these customers for the year ended October 31, 1999, were approximately 14.3% and 16.2%, respectively, and for the two months ended December 31, 1999 were 15.5% and 6.5%, respectively. At December 31, 2000, the outstanding accounts receivable balances due from these two customers were $1,045,965 and $219,243, respectively. Use of Estimates In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the 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. 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. Impairment of Long-Lived Assets and Goodwill 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. Goodwill is amortized over a fifteen year period. Accumulated amortization of goodwill at December 31, 1999 and 2000 was $13,519 and $100,183, respectively. F-9 CTI Industries Corporation and Subsidiaries Notes to the Consolidated Financial Statements 3. Inventory Inventory is comprised of the following: December 31, 1999 December 31, 2000 ----------------- ----------------- Raw materials $ 744,281 $ 693,166 Work in process 1,099,763 975,360 Finished goods 4,677,444 5,392,470 ------------- ------------- Total inventory $ 6,521,488 $ 7,060,996 ============= ============= 4. Line of Credit The Company has a bank line of credit, due May 1, 2001, which provides for a maximum borrowing limit of $5,000,000, of which $245,823 and $16,986 was available at December 31, 1999 and 2000, 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 9.5% at December 31, 1999 and 2000, respectively). The line of credit is collateralized by all assets of the Company. The line of credit agreement contains, among other provisions, certain financial convenants relating to the maintenance of tangible net worth and the ratio of debt to equity. (See note 5) 5. Notes Payable Long-term debt at December 31, 2000 consists of: Term Loan, payable in monthly installments of $43,979 including interest at 8.25% due May, 2002 Collateralized by all assets of the Company. * $ 702,837 Term Loan, payable in monthly installments of $19,617 including interest at 8.25% due September, 2001 Collateralized by all assets of the Company. * 1,959,525 Term Loan, payable in monthly installments of $46,195 including interest at 8.25% due February, 2004 Collateralized by all assets of the Company. * 1,482,291 Single payment note due January 31, 2001 Interest rate at Prime. Unsecured. * 250,000 Single payment notes payable to an officer/shareholder Interest at 9%, payable on demand. Unsecured. * 350,000 Single payment notes payable to an officer/shareholder Interest at 9%, payable on demand. Unsecured. * 370,000 Installment Loan, payable in monthly installments of $3,633 including interest at 8.25% due May, 2001 Collateralized by equipment. * 11,137 Single payment note due September, 2000 Interest at 26%. Unsecured 51,071 Note payable on demand. Interest at 48%. Unsecured Interest payable monthly 83,440 F-10 CTI Industries Corporation and Subsidiaries Notes to the Consolidated Financial Statements 5. Notes Payable, continued Note payable on demand. Interest at 48%. Unsecured. Interest payable monthly. 125,160 Term Loan, payable in monthly installments of $3,854 plus interest at 4% over the CTP rate(20.25% at Dec. 31, 2000), due December, 2002. Unsecured. 92,495 ----------- Total $ 5,477,956 Less current portion (4,176,934) ----------- Total long-term debt $ 1,301,022 =========== *Paid off with new financing Future Minimum principal payments for amounts outstanding under these long-term debt agreements are as follows for the years ended December 31: 2001 $ 4,176,934 2002 747,467 2003 527,943 2004 25,612 ----------- $ 5,477,956 =========== The loan agreements contain, among other provisions, certain financial convenants 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 contain a clause allowing for the subjective acceleration of amounts due under the loan agreements in the event of material adverse changes. At December 31, 2000, the Company was in violation of certain of these financial covenants. In January 2001, the Company entered into a Loan and Security Agreement with a new lender under which the lender has provided the Company with a credit facility in the amount of $9,500,000, secured by equipment, inventory, receivables, and other assets of the Company. The credit facility includes a term loan of $1,426,000, at an interest rate of prime plus 0.75%, and a revolving line of credit at an interest rate of prime plus 0.50%, the amount of which is based on advances of up to 85% of eligible receivables and 50% of the value of the Company's inventory. The credit facility is secured by substantially all assets of the Company. The term of this credit facility is for a period of three years, which may be extended by either party for an additional year. Also in January 2001, another lender loaned to the Company the sum of $2,873,000 in a refinance of the Company's principal office building and property situated in Barrington, Illinois. The loan is secured by the aforementioned building and property, and has been made in the form of two notes. The first note is in the principal amount of $2,700,000, bears interest at the rate of 9.75%, and has a term of five years with an amortization period of 25 years. The second note is in the principal amount of $173,000 with an interest rate of 10%, and has a term of three years. F-11 CTI Industries Corporation and Subsidiaries Notes to the Consolidated Financial Statements 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 111,111 shares of Common Stock owned by the shareholder at the price of $5.85 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 $5.85 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 that 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 $5.85 per share, provided total number of shares subject to redemption under the Stock Redemption Agreement does not exceed 111,111. 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, the obligation to redeem shares had expired, and 40,444 shares of Common Stock were redeemed under the Stock Redemption Agreement. 7. Income Taxes The income tax provisions (benefits) are comprised of the following: Oct. 31, Dec. 31, Dec. 31, 1999 1999 2000 Current: Federal $ -- $ -- $ -- State -- -- -- Foreign 27,749 5,383 84,917 ---------------------------------------- 27,749 5,383 84,917 Deferred: Federal (354,800) -- -- State (52,200) -- -- Foreign -- -- 21,993 ---------------------------------------- (407,700) -- -- ---------------------------------------- Total income tax provision (benefit) $(379,251) $ 5,383 $ 106,910 ======================================== The components of the net deferred tax asset(liability)at December 31 are as follows: 1999 2000 Deferred tax assets: Allowance for doubtful accounts $ 130,000 $ 112,400 Inventory valuation 123,200 142,600 Accrued liabilities 155,100 167,900 Cash basis of foreign inventory purchases (276,200) (357,200) Net operating loss carryforwards 1,611,400 1,910,300 Alternative minimum tax credit carryforwards 371,600 381,300 ----------- ----------- Total deferred tax assets 2,115,100 2,357,300 F-12 CTI Industries Corporation and Subsidiaries Notes to the Consolidated Financial Statements 7. Income Taxes, continued Deferred tax liabilities: Book over tax basis of capital assets 718,476 767,709 ----------- ----------- 1,396,624 1,589,591 Less: Valuation allowance (496,400) (711,300) ----------- ----------- Net deferred tax asset $ 900,224 $ 878,291 =========== =========== The Company maintains a valuation allowance with respect to deferred tax assets as a result of the uncertainty of ultimate realization. At December 31, 2000, the Company has net operating loss carryforwards of approximately $4,500,000, expiring in various years through 2020. In addition, the Company has approximately $372,000 and $381,000 of alternative minimum tax credits as of December 31, 1999 and 2000, respectively, which have no expiration date. Unremitted earnings of foreign subsidiaries have been indefinitely reinvested. Income tax provisions differed from the taxes calculated at the statutory federal tax rate as follows: October 31, December 31, December 31, 1999 1999 2000 Taxes at statutory rate $(734,900) $ (59,500) $(291,300) State income taxes (104,100) (8,400) (41,300) Increase in deferred tax Valuation allowance 400,000 96,400 214,900 Foreign tax on assets -- -- 42,700 Foreign taxes and other 59,749 (23,117) 181,910 --------------------------------------- Income tax provision (benefit) $(379,251) $ 5,383 $ 106,910 ======================================= 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 year ended October 31, 1999, the two months ended December 31, 1999, and the year ended December 31, 2000, the Company estimates that the total amount spent on research and development activities was approximately, $257,000, $45,000, and $291,000, 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 date 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 $62,506 for the year ended October 31, 1999, $8,535 for the two months ended December 31, 1999, and $54,012 for the year ended December 31, 2000. F-13 CTI Industries Corporation and Subsidiaries Notes to the Consolidated Financial Statements 10. Related Party Transactions The Company obtains legal services from law firms in which several shareholders of the law firms are also shareholders of the Company, and in which one shareholder of the law firms is both a director and a shareholder of the Company. Legal fees incurred with these firms were $101,014 for the year ended October 31, 1999, $26,798 for the two months ended December 31, 1999, and $124,308 for the year ended December 31, 2000. The Company purchases packaging materials from entities in which shareholders of the Company maintained an ownership interest. Purchases from these affiliates were $251,203 for the year ended October 31, 1999, $43,847 for the two months ended December 31, 1999, and $235,299 for the year ended December 31, 2000. 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 December 31, 1999 and 2000. In November 1999, the Company sold one of its buildings to a related party. See Note 14. 11. Joint Venture Effective September 16, 1996, the Company entered into a joint venture agreement with a manufacturer in Mexico. The joint venture, CTF International, was formed to engage in the production and packaging of balloons. Under the agreement, both entities held a 50% interest in the joint venture. As of October 31, 1998, the Company had made a total capital investment in the joint venture of $77,975 and accounted for its proportionate share of income or loss using the equity method. In July 1999, the Company acquired the remaining 50% of CTF International for $40,000. 12. Investment in Subsidiary On January 26, 1998, the Company and CTI Mexico Corporation S.A. de C.V. ("CTI Mexico") entered into an agreement under which (i) the Company subscribed for 45% of the outstanding capital stock of CTI Mexico for $800,000, (ii) the Company loaned to CTI Mexico $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 CTI Mexico. The purchase of the capital stock was effective February 1, 1998. The Company accounted for the investment using the equity method. On November 12, 1999, the Company entered into an agreement to acquire additional shares of CTI Mexico, bringing the Company's Common Stock ownership to approximately 74%. The Company contributed to the capital of CTI Mexico certain outstanding indebtedness of CTI Mexico to the Company in the amount of $989,400, and certain equipment valued at $855,600, in exchange for capital stock of CTI Mexico. The acquisition resulted in the recording of goodwill in the amount of $1,216,704, which is being amortized over a period of 15 years. On March 8, 2000, the Company acquired an additional 2% interest in CTI Mexico. The new shares were purchased for $109,547, resulting in $83,250 of additional goodwill. F-14 CTI Industries Corporation and Subsidiaries Notes to the Consolidated Financial Statements 12. Investment in Subsidiary, continued Amortization of goodwill for the two months ended December 31, 1999 was $13,519, and for the year ended December 31, 2000 was $86,664. 13. Commitments and Contingencies Operating Leases The Company entered into a 10-year lease agreement for office and warehouse facilities in November 1999. Approximately 50% of the facility is subleased through March 2002. The Company's United Kingdom subsidiary also maintains a lease for office and warehouse space which expires in 2019. The Company leases office equipment under operating leases which expire on various dates between February 2002 and April 2004. The net lease expense was $109,056 for the year ended October 31, 1999, $46,468 for the two months ended December 31, 1999, and $338,213 for the year ended December 31, 2000. The future aggregate minimum net lease payments under existing agreements as of December 31, as follows: Lease payments Sublease Income Net 2001 $ 410,126 $ 135,374 $ 274,752 2002 360,398 49,800 310,598 2003 335,157 -- 335,157 2004 269,610 -- 269,610 2005 260,544 -- 260,544 Thereafter 1,524,368 -- 1,524,368 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 December 31, are as follows: 2001 $549,500 2002 308,250 2003 172,500 14. Sale/Leaseback of Building In November, 1999, the Company sold its building located next to its headquarters in Barrington, Illinois for a gain of $300,467, and entered into an agreement to lease back the facility. The building is owned by an entity in which officers/shareholders of the Company have a controlling interest. The gain realized on the sale was deferred and is being recognized into income over the 10 year lease term. The gain as previously reported in the 10-QSBT filed for the two month transition period ended December 31, 1999 has been adjusted to reflect the deferral of the gain over the life of the lease. F-15 CTI Industries Corporation and Subsidiaries Notes to the Consolidated Financial Statements 15. Stock Options On March 19, 1999, the Board of Directors approved for adoption, effective May 6, 1999, the 1999 Stock Option Plan ("Plan"). The Plan authorizes the grant of options to purchase up to an aggregate of 133,333 shares of the Company's Common Stock. As of December 31, 2000, 132,500 options had been granted under the 1999 Stock Option Plan. The options are exercisable immediately upon grant, and have a term of ten years. Under the Company's 1997 Stock Option Plan (effective July 1, 1997), a total of 100,000 shares of Common Stock are reserved for issuance under the Stock Option Plan. Options to purchase 99,667 shares of Common Stock have been granted as of October 31, 1998, and remain outstanding at December 31, 2000. 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 10,000 shares of the Company's Common Stock at an exercise price of $7.50 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 76,923 shares of the Company's Common Stock at an exercise price of $2.73 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 92,415 shares of the Company's Common Stock at an exercise price of $9.36 per share. The warrants had a term of five years. F-16 CTI Industries Corporation and Subsidiaries Notes to the Consolidated Financial Statements 15. Stock Options, continued In September, 1999, warrants to purchase 16,026 shares of the Company's Common Stock at an exercise price of $9.36 per share were cancelled and reissued at an exercise price of $1.69 per share. In November 1999, warrants issued in 1997 to purchase up to 76,389 shares of the Company's Common Stock for $9.36 were cancelled. New warrants to purchase up to 423,579 shares of the Company's Common Stock at $1.688 were issued. The new warrants expire on November 9, 2004. The following is a summary of the activity in the Company's stock option plans and other options issued for the periods ended October 31, 1999, December 31, 1999, and December 31, 2000.
Oct. 31, 1999 Dec. 31, 1999 Dec. 31, 2000 Outstanding, beginning of period 272,539 271,205 610,729 Granted 16,026 423,579 132,500 Exercised -- -- -- Cancelled (17,360) (84,055) -- -------------------------------------------- Outstanding at the end of period 271,205 610,729 743,229 ============================================ Weighted average exercise price per share $ 6.54 $ 2.81 $ 2.72 ============================================ Exercisable at end of period 271,205 610,729 743,229 ============================================
At December 31, 2000, available options to grant were 1,166. 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-17 CTI Industries Corporation and Subsidiaries Notes to the Consolidated Financial Statements 15. 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 for the year ended December 31, 2000: 2000 Net income (loss) As reported $ (877) Pro Forma (1,025) EPS As reported $ (0.73) Pro Forma $ (0.85) The pro forma effect of compensation cost based on the fair value method of the warrants issued in 1999 and 2000 was not significant. 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: 1999 2000 Expected life (years) 3.75 10 Volatility 20% 20% Risk-free interest rate 6.0% 6.1% Dividend yield -- -- The weighted average fair value of options granted during the years ending October 31, 1999 and December 31, 2000 was $0.44 and $1.12 per share, respectively. Significant option and warrant groups outstanding at December 31, 2000 and related weighted average price and remaining life information are as follows: Remaining Life Grant Date Outstanding Exercisable Exercise Price (Years) March 2000 132,500 132,500 $2.32 9 September 1998 65,667 65,667 $7.80 8 September 1997 35,000 35,000 $7.71 7 September 1999 16,026 16,026 $1.69 4 November 1999 423,579 423,579 $1.69 4 December 1996 70,457 70,457 $2.73 2 16. Stock Split On November 4, 1999, a one-for-three reverse stock split became effective. As a result of the reverse stock split, every three shares of the Company's Common Stock were reclassified and changed into one share of the Company's Common Stock with a new par value of $.195 per share, and every three shares of the Company's Class B Common Stock were reclassified and changed into one share of the Company's Class B Common Stock, with a new par value of $2.73 per share. The information presented in these financial statements has been restated to reflect the effect of the reverse split. F-18 CTI Industries Corporation and Subsidiaries Notes to the Consolidated Financial Statements 17. Earnings Per Share 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 the net earnings by the weighted average number of shares of common stock and common stock equivalents (redeemable common stock, stock options and warrants), unless anti-dilutive, during each period. Earnings per share for the periods ended October 31, 1999, December 31, 1999, and December 31, 2000 was computed as follows:
Year Ended Two months ended Year Ended October 31, 1999 December 31, 1999 December 31, 2000 BASIC Average shares outstanding: Weighted average shares Outstanding during period 1,269,984 1,222,549 1,207,944 Earnings: Net income (loss) $(1,782,270) $ (168,733) $ (876,960) Amount for per share Computation $(1,782,270) $ (168,733) $ (876,960) =========== =========== =========== Net earnings applicable to Common shares $ (1.40) $ (0.14) $ (0.73) =========== =========== =========== DILUTED Average shares outstanding: Weighted average shares Outstanding 1,269,984 1,222,549 1,207,944 Common stock equivalents (options/warrants) -- -- -- ----------- ----------- ----------- Weighted average shares Outstanding during period 1,269,984 1,222,549 1,207,944 Earnings: Net income $(1,782,270) $ (168,733) $ (876,960) Amount for per share Computation $(1,782,270) $ (168,733) $ (876,960) =========== =========== =========== Net earnings applicable to Common shares $ (1.40) $ (0.14) $ (0.73) =========== =========== ===========
F-19 CTI Industries Corporation and Subsidiaries Notes to the Consolidated Financial Statements 18. 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 subsidiaries have assets consisting primarily of trade accounts receivable, inventory and machinery and equipment. Sales and selected financial information by geographic area for the periods ended October 31, 1999, December 31, 1999, and December 31, 2000 are as follows:
United States United Kingdom Mexico Eliminations Consolidated Year ended 10/31/99 Revenues $ 17,388,540 $ 1,826,874 $ 437,410 $ (1,046,410) $ 18,606,414 Operating income (1,481,723) 130,829 (14,720) (1,365,614) Net income (1,874,456) 108,622 (16,436) (1,782,270) Total Assets $ 20,677,206 $ 839,891 $ 412,262 $ (490,372) $ 21,438,987 2 months ended 12/31/99 Revenues $ 3,219,118 $ 321,296 $ 876,401 $ (510,919) $ 3,905,896 Operating income 4,640 44,633 (3,234) (29,465) 16,574 Net income (128,814) 39,250 (61,464) (17,705) (168,733) Total Assets $ 19,957,219 $ 779,182 $ 5,317,292 $ (1,946,167) $ 24,107,526 Year ended 12/31/00 Revenues $ 19,132,267 $ 2,030,685 $ 5,162,131 $ (3,525,423) $ 22,799,660 Operating income 326,986 177,340 (310,019) 18,687 212,994 Net income (546,192) 144,898 (380,170) (95,496) (876,960) Total Assets $ 18,881,026 $ 723,178 $ 4,849,095 $ (2,234,509) $ 22,218,790
F-20 EX-10.14 2 d25424_ex10-14.txt LOAN AND SECURITY AGREEMENT EXHIBIT 10.14 Loan and Security Agreement by and between CONGRESS FINANCIAL CORPORATION (CENTRAL) as Lender and CTI INDUSTRIES CORPORATION as Borrower Dated: January 12, 2001 TABLE OF CONTENTS Page SECTION 1. DEFINITIONS .................................................... 1 SECTION 2. CREDIT FACILITIES .............................................. 9 2.1. Revolving Loans ................................................ 9 2.2. Letter of Credit Accommodations ................................ 10 2.3. Term Loan ...................................................... 13 2.4. Availability Reserves .......................................... 13 2.5. Licensed Inventory Limit ....................................... 13 SECTION 3. INTEREST AND FEES .............................................. 13 3.1. Interest ....................................................... 13 3.2. Closing Fee .................................................... 14 3.3. Servicing Fee .................................................. 14 3.4. Unused Line Fee ................................................ 15 SECTION 4. CONDITIONS PRECEDENT ........................................... 15 4.1. Conditions Precedent to Initial Loans and Letter of Credit Accommodations ....................................... 15 4.2. Conditions Precedent to All Loans and Letter of Credit Accommodations .......................................... 17 SECTION 5. GRANT OF SECURITY INTEREST ..................................... 17 SECTION 6. COLLECTION AND ADMINISTRATION .................................. 18 6.1. Borrower's Loan Account ........................................ 18 6.2. Statements ..................................................... 18 6.3. Collection of Accounts ......................................... 18 6.4. Payments ....................................................... 20 6.5. Authorization to Make Loans .................................... 20 6.6. Use of Proceeds ................................................ 20 SECTION 7. COLLATERAL REPORTING AND COVENANTS ............................. 21 7.1. Collateral Reporting ........................................... 21 7.2. Accounts Covenants ............................................. 21 7.3. Inventory Covenants ............................................ 23 7.4. Equipment Covenants ............................................ 24 7.5. Power of Attorney .............................................. 24 7.6. Right to Cure .................................................. 25 7.7. Access to Premises ............................................. 25 SECTION 8. REPRESENTATIONS AND WARRANTIES ................................. 25 8.1. Corporate Existence, Power and Authority; Subsidiaries ................................................... 26 -i- 8.2. Financial Statements; No Material Adverse Change ............... 26 8.3. Chief Executive Office; Collateral Locations ................... 26 8.4. Priority of Liens; Title to Properties ......................... 26 8.5. Tax Returns .................................................... 27 8.6. Litigation ..................................................... 27 8.7. Compliance with Other Agreements and Applicable Laws ........................................................... 27 8.8. Bank Accounts .................................................. 27 8.9. Accuracy and Completeness of Information ....................... 28 8.10. Survival of Warranties; Cumulative ............................. 28 8.11. Employee Benefits .............................................. 28 8.12. Environmental Compliance ....................................... 29 SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS ............................. 30 9.1. Maintenance of Existence ....................................... 30 9.2. New Collateral Locations ....................................... 30 9.3. Compliance with Laws, Regulations, Etc. ........................ 30 9.4. Payment of Taxes and Claims .................................... 31 9.5. Insurance ...................................................... 32 9.6. Financial Statements and Other Information ..................... 32 9.7. Sale of Assets, Consolidation, Merger, Dissolution, Etc. .............................................. 33 9.8. Encumbrances ................................................... 34 9.9. Indebtedness ................................................... 34 9.10. Loans, Investments, Guarantees, Etc. ........................... 35 9.11. Dividends and Redemptions ...................................... 36 9.12. Transactions with Affiliates ................................... 36 9.13. Additional Bank Accounts ....................................... 36 9.14. Costs and Expenses ............................................. 36 9.15. Further Assurances ............................................. 37 9.16. Compliance with ERISA .......................................... 38 SECTION 10. EVENTS OF DEFAULT AND REMEDIES ................................. 38 10.1. Events of Default .............................................. 38 10.2. Remedies ....................................................... 40 SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW .................................................. 42 11.1. Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver ..................................... 42 11.2. Waiver of Notices .............................................. 43 11.3. Amendments and Waivers ......................................... 43 11.4. Waiver of Counterclaims ........................................ 43 11.5. Indemnification ................................................ 44 SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS ............................... 44 12.1. Term ........................................................... 44 12.2. Notices ........................................................ 46 -ii- 12.3. Partial Invalidity ............................................. 46 12.4. Successors ..................................................... 46 12.5. Entire Agreement ............................................... 46 -iii- INDEX TO EXHIBITS AND SCHEDULES Exhibit A Information Certificate Exhibit B New West Letter of Credit Schedule 2.5A Form of Agreement re License Schedule 2.5B Specified Licensors Schedule 8.4 Existing Liens Schedule 8.8 Bank Accounts Schedule 8.12 Environmental Matters Schedule 9.9 Existing Indebtedness Schedule 9.10 Existing Loans, Advances and Guarantees Schedule 9.12 Affiliate Transactions -iv- LOAN AND SECURITY AGREEMENT This Loan and Security Agreement dated January 12, 2001 is entered into by and between Congress Financial Corporation (Central), an Illinois corporation ("Lender") and CTI Industries Corporation, a Delaware corporation ("Borrower"). W I T N E S S E T H WHEREAS, Borrower has requested that Lender enter into certain financing arrangements with Borrower pursuant to which Lender may make loans and provide other financial accommodations to Borrower; and WHEREAS, Lender is willing to make such loans and provide such financial accommodations on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the mutual conditions and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: SECTION 1. DEFINITIONS All terms used herein which are defined in Article 1 or Article 9 of the Uniform Commercial Code shall have the meanings given therein unless otherwise defined in this Agreement. All references to the plural herein shall also mean the singular and to the singular shall also mean the plural unless the context otherwise requires. All references to Borrower and Lender pursuant to the definitions set forth in the recitals hereto, or to any other person herein, shall include their respective successors and assigns. The words "hereof", "herein", "hereunder", "this Agreement" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not any particular provision of this Agreement and as this Agreement now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. The word "including" when used in this Agreement shall mean "including, without limitation". An Event of Default shall exist or continue or be continuing until such Event of Default is waived in accordance with Section 11.3 or is cured in a manner satisfactory to Lender, if such Event of Default is capable of being cured as determined by Lender. Any accounting term used herein unless otherwise defined in this Agreement shall have the meanings customarily given to such term in accordance with GAAP. For purposes of this Agreement, the following terms shall have the respective meanings given to them below: 1.1. "Accounts" shall mean all present and future rights of Borrower to payment for goods sold or leased or for services rendered, which are not evidenced by instruments or chattel paper, and whether or not earned by performance. 1.2. "Appraised Value" shall mean the appraised value of Inventory, with such appraised value determined on a net orderly liquidation basis, by an appraiser acceptable to Lender. The Appraised Value shall be based on the most recent such appraisal obtained at the request of Lender. 1.3. "Availability Reserves" shall mean, as of any date of determination, such amounts as Lender may from time to time establish and revise in good faith reducing the amount of Revolving Loans and Letter of Credit Accommodations which would otherwise be available to Borrower under the lending formula(s) provided for herein: (a) to reflect events, conditions, contingencies or risks which, as determined by Lender in good faith, do or may affect either (i) the Collateral or any other property which is security for the Obligations or its value, (ii) the assets, business or prospects of Borrower or any Obligor or (iii) the security interests and other rights of Lender in the Collateral (including the enforceability, perfection and priority thereof) or (b) to reflect Lender's good faith belief that any collateral report or financial information furnished by or on behalf of Borrower or any Obligor to Lender is or may have been incomplete, inaccurate or misleading in any material respect or (c) to reflect outstanding Letter of Credit Accommodations as provided in Section 2.2 hereof or (d) in respect of any state of facts which Lender determines in good faith constitutes an Event of Default or may, with notice or passage of time or both, constitute an Event of Default. Without limiting the foregoing, Lender shall establish reserves (in such amounts as are determined by Lender in good faith) for accrued rebates. 1.4. "Blocked Accounts" shall have the meaning set forth in Section 6.3 hereof. 1.5. "Code" shall mean the Internal Revenue Code of 1986, as the same now exists or may from time to time hereafter be amended, modified, recodified or supplemented, together with all rules, regulations and interpretations thereunder or related thereto. 1.6. "Collateral" shall have the meaning set forth in Section 5 hereof. 1.7. "Eckerd" shall mean Eckerd Corporation. 1.8. "Eligible Accounts" shall mean Accounts created by Borrower which are and continue to be acceptable to Lender based on the criteria set forth below. In general, Accounts shall be Eligible Accounts if: (a) such Accounts arise from the actual and bona fide sale and delivery of goods by Borrower or rendition of services by Borrower in the ordinary course of its business which transactions are completed in accordance with the terms and provisions contained in any documents related thereto; (b) such Accounts are not unpaid more than ninety (90) days after the date of the original invoice for them; (c) such Accounts comply with the terms and conditions contained in Section 7.2(c) of this Agreement; -2- (d) such Accounts do not arise from sales on consignment, guaranteed sale, sale and return, sale on approval, or other terms under which payment by the account debtor may be conditional or contingent, except for Accounts arising from sales to Eckerd in the ordinary course of Borrower's business pursuant to past practices pursuant to which Eckerd has a right of return with respect to up to thirty percent (30%) of such Accounts (but only so long as the amount of Accounts owing by Eckerd reported to Lender and reflected on Borrower's books has been reduced by at least twenty percent (20%) of such Accounts); (e) the chief executive office of the account debtor with respect to such Accounts is located in the United States of America, or, at Lender's option, if either: (i) the account debtor has delivered to Borrower an irrevocable letter of credit issued or confirmed by a bank satisfactory to Lender and payable only in the United States of America and in U.S. dollars, sufficient to cover such Account, in form and substance satisfactory to Lender and, if required by Lender, the original of such letter of credit has been delivered to Lender or Lender's agent and the issuer thereof notified of the assignment of the proceeds of such letter of credit to Lender, or (ii) such Account is subject to credit insurance payable to Lender issued by an insurer and on terms and in an amount acceptable to Lender, or (iii) such Account is otherwise acceptable in all respects to Lender (subject to such lending formula with respect thereto as Lender may determine); (f) such Accounts do not consist of progress billings, bill and hold invoices or retainage invoices, except as to bill and hold invoices, if Lender shall have received an agreement in writing from the account debtor, in form and substance satisfactory to Lender, confirming the unconditional obligation of the account debtor to take the goods related thereto and pay such invoice; (g) the account debtor with respect to such Accounts has not asserted a counterclaim, defense or dispute and does not have, and does not engage in transactions which may give rise to, a contra or any right of setoff against such Accounts (but the portion of the Accounts of such account debtor in excess of the amount at any time and from time to time owed by Borrower to such account debtor or claimed owed by such account debtor may be deemed Eligible Accounts); (h) there are no facts, events or occurrences which would impair the validity, enforceability or collectability of such Accounts or reduce the amount payable or delay payment thereunder; (i) such Accounts are subject to the first priority, valid and perfected security interest of Lender and any goods giving rise thereto are not, and were not at the time of the sale thereof, subject to any liens except those permitted in this Agreement; (j) neither the account debtor nor any officer or employee of the account debtor with respect to such Accounts is an officer, employee or agent of or affiliated with Borrower directly or indirectly by virtue of family membership, ownership, control, management or otherwise (provided, that Accounts owing by Packaging Systems, Inc. up to $250,000 shall be Eligible Accounts even though John H. Schwan is an officer of Packaging -3- Systems, Inc. so long as such Accounts are on terms substantially the same as the terms of Borrower's other Accounts and such Accounts are otherwise Eligible Accounts); (k) the account debtors with respect to such Accounts are not any foreign government, the United States of America, any State, political subdivision, department, agency or instrumentality thereof, unless, if the account debtor is the United States of America, any State, political subdivision, department, agency or instrumentality thereof, upon Lender's request, the Federal Assignment of Claims Act of 1940, as amended or any similar State or local law, if applicable, has been complied with in a manner satisfactory to Lender; (l) there are no proceedings or actions which are threatened or pending against the account debtors with respect to such Accounts which might result in any material adverse change in any such account debtor's financial condition; (m) such Accounts of a single account debtor or its affiliates do not constitute more than twelve and one-half percent (12.5%) of all otherwise Eligible Accounts (but the portion of the Accounts not in excess of such percentage may be deemed Eligible Accounts), except for (i) Accounts of Eckerd or its affiliates to the extent such Accounts do not constitute more than fifteen percent (15%) of all otherwise Eligible Accounts (but the portion of the Accounts not in excess of such percentage may be deemed Eligible Accounts), and (ii) Accounts of New West to the extent permitted under clause (q) below; (n) such Accounts are not owed by an account debtor who has Accounts unpaid more than ninety (90) days after the date of the original invoice for them which constitute more than fifty percent (50%) of the total Accounts of such account debtor; (o) such Accounts are owed by account debtors whose total indebtedness to Borrower does not exceed the credit limit with respect to such account debtors as determined by Lender from time to time (but the portion of the Accounts not in excess of such credit limit may be deemed Eligible Accounts); (p) such Accounts are owed by account debtors deemed creditworthy at all times by Lender, as determined by Lender; and (q) such Accounts are owed by New West to the extent (i) the total indebtedness owing thereunder does not exceed the New West Credit Sublimit (but the portion of the Accounts not in excess of such credit limit may be deemed Eligible Accounts) and (ii) such Accounts are otherwise Eligible Accounts. General criteria for Eligible Accounts may be established and revised from time to time by Lender in good faith. Any Accounts which are not Eligible Accounts shall nevertheless be part of the Collateral. 1.9. "Eligible Inventory" shall mean Inventory consisting of finished goods held for resale in the ordinary course of the business of Borrower and raw materials and work-in-process for such finished goods which are acceptable to Lender based on the criteria -4- set forth below. In general, Eligible Inventory shall not include (a) components which are not part of finished goods; (b) spare parts for equipment; (c) supplies used or consumed in Borrower's business; (d) Inventory at premises other than those owned and controlled by Borrower, except if Lender shall have received an agreement in writing from the person in possession of such Inventory and/or the owner or operator of such premises in form and substance satisfactory to Lender acknowledging Lender's first priority security interest in the Inventory, waiving security interests and claims by such person against the Inventory and permitting Lender access to, and the right to remain on, the premises so as to exercise Lender's rights and remedies and otherwise deal with the Collateral; (e) Inventory subject to a security interest or lien in favor of any person other than Lender except those permitted in this Agreement; (f) bill and hold goods; (g) unserviceable, obsolete or slow moving Inventory; (h) Inventory which is not subject to the first priority, valid and perfected security interest of Lender; (i) returned (except for Inventory returned in the ordinary course of Borrower's business that will be resold as new and unused Inventory by Borrower in the ordinary course of its business), damaged and/or defective Inventory; (j) any Licensed Inventory with respect to which the applicable license agreement has terminated; (k) the portion of the Licensed Inventory, which in the aggregate, exceeds the Licensed Inventory Limit unless the licensor, with respect to such Licensed Inventory, has agreed to permit Lender to dispose of such Licensed Inventory on terms and conditions satisfactory to Lender; and (l) Inventory purchased or sold on consignment. General criteria for Eligible Inventory may be established and revised from time to time by Lender in good faith. Any Inventory which is not Eligible Inventory shall nevertheless be part of the Collateral. 1.10. "Environmental Laws" shall mean all foreign, Federal, State and local laws (including common law), legislation, rules, codes, licenses, permits (including any conditions imposed therein), authorizations, judicial or administrative decisions, injunctions or agreements between Borrower and any governmental authority, (a) relating to pollution and the protection, preservation or restoration of the environment (including air, water vapor, surface water, ground water, drinking water, drinking water supply, surface land, subsurface land, plant and animal life or any other natural resource), or to human health or safety, (b) relating to the exposure to, or the use, storage, recycling, treatment, generation, manufacture, processing, distribution, transportation, handling, labeling, production, release or disposal, or threatened release, of Hazardous Materials, or (c) relating to all laws with regard to recordkeeping, notification, disclosure and reporting requirements respecting Hazardous Materials. The term "Environmental Laws" includes (i) the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Federal Superfund Amendments and Reauthorization Act, the Federal Water Pollution Control Act of 1972, the Federal Clean Water Act, the Federal Clean Air Act, the Federal Resource Conservation and Recovery Act of 1976 (including the Hazardous and Solid Waste Amendments thereto), the Federal Solid Waste Disposal and the Federal Toxic Substances Control Act, the Federal Insecticide, Fungicide and Rodenticide Act, and the Federal Safe Drinking Water Act of 1974, (ii) applicable state counterparts to such laws, and (iii) any common law or equitable doctrine that may impose liability or obligations for injuries or damages due to, or threatened as a result of, the presence of or exposure to any Hazardous Materials. -5- 1.11. "Equipment" shall mean all of Borrower's now owned and hereafter acquired equipment, machinery, computers and computer hardware and software (whether owned or licensed), vehicles, tools, furniture, fixtures, all attachments, accessions and property now or hereafter affixed thereto or used in connection therewith, and substitutions and replacements thereof, wherever located. 1.12. "ERISA" shall mean the United States Employee Retirement Income Security Act of 1974, as the same now exists or may hereafter from time to time be amended, modified, recodified or supplemented, together with all rules, regulations and interpretations thereunder or related thereto. 1.13. "ERISA Affiliate" shall mean any person required to be aggregated with Borrower or any of its Subsidiaries under Sections 414(b), 414(c), 414(m) or 414(o) of the Code. 1.14. "Event of Default" shall mean the occurrence or existence of any event or condition described in Section 10.1 hereof. 1.15. "Excess Availability" shall mean the amount, as determined by Lender, calculated at any time, equal to: (a) the lesser of: (i) the amount of the Revolving Loans available to Borrower as of such time based on the applicable lending formulas multiplied by the Net Amount of Eligible Accounts and the Value of Eligible Inventory, as determined by Lender, and subject to the sublimits and Availability Reserves from time to time established by Lender hereunder, and (ii) the Maximum Credit (less the then outstanding principal amount of the Term Loan), minus (b) the sum of: (i) the amount of all then outstanding and unpaid Obligations (but not including for this purpose the then outstanding principal amount of the Term Loan), plus (ii) the aggregate amount of all then outstanding and unpaid trade payables of Borrower which are more than sixty (60) days past due as of such time, plus (iii) the amount of checks issued by Borrower to pay trade payables, but not yet sent and the book overdraft of Borrower. 1.16. "Financing Agreements" shall mean, collectively, this Agreement and all notes, guarantees, security agreements and other agreements, documents and instruments now or at any time hereafter executed and/or delivered by Borrower or any Obligor in connection with this Agreement, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.17. "GAAP" shall mean generally accepted accounting principles in the United States of America as in effect from time to time as set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and the statements and pronouncements of the Financial Accounting Standards Board which are applicable to the circumstances as of the date of determination consistently applied. 1.18. "Hazardous Materials" shall mean any hazardous, toxic or dangerous substances, materials and wastes, including hydrocarbons (including naturally occurring or -6- man-made petroleum and hydrocarbons), flammable explosives, asbestos, urea formaldehyde insulation, radioactive materials, biological substances, polychlorinated biphenyls, pesticides, herbicides and any other kind and/or type of pollutants or contaminants (including materials which include hazardous constituents), sewage, sludge, industrial slag, solvents and/or any other similar substances, materials, or wastes and including any other substances, materials or wastes that are or become regulated under any Environmental Law (including any that are or become classified as hazardous or toxic under any Environmental Law). 1.19. "Information Certificate" shall mean the Information Certificate of Borrower constituting Exhibit A hereto containing material information with respect to Borrower, its business and assets provided by or on behalf of Borrower to Lender in connection with the preparation of this Agreement and the other Financing Agreements and the financing arrangements provided for herein. 1.20. "Inventory" shall mean all of Borrower's now owned and hereafter existing or acquired raw materials, work in process, finished goods and all other inventory of whatsoever kind or nature, wherever located. 1.21. "Licensed Inventory" shall mean Inventory, the sale of which by Borrower is subject to the terms of a license agreement. 1.22. "Licensed Inventory Limit" shall mean $1,500,000 as such limit may be reduced pursuant to Section 2.5. 1.23. "Letter of Credit Accommodations" shall mean the letters of credit, merchandise purchase or other guaranties which are from time to time either (a) issued or opened by Lender for the account of Borrower or any Obligor or (b) with respect to which Lender has agreed to indemnify the issuer or guaranteed to the issuer the performance by Borrower of its obligations to such issuer. 1.24. "Loans" shall mean the Revolving Loans and the Term Loan. 1.25. "Maximum Credit" shall mean the amount of $9,500,000. 1.26. "Net Amount of Eligible Accounts" shall mean the gross amount of Eligible Accounts less (a) sales, excise or similar taxes included in the amount thereof and (b) returns, discounts, claims, credits and allowances of any nature at any time issued, owing, granted, outstanding, available or claimed with respect thereto. 1.27. "New West" shall mean New West Products, Inc. 1.28. "New West Credit Sublimit" shall mean the lesser of (A) the sum of (x) $850,000 plus (y) the lesser of (i) the undrawn face amount of the New West Letter of Credit and (ii) $250,000, and (B) thirty-five percent (35%) of all Accounts. 1.29. "New West Joint Venture" shall mean the joint venture between Borrower and New West to manufacture and sell space bags. -7- 1.30. "New West Letter of Credit" shall mean that certain letter of credit in the face amount of $250,000 issued by American National Bank & Trust Company of Chicago for the account of John H. Schwan, a copy of which is attached hereto as Exhibit B. 1.31. "Obligations" shall mean any and all Revolving Loans, the Term Loan, Letter of Credit Accommodations and all other obligations, liabilities and indebtedness of every kind, nature and description owing by Borrower to Lender and/or its affiliates, including principal, interest, charges, fees, costs and expenses, however evidenced, whether as principal, surety, endorser, guarantor or otherwise, whether arising under this Agreement or otherwise, whether now existing or hereafter arising, whether arising before, during or after the initial or any renewal term of this Agreement or after the commencement of any case with respect to Borrower under the United States Bankruptcy Code or any similar statute (including the payment of interest and other amounts which would accrue and become due but for the commencement of such case, whether or not such amounts are allowed or allowable in whole or in part in such case), whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, secured or unsecured, and however acquired by Lender. 1.32. "Obligor" shall mean any guarantor, endorser, acceptor, surety or other person liable on or with respect to the Obligations or who is the owner of any property which is security for the Obligations, other than Borrower. 1.33. "Payment Account" shall have the meaning set forth in Section 6.3 hereof. 1.34. "Person" or "person" shall mean any individual, sole proprietorship, partnership, corporation (including any corporation which elects subchapter S status under the Internal Revenue Code of 1986, as amended), limited liability company, limited liability partnership, business trust, unincorporated association, joint stock corporation, trust, joint venture or other entity or any government or any agency or instrumentality or political subdivision thereof. 1.35. "Prime Rate" shall mean the rate from time to time publicly announced by First Union National Bank, or its successors, as its prime rate, whether or not such announced rate is the best rate available at such bank. 1.36. "Real Estate Documents" means the Real Estate Mortgage, the Secured Promissory Note for $173,000 due 2004, the Secured Promissory Note for $2,700,000 due 2006, the Assignment of Leases and Rents and the Environmental Indemnity, together with the agreements, instruments and documents executed in connection therewith. 1.37. "Records" shall mean all of Borrower's present and future books of account of every kind or nature, purchase and sale agreements, invoices, ledger cards, bills of lading and other shipping evidence, statements, correspondence, memoranda, credit files and other data relating to the Collateral or any account debtor, together with the tapes, disks, diskettes and other data and software storage media and devices, file cabinets or containers in -8- or on which the foregoing are stored (including any rights of Borrower with respect to the foregoing maintained with or by any other person). 1.38. "Revolving Loans" shall mean the loans now or hereafter made by Lender to or for the benefit of Borrower on a revolving basis (involving advances, repayments and readvances) as set forth in Section 2.1 hereof. 1.39. "Term Loan" shall mean the term loan made by Lender to Borrower as provided for in Section 2.3 hereof. 1.40. "Value" shall mean, as determined by Lender in good faith, with respect to Inventory, the lower of (a) cost computed on a first-in-first-out basis in accordance with GAAP or (b) market value. SECTION 2. CREDIT FACILITIES 2.1. Revolving Loans. (a) Subject to and upon the terms and conditions contained herein, Lender agrees to make Revolving Loans to Borrower from time to time in amounts requested by Borrower up to the amount equal to the sum of: (i) eighty-five percent (85%) of the Net Amount of Eligible Accounts, plus (ii) the lesser of: (A) the sum of fifty percent (50%) of the Value of Eligible Inventory (provided, that the foregoing advance rate applicable to Eligible Inventory shall at no time exceed the quotient, expressed as a percentage, equal to eighty-seven percent (87%) multiplied by the Appraised Value of Eligible Inventory, divided by the Value of such Eligible Inventory), or (B) $3,500,000, less (iii) any Availability Reserves. (b) Lender may, in its discretion, from time to time, upon not less than five (5) days prior notice to Borrower, (i) reduce the lending formula with respect to Eligible Accounts to the extent that Lender determines in good faith that: (A) the dilution with respect to the Accounts for any period (based on the ratio of (1) the aggregate amount of reductions in Accounts other than as a result of payments in cash to (2) the aggregate amount of total sales) has increased in any material respect or may be reasonably anticipated to increase in any material respect above historical levels, or (B) the general creditworthiness of account debtors has declined or (ii) reduce the lending formula(s) with respect to Eligible Inventory to the extent that Lender determines that: (A) the number of days of the turnover of the Inventory for any period has changed in any material respect or (B) the liquidation value of the Eligible Inventory, or any category thereof, has decreased, or (C) the nature and quality of the Inventory has deteriorated. In determining whether to reduce the lending -9- formula(s), Lender may consider events, conditions, contingencies or risks which are also considered in determining Eligible Accounts, Eligible Inventory or in establishing Availability Reserves. (c) Except in Lender's discretion, the aggregate amount of the Loans and the Letter of Credit Accommodations outstanding at any time shall not exceed the Maximum Credit. In the event that the outstanding amount of any component of the Revolving Loans, or the aggregate amount of the outstanding Revolving Loans and Letter of Credit Accommodations, exceed the amounts available under the lending formulas, the sublimits for Letter of Credit Accommodations set forth in Section 2.2(d) or the Maximum Credit (less the outstanding principal balance of the Term Loan), as applicable, such event shall not limit, waive or otherwise affect any rights of Lender in that circumstance or on any future occasions and Borrower shall, upon demand by Lender, which may be made at any time or from time to time, immediately repay to Lender the entire amount of any such excess(es) for which payment is demanded. (d) For purposes only of applying the sublimit on Revolving Loans based on Eligible Inventory pursuant to Section 2.1(a)(ii)(B), Lender may treat the then undrawn amounts of outstanding Letter of Credit Accommodations for the purpose of purchasing Eligible Inventory as Revolving Loans to the extent Lender is in effect basing the issuance of the Letter of Credit Accommodations on the Value of the Eligible Inventory being purchased with such Letter of Credit Accommodations. In determining the actual amounts of such Letter of Credit Accommodations to be so treated for purposes of the sublimit, the outstanding Revolving Loans and Availability Reserves shall be attributed first to any components of the lending formulas in Section 2.1(a) that are not subject to such sublimit, before being attributed to the components of the lending formulas subject to such sublimit. 2.2. Letter of Credit Accommodations. (a) Subject to and upon the terms and conditions contained herein, at the request of Borrower, Lender agrees to provide or arrange for Letter of Credit Accommodations for the account of Borrower containing terms and conditions acceptable to Lender and the issuer thereof. Any payments made by Lender to any issuer thereof and/or related parties in connection with the Letter of Credit Accommodations shall constitute additional Revolving Loans to Borrower pursuant to this Section 2. (b) In addition to any charges, fees or expenses charged by any bank or issuer in connection with the Letter of Credit Accommodations, Borrower shall pay to Lender a letter of credit fee at a rate equal to one and one-half percent (1.5%) per annum on the daily outstanding balance of the Letter of Credit Accommodations for the immediately preceding month (or part thereof), payable in arrears as of the first day of each succeeding month, except that Borrower shall pay to Lender such letter of credit fee, at Lender's option, without notice, at a rate equal to three and one-half percent (3.5%) per annum on such daily outstanding balance for: (i) the period from and after the date of termination or non-renewal hereof until Lender has received full and final payment of all Obligations (notwithstanding entry of a judgment against Borrower) and (ii) the period from and after the date of the -10- occurrence of an Event of Default for so long as such Event of Default is continuing as determined by Lender. Such letter of credit fee shall be calculated on the basis of a three hundred sixty (360) day year and actual days elapsed and the obligation of Borrower to pay such fee shall survive the termination or non-renewal of this Agreement. (c) No Letter of Credit Accommodations shall be available unless on the date of the proposed issuance of any Letter of Credit Accommodations, the Revolving Loans available to Borrower (subject to the Maximum Credit and any Availability Reserves) are equal to or greater than: (i) if the proposed Letter of Credit Accommodation is for the purpose of purchasing Eligible Inventory and all documents of title with respect to such Eligible Inventory have been consigned to the issuing bank, the sum of (A) the percentage equal to one hundred percent (100%) minus the then applicable percentage set forth in Section 2.1(a)(ii)(A) above of the Value of such Eligible Inventory, plus (B) freight, taxes, duty and other amounts which Lender estimates must be paid in connection with such Inventory upon arrival and for delivery to one of Borrower's locations for Eligible Inventory within the United States of America and (ii) if the proposed Letter of Credit Accommodation is for any other purpose, an amount equal to one hundred percent (100%) of the face amount thereof and all other commitments and obligations made or incurred by Lender with respect thereto. Effective on the issuance of each Letter of Credit Accommodation, an Availability Reserve shall be established in the applicable amount set forth in Section 2.2(c)(i) or Section 2.2(c)(ii). (d) Except in Lender's discretion, the amount of all outstanding Letter of Credit Accommodations and all other commitments and obligations made or incurred by Lender in connection therewith shall not at any time exceed $1,500,000. At any time an Event of Default exists or has occurred and is continuing, upon Lender's request, Borrower will either furnish cash collateral to secure the reimbursement obligations to the issuer in connection with any Letter of Credit Accommodations or furnish cash collateral to Lender for the Letter of Credit Accommodations, and in either case, the Revolving Loans otherwise available to Borrower shall not be reduced as provided in Section 2.2(c) to the extent of such cash collateral. (e) Borrower shall indemnify and hold Lender harmless from and against any and all losses, claims, damages, liabilities, costs and expenses which Lender may suffer or incur in connection with any Letter of Credit Accommodations and any documents, drafts or acceptances relating thereto, including any losses, claims, damages, liabilities, costs and expenses due to any action taken by any issuer or correspondent with respect to any Letter of Credit Accommodation. Borrower assumes all risks with respect to the acts or omissions of the drawer under or beneficiary of any Letter of Credit Accommodation and for such purposes the drawer or beneficiary shall be deemed Borrower's agent. Borrower assumes all risks for, and agrees to pay, all foreign, Federal, State and local taxes, duties and levies relating to any goods subject to any Letter of Credit Accommodations or any documents, drafts or acceptances thereunder. Borrower hereby releases and holds Lender harmless from and against any acts, waivers, errors, delays or omissions, whether caused by Borrower, by any issuer or correspondent or otherwise with respect to or relating to any Letter of Credit -11- Accommodation. The provisions of this Section 2.2(e) shall survive the payment of Obligations and the termination or non-renewal of this Agreement. (f) Nothing contained herein shall be deemed or construed to grant Borrower any right or authority to pledge the credit of Lender in any manner. Lender shall have no liability of any kind with respect to any Letter of Credit Accommodation provided by an issuer other than Lender unless Lender has duly executed and delivered to such issuer the application or a guarantee or indemnification in writing with respect to such Letter of Credit Accommodation. Borrower shall be bound by any interpretation made in good faith by Lender, or any other issuer or correspondent under or in connection with any Letter of Credit Accommodation or any documents, drafts or acceptances thereunder, notwithstanding that such interpretation may be inconsistent with any instructions of Borrower. Lender shall have the sole and exclusive right and authority to, and Borrower shall not: (i) at any time an Event of Default exists or has occurred and is continuing, (A) approve or resolve any questions of non-compliance of documents, (B) give any instructions as to acceptance or rejection of any documents or goods or (C) execute any and all applications for steamship or airway guaranties, indemnities or delivery orders, and (ii) at all times, (A) grant any extensions of the maturity of, time of payment for, or time of presentation of, any drafts, acceptances, or documents, and (B) agree to any amendments, renewals, extensions, modifications, changes or cancellations of any of the terms or conditions of any of the applications, Letter of Credit Accommodations, or documents, drafts or acceptances thereunder or any letters of credit included in the Collateral. Lender may take such actions either in its own name or in Borrower's name. (g) Any rights, remedies, duties or obligations granted or undertaken by Borrower to any issuer or correspondent in any application for any Letter of Credit Accommodation, or any other agreement in favor of any issuer or correspondent relating to any Letter of Credit Accommodation, shall be deemed to have been granted or undertaken by Borrower to Lender. Any duties or obligations undertaken by Lender to any issuer or correspondent in any application for any Letter of Credit Accommodation, or any other agreement by Lender in favor of any issuer or correspondent relating to any Letter of Credit Accommodation, shall be deemed to have been undertaken by Borrower to Lender and to apply in all respects to Borrower. 2.3. Term Loan. Lender is making a Term Loan to Borrower in the original principal amount of $1,426,000. The Term Loan is (a) evidenced by a Term Promissory Note in such original principal amount duly executed and delivered by Borrower to Lender concurrently herewith; (b) to be repaid, together with interest and other amounts, in accordance with this Agreement, the Term Promissory Note, and the other Financing Agreements and (c) secured by all of the Collateral. In addition to monthly principal payments set forth in the Term Promissory Note, in the event at any time the outstanding principal balance of the Term Loan exceeds eighty-five percent (85%) of the appraised net orderly liquidation value (based on the appraisals required under Section 7.4) of the Equipment of Borrower that is subject to the first priority lien of Lender and that is otherwise acceptable to Lender, at the written request -12- of Lender, Borrower shall make a mandatory prepayment of the Term Loan in an amount equal to such excess. Any such mandatory prepayment shall be applied to the installments owing in respect of the Term Loan in the inverse order of their maturity. 2.4. Availability Reserves. All Revolving Loans otherwise available to Borrower pursuant to the lending formulas and subject to the Maximum Credit and other applicable limits hereunder shall be subject to Lender's continuing right to establish and revise Availability Reserves. 2.5. Licensed Inventory Limit. In the event Lender has not received an executed Agreement re License in the form of Schedule 2.5A from each of the licensors listed on Schedule 2.5B on or before March 31, 2001, Lender may reduce the Licensed Inventory Limit in its good faith discretion. SECTION 3. INTEREST AND FEES 3.1. Interest. (a) Borrower shall pay to Lender interest on (i) the outstanding principal amount of the non-contingent Obligations (other than the Term Loan) at the rate of one-half of one percent (0.5%) per annum in excess of the Prime Rate (the "Revolving Rate") and (ii) on the outstanding principal amount of the Term Loan at the rate of three-quarters of one percent (0.75%) per annum in excess of the Prime Rate (the "Term Rate"), except that, at Lender's option, without notice, Borrower shall pay to Lender interest at the rate of two percent (2%) per annum in excess of the rate otherwise payable hereunder: (i) on the non-contingent Obligations (including the Term Loan) for (A) the period from and after the date of termination or non-renewal hereof until such time as Lender has received full and final payment of all such Obligations (notwithstanding entry of any judgment against Borrower), and (B) the period from and after the date of the occurrence of an Event of Default for so long as such Event of Default is continuing as determined by Lender and (ii) on the Revolving Loans at any time outstanding in excess of the amounts available to Borrower under Section 2 (whether or not such excess(es), arise or are made with or without Lender's knowledge or consent and whether made before or after an Event of Default); provided, that if no Event of Default exists and the audited financial statements of Borrower for any twelve (12) month fiscal year ending on or after December 31, 2001 show that Borrower's net income before taxes exceeded $750,000 for such fiscal year, on the tenth day after Lender's receipt of such financial statements, the Revolving Rate and the Term Rate shall each be reduced twenty-five (25) basis points; provided, further, that the Revolving Rate and the Term Rate may not be reduced more than once during the term of this Agreement and if the audited financial statements of Borrower for any twelve (12) month fiscal year ending on or after December 31, 2002 show a net loss for such fiscal year, the Revolving Rate shall revert to one-half of one percent (0.5%) per annum in excess of the Prime Rate and the Term Rate shall revert to three-quarters of one percent (0.75%) per annum in excess of the Prime Rate. -13- For purposes hereof, net income and net loss shall be calculated exclusive of nonrecurring or one time gains and extraordinary gains. (b) Interest shall be payable by Borrower to Lender monthly in arrears not later than the first day of each calendar month and shall be calculated on the basis of a three hundred sixty (360) day year and actual days elapsed. The interest rate shall increase or decrease by an amount equal to each increase or decrease in the Prime Rate effective on the first day of the month after any change in such Prime Rate is announced. The increase or decrease shall be based on the Prime Rate in effect on the last day of the month in which any such change occurs. All interest accruing hereunder on and after an Event of Default or termination or non-renewal hereof shall be payable on demand. In no event shall charges constituting interest payable by Borrower to Lender exceed the maximum amount or the rate permitted under any applicable law or regulation, and if any part or provision of this Agreement is in contravention of any such law or regulation, such part or provision shall be deemed amended to conform thereto. 3.2. Closing Fee. Borrower shall pay to Lender as a closing fee the amount of $71,250, which shall be fully earned as of the date hereof, and of which $35,625 shall be payable on the date hereof and of which $35,625 shall be payable upon the earlier of the first anniversary of the date hereof and the termination of this Agreement. 3.3. Servicing Fee. Borrower shall pay to Lender quarterly a servicing fee in an amount equal to $3,000 in respect of Lender's services for each quarter (or part thereof) while this Agreement remains in effect and for so long thereafter as any of the Obligations are outstanding, which fee shall be fully earned as of and payable in advance on the date hereof and on the first day of each quarter hereafter. 3.4. Unused Line Fee. Borrower shall pay to Lender monthly an unused line fee at a rate equal to three-eighths of one percent (0.375%) per annum calculated upon the amount by which the Maximum Credit exceeds the average daily principal balance of the outstanding Loans and Letter of Credit Accommodations during the immediately preceding month (or part thereof) while this Agreement is in effect and for so long thereafter as any of the Obligations are outstanding, which fee shall be payable on the first day of each month in arrears. -14- SECTION 4. CONDITIONS PRECEDENT 4.1. Conditions Precedent to Initial Loans and Letter of Credit Accommodations. Each of the following is a condition precedent to Lender making the initial Loans and providing the initial Letter of Credit Accommodations hereunder: (a) Lender shall have received, in form and substance satisfactory to Lender, all releases, terminations and such other documents as Lender may request to evidence and effectuate the termination by the existing lender or lenders to Borrower of their respective financing arrangements with Borrower and the termination and release by it or them, as the case may be, of any interest in and to any assets and properties of Borrower and each Obligor, duly authorized, executed and delivered by it or each of them, including, but not limited to, (i) UCC termination statements for all UCC financing statements previously filed by it or any of them or their predecessors, as secured party and Borrower or any Obligor, as debtor and (ii) satisfactions and discharges of any mortgages, deeds of trust or deeds to secure debt by Borrower or any Obligor in favor of such existing lender or lenders, in form acceptable for recording in the appropriate government office; (b) Lender shall have received evidence, in form and substance satisfactory to Lender, that Lender has valid perfected and first priority security interests in and liens upon the Collateral and any other property which is intended to be security for the Obligations or the liability of any Obligor in respect thereof, subject only to the security interests and liens permitted herein or in the other Financing Agreements; (c) all requisite corporate action and proceedings in connection with this Agreement and the other Financing Agreements shall be satisfactory in form and substance to Lender, and Lender shall have received all information and copies of all documents, including records of requisite corporate action and proceedings which Lender may have requested in connection therewith, such documents where requested by Lender or its counsel to be certified by appropriate corporate officers or governmental authorities; (d) no material adverse change shall have occurred in the assets, business or prospects of Borrower since the date of Lender's latest field examination and no change or event shall have occurred which would impair the ability of Borrower or any Obligor to perform its obligations hereunder or under any of the other Financing Agreements to which it is a party or of Lender to enforce the Obligations or realize upon the Collateral; (e) Lender shall have completed a field review of the Records and such other information with respect to the Collateral as Lender may require to determine the amount of Revolving Loans available to Borrower, the results of which shall be satisfactory to Lender, not more than seven (7) business days prior to the date hereof; (f) Lender shall have received, in form and substance satisfactory to Lender, all consents, waivers, acknowledgments and other agreements from third persons -15- which Lender may deem necessary or desirable in order to permit, protect and perfect its security interests in and liens upon the Collateral or to effectuate the provisions or purposes of this Agreement and the other Financing Agreements, including acknowledgments by lessors, mortgagees and warehousemen of Lender's security interests in the Collateral, waivers by such persons of any security interests, liens or other claims by such persons to the Collateral and agreements permitting Lender access to, and the right to remain on, the premises to exercise its rights and remedies and otherwise deal with the Collateral; (g) Lender shall have received evidence of insurance and loss payee endorsements required hereunder and under the other Financing Agreements, in form and substance satisfactory to Lender, and certificates of insurance policies and/or endorsements naming Lender as loss payee; (h) the Excess Availability as determined by Lender, as of the date hereof, shall be not less than $500,000 after giving effect to the initial Loans made or to be made and Letter of Credit Accommodations issued or to be issued in connection with the initial transactions hereunder; (i) Lender shall have received evidence satisfactory to Lender that the real estate refinancing evidenced by the Real Estate Documents has been consummated and that Borrower has received proceeds thereunder of at least $2,800,000, and Lender shall have a received a mortgagee waiver in form and substance satisfactory to Lender; (j) Borrower's licensing and royalty agreements shall be in form and substance satisfactory to Lender; (k) Lender shall have received, in form and substance satisfactory to Lender, such opinion letters of counsel to Borrower with respect to the Financing Agreements and such other matters as Lender may request; and (l) the other Financing Agreements (including, without limitation, personal guaranties of Stephen M. Merrick and John H. Schwan, stock pledge agreements pertaining to Borrower's subsidiaries and subordination agreements pertaining to indebtedness owing to certain of Borrower's shareholders) and all instruments and documents hereunder and thereunder shall have been duly executed and delivered to Lender, in form and substance satisfactory to Lender. 4.2. Conditions Precedent to All Loans and Letter of Credit Accommodations. Each of the following is an additional condition precedent to Lender making Loans and/or providing Letter of Credit Accommodations to Borrower, including the initial Loans and Letter of Credit Accommodations and any future Loans and Letter of Credit Accommodations: (a) all representations and warranties contained herein and in the other Financing Agreements shall be true and correct in all material respects with the same effect -16- as though such representations and warranties had been made on and as of the date of the making of each such Loan or providing each such Letter of Credit Accommodation and after giving effect thereto; and (b) no Event of Default and no event or condition which, with notice or passage of time or both, would constitute an Event of Default, shall exist or have occurred and be continuing on and as of the date of the making of such Loan or providing each such Letter of Credit Accommodation and after giving effect thereto. SECTION 5. GRANT OF SECURITY INTEREST To secure payment and performance of all Obligations, Borrower hereby grants to Lender a continuing security interest in, a lien upon, and a right of set off against, and hereby assigns to Lender as security, the following property and interests in property of Borrower, whether now owned or hereafter acquired or existing, and wherever located (collectively, the "Collateral"): 5.1. Accounts; 5.2. all present and future contract rights, general intangibles (including tax and duty refunds, registered and unregistered patents, trademarks, service marks, copyrights, trade names, applications for the foregoing, trade secrets, goodwill, processes, drawings, blueprints, customer lists, licenses, whether as licensor or licensee, choses in action and other claims and existing and future leasehold interests in equipment, real estate and fixtures), chattel paper, documents, instruments, securities and other investment property, letters of credit, bankers' acceptances and guaranties; 5.3. all present and future monies, securities, credit balances, deposits, deposit accounts and other property of Borrower now or hereafter held or received by or in transit to Lender or its affiliates or at any other depository or other institution from or for the account of Borrower, whether for safekeeping, pledge, custody, transmission, collection or otherwise, and all present and future liens, security interests, rights, remedies, title and interest in, to and in respect of Accounts and other Collateral, including (a) rights and remedies under or relating to guaranties, contracts of suretyship, letters of credit and credit and other insurance related to the Collateral, (b) rights of stoppage in transit, replevin, repossession, reclamation and other rights and remedies of an unpaid vendor, lienor or secured party, (c) goods described in invoices, documents, contracts or instruments with respect to, or otherwise representing or evidencing, Accounts or other Collateral, including returned, repossessed and reclaimed goods, and (d) deposits by and property of account debtors or other persons securing the obligations of account debtors; 5.4. Inventory; 5.5. Equipment; 5.6. Records; and -17- 5.7. all products and proceeds of the foregoing, in any form, including insurance proceeds and all claims against third parties for loss or damage to or destruction of any or all of the foregoing. SECTION 6. COLLECTION AND ADMINISTRATION 6.1. Borrower's Loan Account. Lender shall maintain one or more loan account(s) on its books in which shall be recorded (a) all Loans, Letter of Credit Accommodations and other Obligations and the Collateral, (b) all payments made by or on behalf of Borrower and (c) all other appropriate debits and credits as provided in this Agreement, including fees, charges, costs, expenses and interest. All entries in the loan account(s) shall be made in accordance with Lender's customary practices as in effect from time to time. 6.2. Statements. Lender shall render to Borrower each month a statement setting forth the balance in the Borrower's loan account(s) maintained by Lender for Borrower pursuant to the provisions of this Agreement, including principal, interest, fees, costs and expenses. Each such statement shall be subject to subsequent adjustment by Lender but shall, absent manifest errors or omissions, be considered correct and deemed accepted by Borrower and conclusively binding upon Borrower as an account stated except to the extent that Lender receives a written notice from Borrower of any specific exceptions of Borrower thereto within thirty (30) days after the date such statement has been mailed by Lender. Until such time as Lender shall have rendered to Borrower a written statement as provided above, the balance in Borrower's loan account(s) shall be presumptive evidence of the amounts due and owing to Lender by Borrower. 6.3. Collection of Accounts. (a) Borrower shall establish and maintain, at its expense, blocked accounts or lockboxes and related blocked accounts (in either case, "Blocked Accounts"), as Lender may specify, with such banks as are acceptable to Lender into which Borrower shall promptly deposit and direct its account debtors to directly remit all payments on Accounts and all payments constituting proceeds of Inventory or other Collateral in the identical form in which such payments are made, whether by cash, check or other manner. The banks at which the Blocked Accounts are established shall enter into an agreement, in form and substance satisfactory to Lender, providing that all items received or deposited in the Blocked Accounts are the property of Lender, that the depository bank has no lien upon, or right to setoff against, the Blocked Accounts, the items received for deposit therein, or the funds from time to time on deposit therein and that the depository bank will wire, or otherwise transfer, in immediately available funds, on a daily basis, all funds received or deposited into the Blocked Accounts to such bank account of Lender as Lender may from time to time designate for such purpose ("Payment Account"). Borrower agrees that all payments made to such Blocked Accounts or other funds received and collected by Lender, -18- whether on the Accounts or as proceeds of Inventory or other Collateral or otherwise shall be the property of Lender. (b) For purposes of calculating the amount of the Loans available to Borrower, such payments will be applied (conditional upon final collection) to the Obligations on the business day of receipt by Lender of immediately available funds in the Payment Account provided such payments and notice thereof are received in accordance with Lender's usual and customary practices as in effect from time to time and within sufficient time to credit Borrower's loan account on such day, and if not, then on the next business day. For the purposes of calculating interest on the Obligations, such payments or other funds received will be applied (conditional upon final collection) to the Obligations one (1) business day following the date of receipt of immediately available funds by Lender in the Payment Account provided such payments or other funds and notice thereof are received in accordance with Lender's usual and customary practices as in effect from time to time and within sufficient time to credit Borrower's loan account on such day, and if not, then on the next business day. (c) Borrower and all of its affiliates, subsidiaries, shareholders, directors, employees or agents shall, acting as trustee for Lender, receive, as the property of Lender, any monies, checks, notes, drafts or any other payment relating to and/or proceeds of Accounts or other Collateral which come into their possession or under their control and immediately upon receipt thereof, shall deposit or cause the same to be deposited in the Blocked Accounts, or remit the same or cause the same to be remitted, in kind, to Lender. In no event shall the same be commingled with Borrower's own funds. Borrower agrees to reimburse Lender on demand for any amounts owed or paid to any bank at which a Blocked Account is established or any other bank or person involved in the transfer of funds to or from the Blocked Accounts arising out of Lender's payments to or indemnification of such bank or person. The obligation of Borrower to reimburse Lender for such amounts pursuant to this Section 6.3 shall survive the termination or non-renewal of this Agreement. 6.4. Payments. All Obligations shall be payable to the Payment Account as provided in Section 6.3 or such other place as Lender may designate from time to time. Lender may apply payments received or collected from Borrower or for the account of Borrower (including the monetary proceeds of collections or of realization upon any Collateral) to such of the Obligations, whether or not then due, in such order and manner as Lender determines. At Lender's option, all principal, interest, fees, costs, expenses and other charges provided for in this Agreement or the other Financing Agreements may be charged directly to the loan account(s) of Borrower. Borrower shall make all payments to Lender on the Obligations free and clear of, and without deduction or withholding for or on account of, any setoff, counterclaim, defense, duties, taxes, levies, imposts, fees, deductions, withholding, restrictions or conditions of any kind. If after receipt of any payment of, or proceeds of Collateral applied to the payment of, any of the Obligations, Lender is required to surrender or return such payment or proceeds to any Person for any reason, then the Obligations intended to be satisfied by such payment or proceeds shall be reinstated and continue and this -19- Agreement shall continue in full force and effect as if such payment or proceeds had not been received by Lender. Borrower shall be liable to pay to Lender, and does hereby indemnify and hold Lender harmless for the amount of any payments or proceeds surrendered or returned. This Section 6.4 shall remain effective notwithstanding any contrary action which may be taken by Lender in reliance upon such payment or proceeds. This Section 6.4 shall survive the payment of the Obligations and the termination or non-renewal of this Agreement. 6.5. Authorization to Make Loans. Lender is authorized to make the Loans and provide the Letter of Credit Accommodations based upon telephonic or other instructions received from anyone purporting to be an officer of Borrower or other authorized person or, at the discretion of Lender, if such Loans are necessary to satisfy any Obligations. All requests for Loans or Letter of Credit Accommodations hereunder shall specify the date on which the requested advance is to be made or Letter of Credit Accommodations established (which day shall be a business day) and the amount of the requested Loan. Requests received after 11:00 a.m. Chicago time on any day shall be deemed to have been made as of the opening of business on the immediately following business day. All Loans and Letter of Credit Accommodations under this Agreement shall be conclusively presumed to have been made to, and at the request of and for the benefit of, Borrower when deposited to the credit of Borrower or otherwise disbursed or established in accordance with the instructions of Borrower or in accordance with the terms and conditions of this Agreement. 6.6. Use of Proceeds. Borrower shall use the initial proceeds of the Loans provided by Lender to Borrower hereunder only for: (a) payments to each of the persons listed in the disbursement direction letter furnished by Borrower to Lender on or about the date hereof and (b) costs, expenses and fees in connection with the preparation, negotiation, execution and delivery of this Agreement and the other Financing Agreements. All other Loans made or Letter of Credit Accommodations provided by Lender to Borrower pursuant to the provisions hereof shall be used by Borrower only for general operating, working capital and other proper corporate purposes of Borrower not otherwise prohibited by the terms hereof. None of the proceeds will be used, directly or indirectly, for the purpose of purchasing or carrying any margin security or for the purposes of reducing or retiring any indebtedness which was originally incurred to purchase or carry any margin security or for any other purpose which might cause any of the Loans to be considered a "purpose credit" within the meaning of Regulation G of the Board of Governors of the Federal Reserve System, as amended. SECTION 7. COLLATERAL REPORTING AND COVENANTS 7.1. Collateral Reporting. Borrower shall provide Lender with the following documents in a form satisfactory to Lender: (a) on a regular basis as required by Lender, a schedule of Accounts, -20- sales made, credits issued and cash received; (b) on a monthly basis or more frequently as Lender may request, (i) perpetual inventory reports, (ii) inventory reports by category (and separately listing the Licensed Inventory) and in the same format as provided by Ozer Valuation Services LLC in its appraisal dated October, 2000, (iii) agings of accounts payable, and (iv) proof of payment of royalty and licensing fees due under applicable licensing agreements; (c) upon Lender's request, (i) copies of customer statements and credit memos, remittance advices and reports, and copies of deposit slips and bank statements, (ii) copies of shipping and delivery documents, and (iii) copies of purchase orders, invoices and delivery documents for Inventory and Equipment acquired by Borrower; (d) agings of accounts receivable on a monthly basis or more frequently as Lender may request; and (e) such other reports as to the Collateral as Lender shall request from time to time. If any of Borrower's records or reports of the Collateral are prepared or maintained by an accounting service, contractor, shipper or other agent, Borrower hereby irrevocably authorizes such service, contractor, shipper or agent to deliver such records, reports, and related documents to Lender and to follow Lender's instructions with respect to further services at any time that an Event of Default exists or has occurred and is continuing. 7.2. Accounts Covenants. (a) Borrower shall notify Lender promptly of: (i) any material delay in Borrower's performance of any of its obligations to any account debtor or the assertion of any claims, offsets, defenses or counterclaims by any account debtor, or any disputes with account debtors, or any settlement, adjustment or compromise thereof, (ii) all material adverse information relating to the financial condition of any account debtor and (iii) any event or circumstance which, to Borrower's knowledge would cause Lender to consider any then existing Accounts as no longer constituting Eligible Accounts. No credit, discount, allowance or extension or agreement for any of the foregoing shall be granted to any account debtor without Lender's consent, except in the ordinary course of Borrower's business in accordance with practices and policies previously disclosed in writing to Lender. So long as no Event of Default exists or has occurred and is continuing, Borrower shall settle, adjust or compromise any claim, offset, counterclaim or dispute with any account debtor. At any time that an Event of Default exists or has occurred and is continuing, Lender shall, at its option, have the exclusive right to settle, adjust or compromise any claim, offset, counterclaim or dispute with account debtors or grant any credits, discounts or allowances. (b) Without limiting the obligation of Borrower to deliver any other information to Lender, Borrower shall promptly report to Lender any return of Inventory by any one account debtor if the inventory so returned in such case has a value in excess of $5,000. At any time that Inventory is returned, reclaimed or repossessed, the Account (or portion thereof) which arose from the sale of such returned, reclaimed or repossessed Inventory shall not be deemed an Eligible Account. In the event any account debtor returns Inventory when an Event of Default exists or has occurred and is continuing, Borrower shall, upon Lender's request, (i) hold the returned Inventory in trust for Lender, (ii) segregate all returned Inventory from all of its other property, (iii) dispose of the returned Inventory solely according to Lender's instructions, and (iv) not issue any credits, discounts or allowances with respect thereto without Lender's prior written consent. -21- (c) With respect to each Account: (i) the amounts shown on any invoice delivered to Lender or schedule thereof delivered to Lender shall be true and complete, (ii) no payments shall be made thereon except payments immediately delivered to Lender pursuant to the terms of this Agreement, (iii) no credit, discount, allowance or extension or agreement for any of the foregoing shall be granted to any account debtor except as reported to Lender in accordance with this Agreement and except for credits, discounts, allowances or extensions made or given in the ordinary course of Borrower's business in accordance with practices and policies previously disclosed to Lender, (iv) there shall be no setoffs, deductions, contras, defenses, counterclaims or disputes existing or asserted with respect thereto except as reported to Lender in accordance with the terms of this Agreement, (v) none of the transactions giving rise thereto will violate any applicable State or Federal laws or regulations, all documentation relating thereto will be legally sufficient under such laws and regulations and all such documentation will be legally enforceable in accordance with its terms. (d) Lender shall have the right at any time or times, in Lender's name or in the name of a nominee of Lender, to verify the validity, amount or any other matter relating to any Account or other Collateral, by mail, telephone, facsimile transmission or otherwise. (e) Borrower shall deliver or cause to be delivered to Lender, with appropriate endorsement and assignment, with full recourse to Borrower, all chattel paper and instruments which Borrower now owns or may at any time acquire immediately upon Borrower's receipt thereof, except as Lender may otherwise agree. (f) Lender may, at any time or times that an Event of Default exists or has occurred and is continuing, (i) notify any or all account debtors that the Accounts have been assigned to Lender and that Lender has a security interest therein and Lender may direct any or all accounts debtors to make payment of Accounts directly to Lender, (ii) extend the time of payment of, compromise, settle or adjust for cash, credit, return of merchandise or otherwise, and upon any terms or conditions, any and all Accounts or other obligations included in the Collateral and thereby discharge or release the account debtor or any other party or parties in any way liable for payment thereof without affecting any of the Obligations, (iii) demand, collect or enforce payment of any Accounts or such other obligations, but without any duty to do so, and Lender shall not be liable for its failure to collect or enforce the payment thereof nor for the negligence of its agents or attorneys with respect thereto and (iv) take whatever other action Lender may deem necessary or desirable for the protection of its interests. At any time that an Event of Default exists or has occurred and is continuing, at Lender's request, all invoices and statements sent to any account debtor shall state that the Accounts and such other obligations have been assigned to Lender and are payable directly and only to Lender and Borrower shall deliver to Lender such originals of documents evidencing the sale and delivery of goods or the performance of services giving rise to any Accounts as Lender may require. -22- 7.3. Inventory Covenants. With respect to the Inventory: (a) Borrower shall at all times maintain inventory records reasonably satisfactory to Lender, keeping correct and accurate records itemizing and describing the kind, type, quality and quantity of Inventory, Borrower's cost therefor and daily withdrawals therefrom and additions thereto; (b) Borrower shall conduct a physical count of the Inventory at least once each year, but at any time or times as Lender may request on or after an Event of Default, and promptly following such physical inventory shall supply Lender with a report in the form and with such specificity as may be reasonably satisfactory to Lender concerning such physical count; (c) Borrower shall not remove any Inventory from the locations set forth or permitted herein, without the prior written consent of Lender, except for sales of Inventory in the ordinary course of Borrower's business and except to move Inventory directly from one location set forth or permitted herein to another such location; (d) upon Lender's request, Borrower shall, at its expense, no more than once in any twelve (12) month period, but at any time or times as Lender may request on or after an Event of Default, deliver or cause to be delivered to Lender written reports or appraisals as to the Inventory in form, scope and methodology acceptable to Lender and by an appraiser acceptable to Lender, addressed to Lender or upon which Lender is expressly permitted to rely; (e) Borrower shall produce, use, store and maintain the Inventory with all reasonable care and caution and in accordance with applicable standards of any insurance and in conformity with applicable laws (including the requirements of the Federal Fair Labor Standards Act of 1938, as amended and all rules, regulations and orders related thereto); (f) Borrower assumes all responsibility and liability arising from or relating to the production, use, sale or other disposition of the Inventory; (g) Borrower shall not sell Inventory to any customer on approval, or any other basis which entitles the customer to return or may obligate Borrower to repurchase such Inventory (except that Borrower may sell to Eckerd on terms that allow Eckerd a right of return of up to thirty percent (30%) of such sales in the ordinary course of Borrower's business consistent with Borrower's past practices); (h) Borrower shall keep the Inventory in good and marketable condition; (i) Borrower shall immediately notify Lender if Borrower has breached any of the terms of any of its license agreements or if any of its license agreements are terminated; and (j) Borrower shall not, without prior written notice to Lender, acquire or accept any Inventory on consignment or approval. 7.4. Equipment Covenants. With respect to the Equipment: (a) Borrower shall, at its expense, no more than once in any twelve (12) month period, but at any time or times as Lender may request on or after an Event of Default, deliver or cause to be delivered to Lender written reports or appraisals as to the Equipment in form, scope and methodology acceptable to Lender and by an appraiser acceptable to Lender; (b) Borrower shall keep the Equipment in good order, repair, running and marketable condition (ordinary wear and tear excepted); (c) Borrower shall use the Equipment with all reasonable care and caution and in accordance with applicable standards of any insurance and in conformity with all applicable laws; (d) the Equipment is and shall be used in Borrower's business and not for personal, family, household or farming use; (e) Borrower shall not remove any Equipment from the locations -23- set forth or permitted herein, except to the extent necessary to have any Equipment repaired or maintained in the ordinary course of the business of Borrower or to move Equipment directly from one location set forth or permitted herein to another such location and except for the movement of motor vehicles used by or for the benefit of Borrower in the ordinary course of business; (f) the Equipment is now and shall remain personal property and Borrower shall not permit any of the Equipment to be or become a part of or affixed to real property; and (g) Borrower assumes all responsibility and liability arising from the use of the Equipment. 7.5. Power of Attorney. Borrower hereby irrevocably designates and appoints Lender (and all persons designated by Lender) as Borrower's true and lawful attorney-in-fact, and authorizes Lender, in Borrower's or Lender's name, to: (a) at any time an Event of Default or event which with notice or passage of time or both would constitute an Event of Default exists or has occurred and is continuing (i) demand payment on Accounts or other proceeds of Inventory or other Collateral, (ii) enforce payment of Accounts by legal proceedings or otherwise, (iii) exercise all of Borrower's rights and remedies to collect any Account or other Collateral, (iv) sell or assign any Account upon such terms, for such amount and at such time or times as the Lender deems advisable, (v) settle, adjust, compromise, extend or renew an Account, (vi) discharge and release any Account, (vii) prepare, file and sign Borrower's name on any proof of claim in bankruptcy or other similar document against an account debtor, (viii) notify the post office authorities to change the address for delivery of Borrower's mail to an address designated by Lender, and open and dispose of all mail addressed to Borrower, and (ix) do all acts and things which are necessary, in Lender's determination, to fulfill Borrower's obligations under this Agreement and the other Financing Agreements and (b) at any time to (i) take control in any manner of any item of payment or proceeds thereof, (ii) have access to any lockbox or postal box into which Borrower's mail is deposited, (iii) endorse Borrower's name upon any items of payment or proceeds thereof and deposit the same in the Lender's account for application to the Obligations, (iv) endorse Borrower's name upon any chattel paper, document, instrument, invoice, or similar document or agreement relating to any Account or any goods pertaining thereto or any other Collateral, (v) sign Borrower's name on any verification of Accounts and notices thereof to account debtors and (vi) execute in Borrower's name and file any UCC financing statements or amendments thereto. Borrower hereby releases Lender and its officers, employees and designees from any liabilities arising from any act or acts under this power of attorney and in furtherance thereof, whether of omission or commission, except as a result of Lender's own gross negligence or willful misconduct as determined pursuant to a final non-appealable order of a court of competent jurisdiction. 7.6. Right to Cure. Lender may, at its option, (a) cure any default by Borrower under any agreement with a third party or pay or bond on appeal any judgment entered against Borrower, (b) discharge taxes, liens, security interests or other encumbrances at any time levied on or existing with respect to the Collateral and (c) pay any amount, incur any expense -24- or perform any act which, in Lender's judgment, is necessary or appropriate to preserve, protect, insure or maintain the Collateral and the rights of Lender with respect thereto. Lender may add any amounts so expended to the Obligations and charge Borrower's account therefor, such amounts to be repayable by Borrower on demand. Lender shall be under no obligation to effect such cure, payment or bonding and shall not, by doing so, be deemed to have assumed any obligation or liability of Borrower. Any payment made or other action taken by Lender under this Section shall be without prejudice to any right to assert an Event of Default hereunder and to proceed accordingly. 7.7. Access to Premises. From time to time as requested by Lender, at the cost and expense of Borrower, (a) Lender or its designee shall have complete access to all of Borrower's premises during normal business hours and after notice to Borrower, or at any time and without notice to Borrower if an Event of Default exists or has occurred and is continuing, for the purposes of inspecting, verifying and auditing the Collateral and all of Borrower's books and records, including the Records, and (b) Borrower shall promptly furnish to Lender such copies of such books and records or extracts therefrom as Lender may request, and (c) use during normal business hours such of Borrower's personnel, equipment, supplies and premises as may be reasonably necessary for the foregoing and if an Event of Default exists or has occurred and is continuing for the collection of Accounts and realization of other Collateral. SECTION 8. REPRESENTATIONS AND WARRANTIES Borrower hereby represents and warrants to Lender the following (which shall survive the execution and delivery of this Agreement), the truth and accuracy of which are a continuing condition of the making of Loans and providing Letter of Credit Accommodations by Lender to Borrower: 8.1. Corporate Existence, Power and Authority; Subsidiaries. Borrower is a corporation duly organized and in good standing under the laws of its state of incorporation and is duly qualified as a foreign corporation and in good standing in all states or other jurisdictions where the nature and extent of the business transacted by it or the ownership of assets makes such qualification necessary, except for those jurisdictions in which the failure to so qualify would not have a material adverse effect on Borrower's financial condition, results of operation or business or the rights of Lender in or to any of the Collateral. The execution, delivery and performance of this Agreement, the other Financing Agreements and the transactions contemplated hereunder and thereunder are all within Borrower's corporate powers, have been duly authorized and are not in contravention of law or the terms of Borrower's certificate of incorporation, by-laws, or other organizational documentation, or any indenture, agreement or undertaking to which Borrower is a party or by which Borrower or its property are bound. This Agreement and the other Financing Agreements constitute legal, valid and binding obligations of Borrower enforceable in accordance with their respective terms. Borrower does not have any subsidiaries except as set forth on the Information Certificate. -25- 8.2. Financial Statements; No Material Adverse Change. All financial statements relating to Borrower which have been or may hereafter be delivered by Borrower to Lender have been prepared in accordance with GAAP and fairly present the financial condition and the results of operation of Borrower as at the dates and for the periods set forth therein. Except as disclosed in any interim financial statements furnished by Borrower to Lender prior to the date of this Agreement, there has been no material adverse change in the assets, liabilities, properties and condition, financial or otherwise, of Borrower, since the date of the most recent audited financial statements furnished by Borrower to Lender prior to the date of this Agreement. 8.3. Chief Executive Office; Collateral Locations. The chief executive office of Borrower and Borrower's Records concerning Accounts are located only at the address set forth below and its only other places of business and the only other locations of Collateral, if any, are the addresses set forth in the Information Certificate, subject to the right of Borrower to establish new locations in accordance with Section 9.2 below. The Information Certificate correctly identifies any of such locations which are not owned by Borrower and sets forth the owners and/or operators thereof and to the best of Borrower's knowledge, the holders of any mortgages on such locations. 8.4. Priority of Liens; Title to Properties. The security interests and liens granted to Lender under this Agreement and the other Financing Agreements constitute valid and perfected first priority liens and security interests in and upon the Collateral subject only to the liens indicated on Schedule 8.4 hereto and the other liens permitted under Section 9.8 hereof. Borrower has good and marketable title to all of its properties and assets subject to no liens, mortgages, pledges, security interests, encumbrances or charges of any kind, except those granted to Lender and such others as are specifically listed on Schedule 8.4 hereto or permitted under Section 9.8 hereof. 8.5. Tax Returns. Borrower has filed, or caused to be filed, in a timely manner all tax returns, reports and declarations which are required to be filed by it (without requests for extension except as previously disclosed in writing to Lender). All information in such tax returns, reports and declarations is complete and accurate in all material respects. Borrower has paid or caused to be paid all taxes due and payable or claimed due and payable in any assessment received by it, except taxes the validity of which are being contested in good faith by appropriate proceedings diligently pursued and available to Borrower and with respect to which adequate reserves have been set aside on its books. Adequate provision has been made for the payment of all accrued and unpaid Federal, State, county, local, foreign and other taxes whether or not yet due and payable and whether or not disputed. -26- 8.6. Litigation. Except as set forth on the Information Certificate, there is no present investigation by any governmental agency pending, or to the best of Borrower's knowledge threatened, against or affecting Borrower, its assets or business and there is no action, suit, proceeding or claim by any Person pending, or to the best of Borrower's knowledge threatened, against Borrower or its assets or goodwill, or against or affecting any transactions contemplated by this Agreement, which if adversely determined against Borrower would result in any material adverse change in the assets, business or prospects of Borrower or would impair the ability of Borrower to perform its obligations hereunder or under any of the other Financing Agreements to which it is a party or of Lender to enforce any Obligations or realize upon any Collateral. 8.7. Compliance with Other Agreements and Applicable Laws. Borrower is not in default in any material respect under, or in violation in any material respect of any of the terms of, any agreement, contract, instrument, lease or other commitment to which it is a party or by which it or any of its assets are bound and Borrower is in compliance in all material respects with all applicable provisions of laws, rules, regulations, licenses, permits, approvals and orders of any foreign, Federal, State or local governmental authority. 8.8. Bank Accounts. All of the deposit accounts, investment accounts or other accounts in the name of or used by Borrower maintained at any bank or other financial institution are set forth on Schedule 8.8 hereto, subject to the right of Borrower to establish new accounts in accordance with Section 9.13 below. 8.9. Accuracy and Completeness of Information. All information furnished by or on behalf of Borrower in writing to Lender in connection with this Agreement or any of the other Financing Agreements or any transaction contemplated hereby or thereby, including all information on the Information Certificate is true and correct in all material respects on the date as of which such information is dated or certified and does not omit any material fact necessary in order to make such information not misleading. No event or circumstance has occurred which has had or could reasonably be expected to have a material adverse affect on the business, assets or prospects of Borrower, which has not been fully and accurately disclosed to Lender in writing. 8.10. Survival of Warranties; Cumulative. All representations and warranties contained in this Agreement or any of the other Financing Agreements shall survive the execution and delivery of this Agreement and shall be deemed to have been made again to Lender on the date of each additional borrowing or other credit accommodation hereunder and shall be conclusively presumed to have been relied on by Lender regardless of any investigation made or information possessed by -27- Lender. The representations and warranties set forth herein shall be cumulative and in addition to any other representations or warranties which Borrower shall now or hereafter give, or cause to be given, to Lender. 8.11. Employee Benefits. (a) Borrower has not engaged in any transaction in connection with which Borrower or any of its ERISA Affiliates could be subject to either a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Code, including any accumulated funding deficiency described in Section 8.11(c) hereof and any deficiency with respect to vested accrued benefits described in Section 8.11(d) hereof. (b) No liability to the Pension Benefit Guaranty Corporation has been or is expected by Borrower to be incurred with respect to any employee benefit plan of Borrower or any of its ERISA Affiliates. There has been no reportable event (within the meaning of Section 4043(b) of ERISA) or any other event or condition with respect to any employee pension benefit plan of Borrower or any of its ERISA Affiliates which presents a risk of termination of any such plan by the Pension Benefit Guaranty Corporation. (c) Full payment has been made of all amounts which Borrower or any of its ERISA Affiliates is required under Section 302 of ERISA and Section 412 of the Code to have paid under the terms of each employee benefit plan as contributions to such plan as of the last day of the most recent fiscal year of such plan ended prior to the date hereof, and no accumulated funding deficiency (as defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived, exists with respect to any employee benefit plan, including any penalty or tax described in Section 8.11(a) hereof and any deficiency with respect to vested accrued benefits described in Section 8.11(d) hereof. (d) The current value of all vested accrued benefits under all employee benefit plans maintained by Borrower that are subject to Title IV of ERISA does not exceed the current value of the assets of such plans allocable to such vested accrued benefits, including any penalty or tax described in Section 8.11(a) hereof and any accumulated funding deficiency described in Section 8.11(c) hereof. The terms "current value" and "accrued benefit" have the meanings specified in ERISA. (e) Neither Borrower nor any of its ERISA Affiliates is or has ever been obligated to contribute to any "multiemployer plan" (as such term is defined in Section 4001(a)(3) of ERISA) that is subject to Title IV of ERISA. 8.12. Environmental Compliance. (a) Except as set forth on Schedule 8.12 hereto, Borrower has not generated, used, stored, treated, transported, manufactured, handled, produced or disposed of any Hazardous Materials, on or off its premises (whether or not owned by it) in any manner which at any time violates any applicable Environmental Law or any license, permit, certificate, approval or similar authorization thereunder and the operations of Borrower -28- complies in all material respects with all Environmental Laws and all licenses, permits, certificates, approvals and similar authorizations thereunder. (b) Except as set forth on Schedule 8.12 hereto, there has been no investigation, proceeding, complaint, order, directive, claim, citation or notice by any governmental authority or any other person nor is any pending or to the best of Borrower's knowledge threatened, with respect to any non-compliance with or violation of the requirements of any Environmental Law by Borrower or the release, spill or discharge, threatened or actual, of any Hazardous Material or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials or any other environmental, health or safety matter, which affects Borrower or its business, operations or assets or any properties at which Borrower has transported, stored or disposed of any Hazardous Materials. (c) Borrower has no material liability (contingent or otherwise) in connection with a release, spill or discharge, threatened or actual, of any Hazardous Materials or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials. (d) Borrower has all licenses, permits, certificates, approvals or similar authorizations required to be obtained or filed in connection with the operations of Borrower under any Environmental Law and all of such licenses, permits, certificates, approvals or similar authorizations are valid and in full force and effect. SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS 9.1. Maintenance of Existence. Borrower shall at all times preserve, renew and keep in full, force and effect its corporate existence and rights and franchises with respect thereto and maintain in full force and effect all permits, licenses, trademarks, tradenames, approvals, authorizations, leases and contracts necessary to carry on the business as presently or proposed to be conducted. Borrower shall give Lender thirty (30) days prior written notice of any proposed change in its corporate name, which notice shall set forth the new name and Borrower shall deliver to Lender a copy of the amendment to the Certificate of Incorporation of Borrower providing for the name change certified by the Secretary of State of the jurisdiction of incorporation of Borrower as soon as it is available. 9.2. New Collateral Locations. Borrower may open any new location within the continental United States provided Borrower (a) gives Lender thirty (30) days prior written notice of the intended opening of any such new location and (b) executes and delivers, or causes to be executed and delivered, to Lender such agreements, documents, and instruments as Lender may deem reasonably necessary or desirable to protect its interests in the Collateral at such location, including UCC financing statements. -29- 9.3. Compliance with Laws, Regulations, Etc. (a) Borrower shall, at all times, comply in all material respects with all laws, rules, regulations, licenses, permits, approvals and orders applicable to it and duly observe all requirements of any Federal, State or local governmental authority, including the Employee Retirement Security Act of 1974, as amended, the Occupational Safety and Health Act of 1970, as amended, the Fair Labor Standards Act of 1938, as amended, and all statutes, rules, regulations, orders, permits and stipulations relating to environmental pollution and employee health and safety, including all of the Environmental Laws. (b) Borrower shall establish and maintain, at its expense, a system to assure and monitor its continued compliance with all Environmental Laws in all of its operations, which system shall include annual reviews of such compliance by employees or agents of Borrower who are familiar with the requirements of the Environmental Laws. Copies of all environmental surveys, audits, assessments, feasibility studies and results of remedial investigations shall be promptly furnished, or caused to be furnished, by Borrower to Lender. Borrower shall take prompt and appropriate action to respond to any non-compliance with any of the Environmental Laws and shall regularly report to Lender on such response. (c) Borrower shall give both oral and written notice to Lender immediately upon Borrower's receipt of any notice of, or Borrower's otherwise obtaining knowledge of, (i) the occurrence of any event involving the release, spill or discharge, threatened or actual, of any Hazardous Material or (ii) any investigation, proceeding, complaint, order, directive, claims, citation or notice with respect to: (A) any non-compliance with or violation of any Environmental Law by Borrower or (B) the release, spill or discharge, threatened or actual, of any Hazardous Material or (C) the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials or (D) any other environmental, health or safety matter, which affects Borrower or its business, operations or assets or any properties at which Borrower transported, stored or disposed of any Hazardous Materials. (d) Without limiting the generality of the foregoing, whenever Lender reasonably determines that there is non-compliance, or any condition which requires any action by or on behalf of Borrower in order to avoid any material non-compliance, with any Environmental Law, Borrower shall, at Lender's request and Borrower's expense: (i) cause an independent environmental engineer acceptable to Lender to conduct such tests of the site where Borrower's non-compliance or alleged non-compliance with such Environmental Laws has occurred as to such non-compliance and prepare and deliver to Lender a report as to such non-compliance setting forth the results of such tests, a proposed plan for responding to any environmental problems described therein, and an estimate of the costs thereof and (ii) provide to Lender a supplemental report of such engineer whenever the scope of such non-compliance, or Borrower's response thereto or the estimated costs thereof, shall change in any material respect. (e) Borrower shall indemnify and hold harmless Lender, its directors, officers, employees, agents, invitees, representatives, successors and assigns, from and -30- against any and all losses, claims, damages, liabilities, costs, and expenses (including attorneys' fees and legal expenses) directly or indirectly arising out of or attributable to the use, generation, manufacture, reproduction, storage, release, threatened release, spill, discharge, disposal or presence of a Hazardous Material, including the costs of any required or necessary repair, cleanup or other remedial work with respect to any property of Borrower and the preparation and implementation of any closure, remedial or other required plans. All representations, warranties, covenants and indemnifications in this Section 9.3 shall survive the payment of the Obligations and the termination or non-renewal of this Agreement. 9.4. Payment of Taxes and Claims. Borrower shall duly pay and discharge all taxes, assessments, contributions and governmental charges upon or against it or its properties or assets, except for taxes the validity of which are being contested in good faith by appropriate proceedings diligently pursued and available to Borrower and with respect to which adequate reserves have been set aside on its books. Borrower shall be liable for any tax or penalties imposed on Lender as a result of the financing arrangements provided for herein and Borrower agrees to indemnify and hold Lender harmless with respect to the foregoing, and to repay to Lender on demand the amount thereof, and until paid by Borrower such amount shall be added and deemed part of the Loans, provided, that nothing contained herein shall be construed to require Borrower to pay any income or franchise taxes attributable to the income of Lender from any amounts charged or paid hereunder to Lender. The foregoing indemnity shall survive the payment of the Obligations and the termination or non-renewal of this Agreement. 9.5. Insurance. Borrower shall, at all times, maintain with financially sound and reputable insurers insurance with respect to the Collateral against loss or damage and all other insurance of the kinds and in the amounts customarily insured against or carried by corporations of established reputation engaged in the same or similar businesses and similarly situated. Said policies of insurance shall be satisfactory to Lender as to form, amount and insurer. Borrower shall furnish certificates, policies or endorsements to Lender as Lender shall require as proof of such insurance, and, if Borrower fails to do so, Lender is authorized, but not required, to obtain such insurance at the expense of Borrower. All policies shall provide for at least thirty (30) days prior written notice to Lender of any cancellation or reduction of coverage and that Lender may act as attorney for Borrower in obtaining, and at any time an Event of Default exists or has occurred and is continuing, adjusting, settling, amending and canceling such insurance. Borrower shall cause Lender to be named as a loss payee and an additional insured (but without any liability for any premiums) under such insurance policies and Borrower shall obtain non-contributory lender's loss payable endorsements to all insurance policies in form and substance satisfactory to Lender. Such lender's loss payable endorsements shall specify that the proceeds of such insurance shall be payable to Lender as its interests may appear and further specify that Lender shall be paid regardless of any act or omission by Borrower or any of its affiliates. At its option, Lender may apply any insurance proceeds received by Lender at any time to the cost of repairs or replacement of Collateral and/or to payment of the Obligations, whether -31- or not then due, in any order and in such manner as Lender may determine or hold such proceeds as cash collateral for the Obligations. 9.6. Financial Statements and Other Information. (a) Borrower shall keep proper books and records in which true and complete entries shall be made of all dealings or transactions of or in relation to the Collateral and the business of Borrower and its subsidiaries (if any) in accordance with GAAP and Borrower shall furnish or cause to be furnished to Lender: (i) within thirty (30) days after the end of each fiscal month, separate monthly unaudited financial statements for each of Borrower and each subsidiary of Borrower (and, in addition, if such fiscal month is the last month of a fiscal quarter, financial statements of Borrower and its subsidiaries on a consolidated basis) (including in each case balance sheets, statements of income and loss, statements of cash flow, and statements of shareholders' equity), all in reasonable detail, fairly presenting the financial position and the results of the operations of Borrower and its subsidiaries as of the end of and through such fiscal month and (ii) within ninety (90) days after the end of each fiscal year, audited consolidated financial statements and, if Borrower has any subsidiaries, audited consolidating financial statements of Borrower and its subsidiaries (including in each case balance sheets, statements of income and loss, statements of cash flow and statements of shareholders' equity), and the accompanying notes thereto, all in reasonable detail, fairly presenting the financial position and the results of the operations of Borrower and its subsidiaries as of the end of and for such fiscal year, together with the unqualified opinion of independent certified public accountants, which accountants shall be an independent accounting firm selected by Borrower and reasonably acceptable to Lender, that such financial statements have been prepared in accordance with GAAP, and present fairly the results of operations and financial condition of Borrower and its subsidiaries as of the end of and for the fiscal year then ended. (b) Borrower shall promptly notify Lender in writing of the details of (i) any loss, damage, investigation, action, suit, proceeding or claim relating to the Collateral or any other property which is security for the Obligations or which would result in any material adverse change in Borrower's business, properties, assets, goodwill or condition, financial or otherwise and (ii) the occurrence of any Event of Default or event which, with the passage of time or giving of notice or both, would constitute an Event of Default. (c) Borrower shall promptly after the sending or filing thereof furnish or cause to be furnished to Lender copies of all reports which Borrower sends to its stockholders generally and copies of all reports and registration statements which Borrower files with the Securities and Exchange Commission, any national securities exchange or the National Association of Securities Dealers, Inc. (d) Borrower shall, on an annual basis, deliver to Lender the personal financial statements of the guarantors of any of the Obligations, which personal financial statements shall be in form and substance satisfactory to Lender. -32- (e) Borrower shall furnish or cause to be furnished to Lender such budgets, forecasts, projections and other information respecting the Collateral and the business of Borrower, as Lender may, from time to time, reasonably request. Lender is hereby authorized to deliver a copy of any financial statement or any other information relating to the business of Borrower to any court or other government agency or to any participant or assignee or prospective participant or assignee. Borrower hereby irrevocably authorizes and directs all accountants or auditors to deliver to Lender, at Borrower's expense, copies of the financial statements of Borrower and any reports or management letters prepared by such accountants or auditors on behalf of Borrower and to disclose to Lender such information as they may have regarding the business of Borrower. Any documents, schedules, invoices or other papers delivered to Lender may be destroyed or otherwise disposed of by Lender one (1) year after the same are delivered to Lender, except as otherwise designated by Borrower to Lender in writing. 9.7. Sale of Assets, Consolidation, Merger, Dissolution, Etc. Borrower shall not, directly or indirectly, (a) merge into or with or consolidate with any other Person or permit any other Person to merge into or with or consolidate with it, or (b) sell, assign, lease, transfer, abandon or otherwise dispose of any stock or indebtedness to any other Person or any of its assets to any other Person (except for (i) sales of Inventory in the ordinary course of business and (ii) the disposition of worn-out or obsolete Equipment or Equipment no longer used in the business of Borrower so long as (A) if an Event of Default exists or has occurred and is continuing, any proceeds are paid to Lender and (B) such sales do not involve Equipment having an aggregate fair market value in excess of $100,000 for all such Equipment disposed of in any fiscal year of Borrower), or (c) form or acquire any subsidiaries, or (d) wind up, liquidate or dissolve or (e) agree to do any of the foregoing. Nothing contained herein shall prohibit Borrower from issuing common stock. 9.8. Encumbrances. Borrower shall not create, incur, assume or suffer to exist any security interest, mortgage, pledge, lien, charge or other encumbrance of any nature whatsoever on any of its assets or properties, including the Collateral, except: (a) liens and security interests of Lender; (b) liens securing the payment of taxes, either not yet overdue or the validity of which are being contested in good faith by appropriate proceedings diligently pursued and available to Borrower and with respect to which adequate reserves have been set aside on its books; (c) non-consensual statutory liens (other than liens securing the payment of taxes) arising in the ordinary course of Borrower's business to the extent: (i) such liens secure indebtedness which is not overdue or (ii) such liens secure indebtedness relating to claims or liabilities which are fully insured and being defended at the sole cost and expense and at the sole risk of the insurer or being contested in good faith by appropriate proceedings diligently pursued and available to Borrower, in each case prior to the commencement of foreclosure or other similar proceedings and with respect to which adequate reserves have been set aside on its books; (d) zoning restrictions, easements, licenses, covenants and other restrictions affecting the use of real property which do not interfere in any material respect with the use of such real property or ordinary conduct of the business of Borrower as presently conducted -33- thereon or materially impair the value of the real property which may be subject thereto; (e) purchase money security interests in Equipment (including capital leases) and purchase money mortgages on real estate not to exceed $1,000,000 in the aggregate at any time outstanding so long as such security interests and mortgages do not apply to any property of Borrower other than the Equipment or real estate so acquired, and the indebtedness secured thereby does not exceed the cost of the Equipment or real estate so acquired, as the case may be; and (f) the security interests and liens set forth on Schedule 8.4 hereto. 9.9. Indebtedness. Borrower shall not incur, create, assume, become or be liable in any manner with respect to, or permit to exist, any obligations or indebtedness, except: (a) the Obligations; (b) trade obligations and normal accruals in the ordinary course of business not yet due and payable, or with respect to which the Borrower is contesting in good faith the amount or validity thereof by appropriate proceedings diligently pursued and available to Borrower, and with respect to which adequate reserves have been set aside on its books; (c) purchase money indebtedness (including capital leases) to the extent not incurred or secured by liens (including capital leases) in violation of any other provision of this Agreement; (d) a loan by Bank One, NA to Borrower in an amount not to exceed $250,000; and (e) the indebtedness set forth on Schedule 9.9 hereto; provided, that (i) Borrower may only make regularly scheduled payments of principal and interest in respect of such indebtedness in accordance with the terms of the agreement or instrument evidencing or giving rise to such indebtedness as in effect on the date hereof, (ii) Borrower shall not, directly or indirectly, (A) amend, modify, alter or change the terms of such indebtedness or any agreement, document or instrument related thereto as in effect on the date hereof, or (B) redeem, retire, defease, purchase or otherwise acquire such indebtedness, or set aside or otherwise deposit or invest any sums for such purpose, and (iii) Borrower shall furnish to Lender all notices or demands in connection with such indebtedness either received by Borrower or on its behalf, promptly after the receipt thereof, or sent by Borrower or on its behalf, concurrently with the sending thereof, as the case may be. 9.10. Loans, Investments, Guarantees, Etc. Borrower shall not, directly or indirectly, make any loans or advance money or property to any person, or invest in (by capital contribution, dividend or otherwise) or purchase or repurchase the stock or indebtedness or all or a substantial part of the assets or property of any person, or guarantee, assume, endorse, or otherwise become responsible for (directly or indirectly) the indebtedness, performance, obligations or dividends of any Person or agree to do any of the foregoing, except: (a) the endorsement of instruments for collection or deposit in the ordinary course of business; (b) loans and advances to, and investments in, CTI Ballons, Ltd. in an aggregate amount not to exceed $500,000 at any time, provided, that Borrower may not make any such loan, advance or investment after the date hereof unless after giving effect to such loan, advance or investment, Excess Availability is at least $500,000 and no Event of Default then exists or would be caused thereby; (c) loans and advances to, and investments in, CTI Mexico Corporation, S.A. de C.V. in an aggregate amount not to exceed $3,000,000 at any time, provided, that Borrower may not make any -34- such loan, advance or investment after the date hereof unless after giving effect to such loan, advance or investment, Excess Availability is at least $500,000 and no Event of Default then exists or would be caused thereby; (d) loans and advances to, and investments in, the New West Joint Venture in an aggregate amount not to exceed $500,000 at any time, provided, that Borrower may not make any such loan, advance or investment after the date hereof unless after giving effect to such loan, advance or investment, Excess Availability is at least $500,000 and no Event of Default then exists or would be caused thereby; (e) investments in: (i) short-term direct obligations of the United States Government, (ii) negotiable certificates of deposit issued by any bank satisfactory to Lender, payable to the order of the Borrower or to bearer and delivered to Lender, and (iii) commercial paper rated A1 or P1; provided, that as to any of the foregoing, unless waived in writing by Lender, Borrower shall take such actions as are deemed necessary by Lender to perfect the security interest of Lender in such investments; and (f) the loans, advances and guarantees set forth on Schedule 9.10 hereto; provided, that as to such loans, advances and guarantees, (i) Borrower shall not, directly or indirectly, (A) amend, modify, alter or change the terms of such loans, advances or guarantees or any agreement, document or instrument related thereto, or (B) as to such guarantees, redeem, retire, defease, purchase or otherwise acquire the obligations arising pursuant to such guarantees, or set aside or otherwise deposit or invest any sums for such purpose, and (ii) Borrower shall furnish to Lender all notices or demands in connection with such loans, advances or guarantees or other indebtedness subject to such guarantees either received by Borrower or on its behalf, promptly after the receipt thereof, or sent by Borrower or on its behalf, concurrently with the sending thereof, as the case may be. 9.11. Dividends and Redemptions. Borrower shall not, directly or indirectly, declare or pay any dividends on account of any shares of any class of capital stock of Borrower now or hereafter outstanding, or set aside or otherwise deposit or invest any sums for such purpose, or redeem, retire, defease, purchase or otherwise acquire any shares of any class of capital stock (or set aside or otherwise deposit or invest any sums for such purpose) for any consideration other than common stock or apply or set apart any sum, or make any other distribution (by reduction of capital or otherwise) in respect of any such shares or agree to do any of the foregoing; provided, that Borrower may declare and pay dividends in an aggregate amount not to exceed $300,000 in any calendar year so long as after giving effect to the payment of any such dividend, Excess Availability is at least $500,000 and no Event of Default then exists or would be caused thereby. 9.12. Transactions with Affiliates. Except as described on Schedule 9.12, Borrower shall not, directly or indirectly, (a) purchase, acquire or lease any property from, or sell, transfer or lease any property to, any officer, director, agent or other person affiliated with Borrower, except in the ordinary course of and pursuant to the reasonable requirements of Borrower's business and upon fair and reasonable terms no less favorable to the Borrower than Borrower would obtain in a comparable arm's length transaction with an unaffiliated person or (b) make any payments of management, consulting or other fees for management or similar services, or of -35- any indebtedness owing to any officer, employee, shareholder, director or other person affiliated with Borrower except reasonable compensation to officers, employees and directors for services rendered to Borrower in the ordinary course of business. 9.13. Additional Bank Accounts. Borrower shall not, directly or indirectly, open, establish or maintain any deposit account, investment account or any other account with any bank or other financial institution, other than the Blocked Accounts and the accounts set forth in Schedule 8.8 hereto, except: (a) as to any new or additional Blocked Accounts and other such new or additional accounts which contain any Collateral or proceeds thereof, with the prior written consent of Lender and subject to such conditions thereto as Lender may establish and (b) as to any accounts used by Borrower to make payments of payroll, taxes or other obligations to third parties, after prior written notice to Lender. 9.14. Costs and Expenses. Borrower shall pay to Lender on demand all costs, expenses, filing fees and taxes paid or payable in connection with the preparation, negotiation, execution, delivery, recording, administration, collection, liquidation, enforcement and defense of the Obligations, Lender's rights in the Collateral, this Agreement, the other Financing Agreements and all other documents related hereto or thereto, including any amendments, supplements or consents which may hereafter be contemplated (whether or not executed) or entered into in respect hereof and thereof, including: (a) all costs and expenses of filing or recording (including Uniform Commercial Code financing statement filing taxes and fees, documentary taxes, intangibles taxes and mortgage recording taxes and fees, if applicable); (b) costs and expenses and fees for insurance premiums, environmental audits, surveys, assessments, engineering reports and inspections, appraisal fees and search fees; (c) costs and expenses of remitting loan proceeds, collecting checks and other items of payment, and establishing and maintaining the Blocked Accounts, together with Lender's customary charges and fees with respect thereto; (d) charges, fees or expenses charged by any bank or issuer in connection with the Letter of Credit Accommodations; (e) costs and expenses of preserving and protecting the Collateral; (f) costs and expenses paid or incurred in connection with obtaining payment of the Obligations, enforcing the security interests and liens of Lender, selling or otherwise realizing upon the Collateral, and otherwise enforcing the provisions of this Agreement and the other Financing Agreements or defending any claims made or threatened against Lender arising out of the transactions contemplated hereby and thereby (including preparations for and consultations concerning any such matters); (g) all out-of-pocket expenses and costs heretofore and from time to time hereafter incurred by Lender during the course of periodic field examinations of the Collateral and Borrower's operations, plus a per diem charge at the rate of $650 per person per day for Lender's examiners in the field and office (provided, that Borrower shall not be liable for expenses, costs and charges hereafter incurred after the date hereof by Lender unless an Event of Default exists); and (h) the fees and disbursements of counsel (including legal assistants) to Lender in connection with any of the foregoing. -36- 9.15. Further Assurances. At the request of Lender at any time and from time to time, Borrower shall, at its expense, duly execute and deliver, or cause to be duly executed and delivered, such further agreements, documents and instruments, and do or cause to be done such further acts as may be necessary or proper to evidence, perfect, maintain and enforce the security interests and the priority thereof in the Collateral and to otherwise effectuate the provisions or purposes of this Agreement or any of the other Financing Agreements. Lender may at any time and from time to time request a certificate from an officer of Borrower representing that all conditions precedent to the making of Loans and providing Letter of Credit Accommodations contained herein are satisfied. In the event of such request by Lender, Lender may, at its option, cease to make any further Loans or provide any further Letter of Credit Accommodations until Lender has received such certificate and, in addition, Lender has determined that such conditions are satisfied. Where permitted by law, Borrower hereby authorizes Lender to execute and file one or more UCC financing statements signed only by Lender. 9.16. Compliance with ERISA. (a) Borrower shall not with respect to any "employee benefit plans" maintained by Borrower or any of its ERISA Affiliates: (i) terminate any of such employee benefit plans so as to incur any liability to the Pension Benefit Guaranty Corporation established pursuant to ERISA, (ii) allow or suffer to exist any prohibited transaction involving any of such employee benefit plans or any trust created thereunder which would subject Borrower or such ERISA Affiliate to a tax or penalty or other liability on prohibited transactions imposed under Section 4975 of the Code or ERISA, (iii) fail to pay to any such employee benefit plan any contribution which it is obligated to pay under Section 302 of ERISA, Section 412 of the Code or the terms of such plan, (iv) allow or suffer to exist any accumulated funding deficiency, whether or not waived, with respect to any such employee benefit plan, (v) allow or suffer to exist any occurrence of a reportable event or any other event or condition which presents a material risk of termination by the Pension Benefit Guaranty Corporation of any such employee benefit plan that is a single employer plan, which termination could result in any liability to the Pension Benefit Guaranty Corporation or (vi) incur any withdrawal liability with respect to any multiemployer pension plan. (b) As used in this Section 9.18, the terms "employee benefit plans", "accumulated funding deficiency" and "reportable event" shall have the respective meanings assigned to them in ERISA, and the term "prohibited transaction" shall have the meaning assigned to it in Section 4975 of the Code and ERISA. -37- SECTION 10. EVENTS OF DEFAULT AND REMEDIES 10.1. Events of Default. The occurrence or existence of any one or more of the following events are referred to herein individually as an "Event of Default", and collectively as "Events of Default": (a) Borrower fails to pay when due any of the Obligations or fails to perform any of the terms, covenants, conditions or provisions contained in this Agreement or any of the other Financing Agreements; (b) any representation, warranty or statement of fact made by Borrower to Lender in this Agreement, the other Financing Agreements or any other agreement, schedule, confirmatory assignment or otherwise shall when made or deemed made be false or misleading in any material respect; (c) any Obligor revokes, terminates or fails to perform any of the terms, covenants, conditions or provisions of any guarantee, endorsement or other agreement of such party in favor of Lender; (d) any judgment for the payment of money is rendered against Borrower or any Obligor in excess of $100,000 in any one case or in excess of $250,000 in the aggregate and shall remain undischarged or unvacated for a period in excess of thirty (30) days or execution shall at any time not be effectively stayed, or any judgment other than for the payment of money, or injunction, attachment, garnishment or execution is rendered against Borrower or any Obligor or any of their assets; (e) any Obligor (being a natural person or a general partner of an Obligor which is a partnership) dies or Borrower or any Obligor, which is a partnership, limited liability company, limited liability partnership or a corporation, dissolves or suspends or discontinues doing business; (f) Borrower or any Obligor becomes insolvent (however defined or evidenced), makes an assignment for the benefit of creditors, makes or sends notice of a bulk transfer or calls a meeting of its creditors or principal creditors; (g) a case or proceeding under the bankruptcy laws of the United States of America now or hereafter in effect or under any insolvency, reorganization, receivership, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction now or hereafter in effect (whether at law or in equity) is filed against Borrower or any Obligor or all or any part of its properties and such petition or application is not dismissed within thirty (30) days after the date of its filing or Borrower or any Obligor shall file any answer admitting or not contesting such petition or application or indicates its consent to, acquiescence in or approval of, any such action or proceeding or the relief requested is granted sooner; -38- (h) a case or proceeding under the bankruptcy laws of the United States of America now or hereafter in effect or under any insolvency, reorganization, receivership, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction now or hereafter in effect (whether at a law or equity) is filed by Borrower or any Obligor or for all or any part of its property; or (i) any default by Borrower or any Obligor under any of the Real Estate Documents; or any default by Borrower or any Obligor under any agreement, document or instrument relating to any indebtedness for borrowed money owing to any person other than Lender, or any capitalized lease obligations, contingent indebtedness in connection with any guarantee, letter of credit, indemnity or similar type of instrument in favor of any person other than Lender, in any case in an amount in excess of $100,000, which default continues for more than the applicable cure period, if any, with respect thereto, or any default by Borrower or any Obligor under any material contract, lease, license or other obligation to any person other than Lender, which default continues for more than the applicable cure period, if any, with respect thereto; (j) John H. Schwan and Stephen M. Merrick shall fail to own, in the aggregate, at least twenty-three percent (23%) of the issued and outstanding capital stock of Borrower; (k) the indictment or threatened indictment of Borrower or any Obligor under any criminal statute, or commencement or threatened commencement of criminal or civil proceedings against Borrower or any Obligor, pursuant to which statute or proceedings the penalties or remedies sought or available include forfeiture of any of the property of Borrower or such Obligor; (l) there shall be a material adverse change in the business, assets or prospects of Borrower or any Obligor after the date hereof; or (m) there shall be an event of default under any of the other Financing Agreements. 10.2. Remedies. (a) At any time an Event of Default exists or has occurred and is continuing, Lender shall have all rights and remedies provided in this Agreement, the other Financing Agreements, the Uniform Commercial Code and other applicable law, all of which rights and remedies may be exercised without notice to or consent by Borrower or any Obligor, except as such notice or consent is expressly provided for hereunder or required by applicable law. All rights, remedies and powers granted to Lender hereunder, under any of the other Financing Agreements, the Uniform Commercial Code or other applicable law, are cumulative, not exclusive and enforceable, in Lender's discretion, alternatively, successively, or concurrently on any one or more occasions, and shall include, without limitation, the right to apply to a court of equity for an injunction to restrain a breach or threatened breach by Borrower of this Agreement or any of the other Financing Agreements. Lender may, at any -39- time or times, proceed directly against Borrower or any Obligor to collect the Obligations without prior recourse to the Collateral. (b) Without limiting the foregoing, at any time an Event of Default exists or has occurred and is continuing, Lender may, in its discretion and without limitation, (i) accelerate the payment of all Obligations and demand immediate payment thereof to Lender (provided, that upon the occurrence of any Event of Default described in Sections 10.1(g) and 10.1(h), all Obligations shall automatically become immediately due and payable), (ii) with or without judicial process or the aid or assistance of others, enter upon any premises on or in which any of the Collateral may be located and take possession of the Collateral or complete processing, manufacturing and repair of all or any portion of the Collateral, (iii) require Borrower, at Borrower's expense, to assemble and make available to Lender any part or all of the Collateral at any place and time designated by Lender, (iv) collect, foreclose, receive, appropriate, setoff and realize upon any and all Collateral, (v) remove any or all of the Collateral from any premises on or in which the same may be located for the purpose of effecting the sale, foreclosure or other disposition thereof or for any other purpose, (vi) sell, lease, transfer, assign, deliver or otherwise dispose of any and all Collateral (including entering into contracts with respect thereto, public or private sales at any exchange, broker's board, at any office of Lender or elsewhere) at such prices or terms as Lender may deem reasonable, for cash, upon credit or for future delivery, with the Lender having the right to purchase the whole or any part of the Collateral at any such public sale, all of the foregoing being free from any right or equity of redemption of Borrower, which right or equity of redemption is hereby expressly waived and released by Borrower and/or (vii) terminate this Agreement. If any of the Collateral is sold or leased by Lender upon credit terms or for future delivery, the Obligations shall not be reduced as a result thereof until payment therefor is finally collected by Lender. If notice of disposition of Collateral is required by law, five (5) days prior notice by Lender to Borrower designating the time and place of any public sale or the time after which any private sale or other intended disposition of Collateral is to be made, shall be deemed to be reasonable notice thereof and Borrower waives any other notice. In the event Lender institutes an action to recover any Collateral or seeks recovery of any Collateral by way of prejudgment remedy, Borrower waives the posting of any bond which might otherwise be required. (c) Lender may apply the cash proceeds of Collateral actually received by Lender from any sale, lease, foreclosure or other disposition of the Collateral to payment of the Obligations, in whole or in part and in such order as Lender may elect, whether or not then due. Borrower shall remain liable to Lender for the payment of any deficiency with interest at the highest rate provided for herein and all costs and expenses of collection or enforcement, including attorneys' fees and legal expenses. (d) Borrower irrevocably grants Lender a non-exclusive license to, upon an Event of Default, use all present and future patents, trademarks, copyrights, licenses and other intellectual property owned or used by Borrower from time to time. No royalties or other compensation shall be payable by Lender to Borrower with respect to the such license. The rights of Lender hereunder are assignable in connection with any (a) sale or other disposition of Collateral in accordance with the Financing Agreements, to the extent -40- necessary or appropriate to permit the purchaser of such Collateral to have unfettered rights with respect to such Collateral, or (b) assignment by Lender of all or part of its rights under and in accordance with the Financing Agreements. In addition, Lender may sublicense its rights under such license. (e) Without limiting the foregoing, upon the occurrence of an Event of Default or an event which with notice or passage of time or both would constitute an Event of Default, Lender may, at its option, without notice, (i) cease making Loans or arranging for Letter of Credit Accommodations or reduce the lending formulas or amounts of Revolving Loans and Letter of Credit Accommodations available to Borrower and/or (ii) terminate any provision of this Agreement providing for any future Loans or Letter of Credit Accommodations to be made by Lender to Borrower. SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW 11.1. Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver. (a) The validity, interpretation and enforcement of this Agreement and the other Financing Agreements and any dispute arising out of the relationship between the parties hereto, whether in contract, tort, equity or otherwise, shall be governed by the internal laws of the State of Illinois (without giving effect to principles of conflicts of law). (b) Borrower and Lender irrevocably consent and submit to the non-exclusive jurisdiction of the State courts in Cook County, Illinois and the United States District Court for the Northern District of Illinois and waive any objection based on venue or forum non conveniens with respect to any action instituted therein arising under this Agreement or any of the other Financing Agreements or in any way connected with or related or incidental to the dealings of the parties hereto in respect of this Agreement or any of the other Financing Agreements or the transactions related hereto or thereto, in each case whether now existing or hereafter arising, and whether in contract, tort, equity or otherwise, and agree that any dispute with respect to any such matters shall be heard only in the courts described above (except that Lender shall have the right to bring any action or proceeding against Borrower or its property in the courts of any other jurisdiction which Lender deems necessary or appropriate in order to realize on the Collateral or to otherwise enforce its rights against Borrower or its property). (c) Borrower hereby waives personal service of any and all process upon it and consents that all such service of process may be made by certified mail (return receipt requested) directed to its address set forth on the signature pages hereof and service so made shall be deemed to be completed five (5) days after the same shall have been so deposited in the U.S. mails, or, at Lender's option, by service upon Borrower in any other manner provided under the rules of any such courts. Within thirty (30) days after such service, Borrower shall appear in answer to such process, failing which Borrower shall be deemed in -41- default and judgment may be entered by Lender against Borrower for the amount of the claim and other relief requested. (d) BORROWER AND LENDER EACH HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT OF THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. BORROWER AND LENDER EACH HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT BORROWER OR LENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. (e) Lender shall not have any liability to Borrower (whether in tort, contract, equity or otherwise) for losses suffered by Borrower in connection with, arising out of, or in any way related to the transactions or relationships contemplated by this Agreement, or any act, omission or event occurring in connection herewith, unless it is determined by a final and non-appealable judgment or court order binding on Lender, that the losses were the result of acts or omissions constituting gross negligence or willful misconduct. In any such litigation, Lender shall be entitled to the benefit of the rebuttable presumption that it acted in good faith and with the exercise of ordinary care in the performance by it of the terms of this Agreement. 11.2. Waiver of Notices. Borrower hereby expressly waives demand, presentment, protest and notice of protest and notice of dishonor with respect to any and all instruments and commercial paper, included in or evidencing any of the Obligations or the Collateral, and any and all other demands and notices of any kind or nature whatsoever with respect to the Obligations, the Collateral and this Agreement, except such as are expressly provided for herein. No notice to or demand on Borrower which Lender may elect to give shall entitle Borrower to any other or further notice or demand in the same, similar or other circumstances. 11.3. Amendments and Waivers. Neither this Agreement nor any provision hereof shall be amended, modified, waived or discharged orally or by course of conduct, but only by a written agreement signed by an authorized officer of Lender, and as to amendments, as also signed by an authorized officer of Borrower. Lender shall not, by any act, delay, omission or otherwise be deemed to have expressly or impliedly waived any of its rights, powers and/or remedies unless such -42- waiver shall be in writing and signed by an authorized officer of Lender. Any such waiver shall be enforceable only to the extent specifically set forth therein. A waiver by Lender of any right, power and/or remedy on any one occasion shall not be construed as a bar to or waiver of any such right, power and/or remedy which Lender would otherwise have on any future occasion, whether similar in kind or otherwise. 11.4. Waiver of Counterclaims. Borrower waives all rights to interpose any claims, deductions, setoffs or counterclaims of any nature (other than compulsory counterclaims) in any action or proceeding with respect to this Agreement, the Obligations, the Collateral or any matter arising therefrom or relating hereto or thereto. 11.5. Indemnification. Borrower shall indemnify and hold Lender, and its directors, agents, employees and counsel, harmless from and against any and all losses, claims, damages, liabilities, costs or expenses imposed on, incurred by or asserted against any of them in connection with any litigation, investigation, claim or proceeding commenced or threatened related to the negotiation, preparation, execution, delivery, enforcement, performance or administration of this Agreement, any other Financing Agreements, or any undertaking or proceeding related to any of the transactions contemplated hereby or any act, omission, event or transaction related or attendant thereto, including amounts paid in settlement, court costs, and the fees and expenses of counsel. To the extent that the undertaking to indemnify, pay and hold harmless set forth in this Section may be unenforceable because it violates any law or public policy, Borrower shall pay the maximum portion which it is permitted to pay under applicable law to Lender in satisfaction of indemnified matters under this Section. The foregoing indemnity shall survive the payment of the Obligations and the termination or non-renewal of this Agreement. SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS 12.1. Term. (a) THIS AGREEMENT AND THE OTHER FINANCING AGREEMENTS SHALL BECOME EFFECTIVE AS OF THE DATE SET FORTH ON THE FIRST PAGE HEREOF AND SHALL CONTINUE IN FULL FORCE AND EFFECT FOR A TERM ENDING ON THE DATE THREE (3) YEARS FROM THE DATE HEREOF (THE "RENEWAL DATE"), AND FROM YEAR TO YEAR THEREAFTER, UNLESS SOONER TERMINATED PURSUANT TO THE TERMS HEREOF. LENDER OR BORROWER MAY TERMINATE THIS AGREEMENT AND THE OTHER FINANCING AGREEMENTS EFFECTIVE ON THE RENEWAL DATE OR ON THE ANNIVERSARY OF THE RENEWAL DATE IN ANY YEAR BY GIVING TO THE OTHER PARTY AT LEAST SIXTY (60) DAYS PRIOR WRITTEN NOTICE; PROVIDED, THAT THIS AGREEMENT AND ALL OTHER FINANCING AGREEMENTS MUST BE TERMINATED SIMULTANEOUSLY. Upon the effective -43- date of termination or non-renewal of the Financing Agreements, Borrower shall pay to Lender, in full, all outstanding and unpaid Obligations and shall furnish cash collateral to Lender in such amounts as Lender determines are reasonably necessary to secure Lender from loss, cost, damage or expense, including attorneys' fees and legal expenses, in connection with any contingent Obligations, including issued and outstanding Letter of Credit Accommodations and checks or other payments provisionally credited to the Obligations and/or as to which Lender has not yet received final and indefeasible payment. Such payments in respect of the Obligations and cash collateral shall be remitted by wire transfer in Federal funds to such bank account of Lender, as Lender may, in its discretion, designate in writing to Borrower for such purpose. Interest shall be due until and including the next business day, if the amounts so paid by Borrower to the bank account designated by Lender are received in such bank account later than 12:00 noon, Chicago time. (b) No termination of this Agreement or the other Financing Agreements shall relieve or discharge Borrower of its respective duties, obligations and covenants under this Agreement or the other Financing Agreements until all Obligations have been fully and finally discharged and paid, and Lender's continuing security interest in the Collateral and the rights and remedies of Lender hereunder, under the other Financing Agreements and applicable law, shall remain in effect until all such Obligations have been fully and finally discharged and paid. (c) If for any reason this Agreement is terminated prior to the end of the then current term or renewal term of this Agreement, in view of the impracticality and extreme difficulty of ascertaining actual damages and by mutual agreement of the parties as to a reasonable calculation of Lender's lost profits as a result thereof, Borrower agrees to pay to Lender, upon the effective date of such termination, an early termination fee in the amount set forth below if such termination is effective in the period indicated: Amount Period ------ ------ (i) 2% of Maximum Credit From the date hereof to and including the first anniversary of the date hereof (ii) 1% of Maximum Credit From the first anniversary of the date hereof to and including the second anniversary of the date hereof -44- Amount Period ------ ------ (iii) 0.5% of Maximum Credit From the second anniversary of the date hereof to but not including the 90-day period ending on the third anniversary of the date hereof or if the term of this Agreement is extended for an additional year as provided above, then to but not including the last day of such renewal term Such early termination fee shall be presumed to be the amount of damages sustained by Lender as a result of such early termination and Borrower agrees that it is reasonable under the circumstances currently existing. In addition, Lender shall be entitled to such early termination fee upon the occurrence of any Event of Default described in Sections 10.1(g) and 10.1(h) hereof, even if Lender does not exercise its right to terminate this Agreement, but elects, at its option, to provide financing to Borrower or permit the use of cash collateral under the United States Bankruptcy Code. The early termination fee provided for in this Section 12.1 shall be deemed included in the Obligations. 12.2. Notices. All notices, requests and demands hereunder shall be in writing and (a) made to Lender at its address set forth below and to Borrower at its chief executive office set forth below, or to such other address as either party may designate by written notice to the other in accordance with this provision, and (b) deemed to have been given or made: if delivered in person, immediately upon delivery; if by telex, telegram or facsimile transmission, immediately upon sending and upon confirmation of receipt; if by nationally recognized overnight courier service with instructions to deliver the next business day, one (1) business day after sending; and if by certified mail, return receipt requested, five (5) days after mailing. 12.3. Partial Invalidity. If any provision of this Agreement is held to be invalid or unenforceable, such invalidity or unenforceability shall not invalidate this Agreement as a whole, but this Agreement shall be construed as though it did not contain the particular provision held to be invalid or unenforceable and the rights and obligations of the parties shall be construed and enforced only to such extent as shall be permitted by applicable law. 12.4. Successors. This Agreement, the other Financing Agreements and any other document referred to herein or therein shall be binding upon and inure to the benefit of and be -45- enforceable by Lender, Borrower and their respective successors and assigns, except that Borrower may not assign its rights under this Agreement, the other Financing Agreements and any other document referred to herein or therein without the prior written consent of Lender. Lender may, after notice to Borrower, assign its rights and delegate its obligations under this Agreement and the other Financing Agreements and further may assign, or sell participations in, all or any part of the Loans, the Letter of Credit Accommodations or any other interest herein to another financial institution or other person, in which event, the assignee or participant shall have, to the extent of such assignment or participation, the same rights and benefits as it would have if it were the Lender hereunder, except as otherwise provided by the terms of such assignment or participation. 12.5. Entire Agreement. This Agreement, the other Financing Agreements, any supplements hereto or thereto, and any instruments or documents delivered or to be delivered in connection herewith or therewith represents the entire agreement and understanding concerning the subject matter hereof and thereof between the parties hereto, and supersede all other prior agreements, understandings, negotiations and discussions, representations, warranties, commitments, proposals, offers and contracts concerning the subject matter hereof, whether oral or written. In the event of any inconsistency between the terms of this Agreement and any schedule or exhibit hereto, the terms of this Agreement shall govern. -46- IN WITNESS WHEREOF, Lender and Borrower have caused these presents to be duly executed as of the day and year first above written. LENDER BORROWER - ------ -------- CONGRESS FINANCIAL CORPORATION CTI INDUSTRIES CORPORATION (CENTRAL) By /s/ Richard Dickard By /s/ Howard Schwan --------------------------- ----------------------- Title Senior Vice President Title President Address: Chief Executive Office: - ------- ---------------------- 150 South Wacker Drive 22160 North Pepper Road Suite 2200 Barrington, Illinois 60010 Chicago, Illinois 60606 -47- EX-10.15 3 d25424_ex10-15.txt TERM PROMISSORY NOTE EXHIBIT 10.15 TERM PROMISSORY NOTE $1,426,000 January __, 2001 FOR VALUE RECEIVED, CTI INDUSTRIES CORPORATION, a Delaware corporation (the "Debtor"), hereby unconditionally promises to pay to the order of CONGRESS FINANCIAL CORPORATION (CENTRAL), an Illinois corporation (the "Payee"), at the offices of Payee at 150 South Wacker Drive, Suite 2200, Chicago, Illinois 60606, or at such other place as the Payee or any holder hereof may from time to time designate, the principal sum of ONE MILLION FOUR HUNDRED TWENTY-SIX THOUSAND AND NO/100 DOLLARS ($1,426,000) in lawful money of the United States of America and in immediately available funds in seventy-two (72) consecutive monthly installments (or earlier as hereinafter provided) on the first day of each month commencing on February 1, 2001, each in an amount of NINETEEN THOUSAND EIGHT HUNDRED FIVE AND NO/100 DOLLARS ($19,805) and a final installment on the sixth anniversary of the date hereof in the amount of the entire unpaid balance of this Note; provided, that, notwithstanding the foregoing, the unpaid principal balance of this Note shall be due and payable on the termination of the Loan Agreement. In addition, this Note is subject to mandatory prepayments set forth in the Loan Agreement. Debtor hereby further promises to pay interest to the order of Payee on the unpaid principal balance hereof at the Interest Rate (as hereinafter defined). Such interest shall be paid in like money at said office or place from the date hereof, commencing February 1, 2001 and on the first day of each month thereafter until the indebtedness evidenced by this Note is paid in full. Interest payable upon and after an Event of Default or termination or non-renewal of the Loan Agreement shall be payable upon demand. For purposes hereof, (a) the term "Interest Rate" shall mean a rate of three quarters of one percent (0.75%) per annum in excess of the Prime Rate; provided, that, at Payee's option, the Interest Rate shall mean a rate of two and three quarters percent (2.75%) per annum in excess of the Prime Rate upon and after an Event of Default or termination or non-renewal of the Loan Agreement; provided, further, that if no Event of Default exists and the audited consolidated financial statements of Debtor for any fiscal year ending on or after December 31, 2001 show that Debtor's net income (before taxes) exceeded $750,000 for such fiscal year, on the tenth day after Payee's receipt of such financial statements the Interest Rate shall be reduced by twenty-five (25) basis points; provided, further, that the Interest Rate may not be reduced more than once and if the audited consolidated financial statements of Debtor for any fiscal year ending on or after December 31, 2002 show a net loss for such fiscal year, the Interest Rate shall revert to the original amount prior to any such reduction (for purposes hereof, net income and net loss shall be calculated exclusive of nonrecurring or one time gains and extraordinary gains), (b) the term "Prime Rate" shall mean the rate from time to time announced by First Union National Bank or its successors, as its prime rate, whether or not such announced rate is the best rate available at such bank, (c) the term "Event of Default" shall mean an Event of Default as such term is defined in the Loan Agreement, and (d) the term "Loan Agreement" shall mean the Loan and Security Agreement, dated of even date herewith, between Debtor and Payee, as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. Unless otherwise defined herein, all capitalized terms used herein shall have the meaning assigned thereto in the Loan Agreement. The Interest Rate payable hereunder shall increase or decrease by an amount equal to each increase or decrease, respectively, in the Prime Rate, effective on the first day of the month after any change in the Prime Rate is announced. The increase or decrease shall be based on the Prime Rate in effect on the last day of the month in which any such change occurs. Interest shall be calculated on the basis of a three hundred sixty (360) day year and actual days elapsed. In no event shall the interest charged hereunder exceed the maximum permitted under the laws of the State of Illinois or other applicable law. This Note is issued pursuant to the terms and provisions of the Loan Agreement to evidence the Term Loan by Payee to Debtor. This Note is secured by the Collateral described in the Loan Agreement and all notes, guarantees, security agreements and other agreements, documents and instruments now or at any time hereafter executed and/or delivered by Debtor or any other party in connection therewith (all of the foregoing, together with the Loan Agreement, as the same now exist or may hereafter be amended, modified, supplemented, renewed, extended, restated or replaced, being collectively referred to herein as the "Financing Agreements"), and is entitled to all of the benefits and rights thereof and of the other Financing Agreements. At the time any payment is due hereunder, at its option, Payee may charge the amount thereof to any account of Debtor maintained by Payee. If any payment of principal or interest is not made when due hereunder, or if any other Event of Default shall occur for any reason, or if the Loan Agreement shall be terminated or not renewed for any reason whatsoever, then and in any such event, in addition to all rights and remedies of Payee under the Financing Agreements, applicable law or otherwise, all such rights and remedies being cumulative, not exclusive and enforceable alternatively, successively and concurrently, Payee may, at its option, declare any or all of Debtor's obligations, liabilities and indebtedness owing to Payee under the Loan Agreement and the other Financing Agreements (the "Obligations"), including, without limitation, all amounts owing under this Note, to be due and payable, whereupon the then unpaid balance hereof, together with all interest accrued thereon, shall forthwith become due and payable, together with interest accruing thereafter at the then applicable Interest Rate stated above until the indebtedness evidenced by this Note is paid in full, plus the costs and expenses of collection hereof, including, but not limited to, attorneys' fees and legal expenses. -2- Debtor (i) waives diligence, demand, presentment, protest and notice of any kind, (ii) agrees that it will not be necessary for Payee to first institute suit in order to enforce payment of this Note and (iii) consents to any one or more extensions or postponements of time of payment, release, surrender or substitution of collateral security, or forbearance or other indulgence, without notice or consent. The pleading of any statute of limitations as a defense to any demand against Debtor is expressly hereby waived by Debtor. Upon any Event of Default or termination or non-renewal of the Loan Agreement, Payee shall have the right, but not the obligation to setoff against this Note all money owed by Payee to Debtor. Payee shall not be required to resort to any Collateral for payment, but may proceed against Debtor and any guarantors or endorsers hereof in such order and manner as Payee may choose. None of the rights of Payee shall be waived or diminished by any failure or delay in the exercise thereof. The validity, interpretation and enforcement of this Note and the other Financing Agreements and any dispute arising in connection herewith or therewith shall be governed by the internal laws of the State of Illinois (without giving effect to principles of conflicts of law). Debtor irrevocably consents and submits to the non-exclusive jurisdiction of the Circuit Court of Cook County and the United States District Court for the Northern District of Illinois and waives any objection based on venue or forum non conveniens with respect to any action instituted therein arising under this Note or any of the other Financing Agreements or in any way connected with or related or incidental to the dealings of Debtor and Payee in respect of this Note or any of the other Financing Agreements or the transactions related hereto or thereto, in each case whether now existing or hereafter arising, and whether in contract, tort, equity or otherwise, and agrees that any dispute arising out of the relationship between Debtor and Payee or the conduct of such persons in connection with this Note or otherwise shall be heard only in the courts described above (except that Payee shall have the right to bring any action or proceeding against Debtor or its property in the courts of any other jurisdiction which Payee deems necessary or appropriate in order to realize on the Collateral or to otherwise enforce its rights against Debtor or its property). Debtor hereby waives personal service of any and all process upon it and consents that all such service of process may be made by certified mail (return receipt requested) directed to it and service so made shall be deemed to be completed five (5) days after the same shall have been so deposited in the U.S. mails, or, at Payee's option, by service upon Debtor in any other manner provided under the rules of any such courts. Within thirty (30) days after such service, Debtor shall appear in answer to such process, failing which Debtor shall be deemed in default and judgment may be entered by Payee against Debtor for the amount of the claim and other relief requested. DEBTOR HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS -3- NOTE OR (ii) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS BETWEEN DEBTOR AND PAYEE IN RESPECT OF THIS NOTE OR THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. DEBTOR AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY. The execution and delivery of this Note has been authorized by the Board of Directors and by any necessary vote or consent of the stockholders of Debtor. Debtor hereby authorizes Payee to complete this Note in any particulars according to the terms of the loan evidenced hereby. -4- This Note shall be binding upon the successors and assigns of Debtor and inure to the benefit of Payee and its successors, endorsees and assigns. Whenever used herein, the term "Debtor" shall be deemed to include its successors and assigns and the term "Payee" shall be deemed to include its successors, endorsees and assigns. If any term or provision of this Note shall be held invalid, illegal or unenforceable, the validity of all other terms and provisions hereof shall in no way be affected thereby. ATTEST: CTI INDUSTRIES CORPORATION By By /s/ Howard Schwan ----------------------------- ------------------------- Its Its President ----------------------------- ------------------------- [Corporate Seal] -5- EX-10.16 4 d25424_ex10-16.txt REAL ESTATE MORTGAGE EXHIBIT 10.16 REAL ESTATE MORTGAGE THIS AGREEMENT (the "Mortgage") made as of this _____ day of January, 2001, between CTI INDUSTRIES CORPORATION, a Delaware corporation (the "Mortgagor"), and BANCO POPULAR NORTH AMERICA (the "Mortgagee"). W I T N E S S E T H: That to secure the payment of the Notes of the Mortgagor in the principal amounts of Two Million Seven Hundred Thousand and No/100 Dollars ($2,700,000.00) and One Hundred Seventy-Three Thousand and No/100 Dollars ($173,000.00) respectively, together with interest thereon and the payment of any and all sums heretofore or hereafter loaned and advanced by Mortgagee to Mortgagor all of which sums shall not exceed Two Million Five Hundred Thousand and No/100 Dollars ($2,500,000.00) and the performance and observance by the Mortgagor, and any guarantors of any indebtedness secured hereby, of all of the covenants, agreements, and conditions contained in said Note, this Mortgage, in all other instruments pertaining to the repayment of any indebtedness secured hereby (including any guaranty thereof) and in any other security agreement relating to sums secured hereby, the Mortgagor hereby mortgages and conveys to the Mortgagee: All those certain lots, pieces, or parcels of land with the buildings and improvements thereon situated, lying and being in the County of Lake, in the State of Illinois as set forth in Exhibit "A", attached hereto and made a part hereof (the "Premises"). TOGETHER with all improvements, tenements, hereditaments, gas, oil, minerals, easements, fixtures and appurtenances thereunto belonging or pertaining; all apparatus, equipment and appliances now or hereafter therein or thereon used to supply heat, gas, air conditioning, water, light, power, ventilation and refrigeration; all machinery and other equipment of every nature and kind used or useful in connection with the maintenance and operation of the Premises and intended for the use of tenants or occupants; (all of the foregoing whether now on the Premises or hereafter erected, installed or placed thereon or therein, or whether physically attached thereto or not, are and shall be deemed a part of said real estate as between the parties hereto and all persons claiming by, through or under them, and a portion of the security for said indebtedness); and also all the estate, right, title and interest of the Mortgagor in and to the Premises. 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 for the purpose of creating hereby a security interest in such property, which Mortgagor hereby grants to Mortgagee as Secured Party (as said term is defined in the Uniform Commercial Code), securing said indebtedness and obligations. Notwithstanding anything contained herein to the contrary, this Mortgage does not cover (i) inventory of Mortgagor; (ii) any of the property described on Schedule 1 hereto; or (iii) any proceeds, replacements, additions, substitutions or accessories of any of the foregoing. Mortgagor represents and warrants that it is lawfully seized of the Premises, that the same are unencumbered, and that it has good right, full power and lawful authority to convey and mortgage the same, and covenants that it will warrant and forever defend said Premises and the quiet and peaceful possession of the same against any and all claims of all persons whomsoever; TO HAVE AND HOLD the Premises unto Mortgagee, its successors and assigns, forever, for the purposes and uses herein set forth, free from all rights and benefits under the Homestead Exemption Laws of the State of Illinois, which said rights and benefits Mortgagor does hereby expressly release and waive. Mortgagor covenants and agrees: 1. To pay, when due, all sums secured hereby. 2. Not to abandon the Premises; to keep the Premises in good condition and repair and not to commit or suffer waste; to pay for and complete within a reasonable time any building at any time in the process of erection upon the Premises; to promptly repair, restore, or rebuild any building or improvement now or hereafter on the Premises which may become damaged or destroyed; to refrain from impairing or diminishing the value of the security and to make no material alterations of the Premises. -2- 3. To comply with all requirements of law or municipal ordinances governing the Premises and the use thereof; and to permit Mortgagee to inspect the Premises at all reasonable times. 4. To keep the Premises free from mechanics or other liens or claims for liens of any kind; to pay when due any indebtedness which may be secured by a lien or charge on the Premises, including, without limitation, any condominium association assessments, dues or charges, and, upon request, to exhibit to Mortgagee satisfactory evidence of the payment and discharge of such liens or claims. 5. To pay, ten (10) days before any penalty attaches, all general taxes and to pay, when due, all special taxes, special assessments, water charges, drainage charges, sewer service charges and other charges against the Premises, of any kind whatsoever, which may be levied, assessed, charged or imposed on the Premises or any part thereof. 6. To promptly pay all taxes and assessments assessed or levied under or by virtue of any state, federal or municipal law or regulation now existing or hereafter adopted against Mortgagee upon this mortgage, or the debt hereby secured, or upon Mortgagee's interest under this mortgage, provided however, that the total amount so paid for any such taxes pursuant to this paragraph together with the interest payable on said indebtedness shall not exceed the highest lawful rate of interest in the State of Illinois for commercial business loans of this type and provided further that in the event of the adoption of any law or regulation affecting such highest lawful rate of interest, the entire indebtedness secured by this mortgage shall thereupon become immediately due and payable at the option of Mortgagee. 7. To exhibit to Mortgagee, at least annually and at any time upon request, official receipts showing full payment of all taxes, assessments and charges which Mortgagor is required or shall elect to pay hereunder. 8. To keep the Premises continuously insured until the indebtedness secured hereby is fully paid (or in case of foreclosure until expiration of the period of redemption, if any) against loss or damage under such types of hazard, liability and environmental hazard insurance, in such forms and amounts and written by such companies as may be approved or reasonably required from time to time by Mortgagee; all policies whether or not required by the terms of this mortgage, shall contain loss payable clauses in favor of the Mortgagee (or, in case of foreclosure sale, in favor of the owner of the certificate of sale); in the event of loss, penalty or judgment, Mortgagor shall immediately notify Mortgagee in writing and Mortgagor hereby authorizes and directs each and every insurance company concerned -3- to make payments for such loss, penalty or judgment jointly to Mortgagor and Mortgagee, and the insurance proceeds or any part thereof may be applied by Mortgagee, at its option, either to the reduction of the indebtedness hereby secured, or to the restoration or repair of the property damaged, or to the payment of any fine, penalty, judgment or clean-up costs assessed against Mortgagor or Mortgagee and any application thereof to the indebtedness shall not relieve Mortgagor from making any payments herein required until the indebtedness is paid in full. 9. To deliver to Mortgagee all policies of insurance, with evidence of premiums prepaid (renewal policies to be delivered not less than ten (10) days prior to the respective dates of expiration), and title guarantee policies and other evidence of title to the Premises, all of which shall be held by Mortgagee without liability, and in the event of foreclosure of this mortgage or transfer of title to the Premises in extinguishment of said indebtedness, shall become the absolute property of Mortgagee. Mortgagee may, from time to time, at its option, waive, and after any such waiver, reinstate, any or all provisions hereof requiring deposit of insurance policies, by notice to Mortgagor in writing. 10. Upon default and demand by Mortgagee, to make monthly deposits with Mortgagee, in addition to any other payments required to be made hereunder of a sum equal to one-twelfth (1/12th) of the yearly taxes and assessments which may be levied against the Premises and one-twelfth (1/12th) of the annual premium on the insurance policies covering the Premises. The amount of such taxes and assessments and premiums, when unknown, shall be estimated by Mortgagee. Such deposits shall be used by Mortgagee to pay such taxes and assessments and premiums when due. Any insufficiency of such deposits to pay such taxes and assessments and premiums when due shall be paid by Mortgagor to Mortgagee on demand. Upon any default under this mortgage, Mortgagee may apply any such deposits to any obligation secured hereby or due hereunder. The enforceability of the covenants relating to taxes and assessments and premiums herein otherwise provided, shall not be affected except insofar as the obligations thereunder have been actually met by compliance with this paragraph. Mortgagee may from time to time at its option waive, and after any such waiver reinstate, any or all provisions hereof requiring deposits for taxes and assessments and premiums, by notice to Mortgagor in writing. While any such waiver is in effect, Mortgagor shall pay taxes and assessments and premiums as herein elsewhere provided. 11. To pay to Mortgagee any awards of damage resulting from condemnation proceedings or the taking or injury of the Premises for public use, less reasonable costs and associated attorneys' fees and expenses of Mortgagor and the proceeds or any part thereof shall be applied by Mortgagee, at its option, after the -4- payment of all of its expenses, including costs and attorneys' fees, to the reduction of the indebtedness hereby secured. 12. To deliver to the Mortgagee reports of the income and expenses of the Premises in such reasonable detail as the Mortgagee may require signed by the responsible operating official of the Premises, and to deliver financial statements of the Mortgagor within ten (10) days after request by Mortgagee. 13. In the event of default in performance of any of the covenants or agreements herein contained, Mortgagee may, but need not, make any payment or perform any act hereinbefore 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 any other lien, encumbrance, suit title or claim thereof, or redeem from any tax sale or forfeiture affecting the Premises or contest any tax or assessment. 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 to protect the Premises and the lien hereof shall be so much additional indebtedness secured hereby and shall become immediately due and payable without notice and with interest thereon at the rate in effect after maturity as set forth in the note described above. Mortgagee, making any payment hereby authorized relating to taxes or assessments, shall be the sole judge of the legality and validity thereof and of the amount necessary to be paid in satisfaction thereof. 14. If (a) default be made in payment, when due, of any sum secured hereby, or in any of the other covenants or agreements herein contained to be performed by Mortgagor, or (b) if there be a default in the terms and/or conditions of any other agreement between the Mortgagor and the Mortgagee relating to the sum hereby secured or to any other indebtedness of the Mortgagor to Mortgagee or, (c) if there be a default in the terms or conditions of any other agreement between the Mortgagor, or any guarantor and the Mortgagee, or (d) if any proceedings be instituted or process issued (i) to enforce any other lien, charge, or encumbrance against the Premises, or (ii) against Mortgagor or any guarantor under any bankruptcy or insolvency laws, or (iii) to place the Premises or any part thereof in the custody or control of any court through its receiver or other officer, and such proceedings are not dismissed or stayed on appeal or such process withdrawn within ten days after written notice to Mortgagor, or (e) in the event the Mortgagor shall create or permit to exist any mortgage, lien or other encumbrance on the Premises other than the encumbrance represented by this Mortgage, or (f) in the event the Mortgagor shall convey title to any person or persons other than the Mortgagor, enter into any lease or other agreement containing an option to purchase or -5- receive title to the Premises, or shall suffer or permit Mortgagor's equity of redemption to become vested in any person or persons other than the Mortgagor; or (g) if Mortgagor or any guarantor makes any assignment for the benefit of creditors, or is at any time insolvent, or (h) if, at any time, litigation is commenced or reinstated contesting Mortgagor's ownership of the Premises or the validity of the lien of Mortgagee in the Premises; or (i) if by or with the consent or at the instance of Mortgagor, the Trustee, or any guarantor proceedings to extend the time of payment of any sums secured hereby or to change the terms of this mortgage be instituted; then, I. All sums secured hereby shall, at the option of Mortgagee, become immediately due and payable without notice, with interest thereon. II. Mortgagee may immediately foreclose this mortgage. The Court in which any proceeding is pending for that purpose may, at once or at any time thereafter, either before or after sale, and without regard to the solvency or insolvency of any person liable for payment of the indebtedness secured hereby, and without regard to the then value of the Premises, appoint a receiver (the provisions for the appointment of a receiver and assignment of rents being an express condition upon which the loan hereby secured is made), for the benefit of Mortgagee, with power to collect the rents, issues and profits of the Premises, due and to become due during such foreclosure suit and the full statutory period of redemption notwithstanding any redemption. The receiver, out of such rents, issues and profits when collected, may pay costs incurred in the management and operation of the Premises, prior and subordinate liens, if any, and taxes, assessments, water and other utilities and insurance, then due or thereafter accruing, and may make and pay for any necessary repairs to the Premises, and may pay all or any part of the indebtedness secured hereby or any deficiency decree, and Mortgagor hereby grants to Mortgagee the right, acting through itself, its agents or attorneys, either with or without process of law, forcibly or otherwise, to enter upon and take possession of the Premises and property, expel and remove any persons, goods or chattels, occupying or upon the same, and to collect or receive all the rents, issues and profits thereof, and to manage and control the same, and to lease the same or any part thereof from time to time, and after deducting all reasonable attorneys' fees, and all expenses incurred in the protection, care, maintenance, management and operation of the Premises, apply the remaining net income upon the indebtedness secured hereby, or upon any deficiency -6- decree entered by virtue of any sale held pursuant to a decree of foreclosure. 15. In any foreclosure of this mortgage there shall be allowed and included in the decree for sale, to be paid out of the rents or proceeds of such sale: (a) All sums secured hereby and remaining unpaid, (b) All sums advanced or paid by Mortgagee pursuant to this mortgage with interest, (c) All court costs, attorneys' fees, appraisers' fees, expenditures 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 decree) of procuring all abstracts of title, title searches and examinations, title guarantee policies, Torrens certificates and similar data with respect to title, as Mortgagee may deem necessary in connection with (i) any proceeding, including probate and bankruptcy proceedings, to which Mortgagee shall be a party, either as plaintiff, claimant, or defendant, by reason of this Mortgage or any indebtedness hereby secured; or (ii) preparations for the commencement of any suit for the foreclosure hereof after accrual of such right to foreclose whether or not actually commenced; or (iii) preparations for the defense of any threatened suit or proceeding which might affect the Premises or the security hereof, whether or not actually commenced. All expenditures and expenses of this type mentioned in this subparagraph (c) shall become so much additional indebtedness secured hereby and immediately due and payable, with interest thereon. The proceeds of any foreclosure sale shall be distributed and applied to the items described in subparagraphs (a), (b), and (c) in order of priority inversely to the manner in which said subparagraphs are above listed and any surplus of the proceeds of such sale shall be paid to Mortgagor. 16. Mortgagor hereby waives any and all rights of redemption from sale under any order or decree of foreclosure of this Mortgage, on their own behalf and on behalf of each and every person. 17. No remedy or right of Mortgagee shall be exclusive of but shall be in addition to every other remedy of right now, or hereafter, existing at law or in equity. No delay in exercising, or omission to exercise, any remedy or right, accruing on any default shall impair any such remedy or right, or shall be construed to be a waiver of any such default, or acquiescence -7- therein, nor shall it affect any subsequent default of the same or a different nature. Every such remedy or right may be exercised concurrently or independently, and when and as often as may be deemed expedient by Mortgagee. 18. Without affecting the liability of Mortgagor or any other person (except any person expressly released in writing) for payment of any indebtedness secured hereby or for performance of any obligation contained herein, and without affecting the rights of Mortgagee with respect to any security not expressly released in writing, Mortgagee may, at any time and from time to time, either before or after the maturity of said note, and without notice or consent: (a) release any person liable for payment of all or any part of the indebtedness or for performance of any obligation, (b) make any agreement extending the time or otherwise altering the terms of payment of all or any part of the indebtedness, or modifying or waiving any obligation, or subordinating, modifying or otherwise dealing with the lien or charge hereof, (c) exercise or refrain from exercising or waive any right Mortgagee may have, (d) accept additional security of any kind, (e) release or otherwise deal with any property, real or personal, securing the indebtedness, including all or any part of the property mortgaged hereby. Upon full payment of all sums secured hereby at the time and in the manner provided, then this conveyance shall be null and void and a reconveyance or release of the Premises shall be made by Mortgagee to Mortgagor. 19. Mortgagor represents and warrants that, to the best of Mortgagor's knowledge, after due inquiry, the Premises complies as of the date hereof, and Mortgagor covenants and agrees that it and the Premises will from the date hereof comply, in all material respects with all applicable federal, state, regional, county or local laws, statutes, rules, regulations or ordinances, including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C.ss.9601 et seq., the Resource Conservation and Recovery Act of 1976, as amended by the Solid and Hazardous Waste Amendments of 1984, 42 U.S.C.ss.6901 et seq., the Federal Water Pollution Control Act, as amended by the Clean Water Act of 1977, 33 U.S.C.ss.1251 et seq., the Toxic -8- Substances Control Act of 1976, 15 U.S.C.ss.2601 et seq., the Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C.ss.11001 et seq., the Clean Air Act of 1966, as amended 42 U.S.C.ss.7401 et seq., the National Environmental Policy Act of 1975, 42 U.S.C.ss.4321, the Rivers and Harbors Act of 1899, 33 U.S.C.ss.401 et seq., the Occupational Safety and Health Act of 1970, 29 U.S.C.ss.651 et seq., the Safe Drinking Water Act of 1974, as amended, 42 U.S.C.ss.300, the Illinois Environmental Protection Act, as amended 415, ILCS 5/1, et. seq. (1987), the Illinois Chemical Safety Act, as amended, 430 ILCS 45/1, et. seq. (1987) and the Illinois Responsible Property Transfer Act, as amended, 765 ILCS 90/1, et. seq. (1987), and all rules, regulations and guidance documents promulgated or published thereunder, and any state, regional, county or local statute, law, rule, regulation or ordinance relating to public health, safety or the environment, including, without limitation, relating to releases, discharges, emissions or disposals to air, water, land or groundwater, to the withdrawal or use of groundwater, to the use, handling or disposal of polychlorinated biphenyls (PCB's), asbestos or urea formaldehyde, to the treatment, storage, disposal or management of hazardous substances (including, without limitation, petroleum, its derivatives by-products or other hydrocarbons), to exposure to toxic, hazardous, or other controlled, prohibited or regulated substances, to the transportation, storage, disposal, management or release of gaseous or liquid substances, and any regulation, order, injunction, judgment, declaration, notice or demand issued thereunder. 20. Mortgagor warrants and represents that, to the best of its knowledge, after due inquiry, the Premises, including all personal property, is free from contamination, that there has not been thereon a release, discharge or emission, or threat of release, discharge or emission, of any hazardous substances, gas or liquid (including without limitation, petroleum, its derivatives or by-products, or other hydrocarbons), or any other substance, gas or liquid, which is prohibited, controlled or regulated under applicable law, or which poses a threat or nuisance to safety, health or the environment, and that the Premises does not contain, or is not affected by: (i) asbestos, (ii) urea formaldehyde foam insulation, (iii) polychlorinated biphenyls (PCB's), (iv) underground storage tanks, (v) landfills, land disposals or dumps. 21. Mortgagor represents and warrants that it has not given, nor should it give, nor has it received, any notice, letter, citation, order, warning, complaint, inquiry, claim or demand that: (i) Mortgagor has violated, or is about to violate, any federal, state, regional, county or local environmental, healthy or safety statute, law, rule, regulation, ordinance, judgment or order; (ii) there has been a release, or there is threat of release, of hazardous substances (including, without -9- limitation, petroleum, its by-products or derivatives or other hydrocarbons) from the Premises; (iii) Mortgagor may be or is liable, in whole or in part, for the costs or cleaning up, remediating or responding to a release of hazardous substances on or from the Premises (including, without limitation, petroleum, its by-products or derivatives, or other hydrocarbons); (iv) any of the Mortgagor's property or assets are subject to a lien in favor of any Governmental Body for any liability, costs or damages, under federal, state or local environmental law, rule or regulation arising from or costs incurred by such governmental entity in response to a release of a hazardous substances (including, without limitation, petroleum, its by-products or derivatives, or other hydrocarbons). In the event that Mortgagor receives any notice of the type described in this Section 4, Mortgagor shall promptly provide a copy to Mortgagee, and in no event, later than fifteen (15) days from Mortgagor's receipt or submission thereof. 22. Mortgagor represents and warrants that to the best of its knowledge, after due inquiry, it has never in the past engaged in, and agrees that in the future it shall not conduct, any business, operations or activity on the Premises, or employ or use the personal property or facilities, to manufacture, use, generate, treat, store, transport or dispose of any hazardous substance (including without limitation, petroleum, its derivatives or by-products, or other hydrocarbons), or any other substance which is prohibited, controlled or regulated under applicable law, or which poses a threat or nuisance to safety, healthy or the environment, including, without limitation, any business, operation or activity which would bring Mortgagor, its property or facilities, within the ambit of the Resource Conservation and Recovery Act of 1976, as amended by the Solid and Hazardous Waste Amendments of 1984, 42 U.S.C. ss.6901 et seq., the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. ss.9601 et seq., the Illinois Environmental Protection Act, as amended, 415 ILCS 5/1 et. seq. (1987), the Clean Air Act of 1966, as amended, 42 U.S.C. ss.7401 et seq., or any similar, state, county regional or local statute, law, regulation, rule or ordinance, including, without limitation, any state statute providing for financial responsibility for cleanup for the release or threatened release of substances provided for thereunder. 23. All provisions hereof shall inure to and bind the respective heirs, executors, administrators, successors, vendees and assigns of the parties hereto, and the word Mortgagor shall include all persons claiming under or through Mortgagor (including, if this Mortgage is executed by a trust or trustee, any beneficiary thereof) and all persons liable for the payment of the indebtedness or any part thereof, whether or not such -10- persons shall have executed the Note, any guaranty or this mortgage. Wherever used, the singular number shall include the plural and the singular, and the use of any gender shall be applicable to all genders. -11- IN WITNESS WHEREOF, the undersigned has executed this Mortgage as of the day and year first written above. CTI INDUSTRIES CORPORATION By: /s/ Howard Schwan -------------------------- Its:President ATTEST: ____________________ Its: _______________ This instrument was prepared by: Mail To: David A. Kallick David A. Kallick Tishler & Wald, Ltd. Tishler & Wald, Ltd. 200 S. Wacker Drive 200 S. Wacker Drive Suite 2600 Suite 2600 Chicago, IL 60606 Chicago, IL 60606 (312) 876-3800 -12- ACKNOWLEDGMENT STATE OF ILLINOIS) ) ss. COUNTY OF COOK ) I, , a Notary Public _____________________________________ in and for and residing in said County and State, DO HEREBY CERTIFY that ______________________________, _______________ and ____________________, ___________________ of CTI INDUSTRIES CORPORATION, personally known to me to be the same persons whose names are subscribed to the foregoing instrument, appeared before me this day in person and acknowledged that they signed and delivered said instrument as their own free and voluntary acts and the acts of the Company for the uses and purposes set forth therein. GIVEN under my hand and notarial seal this day of __________________, 2001. --------------------------- Notary Public My commission expires: --------------------------- -13- EX-10.17 5 d25424_ex10-17.txt SECURED PROMISSORY NOTE EXHIBIT 10.17 Amount: $2,700,000.00 Date: January ___, 2001 Due: January 5, 2006 SECURED PROMISSORY NOTE FOR VALUE RECEIVED, the undersigned, CTI INDUSTRIES CORPORATION, a Delaware corporation, promises to pay to the order of BANCO POPULAR NORTH AMERICA (the "Bank") at its offices in Chicago, Illinois the principal sum of Two Million Seven Hundred Thousand and No/100 Dollars ($2,700,000.00), upon the terms and conditions set forth below together with interest on the principal balance hereof from time to time unpaid at a rate per annum of nine and three-quarters percent (9.75%). Interest shall be payable from the date of disbursement, calculated on the basis of the actual number of days elapsed over a year of 360 days but shall not exceed the maximum rate of interest allowable under applicable law for loans of this type. Principal due hereunder shall bear interest after maturity, whether pursuant to acceleration, expiration of the term of this Note or otherwise, at five percent (5%) per annum plus the prematurity rate. Principal and interest due hereunder shall be payable in fifty-nine (59) consecutive monthly installments on the fifth day of each month, commencing on February 5, 2001 of $24,060.71 each, with a final installment due on January 5, 2006, of all sums remaining unpaid hereon. The undersigned shall pay to the Bank a late charge of five percent (5%) of any installment not received by the Bank within fifteen (15) days after the installment is due. At any time any deposit or other indebtedness credited by or due from the holder hereof to the undersigned may be set off against or applied in whole or partial payment of amounts owing hereunder or in whole or partial payment of any other liability of the undersigned to the holder whether now existing or hereafter arising, direct or indirect, absolute or contingent, or whether due or to become due. Amounts owing hereunder are secured as set forth in that certain Real Estate Mortgage and Assignment of Leases and Rents of even date herewith, executed by the undersigned and delivered to the Bank, the terms and conditions of which are incorporated by reference herein; and as additional security for amounts owing hereunder the undersigned grants to the holder a continuing security interest in all property of the undersigned now or hereafter in the possession or control of the holder hereof. Upon nonpayment of the indebtedness evidenced by this Note or any obligation or liability of the undersigned to the holder hereof in accordance with its terms or upon the occurrence of an event of default as defined in the aforesaid Real Estate Mortgage and Assignment of Leases and Rents or any agreement given to secure this Note or any other Note or obligation of the undersigned or the Trustee to the Bank, or if Bank shall in good -2- faith deem itself to be insecure for any reason whatsoever then unless Bank shall otherwise elect the full amount due hereunder shall be immediately due and payable, without notice or demand. No delay on the part of the holder hereof in the exercise of any right or remedy shall operate as a waiver thereof, no single or partial exercise by said holder of any right or remedy shall preclude any other future exercise thereof or the exercise of any other right or remedy and no waiver or indulgence by said holder of any default shall be effective unless in writing and signed by the holder hereof nor shall waiver by the holder hereof of any right on one occasion be construed as or be a bar to or waiver of any such right on any future occasion. The undersigned, each endorser hereof and any other party liable for the indebtedness evidenced hereby severally waive demand, presentment, notice of dishonor and consent to: any extension or postponement of the time for its payment; release of any security interest securing this Note; or the addition of any party hereto or the release or discharge of or suspension of any rights or remedies against any person who may be liable for the payment of the indebtedness evidenced hereby. The undersigned may prepay this Note on any scheduled installment date by giving the Bank ten (10) days prior written notice and paying a premium (the "Premium") equal to the following: five percent (5%) of the Note balance on the date of prepayment if prepaid between December 15, 2000 and January 4, 2002; four percent (4%) of the Note balance if prepaid between -3- January 5, 2002 and January 4, 2003; three percent (3%) of the Note balance on the date of prepayment if prepaid between January 5, 2003 and January 4, 2004; two percent (2%) of the Note balance on the day of prepayment if prepaid between January 5, 2004 and January 4, 2005; and one percent (1%) of the Note balance on the date of prepayment if prepaid between January 5, 2005 and January 4, 2006. The Premium shall not be due if the undersigned prepays the Note by refinancing the Note with the Bank. The undersigned warrants and agrees that (1) the obligation evidenced by this Note is an exempted transaction under the Truth-in-Lending Act, 15 U.S.C. ss. 1601, et seq.; and (2) said obligation constitutes a business loan which comes within the purview of subparagraph (1)(c) of Section 4, and a loan secured by a mortgage on real estate which comes within the purview of subparagraph (1)(1) of Section 4 of "an Act in relation to the rate of interest and other charges in connection with sales on credit and the lending of money," approved May 24, 1879, as amended (815 ILCS 205/4(1)(c) and 205/4(1)(l)). The loan evidenced hereby has been made and this Note has been delivered at Chicago, Illinois, and shall be governed by the laws of the State of Illinois. Wherever possible each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law but if any provision of this Note shall be prohibited by or invalid under such law such -4- 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 Note. The undersigned agrees to pay all expenses of collection of the amounts evidenced under this Note including reasonable attorneys' fees, costs and expenses. This Note shall be binding upon the heirs, successors, and assigns of the undersigned. CTI INDUSTRIES CORPORATION By: /s/ Howard Schwan ----------------------- Its President ATTEST: - -------------------- Its Secretary -5- EX-10.18 6 d25424_ex10-18.txt SECURED PROMISSORY NOTE EXHIBIT 10.18 Amount: $173,000.00 Date: January ___, 2001 Due: January 5, 2004 SECURED PROMISSORY NOTE FOR VALUE RECEIVED, the undersigned, CTI INDUSTRIES CORPORATION, a Delaware corporation, promises to pay to the order of BANCO POPULAR NORTH AMERICA (the "Bank") at its offices in Chicago, Illinois the principal sum of One Hundred Seventy-Three Thousand and No/100 Dollars ($173,000.00), upon the terms and conditions set forth below together with interest on the principal balance hereof from time to time unpaid at a rate per annum of ten percent (10.0%). Interest shall be payable from the date of disbursement, calculated on the basis of the actual number of days elapsed over a year of 360 days but shall not exceed the maximum rate of interest allowable under applicable law for loans of this type. Principal due hereunder shall bear interest after maturity, whether pursuant to acceleration, expiration of the term of this Note or otherwise, at five percent (5%) per annum plus the prematurity rate. Principal and interest due hereunder shall be payable in thirty-five (35) consecutive monthly installments on the fifth day of each month, commencing on February 5, 2001 of $5,582.00 each, with a final installment due on January 5, 2004, all sums remaining unpaid hereon. The undersigned shall pay to the Bank a late charge of five percent (5%) of any installment not received by the Bank within fifteen (15) days after the installment is due. At any time any deposit or other indebtedness credited by or due from the holder hereof to the undersigned may be set off against or applied in whole or partial payment of amounts owing hereunder or in whole or partial payment of any other liability of the undersigned to the holder whether now existing or hereafter arising, direct or indirect, absolute or contingent, or whether due or to become due. Amounts owing hereunder are secured as set forth in that certain Real Estate Mortgage and Assignment of Leases and Rents of even date herewith, executed by the undersigned and delivered to the Bank, the terms and conditions of which are incorporated by reference herein; and as additional security for amounts owing hereunder the undersigned grants to the holder a continuing security interest in all property of the undersigned now or hereafter in the possession or control of the holder hereof. Upon nonpayment of the indebtedness evidenced by this Note or any obligation or liability of the undersigned to the holder hereof in accordance with its terms or upon the occurrence of an event of default as defined in the aforesaid Real Estate Mortgage and Assignment of Leases and Rents or any agreement given to secure this Note or any other Note or obligation of the undersigned to the Bank, or if Bank shall in good faith deem - 2 - itself to be insecure for any reason whatsoever then unless Bank shall otherwise elect the full amount due hereunder shall be immediately due and payable, without notice or demand. No delay on the part of the holder hereof in the exercise of any right or remedy shall operate as a waiver thereof, no single or partial exercise by said holder of any right or remedy shall preclude any other future exercise thereof or the exercise of any other right or remedy and no waiver or indulgence by said holder of any default shall be effective unless in writing and signed by the holder hereof nor shall waiver by the holder hereof of any right on one occasion be construed as or be a bar to or waiver of any such right on any future occasion. The undersigned, each endorser hereof and any other party liable for the indebtedness evidenced hereby severally waive demand, presentment, notice of dishonor and consent to: any extension or postponement of the time for its payment; release of any security interest securing this Note; or the addition of any party hereto or the release or discharge of or suspension of any rights or remedies against any person who may be liable for the payment of the indebtedness evidenced hereby. The undersigned warrants and agrees that (1) the obligation evidenced by this Note is an exempted transaction under the Truth-in-Lending Act, 15 U.S.C. " 1601, et seq.; and (2) said obligation constitutes a business loan which comes within the purview of subparagraph (1)(c) of Section 4, and a loan secured by a mortgage on real estate which comes within the purview of - 3 - subparagraph (1)(1) of Section 4 of "an Act in relation to the rate of interest and other charges in connection with sales on credit and the lending of money," approved May 24, 1879, as amended (815 ILCS 205/4(1)(c) and 205/4(1)(l)). The loan evidenced hereby has been made and this Note has been delivered at Chicago, Illinois, and shall be governed by the laws of the State of Illinois. Wherever possible each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law but if any provision of this Note 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 Note. The undersigned agrees to pay all expenses of collection of the amounts evidenced under this Note including reasonable - 4 - attorneys' fees, costs and expenses. This Note shall be binding upon the heirs, successors, and assigns of the undersigned. CTI INDUSTRIES CORPORATION By /s/ Howard Schwan --------------------- Its President --------------------- ATTEST: - -------------------- Its Secretary - 5 - EX-10.19 7 d25424_ex10-19.txt GUARANTEE EXHIBIT 10.19 GUARANTEE January ___, 2001 Congress Financial Corporation (Central) 150 South Wacker Drive Suite 2200 Chicago, Illinois 60606-4202 Re: CTI Industries Corporation ("Borrower") Gentlemen: Congress Financial Corporation (Central) ("Lender") and Borrower have entered into certain financing arrangements pursuant to which Lender may make loans and advances and provide other financial accommodations to Borrower as set forth in the Loan and Security Agreement, dated January __, 2001 by and between Borrower and Lender (as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, the "Loan Agreement"), and other agreements, documents and instruments referred to therein or at any time executed and/or delivered in connection therewith or related thereto, including, but not limited to, this Guarantee (all of the foregoing, together with the Loan Agreement, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, being collectively referred to herein as the "Financing Agreements"). Due to the close business and financial relationships between Borrower and the undersigned ("Guarantor"), in consideration of the benefits which will accrue to Guarantor and as an inducement for and in consideration of Lender making loans and advances and providing other financial accommodations to Borrower pursuant to the Loan Agreement and the other Financing Agreements, Guarantor hereby agrees in favor of Lender as follows: 1. Guarantee. (a) Guarantor absolutely and unconditionally guarantees and agrees to be liable for the full and indefeasible payment and performance when due of the following (all of which are collectively referred to herein as the "Guaranteed Obligations"): (i) all obligations, liabilities and indebtedness of any kind, nature and description of Borrower to Lender and/or its affiliates, including principal, interest, charges, fees, costs and expenses, however evidenced, whether as principal, surety, endorser, guarantor or otherwise, whether arising under the Loan Agreement, the other Financing Agreements or otherwise, whether now existing or hereafter arising, whether arising before, during or after the initial or any renewal term of the Loan Agreement or after the commencement of any case with respect to Borrower under the United States Bankruptcy Code or any similar statute (including, without limitation, the payment of interest and other amounts, which would accrue and become due but for the commencement of such case, whether or not such amounts are allowed or allowable in whole or in part in any such case and including loans, interest, fees, charges and expenses related thereto and all other obligations of Borrower or its successors to Lender arising after the commencement of such case), whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, secured or unsecured, and however acquired by Lender and (ii) all expenses (including, without limitation, attorneys' fees and legal expenses) incurred by Lender in connection with the preparation, execution, delivery, recording, administration, collection, liquidation, enforcement and defense of Borrower's obligations, liabilities and indebtedness as aforesaid to Lender, the rights of Lender in any collateral or under this Guarantee and all other Financing Agreements or in any way involving claims by or against Lender directly or indirectly arising out of or related to the relationships among Borrower, Guarantor or any other Obligor (as hereinafter defined) and Lender, whether such expenses are incurred before, during or after the initial or any renewal term of the Loan Agreement and the other Financing Agreements or after the commencement of any case with respect to Borrower or Guarantor under the United States Bankruptcy Code or any similar statute. Notwithstanding anything in this Guarantee to the contrary, the liability of Guarantor hereunder in the aggregate shall not exceed Five Hundred Thousand and No/100 Dollars ($500,000.00) (the "Original Maximum Limit"), plus costs and expenses of collection and prosecution of actions against Guarantor, and provided, further, that if the audited consolidated financial statements of Borrower for any fiscal year on or after December 31, 2001 show that Borrower's pre-tax net income exceeded $750,000 for such fiscal year, then on the tenth day after Lender's receipt of such financial statements, so long as there exists no Event of Default under the Loan Agreement, the Original Maximum Limit shall be reduced by One Hundred Sixty-Six Thousand Six Hundred Sixty-Seven and No/100 Dollars ($166,667.00); provided, further, that the Original Maximum Limit may only be reduced once and if the audited financial consolidated financial statements of Borrower for any fiscal year ending on or after December 31, 2002 show a net loss for such fiscal year, the Original Maximum Limit shall revert to $500,000. For purposes hereof, net income and net loss shall be calculated exclusive of nonrecurring or one time gains or extraordinary gains. (b) This Guarantee is a guaranty of payment and not of collection. Guarantor agrees that Lender need not attempt to collect any Guaranteed Obligations from Borrower, Guarantor or any other Obligor or to realize upon any collateral, but may require Guarantor to make immediate payment of all of the Guaranteed Obligations to Lender when due, whether by maturity, acceleration or otherwise, or at any time thereafter. Lender may apply any amounts received in respect of the Guaranteed Obligations to any of the Guaranteed Obligations, in whole or in part (including attorneys' fees and legal expenses incurred by Lender with respect thereto or otherwise chargeable to Borrower or Guarantor) and in such order as Lender may elect. -2- (c) Payment by Guarantor shall be made to Lender at the office of Lender from time to time on demand as Guaranteed Obligations become due. Guarantor shall make all payments to Lender on the Guaranteed Obligations free and clear of, and without deduction or withholding for or on account of, any setoff, counterclaim, defense, duties, taxes, levies, imposts, fees, deductions, withholding, restrictions or conditions of any kind. One or more successive or concurrent actions may be brought hereon against Guarantor either in the same action in which Borrower or any other Obligor is sued or in separate actions. In the event any claim or action, or action on any judgment, based on this Guarantee is brought against Guarantor, Guarantor agrees not to deduct, set-off, or seek any counterclaim for or recoup any amounts which are or may be owed by Lender to Guarantor. 2. Waivers and Consents. (a) Notice of acceptance of this Guarantee, the making of loans and advances and providing other financial accommodations to Borrower and presentment, demand, protest, notice of protest, notice of nonpayment or default and all other notices to which Borrower or Guarantor is entitled are hereby waived by Guarantor. Guarantor also waives notice of and hereby consents to, (i) any amendment, modification, supplement, extension, renewal, or restatement of the Loan Agreement and any of the other Financing Agreements, including, without limitation, extensions of time of payment of or increase or decrease in the amount of any of the Guaranteed Obligations, interest rate, fees, other charges, or any collateral, and the guarantee made herein shall apply to the Loan Agreement and the other Financing Agreements and the Guaranteed Obligations as so amended, modified, supplemented, renewed, restated or extended, increased or decreased, (ii) the taking, exchange, surrender and releasing of collateral or guarantees now or at any time held by or available to Lender for the obligations of Borrower or any other party at any time liable on or in respect of the Guaranteed Obligations or who is the owner of any property which is security for the Guaranteed Obligations (individually, an "Obligor" and collectively, the "Obligors"), (iii) the exercise of, or refraining from the exercise of any rights against Borrower or any other Obligor or any collateral, (iv) the settlement, compromise or release of, or the waiver of any default with respect to, any of the Guaranteed Obligations and (v) any financing by Lender of Borrower under Section 364 of the United States Bankruptcy Code or consent to the use of cash collateral by Lender under Section 363 of the United States Bankruptcy Code. Guarantor agrees that the amount of the Guaranteed Obligations shall not be diminished and the liability of Guarantor hereunder shall not be otherwise impaired or affected by any of the foregoing. (b) No invalidity, irregularity or unenforceability of all or any part of the Guaranteed Obligations shall affect, impair or be a defense to this Guarantee, nor shall any other circumstance which might otherwise constitute a defense available to or legal or equitable discharge of Borrower in respect of any of the Guaranteed Obligations, or Guarantor in respect of this Guarantee, affect, impair or be a defense to this Guarantee. Without limitation of the foregoing, the liability of Guarantor hereunder shall not be discharged or impaired in any respect by reason of any failure by Lender to perfect or continue perfection of any lien or security interest in any collateral or any delay by Lender in perfecting any such lien or security interest. As to interest, fees and expenses, whether -3- arising before or after the commencement of any case with respect to Borrower under the United States Bankruptcy Code or any similar statute, Guarantor shall be liable therefor, even if Borrower's liability for such amounts does not, or ceases to, exist by operation of law. Guarantor acknowledges that Lender has not made any representations to Guarantor with respect to Borrower, any other Obligor or otherwise in connection with the execution and delivery by Guarantor of this Guarantee and Guarantor is not in any respect relying upon Lender or any statements by Lender in connection with this Guarantee. (c) Guarantor hereby irrevocably and unconditionally waives and relinquishes all statutory, contractual, common law, equitable and all other claims against Borrower, any collateral for the Guaranteed Obligations or other assets of Borrower or any other Obligor, for subrogation, reimbursement, exoneration, contribution, indemnification, setoff or other recourse in respect to sums paid or payable to Lender by Guarantor hereunder and Guarantor hereby further irrevocably and unconditionally waives and relinquishes any and all other benefits which Guarantor might otherwise directly or indirectly receive or be entitled to receive by reason of any amounts paid by or collected or due from Guarantor, Borrower or any other Obligor upon the Guaranteed Obligations or realized from their property. 3. Subordination. Payment of all amounts now or hereafter owed to Guarantor by Borrower or any other Obligor is hereby subordinated in right of payment to the indefeasible payment in full to Lender of the Guaranteed Obligations and all such amounts and any security and guarantees therefor are hereby assigned to Lender as security for the Guaranteed Obligations. 4. Acceleration. Notwithstanding anything to the contrary contained herein or any of the terms of any of the other Financing Agreements, the liability of Guarantor for the entire Guaranteed Obligations shall mature and become immediately due and payable, even if the liability of Borrower or any other Obligor therefor does not, upon the occurrence of any act, condition or event which constitutes an Event of Default as such term is defined in the Loan Agreement. 5. Account Stated. The books and records of Lender showing the account among Lender and Borrower shall be admissible in evidence in any action or proceeding against or involving Guarantor as prima facie proof of the items therein set forth, and the monthly statements of Lender rendered to Borrower, to the extent to which no written objection is made within thirty (30) days from the date of sending thereof to Borrower, shall be deemed conclusively correct and constitute an account stated among Lender and Borrower and be binding on Guarantor. 6. Termination. This Guarantee is continuing, unlimited, absolute and unconditional. All Guaranteed Obligations shall be conclusively presumed to have been created in reliance on this Guarantee. Guarantor shall continue to be liable hereunder until one of Lender's officers actually receives a written termination notice from Guarantor sent to Lender at its address set forth above by certified mail, return receipt requested and thereafter as set forth below. Revocation or termination hereof by Guarantor shall not affect, in any -4- manner, the rights of Lender or any obligations or duties of Guarantor under this Guarantee with respect to (a) Guaranteed Obligations which have been created, contracted, assumed or incurred prior to the receipt by Lender of such written notice of revocation or termination as provided herein, including, without limitation, (i) all amendments, extensions, renewals and modifications of such Guaranteed Obligations (whether or not evidenced by new or additional agreements, documents or instruments executed on or after such notice of revocation or termination), (ii) all interest, fees and similar charges accruing or due on and after revocation or termination, and (iii) all attorneys' fees and legal expenses, costs and other expenses paid or incurred on or after such notice of revocation or termination in attempting to collect or enforce any of the Guaranteed Obligations against Borrower, Guarantor or any other Obligor (whether or not suit be brought), or (b) Guaranteed Obligations which have been created, contracted, assumed or incurred after the receipt by Lender of such written notice of revocation or termination as provided herein pursuant to any contract entered into by Lender prior to receipt of such notice. The sole effect of such revocation or termination by Guarantor shall be to exclude from this Guarantee the liability of Guarantor for those Guaranteed Obligations arising after the date of receipt by Lender of such written notice which are unrelated to Guaranteed Obligations arising or transactions entered into prior to such date. Without limiting the foregoing, this Guarantee may not be terminated and shall continue so long as the Loan Agreement shall be in effect (whether during its original term or any renewal, substitution or extension thereof). 7. Reinstatement. If after receipt of any payment of, or proceeds of collateral applied to the payment of, any of the Guaranteed Obligations, Lender is required to surrender or return such payment or proceeds to any Person for any reason, then the Guaranteed Obligations intended to be satisfied by such payment or proceeds shall be reinstated and continue and this Guarantee shall continue in full force and effect as if such payment or proceeds had not been received by Lender. Guarantor shall be liable to pay to Lender, and does indemnify and hold Lender harmless for the amount of any payments or proceeds surrendered or returned. This Section 7 shall remain effective notwithstanding any contrary action which may be taken by Lender in reliance upon such payment or proceeds. This Section 7 shall survive the termination or revocation of this Guarantee. 8. Amendments and Waivers. Neither this Guarantee nor any provision hereof shall be amended, modified, waived or discharged orally or by course of conduct, but only by a written agreement signed by an authorized officer of Lender. Lender shall not by any act, delay, omission or otherwise be deemed to have expressly or impliedly waived any of its rights, powers and/or remedies unless such waiver shall be in writing and signed by an authorized officer of Lender. Any such waiver shall be enforceable only to the extent specifically set forth therein. A waiver by Lender of any right, power and/or remedy on any one occasion shall not be construed as a bar to or waiver of any such right, power and/or remedy which Lender would otherwise have on any future occasion, whether similar in kind or otherwise. -5- 9. Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver. (a) The validity, interpretation and enforcement of this Guarantee and any dispute arising out of the relationship among Guarantor and Lender, whether in contract, tort, equity or otherwise, shall be governed by the internal laws of the State of Illinois (without giving effect to principles of conflicts of law). (b) Guarantor hereby irrevocably consents and submits to the non-exclusive jurisdiction of the state courts of Cook County, Illinois and the United States District Court for the Northern District of Illinois and waives any objection based on venue or forum non conveniens with respect to any action instituted therein arising under this Guarantee or any of the other Financing Agreements or in any way connected with or related or incidental to the dealings of Guarantor and Lender in respect of this Guarantee or any of the other Financing Agreements or the transactions related hereto or thereto, in each case whether now existing or hereafter arising and whether in contract, tort, equity or otherwise, and agrees that any dispute arising out of the relationship among Guarantor or Borrower and Lender or the conduct of any such persons in connection with this Guarantee, the other Financing Agreements or otherwise shall be heard only in the courts described above (except that Lender shall have the right to bring any action or proceeding against Guarantor or his or her property in the courts of any other jurisdiction which Lender deems necessary or appropriate in order to realize on any collateral at any time granted by Borrower or Guarantor to Lender or to otherwise enforce its rights against Guarantor or his or her property). (c) Guarantor hereby waives personal service of any and all process upon Guarantor and consents that all such service of process may be made by certified mail (return receipt requested) directed to his or her address set forth on the signature pages hereof and service so made shall be deemed to be completed five (5) days after the same shall have been so deposited in the U.S. mails, or, at Lender's option, by service upon Guarantor in any other manner provided under the rules of any such courts. Within thirty (30) days after such service, Guarantor shall appear in answer to such process, failing which Guarantor shall be deemed in default and judgment may be entered by Lender against Guarantor for the amount of the claim and other relief requested. (d) GUARANTOR HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS GUARANTEE OR ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF GUARANTOR AND LENDER IN RESPECT OF THIS GUARANTEE OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. GUARANTOR HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT GUARANTOR OR LENDER MAY -6- FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF GUARANTOR AND LENDER HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. (e) Lender shall not have any liability to Guarantor (whether in tort, contract, equity or otherwise) for losses suffered by Guarantor in connection with, arising out of, or in any way related to the transactions or relationships contemplated by this Guarantee, or any act, omission or event occurring in connection herewith, unless it is determined by a final and non-appealable judgment or court order binding on Lender that the losses were the result of acts or omissions constituting gross negligence or willful misconduct. In any such litigation, Lender shall be entitled to the benefit of the rebuttable presumption that it acted in good faith and with the exercise of ordinary care in the performance by it of the terms of the Loan Agreement and the other Financing Agreements. 10. Notices. All notices, requests and demands hereunder shall be in writing and (a) made to Lender at its address set forth above and to Guarantor at his or her address set forth below, or to such other address as either party may designate by written notice to the other in accordance with this provision, and (b) deemed to have been given or made: if delivered in person, immediately upon delivery; if by telex, telegram or facsimile transmission, immediately upon sending and upon confirmation of receipt; if by nationally recognized overnight courier service with instructions to deliver the next business day, one (1) business day after sending; and if by certified mail, return receipt requested, five (5) days after mailing. 11. Partial Invalidity. If any provision of this Guarantee is held to be invalid or unenforceable, such invalidity or unenforceability shall not invalidate this Guarantee as a whole, but this Guarantee shall be construed as though it did not contain the particular provision held to be invalid or unenforceable and the rights and obligations of the parties shall be construed and enforced only to such extent as shall be permitted by applicable law. 12. Entire Agreement. This Guarantee represents the entire agreement and understanding of the parties concerning the subject matter hereof, and supersedes all other prior agreements, understandings, negotiations and discussions, representations, warranties, commitments, proposals, offers and contracts concerning the subject matter hereof, whether oral or written. 13. Successors and Assigns. This Guarantee shall be binding upon Guarantor and his heirs, executors, administrators, successors and assigns and shall inure to the benefit of Lender and its successors, endorsees, transferees and assigns. 14. Construction. All references to the term "Guarantor" wherever used herein shall mean Guarantor and his heirs, executors, administrators, successors and assigns (including, without limitation, any receiver, trustee or custodian for Guarantor or any of his assets or Guarantor in his capacity as debtor or debtor-in-possession under the United States Bankruptcy Code). All references to the term "Lender" wherever used herein shall mean -7- Lender and its successors and assigns and all references to the term "Borrower" wherever used herein shall mean Borrower and its successors and assigns (including, without limitation, any receiver, trustee or custodian for Borrower or any of its assets or Borrower in its capacity as debtor or debtor-in-possession under the United States Bankruptcy Code). All references to the term "Person" or "person" wherever used herein shall mean any individual, sole proprietorship, partnership, corporation (including, without limitation, any corporation which elects subchapter S status under the Internal Revenue Code of 1986, as amended), limited liability company, limited liability partnership, business trust, unincorporated association, joint stock corporation, trust, joint venture or other entity or any government or any agency or instrumentality or political subdivision thereof. All references to the plural shall also mean the singular and to the singular shall also mean the plural. IN WITNESS WHEREOF, Guarantor has executed and delivered this Guarantee as of the day and year first above written. WITNESS: /s/ John H. Schwan - -------------------------------- ----------------------------------- John H. Schwan Address: -------------------------- ----------------------------------- -8- STATE OF ____________ ) ) SS COUNTY OF ___________ ) On this _____ day of ____________, 2001, before me personally came John H. Schwan to me known, to be the individual described in and which executed the foregoing instrument. ----------------------- Notary Public -9- EXHIBIT 10.19 GUARANTEE January ___, 2001 Congress Financial Corporation (Central) 150 South Wacker Drive Suite 2200 Chicago, Illinois 60606-4202 Re: CTI Industries Corporation ("Borrower") Gentlemen: Congress Financial Corporation (Central) ("Lender") and Borrower have entered into certain financing arrangements pursuant to which Lender may make loans and advances and provide other financial accommodations to Borrower as set forth in the Loan and Security Agreement, dated January__, 2001 by and between Borrower and Lender (as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, the "Loan Agreement"), and other agreements, documents and instruments referred to therein or at any time executed and/or delivered in connection therewith or related thereto, including, but not limited to, this Guarantee (all of the foregoing, together with the Loan Agreement, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, being collectively referred to herein as the "Financing Agreements"). Due to the close business and financial relationships between Borrower and the undersigned ("Guarantor"), in consideration of the benefits which will accrue to Guarantor and as an inducement for and in consideration of Lender making loans and advances and providing other financial accommodations to Borrower pursuant to the Loan Agreement and the other Financing Agreements, Guarantor hereby agrees in favor of Lender as follows: 1. Guarantee. (a) Guarantor absolutely and unconditionally guarantees and agrees to be liable for the full and indefeasible payment and performance when due of the following (all of which are collectively referred to herein as the "Guaranteed Obligations"): (i) all obligations, liabilities and indebtedness of any kind, nature and description of Borrower to Lender and/or its affiliates, including principal, interest, charges, fees, costs and expenses, however evidenced, whether as principal, surety, endorser, guarantor or otherwise, whether arising under the Loan Agreement, the other Financing Agreements or otherwise, whether now existing or hereafter arising, whether arising before, during or after the initial or any renewal term of the Loan Agreement or after the commencement of any case with respect to Borrower under the United States Bankruptcy Code or any similar statute (including, without limitation, the payment of interest and other amounts, which would accrue and become due but for the commencement of such case, whether or not such amounts are allowed or allowable in whole or in part in any such case and including loans, interest, fees, charges and expenses related thereto and all other obligations of Borrower or its successors to Lender arising after the commencement of such case), whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, secured or unsecured, and however acquired by Lender and (ii) all expenses (including, without limitation, attorneys' fees and legal expenses) incurred by Lender in connection with the preparation, execution, delivery, recording, administration, collection, liquidation, enforcement and defense of Borrower's obligations, liabilities and indebtedness as aforesaid to Lender, the rights of Lender in any collateral or under this Guarantee and all other Financing Agreements or in any way involving claims by or against Lender directly or indirectly arising out of or related to the relationships among Borrower, Guarantor or any other Obligor (as hereinafter defined) and Lender, whether such expenses are incurred before, during or after the initial or any renewal term of the Loan Agreement and the other Financing Agreements or after the commencement of any case with respect to Borrower or Guarantor under the United States Bankruptcy Code or any similar statute. Notwithstanding anything in this Guarantee to the contrary, the liability of Guarantor hereunder in the aggregate shall not exceed Five Hundred Thousand and No/100 Dollars ($500,000.00) (the "Original Maximum Limit"), plus costs and expenses of collection and prosecution of actions against Guarantor, and provided, further, that if the audited consolidated financial statements of Borrower for any fiscal year on or after December 31, 2001 show that Borrower's pre-tax net income exceeded $750,000 for such fiscal year, then on the tenth day after Lender's receipt of such financial statements, so long as there exists no Event of Default under the Loan Agreement, the Original Maximum Limit shall be reduced by One Hundred Sixty-Six Thousand Six Hundred Sixty-Seven and No/100 Dollars ($166,667.00); provided, further, that the Original Maximum Limit may only be reduced once and if the audited financial consolidated financial statements of Borrower for any fiscal year ending on or after December 31, 2002 show a net loss for such fiscal year, the Original Maximum Limit shall revert to $500,000. For purposes hereof, net income and net loss shall be calculated exclusive of nonrecurring or one time gains or extraordinary gains. (b) This Guarantee is a guaranty of payment and not of collection. Guarantor agrees that Lender need not attempt to collect any Guaranteed Obligations from Borrower, Guarantor or any other Obligor or to realize upon any collateral, but may require Guarantor to make immediate payment of all of the Guaranteed Obligations to Lender when due, whether by maturity, acceleration or otherwise, or at any time thereafter. Lender may apply any amounts received in respect of the Guaranteed Obligations to any of the Guaranteed Obligations, in whole or in part (including attorneys' fees and legal expenses incurred by Lender with respect thereto or otherwise chargeable to Borrower or Guarantor) and in such order as Lender may elect. 2 -- (c) Payment by Guarantor shall be made to Lender at the office of Lender from time to time on demand as Guaranteed Obligations become due. Guarantor shall make all payments to Lender on the Guaranteed Obligations free and clear of, and without deduction or withholding for or on account of, any setoff, counterclaim, defense, duties, taxes, levies, imposts, fees, deductions, withholding, restrictions or conditions of any kind. One or more successive or concurrent actions may be brought hereon against Guarantor either in the same action in which Borrower or any other Obligor is sued or in separate actions. In the event any claim or action, or action on any judgment, based on this Guarantee is brought against Guarantor, Guarantor agrees not to deduct, set-off, or seek any counterclaim for or recoup any amounts which are or may be owed by Lender to Guarantor. 2. Waivers and Consents. (a) Notice of acceptance of this Guarantee, the making of loans and advances and providing other financial accommodations to Borrower and presentment, demand, protest, notice of protest, notice of nonpayment or default and all other notices to which Borrower or Guarantor is entitled are hereby waived by Guarantor. Guarantor also waives notice of and hereby consents to, (i) any amendment, modification, supplement, extension, renewal, or restatement of the Loan Agreement and any of the other Financing Agreements, including, without limitation, extensions of time of payment of or increase or decrease in the amount of any of the Guaranteed Obligations, interest rate, fees, other charges, or any collateral, and the guarantee made herein shall apply to the Loan Agreement and the other Financing Agreements and the Guaranteed Obligations as so amended, modified, supplemented, renewed, restated or extended, increased or decreased, (ii) the taking, exchange, surrender and releasing of collateral or guarantees now or at any time held by or available to Lender for the obligations of Borrower or any other party at any time liable on or in respect of the Guaranteed Obligations or who is the owner of any property which is security for the Guaranteed Obligations (individually, an "Obligor" and collectively, the "Obligors"), (iii) the exercise of, or refraining from the exercise of any rights against Borrower or any other Obligor or any collateral, (iv) the settlement, compromise or release of, or the waiver of any default with respect to, any of the Guaranteed Obligations and (v) any financing by Lender of Borrower under Section 364 of the United States Bankruptcy Code or consent to the use of cash collateral by Lender under Section 363 of the United States Bankruptcy Code. Guarantor agrees that the amount of the Guaranteed Obligations shall not be diminished and the liability of Guarantor hereunder shall not be otherwise impaired or affected by any of the foregoing. (b) No invalidity, irregularity or unenforceability of all or any part of the Guaranteed Obligations shall affect, impair or be a defense to this Guarantee, nor shall any other circumstance which might otherwise constitute a defense available to or legal or equitable discharge of Borrower in respect of any of the Guaranteed Obligations, or Guarantor in respect of this Guarantee, affect, impair or be a defense to this Guarantee. Without limitation of the foregoing, the liability of Guarantor hereunder shall not be discharged or impaired in any respect by reason of any failure by Lender to perfect or 3 -- continue perfection of any lien or security interest in any collateral or any delay by Lender in perfecting any such lien or security interest. As to interest, fees and expenses, whether arising before or after the commencement of any case with respect to Borrower under the United States Bankruptcy Code or any similar statute, Guarantor shall be liable therefor, even if Borrower's liability for such amounts does not, or ceases to, exist by operation of law. Guarantor acknowledges that Lender has not made any representations to Guarantor with respect to Borrower, any other Obligor or otherwise in connection with the execution and delivery by Guarantor of this Guarantee and Guarantor is not in any respect relying upon Lender or any statements by Lender in connection with this Guarantee. (c) Guarantor hereby irrevocably and unconditionally waives and relinquishes all statutory, contractual, common law, equitable and all other claims against Borrower, any collateral for the Guaranteed Obligations or other assets of Borrower or any other Obligor, for subrogation, reimbursement, exoneration, contribution, indemnification, setoff or other recourse in respect to sums paid or payable to Lender by Guarantor hereunder and Guarantor hereby further irrevocably and unconditionally waives and relinquishes any and all other benefits which Guarantor might otherwise directly or indirectly receive or be entitled to receive by reason of any amounts paid by or collected or due from Guarantor, Borrower or any other Obligor upon the Guaranteed Obligations or realized from their property. 3. Subordination. Payment of all amounts now or hereafter owed to Guarantor by Borrower or any other Obligor is hereby subordinated in right of payment to the indefeasible payment in full to Lender of the Guaranteed Obligations and all such amounts and any security and guarantees therefor are hereby assigned to Lender as security for the Guaranteed Obligations. 4. Acceleration. Notwithstanding anything to the contrary contained herein or any of the terms of any of the other Financing Agreements, the liability of Guarantor for the entire Guaranteed Obligations shall mature and become immediately due and payable, even if the liability of Borrower or any other Obligor therefor does not, upon the occurrence of any act, condition or event which constitutes an Event of Default as such term is defined in the Loan Agreement. 5. Account Stated. The books and records of Lender showing the account among Lender and Borrower shall be admissible in evidence in any action or proceeding against or involving Guarantor as prima facie proof of the items therein set forth, and the monthly statements of Lender rendered to Borrower, to the extent to which no written objection is made within thirty (30) days from the date of sending thereof to Borrower, shall be deemed conclusively correct and constitute an account stated among Lender and Borrower and be binding on Guarantor. 6. Termination. This Guarantee is continuing, unlimited, absolute and unconditional. All Guaranteed Obligations shall be conclusively presumed to have been 4 -- created in reliance on this Guarantee. Guarantor shall continue to be liable hereunder until one of Lender's officers actually receives a written termination notice from Guarantor sent to Lender at its address set forth above by certified mail, return receipt requested and thereafter as set forth below. Revocation or termination hereof by Guarantor shall not affect, in any manner, the rights of Lender or any obligations or duties of Guarantor under this Guarantee with respect to (a) Guaranteed Obligations which have been created, contracted, assumed or incurred prior to the receipt by Lender of such written notice of revocation or termination as provided herein, including, without limitation, (i) all amendments, extensions, renewals and modifications of such Guaranteed Obligations (whether or not evidenced by new or additional agreements, documents or instruments executed on or after such notice of revocation or termination), (ii) all interest, fees and similar charges accruing or due on and after revocation or termination, and (iii) all attorneys' fees and legal expenses, costs and other expenses paid or incurred on or after such notice of revocation or termination in attempting to collect or enforce any of the Guaranteed Obligations against Borrower, Guarantor or any other Obligor (whether or not suit be brought), or (b) Guaranteed Obligations which have been created, contracted, assumed or incurred after the receipt by Lender of such written notice of revocation or termination as provided herein pursuant to any contract entered into by Lender prior to receipt of such notice. The sole effect of such revocation or termination by Guarantor shall be to exclude from this Guarantee the liability of Guarantor for those Guaranteed Obligations arising after the date of receipt by Lender of such written notice which are unrelated to Guaranteed Obligations arising or transactions entered into prior to such date. Without limiting the foregoing, this Guarantee may not be terminated and shall continue so long as the Loan Agreement shall be in effect (whether during its original term or any renewal, substitution or extension thereof). 7. Reinstatement. If after receipt of any payment of, or proceeds of collateral applied to the payment of, any of the Guaranteed Obligations, Lender is required to surrender or return such payment or proceeds to any Person for any reason, then the Guaranteed Obligations intended to be satisfied by such payment or proceeds shall be reinstated and continue and this Guarantee shall continue in full force and effect as if such payment or proceeds had not been received by Lender. Guarantor shall be liable to pay to Lender, and does indemnify and hold Lender harmless for the amount of any payments or proceeds surrendered or returned. This Section 7 shall remain effective notwithstanding any contrary action which may be taken by Lender in reliance upon such payment or proceeds. This Section 7 shall survive the termination or revocation of this Guarantee. 8. Amendments and Waivers. Neither this Guarantee nor any provision hereof shall be amended, modified, waived or discharged orally or by course of conduct, but only by a written agreement signed by an authorized officer of Lender. Lender shall not by any act, delay, omission or otherwise be deemed to have expressly or impliedly waived any of its rights, powers and/or remedies unless such waiver shall be in writing and signed by an authorized officer of Lender. Any such waiver shall be enforceable only to the extent specifically set forth therein. A waiver by Lender of any right, power and/or remedy on any one occasion shall not be construed as a bar to or waiver of any such right, power and/or 5 -- remedy which Lender would otherwise have on any future occasion, whether similar in kind or otherwise. 9. Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver. (a) The validity, interpretation and enforcement of this Guarantee and any dispute arising out of the relationship among Guarantor and Lender, whether in contract, tort, equity or otherwise, shall be governed by the internal laws of the State of Illinois (without giving effect to principles of conflicts of law). (b) Guarantor hereby irrevocably consents and submits to the non-exclusive jurisdiction of the state courts of Cook County, Illinois and the United States District Court for the Northern District of Illinois and waives any objection based on venue or forum non conveniens with respect to any action instituted therein arising under this Guarantee or any of the other Financing Agreements or in any way connected with or related or incidental to the dealings of Guarantor and Lender in respect of this Guarantee or any of the other Financing Agreements or the transactions related hereto or thereto, in each case whether now existing or hereafter arising and whether in contract, tort, equity or otherwise, and agrees that any dispute arising out of the relationship among Guarantor or Borrower and Lender or the conduct of any such persons in connection with this Guarantee, the other Financing Agreements or otherwise shall be heard only in the courts described above (except that Lender shall have the right to bring any action or proceeding against Guarantor or his or her property in the courts of any other jurisdiction which Lender deems necessary or appropriate in order to realize on any collateral at any time granted by Borrower or Guarantor to Lender or to otherwise enforce its rights against Guarantor or his or her property). (c) Guarantor hereby waives personal service of any and all process upon Guarantor and consents that all such service of process may be made by certified mail (return receipt requested) directed to his or her address set forth on the signature pages hereof and service so made shall be deemed to be completed five (5) days after the same shall have been so deposited in the U.S. mails, or, at Lender's option, by service upon Guarantor in any other manner provided under the rules of any such courts. Within thirty (30) days after such service, Guarantor shall appear in answer to such process, failing which Guarantor shall be deemed in default and judgment may be entered by Lender against Guarantor for the amount of the claim and other relief requested. (d) GUARANTOR HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS GUARANTEE OR ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF GUARANTOR AND LENDER IN RESPECT OF THIS GUARANTEE OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE WHETHER NOW EXISTING OR 6 -- HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. GUARANTOR HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT GUARANTOR OR LENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF GUARANTOR AND LENDER HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. (e) Lender shall not have any liability to Guarantor (whether in tort, contract, equity or otherwise) for losses suffered by Guarantor in connection with, arising out of, or in any way related to the transactions or relationships contemplated by this Guarantee, or any act, omission or event occurring in connection herewith, unless it is determined by a final and non-appealable judgment or court order binding on Lender that the losses were the result of acts or omissions constituting gross negligence or willful misconduct. In any such litigation, Lender shall be entitled to the benefit of the rebuttable presumption that it acted in good faith and with the exercise of ordinary care in the performance by it of the terms of the Loan Agreement and the other Financing Agreements. 10. Notices. All notices, requests and demands hereunder shall be in writing and (a) made to Lender at its address set forth above and to Guarantor at his or her address set forth below, or to such other address as either party may designate by written notice to the other in accordance with this provision, and (b) deemed to have been given or made: if delivered in person, immediately upon delivery; if by telex, telegram or facsimile transmission, immediately upon sending and upon confirmation of receipt; if by nationally recognized overnight courier service with instructions to deliver the next business day, one (1) business day after sending; and if by certified mail, return receipt requested, five (5) days after mailing. 11. Partial Invalidity. If any provision of this Guarantee is held to be invalid or unenforceable, such invalidity or unenforceability shall not invalidate this Guarantee as a whole, but this Guarantee shall be construed as though it did not contain the particular provision held to be invalid or unenforceable and the rights and obligations of the parties shall be construed and enforced only to such extent as shall be permitted by applicable law. 12. Entire Agreement. This Guarantee represents the entire agreement and understanding of the parties concerning the subject matter hereof, and supersedes all other prior agreements, understandings, negotiations and discussions, representations, warranties, commitments, proposals, offers and contracts concerning the subject matter hereof, whether oral or written. 7 -- 13. Successors and Assigns. This Guarantee shall be binding upon Guarantor and his heirs, executors, administrators, successors and assigns and shall inure to the benefit of Lender and its successors, endorsees, transferees and assigns. 14. Construction. All references to the term "Guarantor" wherever used herein shall mean Guarantor and his heirs, executors, administrators, successors and assigns (including, without limitation, any receiver, trustee or custodian for Guarantor or any of his assets or Guarantor in his capacity as debtor or debtor-in-possession under the United States Bankruptcy Code). All references to the term "Lender" wherever used herein shall mean Lender and its successors and assigns and all references to the term "Borrower" wherever used herein shall mean Borrower and its successors and assigns (including, without limitation, any receiver, trustee or custodian for Borrower or any of its assets or Borrower in its capacity as debtor or debtor-in-possession under the United States Bankruptcy Code). All references to the term "Person" or "person" wherever used herein shall mean any individual, sole proprietorship, partnership, corporation (including, without limitation, any corporation which elects subchapter S status under the Internal Revenue Code of 1986, as amended), limited liability company, limited liability partnership, business trust, unincorporated association, joint stock corporation, trust, joint venture or other entity or any government or any agency or instrumentality or political subdivision thereof. All references to the plural shall also mean the singular and to the singular shall also mean the plural. IN WITNESS WHEREOF, Guarantor has executed and delivered this Guarantee as of the day and year first above written. WITNESS: /s/ Stephen M. Merrick - -------------------------- -------------------------- Stephen M. Merrick Address: ---------------------------- ------------------------------------- 8 -- STATE OF ____________ ) ) SS COUNTY OF ___________ ) On this _____ day of ____________, 2001, before me personally came Stephen M. Merrick to me known, to be the individual described in and which executed the foregoing instrument. ----------------------- Notary Public 9 -- EX-10.20 8 d25424_ex10-20.txt GUARANTY EXHIBIT 10.20 GUARANTY TO: Banco Popular North America 4801 W. Fullerton Avenue Chicago, IL 60639 To induce you to extend credit to CTI INDUSTRIES CORPORATION (hereinafter called "Client") and in consideration of advances to be made to Client and of any loans, advances or financial accommodation heretofore or hereafter granted by you to or for the account of the Client, the undersigned Guarantor guarantees the payment to you of all sums which may be presently due and owing and of all sums which shall in the future become due and owing to you from the Client under any Note, Real Estate Mortgage or Assignment of Rents and Leases executed by the Client to you. This Guaranty shall not be impaired by any modification, supplement, extension or amendment of any contract or agreement to which the parties thereto may hereafter agree, nor by any modification, release or other alteration of any of the obligations hereby guaranteed or of any security therefor, nor by any agreements or arrangements whatever with the Client or any one else. In addition, Guarantor shall be liable to you for reasonable attorneys' fees, if any claim hereunder or under any other instrument or guaranty is referred to an attorney for collection. The liability of Guarantor hereunder is direct and unconditional and may be enforced without requiring you first to resort to any other right, remedy or security. Guarantor shall not have any right of subrogation, reimbursement or indemnity whatsoever, nor any right of recourse to security for the debts and obligations of the Client to you. If there is more than one Guarantor, the liability of the Guarantors shall be joint and several. If the Client or any Guarantor should at any time be adjudicated insolvent or admits in writing of their inability to pay their debts as they become due, or make a general assignment, or if a petition in bankruptcy or any insolvency or reorganization proceedings shall be filed or commenced by, against or in respect of the Client or any Guarantors which is not vacated within thirty (30) days, any and all obligations of each Guarantor shall at your option, forthwith become due and payable without notice. Your records showing the account between you and the Client shall be admissible in any action or proceeding, shall be binding upon each Guarantor for the purpose of establishing the items therein set forth and shall constitute prima facie proof thereof. This Guaranty is, as to Guarantor, a continuing Guaranty which shall remain effective until expressly terminated and nothing shall discharge or satisfy the liability of any Guarantor hereunder except the full payment and performance of all of the Client's debts and obligations to you with interest. Guarantor waives notice of acceptance hereof, presentment and protest of any instrument and any other notice to which the Guarantor may otherwise be entitled. This Guaranty, all acts and transactions hereunder, and the rights and obligations of the parties hereto shall be governed, construed and interpreted according to the laws of the State of Illinois, shall be binding upon the heirs, executors, administrators, successors and assigns of Guarantor and shall inure to the benefit of your successors and assigns. The words "you" and "your" as used herein shall mean and include and this Guaranty shall apply in favor of and be jointly and severally enforceable against each of the Guarantors by the addressee above named. This Guaranty is a key element in the extension of credit to Client and the undersigned directly benefit therefrom. Dated: January 12, 2001. /s/ Stephen M. Merrick ------------------------------ STEPHEN MERRICK ------------------------------ Address ------------------------------ - 2 - EXHIBIT 10.20 GUARANTY TO: Banco Popular North America 4801 W. Fullerton Avenue Chicago, IL 60639 To induce you to extend credit to CTI INDUSTRIES CORPORATION (hereinafter called "Client") and in consideration of advances to be made to Client and of any loans, advances or financial accommodation heretofore or hereafter granted by you to or for the account of the Client, the undersigned Guarantor guarantees the payment to you of all sums which may be presently due and owing and of all sums which shall in the future become due and owing to you from the Client under any Note, Real Estate Mortgage or Assignment of Rents and Leases executed by the Client to you. This Guaranty shall not be impaired by any modification, supplement, extension or amendment of any contract or agreement to which the parties thereto may hereafter agree, nor by any modification, release or other alteration of any of the obligations hereby guaranteed or of any security therefor, nor by any agreements or arrangements whatever with the Client or any one else. In addition, Guarantor shall be liable to you for reasonable attorneys' fees, if any claim hereunder or under any other instrument or guaranty is referred to an attorney for collection. The liability of Guarantor hereunder is direct and unconditional and may be enforced without requiring you first to resort to any other right, remedy or security. Guarantor shall not have any right of subrogation, reimbursement or indemnity whatsoever, nor any right of recourse to security for the debts and obligations of the Client to you. If there is more than one Guarantor, the liability of the Guarantors shall be joint and several. If the Client or any Guarantor should at any time be adjudicated insolvent or admits in writing of their inability to pay their debts as they become due, or make a general assignment, or if a petition in bankruptcy or any insolvency or reorganization proceedings shall be filed or commenced by, against or in respect of the Client or any Guarantors which is not vacated within thirty (30) days, any and all obligations of each Guarantor shall at your option, forthwith become due and payable without notice. Your records showing the account between you and the Client shall be admissible in any action or proceeding, shall be binding upon each Guarantor for the purpose of establishing the items therein set forth and shall constitute prima facie proof thereof. This Guaranty is, as to Guarantor, a continuing Guaranty which shall remain effective until expressly terminated and nothing shall discharge or satisfy the liability of any Guarantor hereunder except the full payment and performance of all of the Client's debts and obligations to you with interest. Guarantor waives notice of acceptance hereof, presentment and protest of any instrument and any other notice to which the Guarantor may otherwise be entitled. This Guaranty, all acts and transactions hereunder, and the rights and obligations of the parties hereto shall be governed, construed and interpreted according to the laws of the State of Illinois, shall be binding upon the heirs, executors, administrators, successors and assigns of Guarantor and shall inure to the benefit of your successors and assigns. The words "you" and "your" as used herein shall mean and include and this Guaranty shall apply in favor of and be jointly and severally enforceable against each of the Guarantors by the addressee above named. This Guaranty is a key element in the extension of credit to Client and the undersigned directly benefit therefrom. Dated: January 12, 2001. /s/ Howard Schwan ------------------------------ HOWARD SCHWAN ------------------------------ Address ------------------------------ - 2 - EXHIBIT 10.20 GUARANTY TO: Banco Popular North America 4801 W. Fullerton Avenue Chicago, IL 60639 To induce you to extend credit to CTI INDUSTRIES CORPORATION (hereinafter called "Client") and in consideration of advances to be made to Client and of any loans, advances or financial accommodation heretofore or hereafter granted by you to or for the account of the Client, the undersigned Guarantor guarantees the payment to you of all sums which may be presently due and owing and of all sums which shall in the future become due and owing to you from the Client under any Note, Real Estate Mortgage or Assignment of Rents and Leases executed by the Client to you. This Guaranty shall not be impaired by any modification, supplement, extension or amendment of any contract or agreement to which the parties thereto may hereafter agree, nor by any modification, release or other alteration of any of the obligations hereby guaranteed or of any security therefor, nor by any agreements or arrangements whatever with the Client or any one else. In addition, Guarantor shall be liable to you for reasonable attorneys' fees, if any claim hereunder or under any other instrument or guaranty is referred to an attorney for collection. The liability of Guarantor hereunder is direct and unconditional and may be enforced without requiring you first to resort to any other right, remedy or security. Guarantor shall not have any right of subrogation, reimbursement or indemnity whatsoever, nor any right of recourse to security for the debts and obligations of the Client to you. If there is more than one Guarantor, the liability of the Guarantors shall be joint and several. If the Client or any Guarantor should at any time be adjudicated insolvent or admits in writing of their inability to pay their debts as they become due, or make a general assignment, or if a petition in bankruptcy or any insolvency or reorganization proceedings shall be filed or commenced by, against or in respect of the Client or any Guarantors which is not vacated within thirty (30) days, any and all obligations of each Guarantor shall at your option, forthwith become due and payable without notice. Your records showing the account between you and the Client shall be admissible in any action or proceeding, shall be binding upon each Guarantor for the purpose of establishing the items therein set forth and shall constitute prima facie proof thereof. This Guaranty is, as to Guarantor, a continuing Guaranty which shall remain effective until expressly terminated and nothing shall discharge or satisfy the liability of any Guarantor hereunder except the full payment and performance of all of the Client's debts and obligations to you with interest. Guarantor waives notice of acceptance hereof, presentment and protest of any instrument and any other notice to which the Guarantor may otherwise be entitled. This Guaranty, all acts and transactions hereunder, and the rights and obligations of the parties hereto shall be governed, construed and interpreted according to the laws of the State of Illinois, shall be binding upon the heirs, executors, administrators, successors and assigns of Guarantor and shall inure to the benefit of your successors and assigns. The words "you" and "your" as used herein shall mean and include and this Guaranty shall apply in favor of and be jointly and severally enforceable against each of the Guarantors by the addressee above named. This Guaranty is a key element in the extension of credit to Client and the undersigned directly benefit therefrom. Dated: January 12, 2001. /s/ John Schwan ------------------------------ JOHN SCHWAN ------------------------------ Address ------------------------------ - 2 - -----END PRIVACY-ENHANCED MESSAGE-----