-----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, EA6wlLhQIxSKELjTqpC/5oOUDN/FHFcDV68lZeQ6EJQEqbVICSmJoVbgkw6Vq2Ik pHu5WSp0TjADY9gcKo2vEg== 0001042187-97-000006.txt : 19970725 0001042187-97-000006.hdr.sgml : 19970725 ACCESSION NUMBER: 0001042187-97-000006 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 35 FILED AS OF DATE: 19970724 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CTI INDUSTRIES CORP CENTRAL INDEX KEY: 0001042187 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-31969 FILM NUMBER: 97644633 BUSINESS ADDRESS: STREET 1: 22160 N PEPPER RD CITY: BARRINGTON STATE: IL ZIP: 60010 MAIL ADDRESS: STREET 2: 22160 N PEPPER RD CITY: BARRINGTON STATE: IL ZIP: 60010 SB-2 1 REGISTRATION STATEMENT As filed with the Securities and Exchange Commission on July 24, 1997 SEC File No. ______ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM SB-2 Registration Statement Under the Securities Act of 1933 CTI INDUSTRIES CORPORATION (Name of Small Business Issuer in its charter) Delaware 3970 36-2848943 (State or jurisdiction (Primary Standard (I.R.S. Employer of incorporation or Industrial Classification Identification No.) organization) Code Number) 22160 North Pepper Road Barrington, Illinois 60010 (847) 382-1000 (Address and Telephone Number of Principal Executive Offices) 22160 North Pepper Road Barrington, Illinois 60010 (Address of Principal Place of Business) Howard W. Schwan, President 22160 North Pepper Road Barrington, Illinois 60010 (847) 382-1000 (Name, address and telephone number of Agent for Service) Copies to: John M. Klimek, Esq. Rubi Finkelstein, Esq. Fishman Merrick Miller Genelly Orrick, Herrington & Sutcliffe LLP Springer Klimek & Anderson, P.C. 666 Fifth Avenue 30 North LaSalle, Suite 3500 New York, New York 10103-0001 Chicago, Illinois 60602 (212) 506-5000 (312) 726-1224 (212) 506-5151 (Facsimile) (312) 726-2649 (Facsimile) Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of earlier effective registration statement for the same offering. |_| If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box |_| The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. FACING SHEET CONTINUED ON NEXT PAGE CONTINUATION OF FACING SHEET CALCULATION OF REGISTRATION FEE
Title of Each Class Proposed Maximum Proposed Maximum Amount of of Securities To Be Amount To Be Offering Price Aggregate Registration Registered Registered(1) Per Share (2) Offering Price (2) Fee - ---------------------------------------------------------------------------------------------------------------------------------- Units, each consisting of one share of Common Stock, $.065 Par Value ("Common Stock") and one Common Stock Purchase Warrant ("Redeemable Warrant") 1,533,332(3) $ 4.50 $ 6,899,994.00 $2,090.91 - ---------------------------------------------------------------------------------------------------------------------------------- Common Stock 1,533,332(4) ----- -------- ------ - ---------------------------------------------------------------------------------------------------------------------------------- Redeemable Warrants 1,533,332(5) ----- -------- ------ - ---------------------------------------------------------------------------------------------------------------------------------- Common Stock Issuable Upon Exercise of the Redeemable Warrants 1,533,332 $ 6.75(6) $10,349,991.00 $3,136.36 - ---------------------------------------------------------------------------------------------------------------------------------- Underwriter's Warrants(7) 133,333 $.0001 $ 13.33 $ 0(8) - ---------------------------------------------------------------------------------------------------------------------------------- Units issuable upon exercise of Underwriter's Warrants, each Unit consisting of one share of Common Stock and one Redeemable Warrant 133,333 $ 5.40(9) $ 719,998.20 $ 218.18 - ---------------------------------------------------------------------------------------------------------------------------------- Common Stock 133,333 ----- -------- ------ - ---------------------------------------------------------------------------------------------------------------------------------- Redeemable Warrants 133,333 ----- -------- ------ - ---------------------------------------------------------------------------------------------------------------------------------- Common Stock Issuable Upon Exercise of the Redeemable Warrants Included in the Underwriter's Warrants 133,333 $ 6.75 $ 899,997.75 $ 272.73 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL $18,869,994.28 $5,718.18 =================================================================================================================================== (1)Pursuant to Rule 416, there are also being registered such indeterminable number of securities which may be issued as a result of the anti-dilution provisions of the Warrants and the Underwriter's Warrants. (2)Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457. (3)Includes 199,999 Units subject to sale upon exercise of over-allotment option granted to Underwriter which may be offered to cover over-allotments, if any. (4)Includes 199,999 shares of Common Stock included in the Units which may be offered to cover over-allotments, if any. (5)Includes 199,999 Redeemable Warrants included in the Units which may be offered to cover over-allotments, if any. (6)Represents the exercise price of the Redeemable Warrants. (7)Represents warrants, to be issued to the Underwriter, to purchase Common Stock and Redeemable Warrants. (8)No separate registration fee is required pursuant to Rule 457(g). (9)Represents the exercise price of the Underwriter's Warrants.
(ii) CTI INDUSTRIES CORPORATION CROSS REFERENCE SHEET Showing the Location in the Prospectus of Information Required by Items of Form SB-2
Registration Statement Item Number and Heading Location in Prospectus - ----------------------- ---------------------- 1. Front of Registration Statement and Outside Front Cover Page of Prospectus....................................... Outside Front Cover of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus.................................................. Inside Front and Outside Back Cover Pages of Prospectus 3. Summary Information and Risk Factors................................. Prospectus Summary; Risk Factors 4. Use of Proceeds...................................................... Use of Proceeds 5. Determination of Offering Price...................................... Outside Front Cover Page; Risk Factors; Underwriting 6. Dilution............................................................. Dilution 7. Selling Security Holders............................................. N/A 8. Plan of Distribution................................................. Outside Front Cover Page of Prospectus; Underwriting 9. Legal Proceedings.................................................... Business - Legal Proceedings 10. Directors, Executive Officers, Promoters and Control Persons.................................................. Management; Principal Stockholders 11. Security Ownership of Certain Beneficial Owners and Management..................................... Principal Stockholders 12. Description of Securities............................................ Description of Capital Stock; Underwriting 13. Interest of Named Experts and Counsel................................ Experts 14. Disclosure of Commission Position on Indemnification for Securities Act Liabilities....................................... Management - Limitation of Liability and Indemnification; Underwriting 15. Organization Within Last Five Years.................................. Not Applicable 16. Description of Business.............................................. Prospectus Summary; Risk Factors; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Certain Transactions; Financial Statements 17. Management's Discussion and Analysis or Plan of Operation.................................................... Management's Discussion and Analysis of Financial Condition and Results of Operations 18. Description of Property.............................................. Business - Manufacturing 19. Certain Relationships and Related Transactions................................................. The Company; Certain Transactions 20. Market for Common Equity and Related Stockholder Matters.......................................... Risk Factors; Description of Capital Stock 21. Executive Compensation............................................... Management - Executive Compensation 22. Financial Statements................................................. Financial Statements 23. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure........................................................... Change in Independent Accountants
(iii) SUBJECT TO COMPLETION, DATED , 1997 PROSPECTUS CTI Industries Corporation 1,333,333 UNITS EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE REDEEMABLE WARRANT This Prospectus relates to an offering (the "Offering") of 1,333,333 Units (the "Units"), each Unit consisting of one share of common stock, $.065 par value per share ("Common Stock"), and one redeemable common stock purchase warrant ("Redeemable Warrant") of CTI Industries Corporation, a Delaware corporation (the "Company"). The shares of Common Stock and Redeemable Warrants comprising the Units are separately tradeable commencing upon issuance. Each Redeemable Warrant entitles the registered holder thereof to purchase one share of Common Stock at an initial exercise price of $__________ [150% of the initial public offering price per Unit], subject to adjustment, at any time from issuance until __________, 2002 [60 months after the date of this Prospectus]. The Company shall have the right to redeem all, but not less than all, of the Redeemable Warrants, commencing __________, 1998 [12 months after the date of this Prospectus] at a price of $.05 per Redeemable Warrant on 30 days' prior written notice, provided that the Company shall have obtained the consent of Joseph Stevens & Company, Inc. (the "Underwriter"), and the average closing bid price of the Common Stock equals or exceeds 150% of the then exercise price per share, subject to adjustment, for any 20 trading days within a period of 30 consecutive trading days ending on the fifth trading day prior to the date of the notice of redemption. See "Description of Securities -- Redeemable Warrants." Prior to the Offering, there has been no public market for the Units, the Common Stock or the Redeemable Warrants, and there can be no assurance that such a market will develop after the completion of the Offering or, if developed, that it will be sustained. It is currently anticipated that the initial public offering price will be $4.50 per Unit. The offering price of the Units and the exercise price and other terms of the Redeemable Warrants were determined by negotiation between the Company and the Underwriter and are not necessarily related to the Company's asset or book values, results of operations or any other established criteria of value. See "Risk Factors," "Description of Securities" and "Underwriting." The Company has applied to include the Units, the Common Stock and the Redeemable Warrants on the Nasdaq SmallCap Market ("Nasdaq") under the symbols "CTINU," "CTIN" and "CTINW," respectively. The Company and the Underwriter may jointly determine, based upon market conditions, to delist the Units upon the expiration of the 30-day period commencing on the date of this Prospectus. THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS" LOCATED ON PAGE 8, AND "DILUTION." THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
=================================================================================================================== Price to Public Underwriting Discounts(1) Proceeds to Company(2) - ------------------------------------------------------------------------------------------------------------------- Per Unit........................ $ $ $ - ------------------------------------------------------------------------------------------------------------------- Total(3)........................ $ $ $ =================================================================================================================== (1) Does not include additional compensation payable to the Underwriter in the form of a non-accountable expense allowance. In addition, see "Underwriting" for information concerning indemnification and contribution arrangements and other compensation payable to the Underwriter. (2) Before deducting estimated expenses of $______ payable by the Company, including the Underwriter's non-accountable expense allowance. (3) The Company has granted to the Underwriter an option (the "Over-Allotment Option"), exercisable for a period of 45 days after the date of this Prospectus, to purchase up to 199,999 additional Units upon the same terms and conditions set forth above, solely to cover over-allotments, if any. If the Over-Allotment Option is exercised in full, the total Price to Public, Underwriting Discounts and Proceeds to Company will be $_____________, $____________ and $______________, respectively. See "Underwriting."
The Units are being offered by the Underwriter, subject to prior sale, when, as and if delivered to and accepted by the Underwriter, and subject to approval of certain legal matters by its counsel and subject to certain other conditions. The Underwriter reserves the right to withdraw, cancel or modify the Offering and to reject any order in whole or in part. It is expected that delivery of the Units offered hereby will be made against payment, at the offices of Joseph Stevens & Company, Inc., New York, New York, on or about _________, 1997. JOSEPH STEVENS & COMPANY, INC. The date of this Prospectus is _______________, 1997. [PHOTOGRAPHS] The Company intends to furnish to the registered holders of the Units, Redeemable Warrants and Common Stock, annual reports containing financial statements audited by its independent accounting firm and quarterly reports for the first three quarters of each fiscal year containing unaudited interim financial information. CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE UNITS, COMMON STOCK AND/OR REDEEMABLE WARRANTS, INCLUDING PURCHASES OF THE UNITS, COMMON STOCK AND/OR REDEEMABLE WARRANTS TO STABILIZE THEIR RESPECTIVE MARKET PRICES, PURCHASES OF THE UNITS, COMMON STOCK AND/OR REDEEMABLE WARRANTS MAINTAINED BY THE UNDERWRITER IN THE UNITS, COMMON STOCK AND/OR REDEEMABLE WARRANTS, RESPECTIVELY, AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Prospectus. In July, 1997, the Company restated its Certificate of Incorporation to provide for Common Stock and Class B Common Stock. The shares of Class B Common Stock contain rights identical to shares of Common Stock, except that shares of Class B Common Stock, voting separately as a class, have the right to elect four of the Company's seven directors. Shares of Common Stock and Class B Common Stock, voting together as a class, vote on all other matters including electing the remaining directors. Also in July, 1997, the Company effected a 1 for 2.6 reverse stock split of both its Common Stock and Preferred Stock. Upon the closing of the Offering, the holders of the Company's then outstanding Convertible Preferred Stock will convert all outstanding shares of such Convertible Preferred Stock into 1,098,901 shares of Class B Common Stock. Except as otherwise noted, all information in this Prospectus gives retroactive effect to the aforementioned recapitalization, the 1 for 2.6 reverse stock split and conversion of Convertible Preferred Stock, and assumes no exercise of the Over-Allotment Option or the Underwriter's Warrants. See "Description of Capital Stock." Investors should carefully consider the information set forth under the heading "Risk Factors." The Company CTI Industries Corporation (the "Company") manufactures and sells mylar balloons and believes it is the third largest manufacturer of mylar balloons in the world. The Company also sells latex balloons, novelty and "message" items, such as mugs and banners, and toy products, such as inflatable masks, punch balls and water bombs, and produces laminated and specialty films for food packaging and other commercial uses. The Company's balloons and related products are sold throughout the United States and in 30 foreign countries through a wide variety of retail outlets including grocery, general merchandise and drugstore chains, such as Eckerd Drug Stores and the Safeway and Winn Dixie grocery chains, card and gift shops, such as Hallmark and Factory Card Outlet stores, and party goods stores, such as Party City, as well as through florists and balloon decorators. The Company estimates the worldwide wholesale market for latex and mylar balloons to be in excess of $570 million. During fiscal 1996, the Company manufactured and sold over 15 million mylar balloons. The mylar balloon, actually a balloon made of a nylon based material with metallized and polyethylene coatings, has become a popular medium of social expression. Most mylar balloons contain printed characters, designs and messages. The Company maintains licenses on numerous characters and designs, including, for example, Peanuts(TM) characters, Garfield(TM), Precious Moments(TM) and Hallmark. To meet the needs of the mylar balloon market, the Company has developed sophisticated film products and techniques which have other applications. The Company's expertise in multi-color printing, with water-based ink in particular, has enabled the Company to expand its business to include the production of film wrappers for consumables. The Company produces, laminates and prints films for food packaging companies and manufactures custom film products for other commercial uses. The Company is a fully integrated designer and manufacturer of its mylar balloon product line and believes that its facilities are among the most advanced in the industry. The Company is a party to a long term agreement with a Mexican manufacturer under which a broad line of latex balloons are manufactured for the Company. The Company thereby has a competitive source of supply of quality latex balloon products which it markets with its mylar balloon line. The Company has also established a joint venture with this Mexican manufacturer for the packaging of balloon products and printing of latex balloons. 3 The Company's objective is to become a dominant participant in the worldwide mylar and latex balloon industry. To achieve this objective, the Company is pursuing a business strategy that includes the following principal elements: Strengthen and Expand Marketing Efforts. The Company is focusing its sales and marketing efforts to strengthen, develop and expand its relationships with balloon distributors and believes it can expand the business volume generated through current distributors of its products. The Company also intends to seek out relationships with new distributors both in current markets and in new sales areas and plans to pursue additional national chain accounts. The Company is developing relationships with independent sales representatives for the marketing of its toy-grade latex balloons, inflatable masks and other toy/novelty products and also is expanding its marketing efforts for its laminated and specialty film products. Increase Production Capability. The Company plans to purchase additional printing, graphic and laminating equipment which will allow it to increase its production capabilities and enable it to produce eight-color mylar balloons and custom film products. Secure Supply. The Company plans to secure its low cost, high quality source of latex balloons by providing capital in the form of loans to its Mexican supplier of these products. The Company believes this relationship provides the Company with a competitive advantage over its competitors. Expand Balloon Design and Product Development. By continuing to expand its design and research and development departments, the Company plans to develop new balloon designs and create or license additional characters for display on its balloons to increase the demand for its products. The Company also intends to expand its toy/novelty product line of toy- grade latex balloons, inflatable masks, punch balls and water bombs. Develop Alternative Sales Channels. The Company plans to develop strategic alliances with greeting card companies and other members of the social expression industry to more effectively market its products. The Company will seek to become the supplier of custom, special order balloon products to major distributors and suppliers. The Offering Securities offered by the Company.................... 1,333,333 Units, each Unit consisting of one share of Common Stock and one Redeemable Warrant. The shares of Common Stock and Redeemable Warrants comprising the Units will be detachable and separately tradeable upon issuance. Each Redeemable Warrant entitles the registered holder thereof to purchase one share of Common Stock at an initial exercise price of $____ per share [150% of the initial public offering price per Unit], subject to adjustment, at any time following the date of issuance until ___________, 2002 [sixty months from the date of this Prospectus]. The Company 4 shall have the right to redeem all, but not less than all, of the Redeemable Warrants commencing ________, 1998 [twelve months from the date of this Prospectus] at a price of $.05 per Redeemable Warrant on 30 days' prior written notice, provided that (i) the average closing bid price of the Common Stock equals or exceeds 150% of the then exercise price per share, subject to adjustment, for any 20 trading days within a period of 30 consecutive trading days ending on the fifth trading day prior to the date of the notice of redemption, and (ii) the Company shall have obtained the consent of the Underwriter. See "Description of Capital Stock." Common Stock outstanding Common Stock Class B Common Stock before the Offering...... 1,010,202(1) 1,098,901 Common Stock to be outstanding after the Offering.............. 2,343,535(1) 1,098,901 Redeemable Warrants to be outstanding after the Offering....... 1,333,333(1) Proposed NASDAQ SmallCap Market Symbols............ Units: CTINU Common Stock: CTIN Redeemable Warrants: CTINW Use of Proceeds............ The net proceeds of the Offering will be used (i) to repay bank indebtedness of approximately $1,250,000, including accrued interest, (ii) $400,000 for sales and marketing programs, (iii) $1,100,000 for improvements to plant and equipment, (iv) $400,000 for loans to Mexican supplier, (v) $150,000 for investment in Mexican joint venture, (vi) $400,000 for product development and character and image licenses and (vii) the balance ($1,000,000) for working capital and general corporate purposes. Risk Factors................. Investment in the Units offered hereby is highly speculative and involves significant risks and substantial dilution. See "Risk Factors." ----------------------- (1)Excludes (i) warrants to purchase an aggregate of 230,769 shares of Common Stock at an exercise price of $.91 per share, (ii) warrants to purchase 277,244 shares of Common Stock at an exercise price of $3.12 per share and (iii) 300,000 shares of Common Stock issuable pursuant to options which may be granted under the Company's stock option plan. 5 Summary Financial Information (in thousands except share and per share data) The following table sets forth summary financial data of the Company for the two years ended October 31, 1996 and 1995 (collectively, the "Year-End Data") and as of April 30, 1997, and for the six month periods ended April 30, 1996 and 1997. The Year-End Data has been derived from the audited financial statements of the Company appearing elsewhere herein, which have been audited by Coopers & Lybrand L.L.P. The summary financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the Financial Statements and notes thereto and other financial and statistical data appearing elsewhere in this Prospectus.
Years Ended October 31, Six Months Ended April 30, -------------------------- -------------------------- 1995 1996 1996 1997 ----------- ----------- ----------- ----------- Consolidated Statement of Operations Data: Net sales ......................... $ 22,784 $ 13,910 $ 7,884 $ 8,736 Cost of sales ..................... $ 15,078 $ 8,558 $ 4,798 $ 5,384 ----------- ----------- ----------- ----------- Gross profit ...................... $ 7,706 $ 5,352 $ 3,086 $ 3,352 Operating Expenses: General and administrative ..... $ 2,900 $ 2,055 $ 1,196 $ 900 Selling ........................ $ 3,770 $ 2,387 $ 1,332 $ 1,364 Advertising and marketing ...... $ 2,356 $ 592 $ 341 $ 468 Plant shut down expense ........ $ 850 -- -- -- ----------- ----------- ----------- ----------- Total operating expenses .......... $ 9,876 $ 5,034 $ 2,869 $ 2,732 ----------- ----------- ----------- ----------- Operating income (loss) ........... $ (2,170) $ 318 $ 217 $ 620 Other income (expense) ............ $ (1,497) $ (495) $ (285) $ (229) Income tax benefit(expense) ....... $ 774 $ (6) $ -- $ -- ----------- ----------- ----------- ----------- Net income (loss) ................. $ (2,893) $ (183) $ (68) $ 391 Dividends applicable to Convertible Preferred Stock .................. -- $ (74) $ (11) $ (65) ----------- ----------- ----------- ----------- Net income (loss) applicable to common shares .................... $ (2,893) $ (257) $ (79) $ 326 =========== =========== =========== =========== Net income (loss) per common and common equivalent share .......... $ (2.14) $ (.20) $ (.06) $ .26 =========== =========== =========== =========== Weighted average number of common and common equivalent shares outstanding ................ 1,353,384 1,290,267 1,324,080 1,254,124 =========== =========== =========== =========== Pro forma per share data reflecting recapitalization (1): Net income (loss) per common share and common equivalent share .............. $ (.11) $ .17 Weighted average common shares and common equivalent shares outstanding ............ 2,301,756 2,265,612
6 April 30, 1997 ----------------------------- Pro Forma Pro Forma(2) As Adjusted(2)(3) ------------ ----------- Consolidated Balance Sheet Data: Working capital .................... $ 1,311 $ 4,383 Total assets ....................... $11,522 $14,994 Long-term debt, less current portion $ 3,738 $ 3,738 Total liabilities .................. $10,114 $ 8,864 Stockholders' equity ............... $ 958 $ 5,680 - ------------- (1) Pro forma per share data gives effect to the conversion of all convertible preferred stock into common shares as if it occurred as of November 1, 1995 using the treasury stock method. The following table presents a reconciliationof the pro forma weighted average common shares used in the pro forma per share computations. Six Months Year Ended Ended October 31, 1996 April 30, 1997 ---------------- -------------- Weighted average common shares outstanding ................ 1,026,572 990,428 Conversion of preferred stock ....... 1,011,489 1,011,489 Warrants ............................ 263,695 263,695 ---------- ---------- 2,301,756 2,265,612 ========== ========== (2) Gives retroactive effect to recapitalization and conversion of Convertible Preferred Stock to shares of Class B Common Stock and issuance of $865,000 of notes in June, 1997. See "Certain Transactions." (3) Adjusted to give effect to the Offering assuming an initial public offering price of $4.50 per Unit and the initial application of the net proceeds therefrom. 7 RISK FACTORS The purchase of Units offered hereby involves substantial risks and immediate substantial dilution. Prospective investors should carefully consider the risk factors set forth below in addition to the other information contained in this Prospectus before purchasing the securities offered hereby. Operating Results; History of Losses. Although the Company had net income of $391,000 for the six months ended April 30, 1997, the Company's revenues and results of operations have fluctuated materially during the last five fiscal years. For the fiscal year ended October 31, 1995 and 1996, the Company experienced net losses of $2,893,000 and $183,000, respectively. There can be no assurance the Company can maintain profitability. See "Selected Financial Data," Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and notes thereto included herein. Additional Capital Requirements; Uncertainty of Additional Funding. Based on its current operating plan, the Company anticipates that its existing capital resources together with the proceeds of this Offering will be adequate to satisfy its requirements for at least 12 months from the date of this Prospectus. Thereafter, the Company may require additional capital in order to expand its business. There can be no assurance that the Company will be able to secure additional debt or equity financing or that such financing will be available on favorable terms. Historically, the Company has been substantially dependent upon bank debt financing and debt and equity financing and guarantees from its affiliates. There can be no assurance that the Company's affiliates will continue to extend or guarantee such financing. See "Certain Transactions." Additionally, financing, if any, may be either equity, debt or a combination of debt and equity. An equity financing could result in dilution in the Company's net tangible book value per share of Common Stock. The Company has agreed not to sell or offer for sale any of its securities for a period of 18 months following the date of this Prospectus without the consent of the Underwriter. If the Company is unable to obtain additional financing, if needed, the Company's ability to meet its obligations and to expand its operations will be materially and adversely affected. See "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and notes thereto included herein. Dependence on Limited Product Lines. The business of the Company is dependent on three principal product lines -- mylar balloons, latex balloons and specialty and printed films. Competition in each of these product lines is intense. There can be no assurance that the Company will be able to establish or maintain sales in all or any of these lines sufficient to achieve or sustain profitability. If demand for one or more of these product lines is not developed or maintained, as the case may be, whether due to competition, product performance, customer assessment of the Company's resources, technological changes or other factors, the Company's operations will be materially adversely affected. See "Business--Products." Dependence on Supplier. The Company is dependent on a supplier located in Mexico for the manufacture of its latex balloon product line. This supplier has experienced financial difficulty and has sought protection from its creditors in a "Suspension of Payments" proceeding similar but not identical to a reorganization proceeding under U.S. bankruptcy laws. The loss of the source of supply for the latex balloon product line for any reason would materially adversely affect the business of the Company. The Company has entered into an agreement to provide capital in the form of loans to the Mexican supplier, and has made loans and advances to the supplier to date in the amount of $300,000. In the event the Mexican supplier is unsuccessful in negotiating a reorganization with its creditors and is forced into bankruptcy, the collection of all or any portion of such advances is unlikely. A portion of the proceeds of this Offering will be used to provide such loans to the Mexican supplier. See "Use of Proceeds" and "Business-Manufacturing." 8 Dependence On Key Personnel. The Company's success depends to a significant degree on the continued service of certain key management personnel, in particular Howard W. Schwan, the Company's President and John C. Davis, the Company's Executive Vice President of Sales. The loss or interruption of Messrs. Schwan or Davis' services, for whatever reason, would have a material adverse effect on the Company. In the event of the loss of services of either Mr. Schwan or Mr. Davis, no assurance can be given that the Company will be able to obtain the services of adequate replacement personnel. The Company has entered into a five year employment agreement with Mr. Schwan and has extended the term of Mr. Davis' employment agreement through January, 2000. Mr. Schwan's agreement includes provisions under which Mr. Schwan agrees not to compete with the Company for a period of three years after termination of his employment with the Company. See "Management-Executive Compensation-Employment Agreement." Related Party Transactions; Potential Conflicts of Interest. In June, 1997, the Company issued notes in the principal amount of $865,000, together with warrants to purchase 277,244 shares of the Company's Common Stock at $3.12 per share. A substantial portion of these notes and warrants were purchased by an investor group including Howard W. Schwan, John H. Schwan and Stephen M. Merrick, current members of Company management. The notes will not be repaid out of the proceeds of the Offering nor will the shares of Common Stock underlying the warrants be included in the Offering. The Company believes that all of these arrangements are favorable to the Company and were entered into on terms reflecting arms' length negotiation; however, since no independent appraisals evaluating these affiliated business transactions were obtained, there can be no assurance that such transactions were based on terms no less favorable than could have been obtained from unaffiliated third parties. Potential conflicts of interest could arise between the Company and the affiliated parties in connection with the future enforcement, amendment or termination of these arrangements. See "Management," "Certain Transactions" and "Principal Stockholders." Stephen M. Merrick, Chief Executive Officer and principal shareholder of the Company is also a member of Fishman Merrick Miller Genelly Springer Klimek & Anderson, P.C., the law firm which represents the Company in this Offering and which has passed on the validity of the Units. Other members of Fishman Merrick Miller Genelly Springer Klimek & Anderson, P.C. also have an equity ownership interest in the Company. A conflict may arise between the responsibilities and duties of Fishman Merrick Miller Genelly Springer Klimek & Anderson, P.C., Mr. Merrick, and/or the other members of the firm, as shareholders, as officers of the Company, and as counsel to the Company. See "Certain Transactions" and "Legal Matters." Possible Control by Insiders; Reduced Probability of Change in Control. Upon completion of the Offering, the Company's executive officers and directors will beneficially own 65% of the outstanding Class B Common Stock and will beneficially own approximately 37% of the outstanding Common Stock (45% if their shares of Class B Common Stock are converted to shares of Common Stock) and will be able to elect at least a majority of the Company's directors and thereby direct the policies of the Company. As a result of the executive officers owning the majority of the Class B Common Stock and thereby being able to elect a majority of the Company's directors, it is less likely that an outside party will seek to obtain control of the Company through the purchase of Common Stock. See "Principal Stockholders", "Management" and "Description of Capital Stock." Competition. The markets in which the Company competes are highly competitive and rapidly changing. A number of companies offer products and services which are the same or similar to those offered by the Company. The Company's ability to compete depends upon many factors within and outside its control. There are a number of well-established competitors in each of the Company's product lines, 9 several of which possess substantially greater financial, marketing and technical resources and established, extensive direct and indirect channels of distribution for their products and services. As a result, such competitors may be able to respond more quickly to new developments and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their products and services than the Company. Competitive pressures include, among other things, price competition, new designs and product development and copyright licensing. There can be no assurance that the Company will be able to compete successfully against current or future competitors, or that competitive pressures will not have a material adverse effect on the Company's business, operating results and financial condition. See "Business - Competition." Dependence on Licenses. Particularly in connection with its mylar balloon product line, the Company relies significantly on the use of character and other copyright licenses to develop, maintain and market its products and to compete against other companies having licenses for other characters and copyrights. All of the Company's licenses are for one or two year terms. The loss of one or more of its present significant licenses or the failure to obtain new licenses as they become available could have a material adverse effect on the business of the Company. There is intense competition among the manufacturers of mylar balloons to obtain and maintain such licenses and there can be no assurance that the Company will be able to retain or obtain current or new licenses. See "Business-Competition." No Dividends. The Company has never paid any dividends on its Common Stock and does not currently intend to pay dividends on its Common Stock in the foreseeable future. The Company currently intends to retain all its earnings, if any, to finance the development and expansion of its business. It is also likely that the Company will be required to agree to restrictions on the payment of dividends in connection with future financings. See "Dividend Policy." Broad Discretion of Management in Use of Proceeds. Approximately 39% of the estimated net proceeds of the Offering (approximately 47% if the Over-Allotment Option is exercised in full) is to be used for sales and marketing activities, character and copyright licensing and working capital and general corporate purposes. Accordingly, the Company's management will have broad discretion as to the application of such proceeds. See "Use of Proceeds." Securities Eligible for Future Sale. Sales of substantial amounts of Common Stock after the Offering could adversely affect the market price of the Company's Common Stock. The number of shares of Common Stock available for sale in the public market is limited by restrictions under the Securities Act of 1933, as amended (the "Securities Act"), and by lock-up agreements pursuant to which the holders of all of the issued and outstanding shares prior to the Offering have agreed not to sell or dispose of any of their shares for a period of 18 months after the date of this Prospectus (the "Lock-up Period") without the prior written consent of the Underwriter. The Underwriter may, in its sole discretion and at any time without notice, release all or any portion of the shares subject to such lock-up agreements. Although the Underwriter does not currently intend to release all of such shares from the lock-up agreements prior to their expiration, it may from time to time release all or a portion thereof, depending on a securityholder's individual circumstances, as market conditions permit. Of the 2,343,535 shares of Common Stock that will be outstanding after the Offering, the 1,333,333 shares underlying the Units sold in this Offering will be freely tradeable without restriction or further registration under the Securities Act, except that shares owned by "affiliates" of the Company, as that term is defined in Rule 144 ("Rule 144") under the Securities Act ("Affiliates"), may generally only be sold in compliance with applicable provisions of Rule 144. The remaining 1,010,202 shares of Common Stock and the 1,098,901 shares of Class B Common Stock (and Common Stock underlying the Class B Common Stock) will be "restricted securities," as that term is 10 defined in Rule 144, and in certain circumstances may be sold without registration pursuant to such rule. After the Offering, substantially all of the restricted shares will be eligible for sale in compliance with Rule 144; however, all of these shares are subject to lock-up agreements and will be subject to restrictions on sale until the expiration of the Lock-up Period, unless released therefrom by the Underwriter. See "Management--Stock Option Plan," "Description of Capital Stock," "Securities Eligible for Future Sale" and "Underwriting." The Redeemable Warrants and the shares of Common Stock underlying such Redeemable Warrants, upon exercise thereof, will be freely tradeable without restriction under the Securities Act, except for any Redeemable Warrants or shares of Common Stock purchased by Affiliates, which will be subject to the resale limitations of Rule 144. Absence of Public Market; Arbitrary Determination of Offering Price; Possible Volatility of Stock Price. Prior to this Offering, there has been no public market for the Units, the Common Stock or the Redeemable Warrants, and there can be no assurance that an active public market for any such securities will develop or be sustained after the Offering. The initial public offering price of the Units and the terms of the Redeemable Warrants has been determined by negotiations among the Company and the Underwriter and may not necessarily bear any relationship to the assets, book value, earnings or net worth of the Company or any other recognized criteria and should not be considered to be an indication of the actual value of the Company. Accordingly, the initial public offering price may bear no relationship to the trading prices of the securities offered hereby after the consummation of this Offering, and there can be no assurance that these prices will not decline below the initial public offering price. See "Underwriting." The trading prices of the Units, the Common Stock and the Redeemable Warrants could be subject to wide fluctuations in response to actual or anticipated quarterly operating results of the Company, announcements of the Company or its competitors and general market conditions, as well as other events or factors. In addition, the stock markets have experienced extreme price and volume trading volatility in recent years. This volatility has had a substantial effect on the market price of many small capitalization companies, and has often been unrelated to the operating performance of those companies. This volatility may adversely affect the market price of the Units, Common Stock and Redeemable Warrants. Dilution; Disproportionate Risk to Purchasers of Units. Purchasers of the Units at the initial public offering price will experience immediate and substantial dilution in the net tangible book value per share of Common Stock of $2.85 or 63% ($2.73 or 61%, if the Over-Allotment Option is exercised in full). The existing stockholders of the Company have acquired their respective equity interests at costs substantially below the offering price in this Offering. Accordingly, to the extent that the Company incurs losses, the purchasers of the Units will bear a disproportionate risk with respect to such losses. See "Dilution." Underwriter's Potential Influence on the Market. It is anticipated that a significant portion of the Units offered hereby will be sold to customers of the Underwriter. Although the Underwriter has advised the Company that it intends to make a market in the Units, the Common Stock and the Redeemable Warrants, it will have no legal obligation to do so. The prices and the liquidity of the Units, the Common Stock and the Redeemable Warrants may be significantly affected by the degree, if any, of the Underwriter's participation in the market. No assurance can be given that any market activities of the Underwriter, if commenced, will be continued. See "Underwriting." Continued Quotation on the Nasdaq SmallCap Market; Potential Penny Stock Classification. The Company has applied to have the Units, the Common Stock and the Redeemable Warrants approved for quotation on the Nasdaq SmallCap Market and believes it will meet the initial listing requirements upon 11 consummation of this Offering. However, there can be no assurance that a trading market for these securities will develop, or if developed, that it will be maintained. In addition, no assurance can be given that the Company will be able to satisfy the criteria for continued quotation on the Nasdaq SmallCap Market following this Offering. Failure to meet the maintenance criteria in the future may result in the Units, the Common Stock and the Redeemable Warrants not being eligible for quotation. If the Company were removed from the Nasdaq SmallCap Market, trading, if any, in the Units, the Common Stock or the Redeemable Warrants would thereafter have to be conducted in the over-the-counter market in so-called "pink sheets" or, if then available, Nasdaq's OTC Bulletin Board. As a result, holders of the Units, the Common Stock and the Redeemable Warrants would find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, such securities. In addition, if the Units, the Common Stock or the Redeemable Warrants are delisted from trading on Nasdaq and the trading price of the Common Stock is less than $5.00 per share, trading in the Common Stock would also be subject to the requirements of Rule 15g-9 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Under such rule, broker/dealers who recommend such low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements, including a requirement that they make an individualized written suitability determination for the purchaser and receive the purchaser's written consent prior to the transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 also requires additional disclosure in connection with any trades involving a stock defined as a penny stock (generally, according to recent regulations adopted by the Securities Exchange Commission (the "Commission"), any equity security not traded on an exchange or quoted on Nasdaq that has a market price of less than $5.00 per share, subject to certain exceptions), including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated therewith. Such requirements could severely limit the market liquidity of the Units, the Common Stock and the Redeemable Warrants and the ability of purchasers in the Offering to sell their securities in the secondary market. There can be no assurance that the Units, Common Stock and Redeemable Warrants will not be delisted or treated as a penny stock. Current Prospectus and State Blue Sky Registration Required to Exercise Redeemable Warrants. The Redeemable Warrants issued in the Offering are not exercisable unless, at the time of exercise, the Company has distributed a current prospectus covering the shares of Common Stock issuable upon exercise of such Redeemable Warrants and such shares have been registered, qualified or deemed to be exempt under the securities laws of the state of residence of the holder who wishes to exercise such Redeemable Warrants. In addition, in the event any Redeemable Warrants are exercised at any time after nine months from the date of this Prospectus, the Company will be required to file a post-effective amendment and deliver a current prospectus before the Redeemable Warrants may be exercised. Although the Company will use its best efforts to have all such shares so registered or qualified on or before the exercise date and to maintain a current prospectus relating thereto until the expiration of such Redeemable Warrants, there is no assurance that it will be able to do so. Holders of Redeemable Warrants who exercise such Redeemable Warrants at a time the Company does not have a current prospectus may receive unregistered and, therefore, restricted shares of Common Stock. Although the Units will not knowingly be sold to purchasers in jurisdictions in which the Units are not registered or otherwise qualified for sale, purchasers may buy Redeemable Warrants in the after market or may move to jurisdictions in which the shares underlying the Redeemable Warrants are not registered or qualified during the period that the Redeemable Warrants are exercisable. In this event, the Company would be unable to issue shares to those persons desiring to exercise their Redeemable Warrants unless and until the shares and Redeemable Warrants could be qualified for sale in the jurisdiction 12 in which such purchasers reside, or an exemption from such qualification exists in such jurisdiction, and holders of Redeemable Warrants would have no choice but to attempt to sell the Redeemable Warrants in a jurisdiction where such sale is permissible or allow them to expire unexercised. Redemption of Redeemable Warrants. Commencing _____________, 1998 [12 months from the date of this Prospectus], the Company shall have the right to redeem all, but not less than all, of the Redeemable Warrants, at a price of $.05 per Redeemable Warrant on 30 days' prior written notice, provided that the Company shall have obtained the consent of the Underwriter, and the average closing bid price of the Common Stock equals or exceeds 150% of the then exercise price per share, subject to adjustment, for any 20 trading days within a period of 30 consecutive trading days ending on the fifth trading day prior to the date of the notice of redemption. In the event the Company exercises the right to redeem the Redeemable Warrants, such Redeemable Warrants will be exercisable until the close of business on the date fixed for redemption in such notice. If any Redeemable Warrant called for redemption is not exercised by such time, it will cease to be exercisable and the holder will be entitled only to the redemption price. Forward-Looking Information and Associated Risk. This Prospectus contains various forward- looking statements, including statements regarding, among other things, (i) the Company's growth strategy, (ii) anticipated trends in the Company's business, and (iii) the Company's ability to enter into contracts with licensors, suppliers, distributors and strategic partners. These statements are based upon management's current beliefs as well as assumptions made by management based upon information currently available to it. These statements are subject to various risks and uncertainties, including those described above, as well as potential changes in economic or regulatory conditions generally which are largely beyond the Company's control. Should one or more of these risks materialize or changes occur, or should management's assumptions prove incorrect, the Company's actual results may vary materially from those anticipated or projected. 13 THE COMPANY Background. The Company was incorporated as Container Technologies, Inc. under the laws of the State of Delaware on October 14, 1983, and changed its name to CTI Industries Corporation on August 2, 1985. The principal executive offices of the Company are located at 22160 North Pepper Road, Barrington, Illinois 60010; the Company's telephone number is (847) 382-1000. See "Business--Property." A predecessor company, Creative Technology, Inc., was organized as an Illinois corporation on December 9, 1975 and was merged into the Company in October, 1983. CTI Balloons Ltd. ("CTI Balloons"), the Company's wholly-owned subsidiary, was organized as a corporation under the laws of the United Kingdom on October 2, 1996. On October 24, 1996, the Company entered into an agreement with CTI Balloons pursuant to which all of the assets and liabilities of the Company in its branch operation in the United Kingdom were sold and transferred to CTI Balloons and all of the capital stock of CTI Balloons was issued and delivered to the Company. Unless otherwise specified, all references herein to the Company shall refer to the Company, its predecessor Creative Technology, Inc. and its wholly-owned subsidiary, CTI Balloons. Change in Control. In March and May of 1996, a group of investors made an equity investment of $1,000,000 in the Company in return for 1,098,091 shares of Preferred Stock, $.91 par value. Each share of Preferred Stock was entitled to an annual cumulative dividend of 13% of the purchase price, and was convertible into one share of Common Stock. The shares of Preferred Stock, voting separately as a class, were entitled to elect four of the Company's directors. Members of such investment group included Howard W. Schwan, John H. Schwan and Stephen M. Merrick, current members of management. See "Management" and "Certain Transactions." Recapitalization. In July, 1997, the Company effected a recapitalization (the "Recapitalization") without a formal reorganization. As part of the Recapitalization, the Board of Directors approved the creation of Class B Common Stock, approved a 1 for 2.6 reverse stock split on both the Common Stock and Preferred Stock, and negotiated a conversion effective upon the closing of this Offering of all then outstanding shares of the Company's Convertible Preferred Stock into an aggregate of 1,098,901 shares of Class B Common Stock. The shares of Class B Common Stock contain rights identical to shares of Common Stock, except that shares of Class B Common Stock, voting separately as a class, have the right to elect four of the Company's seven directors. Shares of Common Stock and Class B Common Stock, voting together as a class, vote on all other matters, including the election of the remaining directors. The recapitalization and related transactions were approved by written consent of the shareholders. See "Description of Capital Stock." 14 USE OF PROCEEDS The net proceeds to the Company from the sale of the Units offered by the Company hereby, after deduction of the underwriting discounts, the Underwriter's non-accountable expense allowance and other estimated expenses of the Offering payable by the Company, are expected to aggregate $4,722,000 ($5,505,000 if the Over-Allotment Option is exercised in full). The following table summarizes the Company's estimated use of the net proceeds: Approximate Approximate Application of Proceeds Amount Percentage - ----------------------- ---------- ---------- Repayment of bank indebtedness(1).................. $ 1,250,000 26.4% Selling and marketing(2) .......................... $ 400,000 8.5% Plant and equipment(3)............................. $ 1,100,000 23.3% Loans to Mexican supplier(4)....................... $ 400,000 8.5% Investment in Mexican joint venture(4) ............ $ 150,000 3.2% Character and other licenses....................... $ 400,000 8.5% Working capital and general corporate purposes..... $ 1,022,000 21.6% ---------- ----- Total........................................ $ 4,722,000 100% ========== ===== - -------------------- (1)Repayment of revolving line of credit. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources." (2)Includes hiring of additional personnel in marketing, product design and development, and sales, and acquiring product displays for expansion into additional retail locations. See "Business-Marketing, Sales and Distribution." (3)Includes purchase of laminating and coating equipment and graphics equipment, including eight- color graphic printer. See "Business-Manufacturing." (4)See "Business-Manufacturing" for description of loan to Mexican supplier and further investment in Mexican joint venture. In the event the Underwriter exercises the Over-Allotment Option in full, the Company will utilize the additional net proceeds for general corporate purposes. The Company anticipates that the proceeds from the Offering, together with its current capital resources and projected cash flow from operations, will be sufficient to satisfy its requirements for at least 12 months from the date of this Prospectus. Thereafter, the Company may need to raise additional funds to expand its operations. There can be no assurance that additional financing will be available or if available will be available on favorable terms. If the Company is unable to obtain such additional financing, the Company's ability to maintain its current level of operations will be materially and adversely affected. See "Risk Factors--Additional Capital Requirements; Uncertainty of Additional Funding." 15 Pending application of the proceeds of the Offering, the Company intends to invest the net proceeds in certificates of deposit, money market accounts, United States government obligations or other short-term interest bearing obligations of investment grade. Proceeds of this Offering may also be used, if the Company so elects, to acquire companies or products that complement its business or operations. In the ordinary course of its business, the Company from time to time evaluates companies for acquisition and products for acquisition or license. Except as otherwise disclosed herein, the Company has no agreement or arrangement with respect to any such acquisition or license. DIVIDEND POLICY The Company has never paid any dividends on its Common Stock and does not currently intend to pay dividends on its Common Stock in the foreseeable future. The Company currently intends to retain all its earnings to finance the development and expansion of its business. It is also likely that the Company will be required to agree to restrictions on the payment of dividends in connection with future financings, if any. See "Risk Factors--No Dividends." 16 CAPITALIZATION The following table sets forth the proforma capitalization of the Company as of April 30, 1997, and as adjusted to reflect the sale of the Units offered hereby at an assumed initial public offering price of $4.50 per Unit and the initial application of the net proceeds therefrom (after deducting the underwriting discounts and estimated Offering expenses payable by the Company). The pro forma column gives retroactive effect to the recapitalization and conversion of Convertible Preferred Stock to shares of Class B Common Stock upon the closing of the Offering and the issuance of $865,000 of notes in June, 1997. See "The Company- Recapitalization" and "Certain Transactions." This table should be read in conjunction with the Company's financial statements attached hereto. April 30,1997 ----------------------- Pro Forma Pro Forma As Adjusted (in thousands) Long-term debt, less current portion ...... $ 3,738 $ 3,738 ------- ------- Stockholders' equity Common Stock, $.065 par value, 11,000,000 shares authorized, 1,010,202 shares outstanding, pro forma, 2,343,535 shares pro forma as adjusted(1) .............. $ 75 $ 162 Class B Common Stock, $.91 par value, 1,100,000 shares authorized, 1,098,901 shares outstanding .......... $ 1,000 $ 1,000 Additional paid-in capital .............. $ 248 $ 4,883 Retained earnings ....................... $ 463 $ 463 Treasury stock .......................... $ (371) $ (371) Redeemable common stock ................. $ (450) $ (450) Stock Subscription Receivable ........... $ (7) $ (7) ------- ------- Total stockholders' equity ........... $ 958 $ 5,680 ------- ------- Total capitalization ............. $ 4,696 $ 9,418 ======= ======= - ------------------- (1)Excludes (i) warrants to purchase an aggregate of 230,769 shares of Common Stock at an exercise price of $.91 per share, (ii) warrants to purchase 277,244 shares of Common Stock at an exercise price of $3.12 per share, and (iii) 300,000 shares of Common Stock issuable pursuant to options which may be granted under the Company's stock option plan. 17 DILUTION "Net tangible book value per share" represents the amount of total tangible assets of the Company reduced by the amount of total liabilities and divided by the number of shares of capital stock outstanding. "Dilution" represents the difference between the price per share to be paid by new investors for the shares of Common Stock included in the Units offered hereby, and the pro forma net tangible book value per share as of April 30, 1997, after giving effect to the Offering. The pro forma net tangible book value per share at April 30, 1997, also gives retroactive effect to the recapitalization and conversion of the Company's Preferred Stock into shares of Class B Common Stock upon the closing of the Offering. See "Certain Transactions." At April 30, 1997, the pro forma net tangible book value of the capital stock was (including shares of Class B Common Stock) $958,000 in the aggregate, or $.45 per share. After giving effect to the sale of the shares of Common Stock included in the Units offered hereby (at the assumed initial public offering price of $4.50 per Unit, resulting in estimated net proceeds of $4,722,000, after deducting underwriting discounts and estimated Offering expenses payable by the Company and assuming no value is attributed to the Redeemable Warrants included in the Units), the pro forma net tangible book value of the capital stock (including shares of Class B Common Stock), as of April 30, 1997, would have been $5,680,000 in the aggregate, or $1.65 per share. This represents an immediate increase in pro forma net tangible book value of $1.20 per share to existing stockholders and an immediate dilution per share of $2.85, or 63%, to new investors in the Offering. The following table illustrates the dilution per share as described above: Initial public offering price per share of Common Stock .... $4.50 Pro forma net tangible book value per share (including shares of Class B Common Stock) before Offering ........................................ $.45 Increase attributable to new investors ................... $1.20 ----- Pro forma net tangible book value per share (including shares of Class B Common Stock) after the Offering ......................... $1.65 ----- Dilution per share to new investors ........................ $2.85 ===== Based on the foregoing assumptions, the following table sets forth, as of completion of the Offering, the number of shares purchased from the Company, the total cash consideration paid to the Company and the average price per share paid by the existing stockholders and by new investors purchasing shares of Common Stock included in the Units in the Offering (assuming no value is attributed to the Redeemable Warrants).
Total Shares Purchased Consideration ----------------- ------------------- Average Price Number Percent Amount Percent Per Share ------ ------- ------ ------- --------- Existing Common Stock holders ................ 1,010,202 29% $ 256,388 3.53% $ .25 Class B Common Stock holders ................ 1,098,901 32% $1,000,000 13.78% $ .91 New Investors ............ 1,333,333 39% $6,000,000 82.69% $4.50 ---------- ---- ----------- ---- Total .................... 3,442,436 100% $7,256,388 100% ========== === =========== ===
18 If the Over-Allotment Option is exercised in full, the pro forma net tangible book value at April 30, 1997, after giving effect to the Offering (assuming no value is attributed to the Redeemable Warrants included in the Units), would be approximately $6,463,000 or $1.77 per share, and the dilution per share to new investors would be approximately $2.73 or 61%. The foregoing also assumes no exercise of the Redeemable Warrants, the Underwriter's Warrants or any outstanding stock options or warrants. As of April 30, 1997, there were outstanding warrants to purchase an aggregate of 230,769 shares of Common Stock at an exercise price of $.91 per share. Subsequent to April 30, 1997, the Company issued $865,000 of notes, together with warrants to purchase up to 277,244 shares of Common Stock at a price of $3.12 per share. See "Certain Transactions." The Company has a total of 300,000 shares of Common Stock reserved for issuance upon the exercise of stock options which may be granted from time to time pursuant to its stock option plan. See "Management-- Executive Compensation--Stock Option Plan." To the extent that any options or warrants are exercised at a price per share less than the initial public offering price, there will be further dilution to new investors. 19 SELECTED FINANCIAL DATA (in thousands except share and per share data) The following table sets forth selected financial data of the Company for the two years ended October 31, 1996 and 1995 (collectively, the "Year-End Data"), and for the six months ended April 30, 1997 and 1996. The Year-End Data has been derived from the audited financial statements of the Company appearing elsewhere herein, which have been audited by Coopers & Lybrand L.L.P. The selected financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Financial Statements and notes thereto and other financial and statistical data appearing elsewhere in this Prospectus.
Six Months Year Ended October 31, Ended April 30, -------------------------- -------------------------- 1995 1996 1996 1997 ----------- ----------- ----------- ----------- Consolidated Statement of Operations Data: Net sales .............................. $ 22,784 $ 13,910 $ 7,884 $ 8,736 Cost of sales .......................... $ 15,078 $ 8,558 $ 4,798 $ 5,384 ----------- ----------- ----------- ----------- Gross profit ........................... $ 7,706 $ 5,352 $ 3,086 $ 3,352 Operating Expenses: General and administrative ......... $ 2,900 $ 2,055 $ 1,196 $ 900 Selling ............................ $ 3,770 $ 2,387 $ 1,332 $ 1,364 Advertising and marketing .......... $ 2,356 $ 592 $ 341 $ 468 Plant shut down expense ............ $ 850 -- -- -- ----------- ----------- ----------- ----------- Total operating expenses ............... $ 9,876 $ 5,034 $ 2,869 $ 2,732 ----------- ----------- ----------- ----------- Operating income (loss) ................ $ (2,170) $ 318 $ 217 $ 620 ----------- ----------- ----------- ----------- Other income (expense) ................. $ (1,497) $ (495) $ (285) $ (229) ----------- ----------- ----------- ----------- Income (loss) before income taxes ...... $ (3,667) $ (177) $ (68) $ 391 Income tax benefit (expense) ........... $ 774 $ (6) $ -- $ -- ----------- ----------- ----------- ----------- Net income (loss) ...................... $ (2,893) $ (183) $ (68) $ 391 Dividends applicable to Convertible Preferred Stock ....................... -- $ (74) $ (11) $ (65) ----------- ----------- ----------- ----------- Net income (loss) applicable to common shares ......................... $ (2,893) $ (257) $ (79) $ 326 =========== =========== =========== =========== Net income (loss) per common and common equivalent share ............... $ (2.14) $ (.20) $ (.06) $ .26 =========== =========== =========== =========== Weighted average number of common and common equivalent shares outstanding ..................... 1,353,384 1,290,267 1,324,080 1,254,124 =========== =========== =========== =========== Pro forma per share data reflecting recapitalization(1): Net income (loss) per common share and common equivalent share .............. $ (.11) $ .17 Weighted average common shares and common equivalent shares outstanding ............ 2,301,756 2,265,612
- -------------------- (1) Pro forma per share data gives effect to the conversion of all convertible preferred stock into common shares as if it occurred as of November 1, 1995 using the treasury stock method. 20 Consolidated Balance Sheet Data: Pro Forma(1) October 31, April 30, 1996 1997 --------- --------- Working capital............................. $ 347 $ 1,311 Total assets................................ $ 10,286 $ 11,522 Long term debt, less current portion........ $ 3,105 $ 3,738 Total liabilities........................... $ 9,355 $ 10,114 Stockholders' equity........................ $ 481 $ 958 - -------------------- (1)Gives retroactive effect to recapitalization and conversion of Convertible Preferred Stock to shares of Class B Common Stock and issuance of $865,000 of notes in June, 1997. See "Certain Transactions." 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General In February, 1996, there was a change of control and management of the Company. Since that time, new management has focused its efforts on (i) reducing costs of operations, (ii) achieving liquidity, (iii) formulating and implementing plans and programs to increase revenues and (iv) achieving profitability. Operating expenses were reduced from 1995 to 1996 by over $4.8 million, a reduction of approximately 49%. The net loss of the Company was reduced from the 1995 level of $2,893,000 to $183,000 for fiscal 1996. While net sales decreased 39% in fiscal 1996 to $13,910,000 from $22,784,000 in fiscal 1995, net sales for the six months ended April 30, 1997 have increased 11% from net sales for the same period in 1996. For the six months ended April 30, 1997, the Company had net income of $391,000 compared to a net loss of $68,000 for the same period in 1996. Working capital increased to $490,000 on April 30, 1997 from $347,000 on October 31, 1996. During the past 18 months, the Company has introduced over 180 new mylar balloon designs, has out-sourced the manufacture of and engaged in active marketing of latex balloons and introduced several new products. Approximately $1.9 million of new financing has been provided in private financings and a new bank loan and line of credit in the aggregate amount of $6.3 million has been obtained. The Company anticipates investing $1.1 million of the proceeds of this offering in capital items and operations to improve the products, production capacity, marketing efforts, product development and operations of the Company. The Company plans to make capital investments of approximately $2.8 million, a portion of which will be financed through equipment leases or otherwise, in plant improvements and equipment which will increase production capacity and which will allow the Company to print eight-color designs in the mylar product line and the laminated and printed films business. The Company plans to make loans to its supplier of latex balloons to further assure the source of supply. The Company plans to invest a portion of the proceeds of the Offering for the hiring of personnel in marketing, product design and development and sales to enhance the Company's product design and development efforts, its product line, marketing, customer service and support and sales effort. Results of Operation Net Sales. For the six months ended April 30, 1997, net sales increased to $8,736,000 from $7,884,000 for the same period in 1996, an increase of approximately 11%. This increase in net sales was a reflection principally of increases in the sales of latex balloons and printed and laminated films. For the fiscal year ended October 31, 1996, net sales were $13,910,000, as compared to net sales of $22,784,000 for the fiscal year ended October 31, 1995. The 39% decline in sales for that period was a result of (i) a decline of approximately $2 million in the sales of latex balloons because of the closing of the Company's latex balloon manufacturing operations in September, 1995 and the lack of supply of latex balloons from October, 1995 to June, 1996, (ii) a decline in sales of mylar balloons of approximately $6 million resulting primarily from the loss of several national account customers and (iii) the elimination of sales of plush toys which represented approximately $900,000 in sales during fiscal 1995. During fiscal 1995, mylar balloons represented approximately 87% of revenues, latex balloons 11% of revenues and laminated and printed films approximately 2% of sales. During fiscal 1996, mylar balloons represented 87% of sales, latex balloons 4% of sales and laminated and printed films 9% of sales. During the six months ended April 30, 1997, mylar balloons represented 80% of sales, latex balloons 8% of sales and laminated and printed films 12% of sales as compared to 92%, 2% and 6%, respectively, for the six 22 months ended April 30, 1996. The Company anticipates that the percentage of sales represented by latex balloons and laminated and printed films will continue to increase during fiscal 1997 and 1998. Cost of Sales. For the six months ended April 30, 1997, cost of sales represented 61.6% of net sales as compared to 60.8% for the same period in 1996. For the fiscal year ended October 31, 1996, cost of goods represented 61.5% of net sales as compared to 66.2% for the fiscal year ended October 31, 1995. Administrative. For the six months ended April 30, 1997, administrative expenses were $900,000, or 10.3% of sales as compared to $1,196,000, or 15.2% of sales, for the same period in the prior year. For the fiscal year ended October 31, 1996, general and administrative expenses were $2,055,000, or 14.8% of sales, as compared to $2,900,000, or 12.7% of sales, for the prior fiscal year. The decreases were the result of a number of items including the reduction in accounting and financial staff, and reduction in certain executive salaries and expenses, and a reduction in overhead expenses. Selling. For the six months ended April 30, 1997, selling expenses were $1,364,000, or 15.6% of net sales, as compared to $1,332,000, or 16.9% of net sales for the same period in the prior year. For the fiscal year ended October 31, 1996, selling expenses were $2,387,000, or 17.2% of net sales, as compared to selling expenses of $3,770,000, or 16.5% of sales for the fiscal year ended October 31, 1995. Advertising and Marketing. For the six months ended April 30, 1997, advertising and marketing expenses were $468,000, or 5.4% of sales, as compared to advertising and marketing expenses of $341,000, or 4.3% of sales, for the same period in the prior year. The increase in these expenses was a result of catalogue printing costs and service fees paid on national account sales programs. For the fiscal year ended October 31, 1996, advertising and marketing expenses were $592,000 compared to $2,356,000 for the fiscal year ended October 31, 1995. This decrease of $1,764,000 was the result of a significant decline in the cost of printed materials incurred by the Company, particularly in its catalogue, as well as a decline in print advertising. Service fees related to national account sales programs declined with the loss of several national account customers. Plant Shutdown Expenses and Loss on Disposition of Latex Equipment. In fiscal 1995, the Company ceased latex manufacturing operations at its Cary, Illinois facility and sold its latex balloon manufacturing equipment. See "Business-Manufacturing." Shutdown expenses of $850,000 were accrued for rent, utilities, operating expenses, building rehabilitation and latex inventory write-down during this period. A loss on disposition of latex equipment was incurred in fiscal 1995 of $822,000 upon sale of the equipment and the forgiveness of the $400,000 receivable relating to the sale. Other Expenses. For the six months ended April 30, 1997, interest expense was $304,000 as compared to $317,000 for the same period in the prior year. For the fiscal years ended October 31, 1995 and 1996, interest expense was $800,000 and $553,000, respectively. The reduction in interest expense is a reflection of the reduction in the aggregate indebtedness of the Company and the new bank loan arrangement in September, 1996 at overall rates of interest less than the prior bank loan rates. Net Income or Loss. For the six months ended April 30, 1997, the Company had net income of $391,000 as compared to a net loss of $68,000 for the same period in the prior year. For the fiscal year ended October 31, 1996, the Company had net loss of $183,000 as compared to a net loss of $2,893,000 for the prior fiscal year. 23 Liquidity and Capital Resources Cash flow used in operations during the six months ended April 30, 1997 was $911,000. This resulted primarily from increased sales and resulting increases in accounts receivable of over $1,000,000. During fiscal years 1995 and 1996, the Company had cash flows from operations of $541,000 and $840,000, respectively. During fiscal 1996, cash raised from the issuance of Preferred Stock and the new revolving line of credit was used in part to reduce accounts payable and accrued expenses. At April 30, 1997 the Company maintained no cash balance, which is consistent with the Company's current cash management policy of utilizing its revolving line of credit for liquidity. As of October 31, 1996, the Company had cash and cash equivalents of $131,000. As of April 30, 1997, the Company had working capital of $490,000. Working capital as of October 31, 1996 was $347,000. During the past eighteen months, the Company has funded its operations primarily through the cash provided by its operating activities, a private placement financing of Preferred Stock, funding provided by a new bank loan and line of credit and a private placement of notes and warrants. In early 1996, the Company completed a private placement of 1,098,901 shares of Preferred Stock, par value $.91 per share, for gross proceeds of $1,000,000. The Preferred Stock included a cumulative preferred dividend at the rate of 13%. The shares of Preferred Stock will be converted into 1,098,901 shares of Class B Common Stock upon the closing of this Offering. See "The Company-Recapitalization." In September, 1996, the Company entered into a Loan Agreement with a bank under which the bank provided loans and a line of credit to the Company aggregating $6,300,000. The arrangement included term loans in the amount of $3,300,000 and a revolving line of credit providing for maximum advances of $3,000,000 of which $57,000 was unused at April 30, 1997. The term loans are due on September 1, 2001, and bear interest at either 8.75% or prime plus 1%. The revolving loan was due on September 1, 1997 and has been renewed until July 1, 1998. The revolving line of credit bears interest at prime plus 1%. During July, 1997, the same bank provided additional term loans to the Company in the aggregate amount of $475,000. All these loans are secured by all of the Company's assets. Three principal shareholders of the Company, John H. Schwan, Howard W. Schwan and Stephen M. Merrick have guaranteed these obligations. A portion of the proceeds of this Offering will be used to pay down the revolving line of credit. See "Use of Proceeds." During June, 1997, the Company completed a private placement of notes and warrants for gross proceeds of $865,000. The notes issued in the placement are subordinated unsecured two year notes, bearing interest at the rate of 10% per annum. Individuals participating in the placement received five year warrants to purchase 277,244 shares of Common Stock of the Company at the price of $3.12 per share. Two officers and directors of the Company applied advances made by them to the Company in January, 1997, in the aggregate amount of $400,000 toward the purchase of the notes and warrants. See "Certain Transactions." During fiscal 1995 and 1996, the Company invested $479,000 and $496,000, respectively, in plant and equipment and has invested $343,000 during the six months ended April 30, 1997. During fiscal 1995 and 1996, the Company utilized $124,000 and $336,000, respectively, in financing activities, principally the reduction of bank indebtedness. During the six months ended April 30, 1997, the Company has generated $1,155,000 in financing activities. 24 The Company believes that the net proceeds of this offering, together with existing capital resources and cash generated from operations, will be sufficient to meet the Company's requirements for at least 12 months following the date of this Prospectus. Thereafter the Company may require additional capital in order to expand its business and there can be no assurance that the Company will be able to secure additional debt or equity financing or that such financing will be available on favorable terms. See "Risk Factors-Additional Capital Requirements; Uncertainty of Additional Financing." Seasonality In the mylar product line, sales have historically been seasonal with approximately 17% to 27% of annual sales of mylar being generated in December and January and 13% to 15% of annual mylar sales being generated in June and July in recent years. The sale of latex balloons and laminated film products have not historically been seasonal, and to the extent sales in these areas increase as a percentage of total sales, this should decrease the seasonality of the Company's total net sales. 25 BUSINESS General Background. CTI Industries Corporation (the "Company") manufactures and sells mylar balloons and believes it is the third largest manufacturer of mylar balloons in the world. The Company also sells latex balloons, novelty and "message" items, such as mugs and banners, and toy products, such as inflatable masks, punch balls and water bombs, and produces laminated and specialty films for food packaging and other commercial uses. The Company's products are sold throughout the United States and in 30 foreign countries through a wide variety of retail outlets including grocery, general merchandise and drugstore chains, such as Eckerd Drug Stores and Safeway and Winn Dixie grocery chains, card and gift shops, such as Hallmark and Factory Card Outlet stores, and party goods stores, such as Party City, as well as through florists and balloon decorators. The Company estimates the worldwide wholesale market for mylar and latex balloons to be in excess of $570 million. The mylar balloon, actually a balloon made of a nylon based material with metallized and polyethylene coatings, has become a popular medium of social expression. Most mylar balloons contain printed characters, designs and messages. The Company maintains licenses on numerous characters and designs, including, for example, Peanuts(TM) characters, Garfield(TM), Precious Moments(TM) and Hallmark. To meet the needs of the mylar balloon market, the Company has developed sophisticated film products and techniques which have other application. The Company's expertise in multi-color printing using water-based ink, in particular, has enabled the Company to expand its business to include the production of film wrappers for consumables. The Company produces, laminates and prints films for food packaging companies and provides custom film products for other commercial uses. The Company is a fully integrated designer and manufacturer of its mylar balloon product line and believes that its facilities are among the most advanced in the industry. The Company is a party to a long term agreement with a Mexican manufacturer under which a broad line of latex balloons are manufactured for the Company. The Company thereby has a competitive source of supply of quality latex balloon products which it markets with its mylar balloon line. The Company has also established a joint venture with this Mexican manufacturer for the packaging of balloon products and printing of latex balloons. Business Plan. Upon assuming control in early 1996, new management concentrated initially on reducing costs of operations, achieving liquidity and profitability and formulating plans to increase revenues. Having achieved these goals in late 1996 and early 1997, management's focus turned to generating increased sales and market share to position itself as a market leader. To achieve this goal, the Company is focusing its efforts on developing sales and marketing programs to strengthen, develop and expand its relationship and sales to its distributors, national chains and other buyers of its products. In addition to expanding the core U.S. market, the Company will seek to increase its presence in emerging markets for its balloon and related products, such as Europe and Central and South America. The Company will also seek additional distributors for its toy/novelty line of products and will continue to expand its customer base for its laminated and specialty film products. 26 To enable the Company to meet customer demand for high quality, multi-color mylar balloons and custom film products, the Company will invest in new laminating and graphic equipment, including an eight- color graphic printer. The Company also intends to assure its supply of competitively priced latex balloons by providing capital in the form of loans to its Mexican supplier of such products. The Company believes that this will provide it with added control over supply and give the Company an advantage over other latex balloon distributors. The Company will continue its efforts to license new characters and designs for its mylar balloons and to develop or license new balloon designs to increase consumer demand for its products. The Company's catalogue published in June 1997, introduced over 100 new balloon designs. The Company has recently introduced a lower-priced, higher quality standard line of latex balloons and has introduced a number of new latex balloon colors and now manufactures mylar and latex balloons in coordinated colors. Further, with the introduction of inflatable masks the Company has entered the novelty/toys market. The Company believes that its full line of mylar and latex balloons and its manufacturing capability may afford the Company a competitive advantage in the market. The Company will continue to seek out new methods for the sale of its products, including strategic partnerships with companies engaged in the greeting card, party goods and related businesses to take advantage of these entities' distribution channels and resources. The Company will continue to offer custom balloon manufacture for distributors and suppliers to position itself as a full service manufacturer. Industry Overview The mylar balloon came into existence in the late 1970s. During the 1980s, the market for mylar balloons grew rapidly. Initially, the product was sold principally to individual vendors, small retail outlets and at fairs, amusement parks, shopping centers and other outdoor facilities and functions. Because of its ability to remain buoyant for a long period of time when filled with helium and its facility for the printing of graphics and messages, the product has significant appeal as a novelty and message item. Mylar balloons became part of the "social expression" industry, carrying graphics designs, characters and messages like greeting cards. In the mid-1980s, the Company and other participants in the market began licensing character and cartoon images for printing on the balloons and directed marketing of the balloons to retail outlets including grocery, general merchandise and drugstore chains, card and gift shops, party goods stores, as well as florists and balloon decorators. The Company estimates that the wholesale world market for mylar balloons is approximately $120 million. Mylar balloons are sold in the United States and in Europe, several countries in the Far East, Canada and to an increasing extent in Latin America. The United States, however, is by far the largest market for these products. Particularly in areas of Europe and Latin America, mylar balloons are also sold by individual vendors at fairs, amusement parks and other public areas. There are presently seven manufacturers of mylar balloons whose products are sold in the United States. Five of these companies maintain their own production facilities in the United States. Several companies market and sell mylar balloons designed by them and manufactured by others for them. Mylar balloons are marketed in the United States and foreign countries through wholesalers or distributors and directly to retail customers. Often the sale of mylar balloons by the wholesalers/distributors is accompanied by related 27 products including latex balloons, floral supplies and candy containers. Although, the latex balloon market overlaps the mylar balloon market, the latex balloon market has been in existence for a longer period than mylar balloons and extends to more customers and market categories than mylar balloons. There are three separate latex balloon product lines: (i) high quality decorator balloons, (ii) standard novelty balloons and (iii) printed balloons. The high quality decorator balloons are generally sold to and through balloon decorators and are generally of higher quality and price than the standard line of balloons. The standard line of balloons is sold widely in retail stores including many of the same outlets as mylar balloons. Printed latex balloons are sold both in retail outlets and for balloon decoration purposes including floral designs. There are five principal manufacturers of latex balloons whose products are sold in the United States. It is estimated that the wholesale world market for latex balloons exceeds $450 million. While the market for printed and laminated films is fragmented, the Company believes it is a multi-billion dollar industry. Products Mylar Balloons. The mylar balloon is actually composed of a base nylon material which is coated on one side with a metal deposit and on the other with polyethylene. Typically, the balloon film is printed with graphic designs and messages. The Company manufactures over 380 balloon designs, in different shapes and sizes. o Superloons(TM) are 18" balloons in round or heart shape, generally made to be filled with helium and remain buoyant for long periods. This is the predominant mylar balloon size. o Ultraloons(TM) are 34" balloons made to be filled with helium and remain buoyant. o Miniloons(TM) are 9" balloons made to be air-filled and sold on holder-sticks or for use in decorations. o Card-B-Loons(TM) (4 1/2") and Pixiloons(TM) (2 1/2") are air-filled balloons, often sold on a stick, used in floral arrangements or with a container of candy. o Shape-A-Loons(TM) are shaped balloons made to be filled with helium. o Minishapes are small shaped balloons designed to be air filled and sold on sticks as toys or inflated characters. o Walk-abouts(TM) are helium filled shaped balloons with attached arms and legs. o Smackers(TM) are helium filled red lip-shaped balloons. o You Name It(TM) are balloons to which lettering can be attached for a personalized message. 28 In addition to size and shape, a principal element of the Company's mylar balloon products is the printed design or message contained on the balloon. These designs include figures and licensed characters many of which are well-known licensed characters. The Company maintains licenses for Peanuts(TM), Garfield(TM), Precious Moments(TM), Hallmark, Hallmark Shoebox(TM), Ziggy(TM), Grimmy(TM), Elephantz(TM), Paddington(TM), Face-Offs(TM), Gibson Greetings(TM), Postman Pat(TM) and several others. See "Business- Patent, Trademarks and Copyrights." Latex Balloons. The Company sells a high end line of latex balloons under the product line name Hi-Tex(TM) and a standard line of latex balloons marketed under the name Partyloons(TM). Toys and Novelty. The Company also manufactures or sells additional and related novelty items including mugs, banners and inflatable masks. With its standard line of latex balloons and newly introduced inflatable masks, the Company has made entry into the toy market. The Company intends to develop and acquire additional novelty and toy lines of products, in many cases products which can be sold in conjunction with its existing products including latex punch balls and water bombs. Packaging Films. The Company fabricates and prints films for use in food packaging. The Company has developed sophisticated methods for the printing of films, including the use of water-based ink. These techniques have proven desirable for companies engaged in packaging food products, particularly candy and snack items, with the result that the Company now provides printed packaging films for several food packaging companies, including Farley Candies, and intends to expand and extend this business line. Custom Film Products. In addition to printed films for food packaging, the Company fabricates custom film products for various commercial and industrial purposes. These now include "dunnage" bags (inflatable film products) used in the packaging of goods and systems for the storage of clothing items. Marketing, Sales and Distribution The Company markets and sells its mylar balloon, latex balloon and related novelty products throughout the United States and in over 30 foreign countries. The Company maintains a marketing, sales staff and support staff of 11 individuals and a customer service department of 16 individuals. European sales are conducted by CTI Balloons, the Company's subsidiary located in Rugby, England. Sales in other foreign countries are made generally to distributors in those countries and are managed at the Company's principal offices. The Company sells and distributes its products principally through a network of over 350 distributors and wholesalers situated throughout the United States and in a number of foreign countries. These distributors and wholesalers are engaged principally in the sale of balloons and related products (including such items as plush toys, mugs, containers, floral supplies and other items). These distributors and wholesalers, in turn, sell balloons and related products to retail outlets including grocery, general merchandise and drug store chains, card and gift shops, party goods stores, as well as florists and balloon decorators. The Company intends to use a portion of the proceeds of this Offering to expand its marketing efforts with current distributors and to seek out new distributors both in current markets and in new sales areas. While the Company will continue to focus on the core U.S. market, it will also seek to exploit other world markets such as Europe and South America. No distributor or other customer accounts for more than 10% of the Company's sales revenues. Most sales are on an individual order basis. 29 The Company also sells balloons and related products to certain national chain stores including grocery, general merchandise and drugstore chains and party goods stores. The Company's largest chain store customer is Eckerd Drug Stores. The Company also sells its balloons to individual retail outlets generally through coordinated efforts with its distributors. The Company has entered into an agreement with a major greeting card company under which such company will act as an agent for the sale of the Company's balloon products in retail outlets to which such company sells greeting cards. Under the agreement, this company takes orders for balloons, services the display of balloons and maintains inventory in the stores. The Company pays this company a commission on sales the company generates and services. The Company is pursuing similar strategic partnerships with other companies in the expression industry. The Company has established independent sales representatives for the sale of its toy/novelty line which include the standard quality latex balloon, inflatable masks, punch balls and water bombs. These products constitute a separate product class requiring a different distribution network. The Company engages in a variety of advertising and promotional activities to promote the sale of its balloon products. Each year, the Company produces a complete catalogue of its balloon products, and also prepares various flyers and brochures for special or seasonal products, which are disseminated to thousands of customers, potential customers and others. The Company participates in numerous trade shows for the gift, novelty, balloon and other industries and advertises in a number of trade and other publications. The Company also attends licensing shows for the purpose of seeking out additional design licenses. The Company markets and sells its printed and laminated films directly and through independent sales representatives. The Company markets these products to companies which package their products in plastic wrapping, in particular food products such as candies. Manufacturing Production and Operations. At the Barrington, Illinois headquarters, the Company owns and operates a modern facility which includes machines of its own design and construction which fabricate mylar balloons, banners and packaging bags. These production systems include a patented system for the production and insertion of valves in balloons. These machines have the capacity to manufacture approximately 55 million 18" balloons annually. The Company owns and operates graphic machinery at its facility in Barrington, Illinois that is used for the printing of films for mylar balloons and for printed and laminated films. The Company's use of water-based ink makes its printed films attractive to food processors for the packaging of their products. The Company intends to use a portion of the proceeds of this Offering for the acquisition of additional graphic equipment which will be located at this facility. See "Use of Proceeds." At the Barrington facility, the Company owns and operates two laminating machines. The Company intends to use a portion of the proceeds of this Offering for the purchase of additional laminating machinery which will substantially enhance the capacity of the Company to produce laminated films. See "Use of Proceeds." 30 The Company also maintains a graphic arts and development department which designs its balloon products and graphics. The Creative Department operates a networked, computerized graphic arts system for the production of these designs and of printed materials including catalogues, advertisements and other promotional materials. The Barrington facility also includes a computerized customer service department which receives and fulfills over 50,000 orders annually. Pulidos et Terminados Finos. The Company's latex balloons are manufactured for it by Pulidos et Terminados Finos S.A. de C.V. ("P&TF"), a Guadalajara, Mexico company engaged principally in the manufacture of latex balloons. The Company believes that P&TF owns and operates the second largest latex balloon manufacturing facility in the world. In 1995, the Company entered into an agreement with P&TF under which (i) the Company sold to P&TF all of its latex balloon manufacturing equipment (for the manufacture of decorator balloons) and such equipment is now operated by P&TF, (ii) P&TF has agreed for a period of 10 years to supply balloons exclusively to the Company for the United States and Canada manufactured on such equipment and (iii) for such 10 year period, P&TF has agreed to supply to the Company, exclusively in the United States except as to two other companies, all balloons manufactured by P&TF. Commencing in 1996, P&TF began manufacturing the Company's high-end line of latex balloons exclusively for the Company for the United States and also manufactures a standard line of latex balloons which the Company distributes throughout the United States and in various foreign countries under the product line name Partyloons(TM). P&TF has experienced financial difficulties and in 1995, sought protection from creditors in a "Suspension of Payment" proceeding in Mexico similar, but not identical to, a reorganization under U.S. bankruptcy laws. See "Risk Factors--Dependence on Supplier." The Company believes it has an opportunity to further secure its source of supply by providing necessary funding to P&TF. In July, 1997, the Company entered into an Agreement with P&TF whereby it agreed to subscribe for a note of P&TF in the principal amount of U.S.$1,200,000 and an option to purchase a portion of P&TF's capital stock. The Company has also agreed to make advances to P&TF in an amount up to U.S.$400,000 prior to the closing of the transaction contemplated by the Agreement. The advances are secured by shares of capital stock of P&TF. The purchase price for the note and option is to be paid by (i) applying the advances made prior to the closing, (ii) by forgiving $400,000 of debt relating to the 1995 acquisition by P&TF of the Company's latex balloon manufacturing equipment and (iii) a cash payment for the balance. In addition to the purchase of notes and options, the Company has also agreed to loan or provide for a loan of up to an additional $800,000 to P&TF. The Company's obligations to purchase the note and option are subject to the termination of P&TF's Suspension of Payment proceeding, the payment or settlement of P&TF's current bank debt and the successful completion of this Offering. The Company believes this relationship provides the Company with a competitive advantage over its competition. A portion of the proceeds of this Offering will be used to finance the acquisition of the note and option. See "Use of Proceeds." P&TF maintains two manufacturing facilities in Guadalajara, Mexico totaling approximately 60,000 square feet of manufacturing, office and warehouse space and operates seven latex balloon machines having the capacity to produce approximately 1 billion latex balloons annually. CTF International. In September, 1996, the Company and P&TF entered into a joint venture agreement to organize and operate CTF International, a Mexican corporation. The joint venture is owned equally by the Company and P&TF. CTF leases a facility of 15,000 square feet in Guadalajara, Mexico. 31 CTF engages in the packaging of balloons for the Company and P&TF and in the printing of latex balloons. The Company believes it can achieve significant savings in overhead, labor and other operating costs through the operation of CTF and expects CTF to be an independent profit center. A portion of the proceeds of this Offering will be used to finance the operations of CTF. See "Use of Proceeds." Competition The balloon and novelty industry is highly competitive, with numerous competitors. There are presently seven major manufacturers of mylar balloons whose products are sold in the United States including Anagram International, Inc., M&D Balloons, Inc., Pioneer Balloon, Convertidora International, Classic Balloon and Betallic. Several companies, including American Greetings, Amscan and Flowers, Inc., market and sell mylar balloons designed by them and manufactured by others for them. There are at least seven manufacturers of latex balloons whose products are sold in the United States including Globus Occidental, Pioneer Balloon, National Latex, Maple City, Tilco and P&TF. The market for film packaging and custom products is fragmented, and competition in this area is difficult to gauge. However, there are numerous participants in this market and the Company can expect to experience intense quality and price competition. Many of these Companies offer products and services which are the same or similar to those offered by the Company and the Company's ability to compete depends on many factors within and outside its control. There are a number of well-established competitors in each of the Company's product lines, several of which possess substantially greater financial, marketing and technical resources and established, extensive, direct and indirect channels of distribution for their products and services. As a result, such competitors may be able to respond more quickly to new developments and changes in customer requirements, or devote greater resources to the development, promotion and sale of their products and services than the Company. Competitive pressures include, among other things, price competition, new designs and product development and copyright licensing. See "Risk Factors-Competition." Patents, Trademarks and Copyrights In connection principally with its mylar balloon business, the Company has developed or acquired a number of intellectual property rights which are significant to its business. Copyright Licenses. The most significant of these rights are licenses on a number of popular characters. The Company presently maintains approximately 20 licenses and produces balloon designs utilizing the characters covered by the licenses. Licenses are generally maintained for a one or two year term, although the Company has maintained long term relationships with a number of its licensors and has been able to obtain renewal of its license agreements with them. The Company has held a license on Peanuts(TM) characters for over 11 years, on Garfield(TM) for more than 10 years and on Hallmark designs for approximately 10 years. Trademarks. The Company is the owner of over 23 registered trademarks in the United States relating to its products. Many of these trademarks are registered in foreign countries, principally in the European Community. Patent Rights. The Company is the owner of, or licensee under, several patents relating to balloon products. These include (i) ownership of two patents, and a license under a third, relating to self-sealing 32 valves for mylar balloons and methods of making balloons with such valves and (ii) a patent on a combination of a greeting card and balloon connected by a ribbon contained in single package. Research and Development The Company maintains a product development and research department of six individuals for the development or identification of new balloons and related products, product components and sources of supply. Research and development includes (i) creative product development, (ii) creative marketing, and (iii) engineering development. During its fiscal years 1995 and 1996, the Company estimates that the total amount spent on research and development activities was approximately $306,000 and $201,000, respectively. Employees As of June 30, 1997, the Company had 146 full-time employees, of whom nine are executive or supervisory, 22 are in sales, 106 are in manufacturing and nine are clerical. The Company believes that its relationship with its employees is satisfactory. Legal Proceedings On October 27, 1995, an action entitled National Sales Services, Inc. v. CTI Industries Corporation, No. 95 L 15381 was filed in the Circuit Court of Cook County, Illinois. In the action National Sales Services claims that there is due to it from the Company for service rendered in the maintenance of product at retail stores, pursuant to an agreement for such services, the sum of $101,323. The Company has filed an answer to the complaint denying the claims and asserting several affirmative defenses, including that National Sales Services (i) failed to perform the agreement, (ii) failed to perform certain conditions precedent and (iii) failed to perform the services claimed. The Company also filed a counterclaim alleging damages of $152,512 for breach of the agreement by National Sales Services. The Company intends to actively defend the claim and pursue its counterclaim. By letter dated October 28, 1996, Kredietbank of Antwerp, Belgium communicated to the Company that it had determined to terminate the opening of a credit which it claimed to have granted to the Company. In the letter, Kredietbank claimed that it was entitled to close the current account and claim repayment of the entire debit balance immediately. Kredietbank further stated that the letter was a notice of the termination of the credit and included a request that the Company settle its current account in full. The amount claimed to be due is believed to be approximately $450,000. Management of the Company has communicated that Kredietbank advanced certain funds to a former subsidiary of the Company -- Superloon N.V., a Belgium company -- but has stated that , at no time, has Kredietbank ever advanced or loaned any funds to the Company. Management of the Company does not believe the Company is obligated with respect to the credit referred by Kredietbank. Regulatory Matters The Company's manufacturing operations are subject to the U.S. Occupational Safety and Health Act ("OSHA"). The Company believes it is in material compliance with OSHA. The Environmental Protection Agency regulates the handling and disposal of hazardous materials. As the Company printing operations utilize only water-based ink, the waste generated by the Company's production process is not deemed hazardous. The Company believes it is in material compliance with applicable environmental rules 33 and regulations. A number of states have enacted laws limiting or restricting the release of helium filled mylar balloons. The Company does not believe such legislation will have any material effect on its operations. Property The Company owns its principal plant and offices located in Barrington, Illinois, approximately 45 miles northwest of Chicago, Illinois. The facility includes approximately 75,000 square feet of office, manufacturing and warehouse space. The Company also leases approximately 62,500 square feet of space in Cary, Illinois expiring December 31, 1999. The Company has subleased approximately 70% of this space through August, 1998. The Company's monthly rent (net of subleases) is $5,957. The facility is utilized for warehouse and latex balloon printing. The Company leases 15,000 square feet of office and warehouse space in Rugby, England at an annual lease cost of $54,000 expiring 2019. This facility is utilized for product packaging operations and to manage and service the Company's operations in England and Europe. 34 MANAGEMENT Directors and Executive Officers The Company's current directors and executive officers and their ages, as of June 30, 1997, are as follows: Name Age Position with Company ----------------- --- -------------------------- John H. Schwan............. 53 Chairman and Director Stephen M. Merrick......... 55 Chief Executive Officer, Secretary, Chief Financial Officer and Director Howard W. Schwan........... 43 President John C. Davis.............. 64 Executive Vice President and Director Sharon Konny............... 39 Manager of Finance and Administration Brent Anderson............. 31 Vice President of Manufacturing Stanley M. Brown........... 51 Director All directors hold office until the annual meeting of stockholders next following their election and/or until their successors are elected and qualified. Officers are elected annually by the Board of Directors and serve at the discretion of the Board. Information with respect to the business experience and affiliation of the directors and the executive officers of the Company is set forth below. John H. Schwan, Chairman. Mr. Schwan has been an officer and director of the Company since January, 1996. Mr. Schwan has been the President and principal executive officer of Packaging Systems, Inc. and affiliated companies for over the last 10 years. Mr. Schwan has over 20 years of general management experience, including manufacturing, marketing and sales. Mr. Schwan served in the U.S. Army Infantry in Vietnam from 1966 to 1969, where he attained the rank of First Lieutenant. See "Certain Transactions." Stephen M. Merrick, Chief Executive Officer and Secretary. Mr. Merrick was President of the Company from January, 1996 to June, 1996 to June, 1997 when he became Chief Executive Officer of the Company. Mr. Merrick devotes a portion of his time to his position as Chief Executive Officer of the Company and is engaged in the practice of law and other business activities. He has been a director and Secretary of the Company since inception. Mr. Merrick is a principal of the law firm of Fishman Merrick Miller Genelly Springer Klimek & Anderson, P.C. of Chicago, Illinois and has been engaged in the practice of law for more than 30 years. He is also Secretary, Director and a member of the Management Committee of Reliv' International, Inc. (NASDAQ), a manufacturer and direct marketer of nutritional supplements and food products. Howard W. Schwan, President. Mr. Schwan has been associated with the Company for 17 years principally in the management of the production and engineering operations of the Company. Mr. Schwan was appointed as Vice President of Manufacturing in November, 1990, and was appointed as President in June, 1997. Mr. Schwan manages administration, production and engineering functions as well as the sales function for latex balloons and custom and created films. See "Certain Transactions." John C. Davis, Executive Vice President-Sales. Mr. Davis has been associated with the Company since 1975 and was President and a director of the Company from that time to January, 1996. Mr. Davis 35 has been active in a sales and marketing capacity and, in January, 1996, became Executive Vice President of Sales. Sharon Konny, Manager of Finance and Administration. Ms. Konny has been Manager of Finance and Administration at the Company since October, 1996. From November of 1992 to 1996, she was an Assistant Vice President of First Chicago Corporation, initially as Loan Servicing Manager of the Mortgage Services Division and in December, 1994, achieving the position of Manager of Financial Administration for the First Card Division. She became a Certified Public Accountant in 1992. Brent Anderson, Vice President of Manufacturing. Mr. Anderson has been employed by the Company since January, 1989, and has held a number of engineering positions with the Company including Plant Engineer and Plant Manager. In such capacities Mr. Anderson was responsible for the design and manufacture of much of the Company's manufacturing equipment. Mr. Anderson was appointed Vice President of Manufacturing in June, 1997. Stanley M. Brown, Director. Mr. Brown was appointed as a director of the Company in January, 1996. Mr. Brown has been President of Inn-Room Systems, Inc., a manufacturer and lessor of in-room vending systems for hotels since March, 1996 and, since 1990, has been President of Surface Preparation Systems, Inc., a company engaged in the business of developing and marketing equipment for the preparation, cleaning and profiling of concrete and other surfaces. From 1968 to 1989, Mr. Brown was with the United States Navy as a naval aviator, achieving the rank of Captain. During his term with the U.S. Navy he served in various command and staff positions including an Amphibious Helicopter Carrier (with 2,500 personnel), an anti-submarine, aviation squadron and at the Pentagon. Mr. Brown was awarded 2 Meritorious Service Medals, 3 Navy Commendation Medals and campaign and service medals from the Pacific and Atlantic Fleets. John H. Schwan and Howard W. Schwan are brothers. Executive Compensation Summary Compensation Table. The following table sets forth certain information with respect to the compensation paid or accrued by the Company to its President, Chief Executive Officer and any other officer who received compensation in excess of $100,000. Annual Compensation ------------------------------------------- Name and Principal Other Annual All Other Position Salary Bonus Compensation Compensation Year ($) ($) ($) ($) Stephen M. Merrick 1996 $ 45,000 --- --- --- Chief Executive 1995 --- --- --- --- Officer 1994 --- --- --- --- Howard W. Schwan 1996 $108,500 --- $ 6,957(1) $ 1,250(3) President 1995 $ 94,231 --- $ 6,933(1) $ 1,242(3) 1994 $ 90,096 $ 28,986 $ 6,813(1) $ 1,159(3) John C. Davis 1996 $195,177 --- $11,438(2) $ 3,252(3) Executive Vice 1995 $280,000 $248,000 $23,747(2) $ 5,150(3) President-Sales 1994 $237,000 $450,000 $44,367(2) $ 7,170(3) Footnotes on next page 36 - ----------------- (1)Perquisites include country club membership ($5,000). (2)Perquisites include country club membership ($5,000) and allocated personal use of Company vehicles ($5,158 in 1996, $16,767 in 1995 and $37,387 in 1994). (3)Company contribution to the Company 401(k) Plan as pre-tax salary deferral. No executive officer owns any options or warrants issued in connection with their employment. Certain executive officers received warrants to purchase Common Stock of the Company in connection with their guarantee of certain bank loans secured by the Company. See "Certain Transactions." No executive officer received or exercised any stock options during the fiscal year ended October 31, 1996. Employment Agreement. In April, 1996, the Company entered into an employment agreement with John C. Davis as Executive Vice President-Sales, which provided for an annual salary of $150,000. The term of the agreement was through January 31, 1998. On June 27, 1997, the agreement was amended to extend the term through January 31, 2000, and to provide for an annual salary of $120,000 per year. The agreement contains covenants of Mr. Davis with respect to use of the Company's confidential information and establishing the Company's rights to inventions created by Mr. Davis during the term of employment. In June, 1997, the Company entered into an Employment Agreement with Howard W. Schwan as President, which provides for an annual salary of $135,000. The term of the Agreement is through June 30, 2002. The Agreement contains covenants of Mr. Schwan with respect to the use of the Company's confidential information, establishes the Company's right to inventions created by Mr. Schwan during the term of employment, and includes a covenant of Mr. Schwan not to compete with the Company for a period of 3 years after the date of termination of the Agreement. Stock Option Plan A total of 300,000 shares of Common Stock are reserved for issuance under the Stock Option Plan. No options have yet been granted. The plan provides for the award of options, which may either be incentive stock options ("ISOs") within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended (the "Code") or non-qualified options ("NQOs") which are not subject to special tax treatment under the Code. The Plan is administered by the Board or a committee appointed by the Board (the "Administrator"). Officers, directors, and employees of, and consultants to, the Company or any parent or subsidiary corporation selected by the Administrator are eligible to receive options under the plan. Subject to certain restrictions, the Administrator is authorized to designate the number of shares to be covered by each award, the terms of the award, the date on which and the rates at which options or other awards may be exercised, the method of payment and other terms. The exercise price for ISOs cannot be less than the fair market value of the stock subject to the option on the grant date (110% of such fair market value in the case of ISOs granted to a stockholder who owns more than 10% of the Company's Common Stock). The exercise price of a NQO shall be fixed by the Administrator at whatever price the Administrator may determine in good faith. Unless the Administrator determines otherwise, options generally have a 10-year term (or five years in the case of ISOs granted to a participant owning more than 10% of the total voting power of the Company's capital stock). Unless the Administrator provides otherwise, options terminate upon the termination of a participant's 37 employment, except that the participant may exercise an option to the extent it was exercisable on the date of termination for a period of time after termination. Generally, awards must be exercised by cash payment to the Company of the exercise price. However, the Administrator may allow a participant to pay all or a portion of the exercise price by means of a promissory note, stock or other lawful consideration. The Plan also allows the Administrator to provide for withholding and employment taxes payable by a participant to the Company upon exercise of the award. In the event of any change in the outstanding shares of Common Stock by reason of any reclassification, recapitalization, merger, consolidation, reorganization, spin-off, split-up, issuance of warrants or rights or debentures, stock dividend, stock split or reverse stock split, cash dividend, property dividend or similar change in the corporate structure, the aggregate number of shares of Common Stock underlying any outstanding options may be equitably adjusted by the Administrator in its sole discretion. The Company has agreed that for a 18-month period commencing on the date this Prospectus that it will not, without the consent of the Underwriter, adopt or propose to adopt any plan or arrangement permitting the grant, issue or sale of any shares of its securities or issue, sell or offer for sale any of its securities, or grant any options for its securities, except for options to purchase up to an aggregate of 300,000 shares of Common Stock which shall have an exercise price per share no less than the greater of (a) the initial public offering price of the Units set forth herein and (b) the fair market value of the Common Stock on the date of grant. No option or other right to acquire Common Stock granted, issued or sold during this period shall permit (a) the payment with any form of consideration other than cash, (b) payment of less than the full purchase price or exercise price for such shares of Common Stock or other securities of the Company on or before the date of issuance, or (c) the existence of stock appreciation rights, phantom options or similar arrangements. Limitation of Liability and Indemnification. As permitted by the Delaware General Corporation Law ("DGCL"), the Company has included in its Certificate of Incorporation a provision to eliminate the personal liability of its directors for monetary damages for breach or alleged breach of their fiduciary duties as directors, except for liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involved intentional misconduct or a knowing violation of law, (iii) in respect of certain unlawful dividend payments or stock redemptions or repurchases, as provided in Section 174 of the DGCL, or (iv) for any transaction from which the director derived an improper personal benefit. The effect of this provision in the Company's Certificate of Incorporation is to eliminate the rights of the Company and its stockholders (through stockholders' derivative suits on behalf of the Company) to recover monetary damages against a director for breach of the fiduciary duty of care as a director except in the situations described in (i) through (iv) above. This provision does not limit nor eliminate the rights of the Company or any stockholder to seek non-monetary relief such as an injunction or rescission in the event of a breach of a director's duty of care. These provisions will not alter the liability of directors under federal securities laws. The Certificate of Incorporation and the by-laws of the Company provide that the Company is permitted to indemnify its officers and directors, employees and agents under certain circumstances. In addition, if permitted by law, the Company is permitted to advance expenses to its officers and directors as incurred in connection with proceedings against them in their capacity as a director or officer for which they may be indemnified upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to indemnification. At present, the Company is not aware of any pending or threatened litigation or proceeding involving a director, officer, employee or agent of the Company in which indemnification would be required or 38 permitted. The Company believes that its charter provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors and officers of the Company pursuant to the foregoing provisions or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission ("Commission"), such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. 39 PRINCIPAL STOCKHOLDERS The following table sets forth certain information with respect to the beneficial ownership of the Company's capital stock, as of the date of this Prospectus by (i) each stockholder who is known by the Company to be the beneficial owner of more than 5% of the Company's Common Stock or Class B Common Stock, (ii) each director and executive officer of the Company who owns any shares of Common Stock or Class B Common Stock, and (iii) all executive officers and directors as a group. Except as otherwise indicated, the Company believes that the beneficial owners of the shares listed below have sole investment and voting power with respect to such shares.
Shares of Class B Shares of Common Common Stock Stock Beneficially Percent of Common Stock(4) Name and Address(1) Beneficially Owned(2)(3) Owned(2) Prior to Offering After Offering - ------------------- ------------------------ -------- ----------------- -------------- Stephen M. Merrick 219,781 318,807(5) 23.55 14.88 John H. Schwan 329,670 189,103(6) 22.57 14.29 Howard W. Schwan 164,835 92,949(7) 11.70 7.29 John C. Davis ----- 464,281(8) 21.52 13.30 Sharon Konny ----- ------ ------ ------ Brent Anderson ----- ------ ------ ------ Stanley M. Brown 747 Glenn Avenue Wheeling, IL ----- ------ ------ ------ Frances Ann Rohlen c/o Cheshire Partners 1504 Wells Chicago, IL 60610 274,725 ------ 13.03 7.98 Philip W. Colburn 109,890 118,267(9) 10.82 6.63 All directors and executive officers as a group (7 persons) 714,286 1,065,140 67.99 45.04 - ------------------ (1 Except as otherwise indicated, the address of each stockholder listed above is c/o CTI Industries Corporation, 22160 North Pepper Road, Barrington, Illinois 60010. (2) A person is deemed to be the beneficial owner of securities that can be acquired within 60 days from the date set forth above through the exercise of any option, warrant or right. Shares of Common Stock subject to options, warrants or rights that are currently exercisable or exercisable within 60 days are deemed outstanding for purposes of computing the percentage ownership of the person holding such options, warrants or rights, but are not deemed outstanding for purposes of computing the percentage ownership of any other person. Footnotes continued on next page 40 (3) Figures below represent all Class B Common Stock outstanding. Beneficial ownership of shares of Class B Common Stock for Messrs. Merrick, John Schwan, Howard Schwan and Ms. Rohlen include indirect ownership of such shares through CTI Investors, L.L.C. See "Certain Transactions." (4) Assumes conversion of all shares of Class B Common Stock into shares of Common Stock. (5)Includes warrants to purchase up to 76,923 shares of Common Stock at $.91 per share and warrants to purchase up to 100,961 shares of Common Stock at $3.12 per share. (6)Includes warrants to purchase up to 76,923 shares of Common Stock at $.91 per share and warrants to purchase up to 112,180 shares of Common Stock at $3.12 per share. (7)Includes warrants to purchase up to 76,923 shares of Common Stock at $.91 per share and warrants to purchase up to 16,026 shares of Common Stock at $3.12 per share. (8)Includes warrants to purchase up to 48,077 shares of Common Stock at $3.12 per share, and 230,769 shares of Common Stock subject to redemption by the Company. See "Certain Transactions." (9)Includes shares held by immediate family members.
41 CERTAIN TRANSACTIONS In March 1996, the Company entered into a Stock Redemption Agreement with John C. Davis which was subsequently amended June 27, 1997. Under the amended Stock Redemption Agreement the Company has the right but not the obligation to redeem up to 333,333 shares of Common Stock owned by Mr. Davis at the price of $1.95 per share at any time through January 31, 1998. Commencing March 1, 1998 through February 28, 2000, the Company is obligated to pay to Mr. Davis, for the redemption of shares at $1.95 per share (i) an amount equal to 2% of the Company's pretax profits each fiscal quarter (beginning with the quarter ended February 28, 1998) and (ii) an amount equal to 2% (but not to exceed $8,000) of the amount by which latex and mylar balloon revenues exceed $1.3 million in any month. The Company also has the right to redeem additional shares of Common Stock from Mr. Davis during this period at $1.95 per share, provided that the total number of shares subject to redemption under the Stock Redemption Agreement does not exceed 333,333. As of the date of this Offering 102,564 shares of Common Stock have been redeemed pursuant to the Stock Redemption Agreement. In March and May of 1996, a group of investors made an equity investment of $1,000,000 in the Company in return for 1,098,901 shares of Preferred Stock, $.91 par value. Each share of Preferred Stock was entitled to an annual cumulative dividend of 13% of the purchase price, and was convertible into one share of Common Stock. The shares of Preferred Stock, voting separately as a class, were entitled to elect four of the Company's directors. CTI Investors, L.L.C., an Illinois limited liability company, invested $900,000 in the shares of Preferred Stock. Members of CTI Investors, L.L.C. include Howard W. Schwan, John H. Schwan and Stephen M. Merrick, members of management, and Frances Ann Rohlen. See "Management." In July, 1997, the shares of Preferred Stock were converted into shares of Class B Common Stock in connection with the recapitalization of the Company. See "The Company--Recapitalization" and "Principal Shareholders." In December, 1996, Howard W. Schwan, John H. Schwan and Stephen M. Merrick were each issued warrants to purchase 76,923 shares of the Company's Common Stock at an exercise price of $.91 per share in consideration of their facilitating and guaranteeing a bank loan to the Company in the amount of $6.3 million. The warrants have a term of six years. See "Management's Discussion and Analysis of Financial Condition and Results of Operation." In June, 1997, the Company issued in a private placement notes in the principal amount of $865,000, together with warrants to purchase up to 277,244 shares of the Company's Common Stock at an exercise price of $3.12 per share. The warrants have a term of five years. Howard W. Schwan, John H. Schwan, Stephen M. Merrick and John C. Davis, members of management, purchased $50,000, $350,000 and $300,000 and $150,000, respectively, of the notes and warrants. Mr. John Schwan and Mr. Merrick applied advances of $200,000 each, made to the Company in January, 1997, toward the purchase of notes and warrants. See "Risk Factors--Related Party Transactions; Potential Conflicts of Interest." Stephen M. Merrick, Chief Executive Officer of the Company, is a principal of the law firm of Fishman Merrick Miller Genelly Springer Klimek & Anderson, P.C. which serves as general counsel of the Company. Fishman Merrick Miller Genelly Springer Klimek & Anderson, P.C. will pass on the validity of the Units in the Offering. In addition, Mr. Merrick owns 219,781 shares of Class B Common Stock, 140,923 shares of Common Stock, warrants to purchase 76,923 shares of Common Stock at $.91 per share, and warrants to purchase 100,961 shares of Common Stock at 3.12 per share. Other members of the firm of Fishman Merrick Miller Genelly Springer Klimek & Anderson, P.C. own an aggregate of 53,561 shares of Common Stock. See "Legal Matters." John H. Schwan is the president and shareholder of Packaging Systems, Inc. and affiliated companies. The Company made purchases of packaging materials from these entities in the amount of $1,106,649 during the year ended October 31, 1996 and $145,267 for the six months ended April 30, 1997. 42 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 11,000,000 shares of Common Stock, $.065 par value, and 1,100,000 shares of Class B Common Stock, $.91 par value and 2,000,000 shares of Preferred Stock, $.91 par value. On the date of this Prospectus, after giving effect to the recapitalization and the conversion, the Company has outstanding 1,010,202 shares of Common Stock held of record by over 20 stockholders and 1,098,901 shares of Class B Common Stock held of record by 2 stockholders. All outstanding shares of capital stock of the Company are fully paid and non-assessable. Common Stock and Class B Common Stock The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Holders of Common Stock will vote together with holders of Class B Common Stock, on a one vote for each share basis, on all matters submitted to a vote of stockholders except the election of directors. Holders of Common Stock and Class B Common Stock shall share equally, on a per share basis, in all dividends declared by the Company and will participate equally in the proceeds of dissolution of the Company, on a per share basis. Holders of Class B Common Stock, voting separately as a class, have the right to elect four of the Company's seven directors, and will vote together with holders of Common Stock, as a class, on the election of the remaining three directors. Neither the Common Stock or Class B Common Stock possess cumulative voting rights or preemptive rights. Holders of Class B Common Stock have the right to convert their shares into shares of Common Stock, on a share for share basis at any time, and such shares will automatically convert on July 23, 2002. The Units Each Unit consists of one share of Common Stock and one Redeemable Warrant, which entitles the registered holder thereof to purchase one share of Common Stock at an initial exercise price of $____ [150% of the initial public offering price per Unit] per share, subject to adjustment. The shares of Common Stock and Redeemable Warrants comprising the Units will be detachable and separately tradeable upon issuance. The Company and the Underwriter may jointly determine, based upon market conditions, to delist the Units upon the expiration of the 30-day period commencing on the date of this Prospectus. The Redeemable Warrants The Redeemable Warrants will be issued under and subject to the terms of a Warrant Agreement (the "Warrant Agreement") dated as of the date hereof between the Company and Continental Stock Transfer & Trust Company, as warrant agent (the "Warrant Agent"). Set forth below is a summary of certain provisions of the Warrant Agreement. Such summary does not purport to be complete and is subject to and qualified in its entirety by reference to all of the provisions of the Warrant Agreement. A copy of the Warrant Agreement is filed as an exhibit to the Registration Statement of which this Prospectus forms a part. General. Each Redeemable Warrant entitles the registered holder thereof to purchase one share of Common Stock at an initial exercise price of $____ [150% of the initial public offering price per Unit] per share, subject to adjustment, at any time following the date of issuance until 5:00 p.m. New York time, on ______, 2002 [60 months from the date of the Prospectus] (the "Expiration Date"), unless previously 43 redeemed. Each Redeemable Warrant will be issued in registered form and will be transferable from and after the date of issuance and prior to the Expiration Date. Warrantholders are not entitled, by virtue of being Warrantholders, to receive dividends or to vote at or receive notice of any meeting of stockholders or to exercise any other rights whatsoever as stockholders of the Company. Commencing ________, 1998 [12 months from the date of the Prospectus], the Company will have the right to redeem all, but not less than all, of the Redeemable Warrants at a price of $.05 per Redeemable Warrant on 30 days' prior written notice, provided that the Company shall have obtained the written consent of Joseph Stevens & Company, Inc. (the "Underwriter"), and the average closing bid price of the Common Stock equals or exceeds 150% of the then exercise price per share, subject to adjustment, for any 20 trading days within a period of 30 consecutive trading days ending on the fifth trading day prior to the date of the notice of redemption. Adjustments. The exercise price of the Redeemable Warrants and the number of shares of Common Stock issuable upon exercise thereof are subject to adjustment in certain events, including stock splits or combinations, stock dividends, or through a recapitalization resulting from a stock split or combination. The remaining shares of Common Stock issuable upon exercise of the Redeemable Warrant and the purchase price thereof will be appropriately adjusted by the Company. Amendments. The Board of Directors of the Company, in its discretion, may amend the terms of the Redeemable Warrants to, among other things, reduce the exercise price; provided, however, that no amendment adversely affecting the rights of the holders of the Redeemable Warrants may be made without the approval of the holders of not less than a majority of the Redeemable Warrants then outstanding. Exercise of Redeemable Warrants. The Redeemable Warrants may be exercised by surrendering to the Warrant Agent the warrant certificate evidencing the Warrant, duly executed by the Warrantholder or his duly authorized agent and indicating such Warrantholder's election to exercise all or a portion of the Redeemable Warrants evidenced by such warrant certificate. Surrendered warrant certificates must be accompanied by payment of the aggregate exercise price of the Redeemable Warrants to be exercised, which payment may be made, at the Warrantholder's election, in cash or by delivery of a cashier's or certified check or any combination of the foregoing. A current Prospectus must be in effect in order for holders of Redeemable Warrants to exercise such Redeemable Warrants. Pursuant to the terms of the Warrant Agreement, the Company has agreed to maintain a current Prospectus in effect until the Expiration Date, subject to certain exceptions. Upon receipt of duly executed Redeemable Warrants and payment of the exercise price, the Company shall issue and cause to be delivered, to or upon the written order of exercising Warrantholders, certificates representing the number of shares of Common Stock so purchased, if fewer than all of the Redeemable Warrants evidenced by any warrant certificate are exercised, a new warrant certificate evidencing the Redeemable Warrants remaining unexercised will be issued to the Warrantholder. The Company has authorized and will reserve for issuance a number of shares of Common Stock sufficient to provide for the exercise of all Redeemable Warrants. When delivered in accordance with the Warrant Agreement, such shares will be fully paid and non-assessable. The Preferred Stock The Preferred Stock may be issued in one or more series at such times and for such consideration as shall be authorized from time to time by the Board of Directors. Transfer Agent and Registrar The transfer agent and registrar for the Common Stock of the Company is Continental Stock Transfer & Trust Company, New York, New York. 44 SECURITIES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, the Company will have outstanding an aggregate of 2,343,535 shares of Common Stock and 1,098,901 shares of Class B Common Stock assuming (i) the issuance by the Company of 1,333,333 shares of Common Stock included in the Units offered hereby, (ii) no issuance of shares of Common Stock underlying the Redeemable Warrants, Underwriter's Warrants or relating to other outstanding warrants to purchase Common Stock, (iii) no exercise of outstanding options to purchase Common Stock and (iv) no conversion of the Class B Common Stock. Of these shares, the 1,333,333 shares included in the Units will be freely tradeable without restriction or further registration under the Securities Act, except for shares held by Affiliates of the Company (whose sales would be subject to certain limitations and restrictions described below) and the regulations promulgated thereunder). The remaining shares were sold by the Company in reliance on exemptions from the registration requirements of the Securities Act and are "restricted securities" within the meaning of Rule 144 under the Securities Act. Most of these shares will be eligible for sale in the public market under Rule 144; however, all of these shares are subject to lock-up agreements whereby such securities cannot be sold for a period of 18 months from the date of this Prospectus, unless released therefrom by the Underwriter. The Redeemable Warrants underlying the Units offered hereby and the shares of Common Stock underlying such Redeemable Warrants, upon exercise thereof, will be freely tradeable without restriction under the Securities Act, except for any Redeemable Warrants or shares of Common Stock purchased by an Affiliate, which will be subject to the resale limitation of Rule 144 under the Securities Act. In addition, without the consent of the Underwriter, the Company has agreed not to sell or offer for sale any of its securities during the Lock-up Period, except pursuant to outstanding options and warrants and pursuant to the Company's existing option plans. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated), including an Affiliate, who has beneficially owned shares for at least one year is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock or (ii) the average weekly trading volume in the Common Stock during the four calendar weeks preceding such sale, subject to the filing of a Form 144 with respect to such sale and certain other limitations and restrictions. In addition, a person who is not deemed to have been an Affiliate of the Company at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years would be entitled to sell such shares under Rule 144 without regard to the requirements described above. To the extent that shares were acquired from an Affiliate of the Company, such stockholder's holding period for the purpose of effecting a sale under Rule 144 commences on the date of transfer from the Affiliate. Sales of a substantial amount of Common Stock in the public market could adversely affect the market price of the Common Stock and could impair the Company's future ability to raise capital through the sale of its equity securities. 45 UNDERWRITING Joseph Stevens & Company, Inc. (the "Underwriter") has entered into an Underwriting Agreement with the Company pursuant to which, and subject to the terms and conditions thereof, it has agreed to purchase from the Company, and the Company has agreed to sell to the Underwriter, on a firm commitment basis, all of the Units offered by the Company hereby. The Company has been advised by the Underwriter that the Underwriter initially proposes to offer the Units to the public at the public offering price set forth on the cover page of this Prospectus and that the Underwriter may allow to certain dealers who are members of the National Association of Securities Dealers, Inc. ("NASD") concessions not in excess of $____ per Unit, of which amount a sum not in excess of $__________ per Unit may in turn be reallowed by such dealers to other dealers. After the commencement of the Offering, the public offering price, concessions and reallowances may be changed. The Underwriter has informed the Company that it does not expect sales to discretionary accounts by the Underwriter to exceed five percent of the securities offered by the Company hereby. The Company has granted to Underwriter an option, exercisable within 45 days of the date of this Prospectus, to purchase from the Company at the offering price, less underwriting discounts and the non-accountable expense allowance, all or part of an additional 199,999 Units on the same terms and conditions of the Offering for the sole purpose of covering over-allotments, if any. The Company has agreed to indemnify the Underwriter against certain liabilities, including liabilities under the Securities Act. The Company has agreed to pay to the Underwriter a non-accountable expense allowance equal to three percent (3%) of the gross proceeds derived from the sale of the Units underwritten, $30,000 of which has been paid to date. Upon the exercise of any Redeemable Warrants more than one year after the date of this Prospectus, which exercise was solicited by the Underwriter, and to the extent not inconsistent with the guidelines of the NASD and the Rules and Regulations of the Commission, the Company has agreed to pay the Underwriter a commission which shall not exceed five percent (5%) of the aggregate exercise price of such Redeemable Warrants in connection with bona fide services provided by the Underwriter relating to any warrant solicitation. In addition, the individual must designate the firm entitled to such warrant solicitation fee. However, no compensation will be paid to the Underwriter in connection with the exercise of the Redeemable Warrants if (a) the market price of the Common Stock is lower than the exercise price of the Redeemable Warrants, (b) the Redeemable Warrants were held in a discretionary account or (c) the Redeemable Warrants are exercised in an unsolicited transaction. Unless granted an exemption by the Commission from its Rule 101 under Regulation M promulgated under the Exchange Act, the Underwriter will be prohibited from engaging in any market-making activities with regard to the Company's securities for the periods prescribed by exemption (xi) to Rule 101 prior to any solicitation of the exercise of the Redeemable Warrants until the later of the termination of such solicitation activity or the termination (by waiver or otherwise) of any right the Underwriter may have to receive a fee. As a result, the Underwriter may be unable to continue to provide a market for the Company's Units, Common Stock or Redeemable Warrants during certain periods while the Redeemable Warrants are exercisable. If the Underwriter has engaged in any of the activities prohibited by Rule 101 under Regulation M during the periods described above, the Underwriter undertakes to waive unconditionally its rights to receive a commission on the exercise of such Redeemable Warrants. 46 In connection with this Offering, the Underwriter and certain selling group members and their respective affiliates may engage in transactions that stabilize, maintain or otherwise affect the market price of the Units, the Common Stock and/or Redeemable Warrants (the "Securities"). Such transactions may include stabilization transactions effected in accordance with Rule 104 of Regulation M, pursuant to which such persons may bid for or purchase Common Stock for the purpose of stabilizing their respective market prices. The Underwriter also may create a short position for the account of the Underwriter by selling more Securities in connection with the Offering than it is committed to purchase from the Company, and in such case may purchase Securities in the open market following completion of the Offering to cover all or a portion of such short position. The Underwriter may also cover all or a portion of such short position, up to 199,999 Units, by exercising the Over-Allotment Option. In addition, the Underwriter may impose "penalty bids" under contractual arrangements whereby it may reclaim from a dealer participating in the Offering for the account of the Underwriter, the selling concession with respect to Securities that are distributed in the Offering but subsequently purchased for the account of the Underwriter in the open market. Any of the transactions described in this paragraph may result in the maintenance of the prices of the Securities at levels above that which might otherwise prevail in the open market. None of the transactions described in the paragraph is required, and, if they are undertaken, they may be discontinued at any time. All of the holders of the issued and outstanding shares of Common Stock and Class B Common Stock prior to the Offering have agreed (i) not to, directly or indirectly, issue, offer to sell, sell, grant an option for the sale of, transfer, pledge, assign, hypothecate, or otherwise encumber or dispose of (collectively, "Transfer"), any securities issued by the Company, including shares of Common Stock and Class B Common Stock or securities convertible into or exchangeable or exercisable for or evidencing any right to purchase or subscribe for any shares of Common Stock or Class B Common Stock for a period of eighteen (18) months from the effective date of the Registration Statement (the "Lock-Up Period"), without the prior written consent of the Underwriter, except in a private transaction where the transferee agrees to such restrictions, and (ii) that, for twenty-four (24) months following the effective date of the Registration Statement, any public sales of the Company's securities shall be made through the Underwriter in accordance with its customary brokerage practices either on a principal or agency basis. An appropriate legend shall be marked on the face of certificates representing all such securities. In connection with the Offering, the Company has agreed to issue and sell to the Underwriter and/or its designees, at the closing of the proposed underwriting, for nominal consideration, five (5) year Underwriter's Warrants (the "Underwriter Warrants") to purchase 133,333 Units. The Underwriter's Warrants are exercisable at any time during a period of four (4) years commencing at the beginning of the second year after their issuance and sale at a price of $__________ [120% of the offering price of the Units] per Unit. The shares of Common Stock, Redeemable Warrants, and shares of Common Stock underlying the Redeemable Warrants issuable upon the exercise of the Underwriter's Warrant are identical to those offered to the public. The Underwriter's Warrants contain anti-dilution provisions providing for adjustment of the number of warrants and exercise price under certain circumstances. The Underwriter's Warrants grant to the holders thereof and to the holders of the underlying securities certain rights of registration of the securities underlying the Underwriter's Warrants. The Company has also agreed that for five (5) years from the effective date of the Registration Statement, the Underwriter may designate one person for election to the Company's Board of Directors (the "Designation Right"). In the event that the Underwriter elects not to exercise its Designation Right, then it may designate one person to attend all meetings of the Company's Board of Directors for a period of five (5) years. The Company has agreed to reimburse the Underwriter's designee for all out-of-pocket expenses 47 incurred in connection with the designee's attendance at meetings of the Board of Directors. The Company has also agreed to retain the Underwriter as the Company's financial consultant for a period of twenty-four (24) months from the date hereof and to pay the Underwriter a monthly retainer of $2,000, all of which is payable in advance on the closing date set forth in the Underwriting Agreement. The Underwriting Agreement also provides that the Underwriter has a right of first refusal for a period of two years from the date of this Prospectus with respect to any sales of securities by the Company or any of its present or future subsidiaries. Prior to this Offering, there has been no public market for the Units, the Common Stock, or the Redeemable Warrants. Accordingly, the initial public offering price of the Units and the terms of the Redeemable Warrants were determined by negotiation between the Company and the Underwriter. Among the factors considered in determining such prices and terms, in addition to the prevailing market conditions, included the history of and the prospects for the industry in which the Company competes, the market price of the Common Stock, an assessment of the Company's management, the prospects of the Company, its capital structure and such other factors that were deemed relevant. The offering price does not necessarily bear any relationship to the assets, results of operations or net worth of the Company. The foregoing is a summary of the principal terms of the agreements described above and does not purport to be complete. Reference is made to a copy of each such agreement which are filed as exhibits to the Registration Statement. See "Additional Information." LEGAL MATTERS The validity of the Units offered hereby have been passed upon for the Company by Fishman Merrick Miller Genelly Springer Klimek & Anderson, P.C., Chicago, Illinois. Stephen M. Merrick, Chief Executive Officer, and a principal shareholder, of the Company, is a principal of Fishman Merrick Miller Genelly Springer Klimek & Anderson, P.C. and members of the firm also have an equity ownership in the Company. See "Certain Transactions" and "Risk Factors--Related Party Transactions; Potential Conflicts of Interests." Orrick, Herrington & Sutcliffe LLP, New York, New York, has acted as counsel for the Underwriter in connection with the Offering. EXPERTS The balance sheets as of October 31, 1996, and the consolidated statements of operations, stockholders' equity, and cash flows for each of the two years in the period ended October 31, 1996, included in this Prospectus have been included herein in reliance on the report of Coopers & Lybrand L.L.P., independent accountants, given on the authority of that firm as experts in accounting and auditing. CHANGE IN INDEPENDENT ACCOUNTANTS In 1996, the Company voluntarily changed its independent accountants from Detterbeck & Associates, Ltd. ("Detterbeck") to Jacobson, Scott, Gordon & Horewitch ("JSG&H"). This change was approved by the Company's Board of Directors. Detterbeck had been retained to audit the Company's financial statements as of and for the year ended October 31, 1995. The report of Detterbeck for the year ended October 31, 1995, which is not included herein, contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or application of accounting principles. During the year ended October 31, 1995 and through the date of replacement, there were no disagreements with Detterbeck on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. 48 In 1997, the Company voluntarily changed its independent accountants from JSG&H to Coopers & Lybrand L.L.P. This change was approved by the Company's Board of Directors. The financial statements for each of the years in the two year period ended October 31, 1996, were audited by Coopers & Lybrand L.L.P. JSG&H had been retained to audit the Company's financial statements as of and for the year ended October 31, 1996. The report of JSG&H for the year ended October 31, 1996, which is not included herein, contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or application of accounting principles. During the year ended October 31, 1996 and through the date of replacement, there were no disagreements with JSG&H on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. AVAILABLE INFORMATION The Company has filed with the Commission a Registration Statement on Form SB-2, including amendments thereto, relating to the Units offered hereby, the Common Stock and Redeemable Warrants included therein and the Common Stock underlying the Redeemable Warrants. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits thereto. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete; however, all material information with respect to such contracts and documents are disclosed in this Prospectus. In each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. For further information with respect to the Company and the securities offered hereby, reference is made to such Registration Statement, exhibits and schedules. A copy of the Registration Statement may be inspected by anyone without charge at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and will also be available for inspection and copying at the regional offices of the Commission located at 7 World Trade Center, New York, New York 10048 and at Citicorp Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Such material may also be accessed electronically by means of the Commission's home page on the Internet at http://www.sec.gov. As a result of the Offering, the Company will be subject to the informational requirements of the Exchange Act. So long as the Company is subject to the periodic reporting requirements of the Exchange Act, it will furnish holders of the Units, the Common Stock and the Redeemable Warrants with annual reports containing, among other information, audited financial statements certified by an independent accounting firm. The Company also intends to furnish such other reports as it may determine or as may be required by law. 49 No underwriter, dealer, sales representative or any other person has been authorized to give any information or to make any representations other than those contained in this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Company [LOGO] or the Underwriter. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof or that the information contained herein is correct as of any date subsequent to the date hereof. This Prospectus does not constitute an offer to sell or a solicitation CTI INDUSTRIES CORPORATION of an offer to buy any securities offered hereby by anyone in any jurisdiction in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to anyone to whom it is unlawful to make such offer or solicitation. TABLE OF CONTENTS 1,333,333 Units Page ---- Each Unit Consisting Prospectus Summary................................... 3 of Risk Factors......................................... 8 One Share of Common Stock The Company.......................................... 14 and Use of Proceeds...................................... 15 One Redeemable Warrant Dividend Policy...................................... 16 Capitalization....................................... 17 Dilution............................................. 18 Selected Financial Data.............................. 20 Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 22 Business............................................. 26 Management........................................... 35 Principal Stockholders............................... 40 PROSPECTUS Certain Transactions................................. 42 Description of Capital Stock......................... 43 Securities Eligible for Future Sale.................. 45 Underwriting......................................... 46 Legal Matters........................................ 48 Experts.............................................. 48 Change in Independent Accountants.................... 48 Available Information................................ 49 JOSEPH STEVENS & COMPANY, INC. Index to Financial Statements........................ F-1 , 1997
Until ________, 1997 (25 days after the date of this Prospectus), all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a Prospectus. This delivery requirement is in addition to the obligations of dealers to deliver a Prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. 50 CTI INDUSTRIES CORPORATION AND SUBSIDIARY REPORT ON AUDIT OF CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED OCTOBER 31, 1995 AND 1996 AND THE SIX MONTHS ENDED APRIL 30, 1996 AND 1997 (unaudited) CTI Industries Corporation and Subsidiary Table of Contents Page(s) Report of Independent Accountants F-1 Consolidated Financial Statements: Consolidated Balance Sheets as of October 31, 1996 and April 30, 1997 (unaudited) F-2 Consolidated Statements of Operations for the years ended October 31, 1995 and 1996 and the six months ended April 30, 1996 and 1997 (unaudited) F-3 Consolidated Statements of Stockholders' Equity for the years ended October 31, 1995 and 1996 F-4 Consolidated Statements of Cash Flows for the years ended October 31, 1995 and 1996 and the six months ended April 30, 1996 and 1997 (unaudited) F-5 Notes to Consolidated Financial Statements F-6 - F-19 Report of Independent Accountants To the Board of Directors of CTI Industries Corporation We have audited the accompanying consolidated balance sheet of CTI Industries Corporation and subsidiary as of October 31, 1996 and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended October 31, 1995 and 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CTI Industries Corporation and subsidiary as of October 31,1996, and the results of its operations, stockholders' equity and its cash flows for the years ended October 31,1995 and 1996 in conformity with generally accepted accounting principles. Chicago, Illinois July 22, 1997 F-1 CTI Industries Corporation and Subsidiary Consolidated Balance Sheet
October 31, April 30, 1997 ASSETS 1996 Actual Pro Forma (unaudited) Current Assets: Cash $ 130,818 $ -- Accounts receivable (less allowance for doubtful accounts of $ 129,998 at October 31, 1996 and $ 126,313 at April 30, 1997) 1,665,097 2,679,461 Inventories 4,582,593 4,701,640 Other 218,879 306,243 ------------ ------------ Total current assets 6,597,387 7,687,344 ------------ ------------ Property and equipment: Machinery and equipment 6,352,054 6,436,719 Building 2,168,563 2,168,563 Office furniture and equipment 1,082,665 1,263,115 Land 250,000 250,000 Leasehold improvements 147,128 147,128 ------------ ------------ 10,000,410 10,265,525 Less: accumulated depreciation (6,418,486) (6,546,714) ------------ ------------ Total property and equipment, net 3,581,924 3,718,811 ------------ ------------ Other assets: Deferred financing costs, net 106,224 81,847 Investment in joint venture -- 34,575 ------------ ------------ 106,224 116,422 ------------ ------------ Total assets $ 10,285,535 $ 11,522,577 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,755,700 $ 2,377,383 Line of credit 2,058,816 2,942,683 Stock redemption contract payable - current portion 100,000 75,101 Advances from related parties -- 375,600 Notes payable, current portion 402,798 403,914 Accrued liabilities 932,575 1,022,687 ------------ ------------ Total current liabilities 6,249,889 7,197,368 ------------ ------------ Stock redemption contract payable 47,908 -- Notes payable 3,056,923 2,872,953 ------------ ------------ Total long-term liabilities 3,104,831 2,872,953 ------------ ------------ Redeemable common stock 450,000 450,000 Stockholders' equity: Convertible Preferred stock - $.91 par value, 2,000,000 shares authorized, 1,098,901 shares issued and outstanding, including accumulated dividends of $27,625 (October 31, 1996) and $43,875 (April 30, 1997) 1,027,625 1,043,875 $ -- Common stock - $.065 par value, 11,000,000 shares authorized, 1,131,507 (October 31, 1996) and 1,154,585 (April 30, 1997) shares issued, 987,125 (October 31, 1996) and 1,010,202 (April 30, 1997) shares outstanding 73,548 75,048 75,048 Class B Common stock - $.91 par value, 1,100,000 shares authorized, 1,098,901 shares outstanding -- -- 1,000,000 Paid-in-capital 230,348 248,348 248,348 Retained earnings 137,194 462,885 462,885 Less: Treasury stock - 144,382 shares at cost (370,700) (370,700) (370,700) Redeemable common stock (450,000) (450,000) (450,000) Stock subscription receivable (167,200) (7,200) (7,200) ------------ ------------ ------------ Total stockholders' equity 480,815 1,002,256 $ 958,381 ------------ ------------ ============ Total liabilities and stockholders' equity $ 10,285,535 $ 11,522,577 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-2 CTI Industries Corporation and Subsidiary Consolidated Statements of Operations
Years Ended Six Months Ended --------------------------- --------------------------- October 31, April 30, 1995 1996 1996 1997 (unaudited) Net sales $ 22,783,780 $ 13,910,104 $ 7,883,675 $ 8,736,121 Cost of sales 15,077,979 8,558,053 4,798,353 5,384,031 ------------ ------------ ------------ ------------ Gross profit on sales 7,705,801 5,352,051 3,085,322 3,352,090 ------------ ------------ ------------ ------------ Operating expenses: Administrative 2,899,640 2,054,780 1,196,072 900,385 Selling 3,770,462 2,387,027 1,332,154 1,363,865 Advertising and marketing 2,356,255 592,309 340,530 468,344 Plant shutdown expense 850,000 -- -- -- ------------ ------------ ------------ ------------ Total operating expenses 9,876,357 5,034,116 2,868,756 2,732,594 ------------ ------------ ------------ ------------ Income (loss) from operations (2,170,556) 317,935 216,566 619,496 ------------ ------------ ------------ ------------ Other income (expense): Interest expense (799,839) (553,027) (317,185) (303,942) Other 125,516 57,986 32,081 75,137 Loss on disposition of latex equipment (822,439) -- -- -- ------------ ------------ ------------ ------------ Total other expense (1,496,762) (495,041) (285,104) (228,805) ------------ ------------ ------------ ------------ Income (loss) before income taxes (3,667,318) (177,106) (68,538) 390,691 Income tax expense (benefit) (774,143) 5,934 -- -- ------------ ------------ ------------ ------------ Net income (loss) (2,893,175) (183,040) (68,538) 390,691 Dividends applicable to convertible preferred stock -- (74,211) (10,294) (65,000) ------------ ------------ ------------ ------------ Income(loss)applicable to common shares $ (2,893,175) $ (257,251) $ (78,832) $ 325,691 ============ ============ ============ ============ Net Income (loss) per common and common equivalent shares $ (2.14) $ (0.20) $ (0.06) $ 0.26 ============ ============ ============ ============ Weighted average number of common and common equivalent shares outstanding 1,353,384 1,290,267 1,324,080 1,254,124 ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-3 CTI Industries Corporation and Subsidiary Consolidated Statements of Stockholders' Equity for the years ended October 31, 1995 and 1996
Less --------------------------------------- Common Stock Preferred Stock Retained Treasury Stock Redeemable Stock ----------------- Paid-In ----------------- --------------- Common Subscription Shares Amount Capital Shares Amount Earnings Shares Amount Stock Receivable Total Balance, October 31, 1994 1,131,507 $73,548 $230,348 $3,287,620 41,818 $170,700 $126,450 $ 3,294,366 Net loss (2,893,175) (2,893,175) --------- ------ -------- --------- ------- -------- -------- -------- Balance, October 31, 1995 1,131,507 73,548 230,348 394,445 41,818 170,700 126,450 401,191 Payment on stock subscription receivable (119,250) 119,250 Preferred stock subscription receivable 160,000 (160,000) Issuance of preferred stock 1,098,901 $1,000,000 1,000,000 Accumulated preferred stock dividends 27,625 27,625 Redeemable common stock $450,000 (450,000) Acquisition of treasury stock 102,564 200,000 (200,000) Net loss (183,040) (183,040) Preferred dividends (74,211) (74,211) --------- ------ -------- --------- ---------- --------- ------- -------- -------- -------- -------- Balance, October 31, 1996 1,131,507 73,548 $230,348 1,098,901 $1,027,625 $ 137,194 144,382 $370,700 $450,000 $167,200 $480,815 ========= ====== ======== ========= ========== ========= ======= ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. CTI Industries Corporation and Subsidiary Consolidated Statements of Cash Flows
Years Ended Six Months Ended ------------------------- -------------------------- October 31, April 30, 1995 1996 1996 1997 (unaudited) Cash flows from operating activities: Net income (loss) $(2,893,175) $ (183,040) $ (68,538) $ 390,691 Adjustments to reconcile net loss to cash provided by (used in) operating activities: Depreciation and amortization 755,638 371,893 274,332 230,702 Gain on sale of property and equipment (8,500) (20,712) (20,437) (42,942) Loss on disposition of latex equipment 822,439 -- -- -- Provision for losses on accounts receivable and inventory 150,000 255,738 84,262 72,600 Deferred income taxes (211,300) -- -- -- Change in assets and liabilities: Accounts receivable 1,136,740 1,006,439 546,945 (1,022,464) Inventories 902,389 486,483 1,195,556 (183,547) Other assets 361,195 (12,526) 41,442 (87,364) Accounts payable and accrued expenses (474,072) (1,064,584) (777,867) (268,704) ----------- ---------- ----------- ----------- Net cash provided by (used in) operating activities 541,354 839,691 1,275,695 (911,028) ----------- ---------- ----------- ----------- Cash flows from investing activities: Proceeds from sale of property and equipment 8,500 45,415 21,452 2,942 Purchases of property and equipment (478,637) (495,880) (256,990) (343,193) Cash surrender value - officers' life insurance -- 10,700 -- -- Investment in joint venture -- -- -- (34,575) ----------- ---------- ----------- ----------- Net cash used in investing activities (470,137) (439,765) (235,538) (374,826) ----------- ---------- ----------- ----------- Cash flows from financing activities: Stock redemption contract payments -- (52,092) -- (32,807) Advances on line of credit 3,232,942 3,270,970 702,239 1,367,205 Repayments on line of credit (3,731,857) (4,843,239) (1,915,187) (483,338) Proceeds from issuance of long-term debt 1,910,273 3,300,000 -- 18,000 Repayment of long-term debt (1,535,236) 2,694,358) (384,118) (200,874) Proceeds from debt issued to related parties -- -- -- 375,600 Proceeds from issuance of preferred stock -- 840,000 840,000 160,000 Payment of debt issue costs -- (110,400) -- -- Dividends paid -- (46,586) -- (48,750) ----------- ----------- ----------- ----------- Net cash provided by (used in) financing activities (123,878) (335,705) (757,066) 1,155,036 ----------- ----------- ----------- ----------- Net increase (decrease) in cash (52,661) 64,221 283,091 (130,818) Cash at beginning of period 119,258 66,597 66,597 130,818 ----------- ----------- ----------- ----------- Cash at end of period $ 66,597 $ 130,818 $ 349,688 $ -- =========== =========== =========== =========== Supplemental disclosures: Cash paid for interest $ 777,227 $ 617,952 $ 374,926 $ 328,319 Cash paid for income taxes 5,776 Non-cash financing activities: Purchase of treasury stock through issuance of stock redemption contract payable $ 200,000 Assets exchanged for settlement of debt $ 40,000 Common stock warrants exercised in exchange for contractual services received 19,500
The accompanying notes are an integral part of these consolidated financial statements. F-5 CTI Industries Corporation and Subsidiary Notes to Consolidated Financial Statements (Information presented for the six month periods ended April 30, 1996 and 1997 is unaudited) 1. Nature of Operations CTI Industries Corporation (the "Company") and its United Kingdom subsidiary (CTI Balloons, Ltd.) design, manufacture and distribute balloon products throughout the world. The Company also operates systems for the production, lamination and printing of films used for food packaging and other commercial uses. Basis of Presentation The accompanying interim financial statements as of April 30, 1997 and for the six months ended April 30, 1997 and 1996 and the related disclosures have not been audited by independent accountants. However, they have been prepared in conformity with the accounting principles stated in the audited financial statements for the two years in the period ended October 31, 1996 and include all adjustments, which were of a normal and recurring nature, which in the opinion of management are necessary to present fairly the financial position of the Company and results of operations and cash flows for the periods presented. The operating results for the interim periods are not necessarily indicative of results expected for the full year. 2. Summary of Significant Accounting Policies Principle of Consolidation The consolidated financial statements include the accounts of CTI Industries Corporation and its subsidiary. All significant intercompany accounts and transactions have been eliminated. Foreign Currency Translation The financial statements of foreign operations are translated into U.S. dollars in accordance with Statement of Financial Accounting Standards (SFAS) No. 52. Accordingly, all assets and liabilities are translated at current rates of exchange, and operating transactions are translated at weighted average rates during the year. The translation gains and losses, to the extent material, are accumulated as a component of stockholders' equity. Inventories Inventories are stated at the lower of cost or market. Cost is determined using standard costs which approximates costing determined on a first-in, first-out basis. F-6 CTI Industries Corporation and Subsidiary Notes to Consolidated Financial Statements, Continued (Information presented for the six month periods ended April 30, 1996 and 1997 is unaudited) 2. Summary of Significant Accounting Policies, continued Property and Equipment Property and equipment is stated at cost. Depreciation is computed using the straight-line and declining-balance methods over estimated useful lives of the related assets. The estimated useful lives range as follows: Building 25 years Machinery and equipment 3-15 years Office furniture and equipment 5-8 years Leasehold improvements 5-8 years Depreciation expense was $755,636 and $367,717 for the years ended October 31, 1995 and 1996, respectively. Effective November 1, 1995, management determined that the useful life of certain equipment was longer than originally estimated. A change in accounting estimate was recognized to reflect this decision, resulting in a reduction in depreciation expense of $196,318 in 1996. Plant Shutdown Expenses During the fiscal year ended October 31, 1995, the Company ceased latex manufacturing operations at its Cary, Illinois facility. Shutdown expenses totaling $850,000 were provided for in 1995. The Company also recorded a loss on the disposition of latex manufacturing equipment of $822,439. Deferred Financing Costs Deferred financing costs consist of unamortized financing costs incurred in connection with the refinancing of long-term debt during fiscal 1996. These costs are being amortized on a straight-line basis over the term of the loans. Amortization expense was $4,176 for the year ended October 31, 1996. Income Taxes The provision for income taxes and corresponding balance sheet accounts are determined in accordance with SFAS No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109, deferred tax assets and liabilities are determined based on temporary differences between the basis of certain assets and liabilities for income tax and financial reporting purposes, if any. The deferred tax assets and liabilities are classified according to the financial statement classification of the assets and liabilities generating the differences. Income tax expense (benefit) is comprised of the current tax payable for the period and the change during the period in the deferred tax assets and liabilities. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. F-7 CTI Industries Corporation and Subsidiary Notes to Consolidated Financial Statements, Continued (Information presented for the six month periods ended April 30, 1996 and 1997 is unaudited) 2. Summary of Significant Accounting Policies, continued Revenue Recognition The Company recognizes revenue using the accrual method of accounting when title transfers upon shipment. Concentration of Credit Risk Concentration of credit risk with respect to trade accounts receivable is generally diversified due to the number of entities comprising the Company's customer base. The Company performs ongoing credit evaluations and provides an allowance for potential credit losses against the portion of accounts receivable which is estimated to be uncollectible. Such losses have historically been within management's expectations. Use of Estimates In preparing financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Unaudited Pro Forma Stockholders' Equity The pro forma stockholders' equity as reflected on the consolidated balance sheet at April 30, 1997 presents estimated effects of the anticipated conversion of all outstanding shares of Preferred Stock into shares of Class B Common Stock on a one-to-one ratio in conjunction with an initial public offering (Note 15). Fair Value of Financial Instruments The Company utilizes a line of credit to finance short-term obligations. Management believes that this instrument bears interest at a rate which approximates prevailing market rates for instruments with similar characteristics, and accordingly, that the carrying value for this instrument is a reasonable estimate of fair value. F-8 CTI Industries Corporation and Subsidiary Notes to Consolidated Financial Statements, Continued (Information presented for the six month periods ended April 30, 1996 and 1997 is unaudited) 2. Summary of Significant Accounting Policies, continued Accounting for Stock Options The Company intends to apply the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", for its employee stock-based compensation programs. Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation" encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options and other equity instruments to employees based on new fair value accounting rules. Although expense recognition for employee stock based compensation is not mandatory, SFAS No. 123 requires companies that choose not to adopt the new fair value accounting to disclose pro-forma net income and earnings per share under the new method. Computation of Income (Loss) Per Share The computation of income (loss) per share as reflected on the consolidated statement of operations is based on the weighted average number of common and common equivalent shares outstanding during the period. Common stock equivalents consist of outstanding stock options, which pursuant to Staff Accounting Bulletin No. 83 of the Securities and Exchange Commission, are included in the weighted average shares as if they were outstanding for the entire period to the extent granted within the twelve months preceding the contemplated public offering date, using the treasury stock method until such time as shares are issued. Information regarding income (loss) per share has been computed on a historical basis under the provisions of Accounting Principles Board Opinion No. 15. Years ended October 31, ---------------------------- 1995 1996 Net loss per share $ (2.66) $ (0.25) ========== ========== Weighted average shares outstanding 1,089,699 1,026,572 ========== ========== Six months ended April 30, ---------------------------- 1996 1997 Primary earnings per share: Net income (loss) per share $ (0.07) $ 0.26 ========== ========== Weighted average common and common equivalent shares outstanding 1,060,385 1,254,124 ========== ========== Fully diluted earnings per share: Net income per share $ 0.17 ========== Weighted average common and common equivalent shares outstanding 2,265,612 ========== F-9 CTI Industries Corporation and Subsidiary Notes to Consolidated Financial Statements, Continued (Information presented for the six month periods ended April 30, 1996 and 1997 is unaudited) 2. Summary of Significant Accounting Policies, continued Computation of Loss Per Share, continued For the six month period ended April 30,1996, fully diluted earnings per share has not been presented as the result would be anti-dilutive to the net loss per share. Reverse Stock Split Effective July 22, 1997, the Company approved a reverse stock split of 1 share for every 2.6 shares of common stock outstanding. All share information retroactively reflects the effect of this split. 3. Inventory Inventory is comprised of the following: October 31, April 30, 1996 1997 (unaudited) Raw materials $ 278,976 $ 291,648 Work in process 510,098 493,748 Finished goods 3,793,519 3,916,244 ----------- ----------- Total inventory $ 4,582,593 $ 4,701,640 ============ =========== 4. Line of Credit The Company has a bank line of credit, due July 1, 1998, which provides for a maximum borrowing limit of $3,000,000 of which $941,184 and $57,317 was available at October 31, 1996 and April 30, 1997, respectively. Advances under the line of credit are subject to a borrowing base, as defined in the line of credit agreement. Interest is payable monthly at prime plus 1% (prime was 8.25% and 8.5% at October 31, 1996 and April 30, 1997, respectively). The line of credit is collateralized by all assets of the Company. The line of credit agreement contains, among other provisions, certain covenants relating to the maintenance of tangible net worth. F-10 CTI Industries Corporation and Subsidiary Notes to Consolidated Financial Statements, Continued (Information presented for the six month periods ended April 30, 1996 and 1997 is unaudited) 5. Stock Redemption In March 1996, the Company entered into a Stock Redemption Agreement with a shareholder which was subsequently amended June 27, 1997. Under the amended Stock Redemption Agreement the Company has the right but not the obligation to redeem up to 333,333 shares of Common Stock owned by the shareholder at the price of $1.95 per share at any time through January 31, 1998. Commencing March 1, 1998 through February 28, 2000, the Company is obligated to pay to the shareholder, for the redemption of shares at $1.95 per share (i) an amount equal to 2% of the Company's pretax profits each fiscal quarter (beginning with the quarter ended February 28, 1998) and (ii) an amount equal to 2% (but not to exceed $3,000) of the amount the latex and mylar balloon revenues exceed $1.3 million in any month. The Company also has the right to redeem additional shares of Common Stock from the shareholder during this period at $1.95 per share, provided total number of shares subject to redemption under the Stock Redemption Agreement does not exceed 333,333. As of the date of this report, 102,564 shares of Common Stock have been redeemed under the Stock Redemption Agreement. 6. Notes Payable Long-term debt at October 31, 1996 consists of: First Term Loan, payable in monthly installments of $18,333 including interest at prime plus 1% due September 1, 2001. Collateralized by all assets of the Company. $ 1,063,333 Second Term Loan, payable in monthly installments of $19,617 with interest at 8.75% due at various times through September 1, 2001. Collateralized by all assets of the Company. 2,190,663 Installment Loan, payable in monthly installments of $9,583 plus interest at 10.5% due May 1, 1998. Collateralized by equipment purchased. 172,495 Installment Loans, payable in monthly installments of $2,067 including interest at 8.25% and 8.5% due at various times through May 18, 1998. Collateralized by vehicles purchased. 33,230 ------------ Total 3,459,721 Less current portion 402,798 ------------ Total long-term debt $ 3,056,923 ============ F-11 CTI Industries Corporation and Subsidiary Notes to Consolidated Financial Statements, Continued (Information presented for the six month periods ended April 30, 1996 and 1997 is unaudited) 6. Notes Payable, continued Future minimum principal payments for amounts outstanding under long-term debt agreements are as follows for the years ended October 31: 1997 $ 402,798 1998 331,840 1999 270,708 2000 275,392 2001 2,178,983 ----------- $ 3,459,721 =========== The loan agreements contain, among other provisions, certain covenants relating to the maintenance of tangible net worth. 7. Convertible Preferred Stock The Company restated its certificate of incorporation to provide for two classes of capital stock, Common and Preferred. The total number of shares of Preferred Stock authorized is 2,000,000, with a par value of ninety-one cents ($.91) per share. The preferred shares are entitled to preferential cumulative dividends at the rate of 13% per annum of the par value, payable only when, as, and if declared by the Board of Directors. As long as the Preferred Stock is outstanding, there shall be no dividends declared or paid on any shares of Common Stock. Preferred shares may be converted by the holder into common shares at any time (See Note 15). F-12 CTI Industries Corporation and Subsidiary Notes to Consolidated Financial Statements, Continued (Information presented for the six month periods ended April 30, 1996 and 1997 is unaudited) 8. Income Taxes The income tax provisions (benefits) as of October 31, are comprised of the following: 1995 1996 Current: Federal $(427,843) $ (34) State (135,000) 192 Foreign -- 5,776 --------- --------- (562,843) 5,934 --------- --------- Deferred: Federal (172,291) -- State (39,009) -- --------- --------- (211,300) -- --------- --------- Total income tax provision (benefit) $(774,143) $ 5,934 ========= ========= The components of the net deferred tax asset (liability) are as follows:
October 31, April 30, 1996 1997 (unaudited) Deferred tax assets: Accounts receivable allowance $ 43,331 $ 44,970 Inventory valuation 54,826 80,243 Accrued liabilities 220,964 301,084 Net operating loss carryforwards 452,178 232,740 Alternative minimum tax credit carry forwards 291,759 291,759 ---------- ---------- Total deferred tax assets 1,063,058 950,796 ---------- ---------- Deferred tax liabilities: Book over tax basis of capital assets 458,706 476,408 Less: Valuation allowance 604,352 474,388 ---------- ---------- Net deferred tax asset (liability) $ -- $ -- ========== ==========
F-13 CTI Industries Corporationand Subsidiary Notes to Consolidated Financial Statements, Continued (Information presented for the six month periods ended April 30, 1996 and 1997 is unaudited) 8. Income Taxes, continued The valuation allowance relates principally to deferred tax assets that the Company estimates may not be realizable, including net operating loss carryforwards and tax credit carryforwards. At October 31, 1996 and April 30, 1997, the Company has net operating loss carryforwards for tax purposes of approximately $1,200,000 and $600,000, respectively. These carryforwards expire in the years 2010 and 2011. In addition, the Company has approximately $292,000 in alternative minimum tax credits which have no expiration date. Income tax provisions differed from the taxes calculated at the statutory federal tax rate as follows:
Years ended Six months ended ------------------------ ------------------------ October 31, April 30, 1995 1996 1996 1997 (unaudited) Taxes at statutory rate $(1,246,889) $ (60,216) $ (22,874) $ 108,387 State income taxes (114,846) 127 -- -- Foreign taxes paid -- 5,776 19,168 (113,302) Increase in valuation allowance 467,707 59,164 3,706 4,915 Other 119,885 1,083 -- -- ----------- ----------- ----------- ----------- Income tax provision $ (774,143) $ 5,934 $ -- $ -- =========== =========== =========== ===========
9. Employee Benefit Plan Effective January 1, 1993, the Company established a defined contribution plan for substantially all employees. The plan provides for the Company matching contributions for the first $300 of employee contributions and an additional bonus match of 1% of compensation for all participants who are employees on the last day of the plan year. Profit sharing contributions may also be made at the discretion of the Board of Directors. Employer contributions to the plan totaled $86,595 and $52,369 for the years ended October 31, 1995 and 1996, respectively. F-14 CTI Industries Corporation and Subsidiary Notes to Consolidated Financial Statements, Continued (Information presented for the six month periods April 30, 1996 and 1997 is unaudited) 1O. Related Party Transactions The Company obtains legal services from a law firm in which several shareholders of the law firm are also shareholders of the Company, and in which one shareholder of the law firm is both a director and a shareholder of the Company. Legal fees incurred with this firm were $95,217 and $123,872 for the years ended October 31, 1995 and 1996 and $72,624 and $62,814 for the six months ended April 30, 1996 and 1997. The Company purchases packaging materials from entities in which shareholders of the Company maintain an ownership interest. Purchases from these affiliates were $1,106,649 and $145,267 for the periods ended October 31, 1996 and April 30, 1997, respectively. 11. Joint Venture Effective September 16, 1996, the Company entered into a joint venture agreement with a manufacturer in Mexico. The joint venture will engage in the production and packaging of balloons. Under the agreement, both entities will hold a 50% interest in the joint venture. As of October 31, 1996, the joint venture has not commenced operations and the Company has made no capital investment in the joint venture. 12. Commitments and Contingencies Operating Leases The Company leases certain production facilities under a noncancelable lease with monthly payments of $21,432 expiring December 31, 1999. The Company subleases approximately 70% of this facility through August, 1998. The Company's United Kingdom subsidiary also maintains a lease for office and warehouse space which expires in 2019. The Company leases a computer system, software, office equipment and automobiles on operating leases which expire on various dates between May 1997 and May 1999. The net rent expense of all leases was $502,603 in 1995 and $528,654 in 1996 The future aggregate minimum net lease payments under existing agreements as of October 31, are as follows: Lease Sublease Payments Income Net 1997 $ 556,420 $ 155,726 $ 400,694 1998 334,366 139,280 195,O86 1999 326,587 326,587 2000 99,564 99,564 Thereafter 1,026,000 1,026,000 F-15 CTI Industries Corporation and Subsidiary Notes to Consolidated Financial Statements, Continued (Information presented for the six month periods ended April 30, 1996 and 1997 is unaudited) 12. Commitments and Contingencies, continued Litigation The Company is a defendant in business-related litigation. Management does not believe the outcome of such litigation will have a material adverse effect on the Company's financial position and results of operations. Licenses The Company has certain merchandising license agreements that require royalty payments based upon the Company's net sales of the respective products. The agreements call for guaranteed minimum commitments that are determined on a calendar year basis. Future guaranteed commitments due, as computed on a pro rata basis, as of October 31, are as follows: 1997 $ 270,792 1998 142,594 1999 21,042 13. Future Adoption of Recently Issued Accounting Standards During 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share", SFAS No. 129, "Disclosure of Information about Capital Structure," SFAS No. 130, "Reporting Comprehensive Income Summary," and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information". SFAS No. 128 establishes standards for the computation, presentation, and disclosure requirements for earnings per share. SFAS No. 129 consolidates the existing requirements relating to the disclosure of certain information about an entity's capital structure. SFAS No. 130 establishes standards for reporting comprehensive income to present a measure of all changes in equity that result from renegotiated transactions and other economic events of the period other than transactions with owners in their capacity as owners. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources and includes net income. SFAS No. 131 specifies revised guidelines for determining an entity's operating segments and the type and level of financial information to be disclosed. This standard requires that management identify operating segments based on the way that management disaggregates the entity for making internal operating decisions. All of the aforementioned statements are effective for fiscal years beginning after December 15, 1997. Management has not determined what impact these standards, when adopted, will have on the Company's financial statements. F-16 CTI Industries Corporation and Subsidiary Notes to Consolidated Financial Statements, Continued (Information presented for the six month periods ended April 30, 1996 and 1997 is unaudited) 14. Geographic Segment Data (Unaudited) The Company's operations consist of a single business segment which designs, manufactures, and distributes balloon products. Transfers between geographic areas were primarily at cost. The Company's subsidiary has assets consisting primarily of trade accounts receivable and inventory. Sales and selected financial information by geographic area for the years ended October 31, 1995 and 1996 are as follows:
United 1995 United States Kingdom Eliminations Consolidated Revenues $ 21,807,836 $ 1,544,384 $ (568,440) $ 22,783,780 Operating income (loss) (2,172,089) 1,533 -- (2,170,556) Net income (loss) (2,894,708) 1,533 -- (2,893,175) Total assets 10,997,898 767,766 -- 11,765,664 1996 Revenues $ 13,055,900 $ 1,408,683 $ (554,479) $ 13,910,104 Operating income 289,521 28,414 -- 317,935 Net income (loss) (208,784) 25,744 -- (183,040) Total assets 9,613,062 672,473 -- 10,285,535
15. Subsequent Events Recapitalization In July 1997, the Company authorized a Recapitalization (the "Recapitalization") without a formal reorganization. As part of the Recapitalization, the Board of Directors approved the creation of Class B Common Stock and negotiated a conversion of all then outstanding shares of the Company's Convertible Preferred Stock into an aggregate of 1,098,901 shares of Class B Common Stock effective with the proposed initial public offering. The shares of the Class B Common Stock contain rights identical to shares of Common Stock, except that shares of Class B Common Stock, voting separately as a class, have the right to elect four of the Company's seven directors. Shares of the Common Stock and Class B Common Stock, voting together as a class, vote on all other matters, including the election of the remaining directors. The Board of Directors also approved a 1 for 2.6 reverse stock split on both the Common Stock and Class B Common Stock. The Recapitalization and related transactions were approved by written consent of the shareholders. F- 17 CTI Industries Corporation and Subsidiary Notes to Consolidated Financial Statements, Continued (Information presented for the six month periods ended April 30, 1996 and 1997 is unaudited) 15. Subsequent Events, continued Stock Option Plan Under the Company's 1997 Stock Option Plan (effective July 1, 1997), a total of 300,000 shares of Common Stock are reserved for issuance under the Stock Option Plan. None of the options have been granted. The Plan provides for the award of options, which may either be incentive stock options ("ISOs") within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended (the "Code") or non-qualified options ("NQOs") which are not subject to special tax treatment under the Code. The Plan is administered by the Board or a committee appointed by the Board (the "Administrator"). Officers, directors, and employees of, and consultants to, the Company or any parent or subsidiary corporation selected by the Administrator are eligible to receive options under the Plan. Subject to certain restrictions, the Administrator is authorized to designate the number of shares to be covered by each award, the terms of the award, the date on which and the rates at which options or other awards may be exercised, the method of payment and other terms. The exercise price for ISOs cannot be less than the fair market value of the stock subject to the option on the grant date (110% of such fair market value in the case of ISOs granted to a stockholder who owns more than 10% of the Company's Common Stock). The exercise price of a NQO shall be fixed by the Administrator at whatever price the Administrator may determine in good faith. Unless the Administrator determines otherwise, options generally have a 10-year term (or five years in the case of ISOs granted to a participant owning more than 10% of the total voting power of the Company's capital stock). Unless the Administrator provides otherwise, options terminate upon the termination of a participant's employment, except that the participant may exercise an option to the extent it was exercisable on the date of termination for a period of time after termination. Private Placement In June 1997, the Company issued notes in the principal amount of $865,000, together with warrants to purchase 277,244 shares of the Company's Common Stock at $3.12 per share. A substantial portion of these notes and warrants were purchased by an investor group comprised principally of members of Company management. F-18 CTI Industries Corporation and Subsidiary Notes to Consolidated Financial Statements, Continued (Information presented for the six month periods ended April 30, 1996 and 1997 is unaudited) 15. Subsequent Events, continued Public Offering of Common Stock and Warrants The Company's Board of Directors (the "Board") authorized the filing of a registration statement on Form SB-2 with the Securities and Exchange Commission relating to an initial public offering ("IPO") by the Company of 1,333,333 units, each unit consisting of one share of common stock and one redeemable warrant to purchase one share of common stock. The offering also includes up to an additional 199,999 units to cover over allotments, if any. In connection with the offering, the Company has agreed to sell to the underwriter, for nominal consideration, underwriter's warrants to purchase an additional 133,333 units. F-19 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 24. Indemnification of Directors and Officers. The Company's Certificate of Incorporation eliminates the personal liability of directors to the Company or its stockholders for monetary damages for breach of fiduciary duty to the extent permitted by Delaware law. The Company's Certificate of Incorporation and By-Laws provide that the Company shall indemnify its officers and directors to the extent permitted by Subsection 145 of the General Corporation Law of the State of Delaware, which authorizes a corporation to indemnify directors, officers, employees or agents of the Corporation in non-derivative suits if such party acted in good faith and in a manner such party reasonably believed to be in or not opposed to the best interest of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Subsection 145 further provides that indemnification shall be provided if the party in question is successful on the merits or otherwise. Reference is hereby made to the caption "Management - Limitation of Liability and Indemnification" in the Prospectus which is a part of this Registration Statement for a description of indemnification arrangements between the Company and its directors. The form of Underwriting Agreement, included as Exhibit 1.1, provides for indemnification of the Company and certain controlling persons under certain circumstances, including liabilities under the Securities Act of 1933, as amended ("Securities Act"). Insofar as indemnification for liabilities under the Securities Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions of the Underwriting Agreement, the Company has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and therefore is unenforceable. Item 25. Other Expenses of Issuance and Distribution. The estimated expenses of the distribution other than compensation paid to the Underwriter, all of which are to be borne by the Company, are as follows: SEC Registration Fee........................... $ 5,700.00 NASD Fee....................................... 2,500.00 NASDAQ Fees.................................... 10,000.00 *Blue Sky Fees and Expenses..................... 45,000.00 *Transfer Agent Fees............................ 10,000.00 *Accounting Fees and Expenses................... 125,000.00 *Legal Fees and Expenses ....................... 125,000.00 *Printing and Engraving Expenses................ 100,000.00 *Miscellaneous Fees and Expenses................ 26,800.00 ------------ Total....................................... $ 450,000.00 ============ * All amounts are estimates. II-1 Item 26. Recent Sales of Unregistered Securities. In March and May of 1996, a group of investors made an equity investment of $1,000,000 in the Company in return for 1,098,901 shares of Preferred Stock, $.91 par value. CTI Investors, L.L.C., an Illinois limited liability company, invested $900,000 in the shares of Preferred Stock. Members of CTI Investors, L.L.C. include Howard W. Schwan, John H. Schwan and Stephen M. Merrick, members of management, and one other accredited investor. One other accredited investor invested the remaining $100,000. The sale was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act") as a transaction not involving a public offering. Upon the closing of the Offering, the shares of Preferred Stock will be converted into shares of Class B Common Stock. In December, 1996, Howard W. Schwan, John H. Schwan and Stephen M. Merrick, members of management, were each issued warrants to purchase 76,923 shares of the Company's Common Stock at an exercise price of $.91 per share in consideration of their facilitating and guaranteeing a bank loan to the Company in the amount of $6.3 million. The issuance was exempt from regulation under Section 4(2) of the Securities Act as a transaction not involving a public offering. In June, 1997, the Company issued in a private placement notes in the principal amount of $865,000, together with warrants to purchase up to 277,244 shares of the Company's Common Stock at an exercise price of $3.12 per share. Howard W. Schwan, John H. Schwan, Stephen M. Merrick and John C. Davis, members of management, and one other accredited investor participated in the sale. The offering was exempt from registration under Section 4(2) of the Securities Act as a transaction not involving a public offering. Item 27. Exhibits. 1.1 Form of Underwriting Agreement 3.1 Second Restated Certificate of Incorporation of CTI Industries Corporation 3.2 By-laws of CTI Industries Corporation *4.1 Form of Certificate for Common Stock of CTI Industries Corporation 4.2 Form of Underwriter's Warrant Agreement 4.3 Form of Warrant Agreement and Warrant 5.1 Opinion, with Consent, of Fishman Merrick Miller Genelly Springer Klimek & Anderson, P.C. 10.1 CTI Industries Corporation Stock Option Plan 10.2 Employment Agreement dated April 29, 1996 between CTI Industries Corporation and John C. Davis 10.3 Stock Redemption Agreement dated March 1, 1996 between CTI Industries Corporation and John C. Davis 10.4 Agreement dated June 27, 1997 between CTI Industries Corporation and John C. Davis *10.5 Third Amendment to Lease Agreement dated August 15, 1994, for premises located at 675 Industrial Drive, Cary, Illinois 10.6 Form of Warrant dated December 3, 1996 to purchase shares of Common Stock 10.7 Form of Subscription Agreement dated March, 1996, for purchase of Preferred Stock 10.8 Form of Subscription Agreement dated June 20, 1997 for promissory notes and warrants to purchase shares of Common Stock 10.9 Employment Agreement dated June 30, 1997, between CTI Industries Corporation and Howard W. Schwan II-2 10.10 Joint Venture Agreement dated September 16, 1996, between CTI Industries Corporation and Pulidos & Terminados Finos S.A. de C.V. 10.11 Agreement for purchase of assets dated September 8, 1995, between CTI Industries Corporation and Pulidos & Terminados Finos S.A. de C.V. 10.12 Amendment dated May 24, 1996, to Agreement for purchase of assets between CTI Industries Corporation and Pulidos & Terminados Finos S.A. de C.V. 10.13 Agreement dated July 14, 1997 between CTI Industries Corporation and Pulidos & Terminados Finos S.A. de C.V. 10.14 Consulting Agreement dated March, 1996 between CTI Industries Corporation and Michael R. Miller 10.15 Loan and Security Agreement dated August 22, 1996 between the Company and First American Bank 10.16 Third Amendment to Loan and Security Agreement dated July 1, 1997, among CTI Industries Corporation, First American Bank, Stephen M. Merrick, John H. Schwan and Howard W. Schwan 10.17 First Term Note in the sum of $1,100,000 dated August 22, 1996 made by CTI Industries Corporation to First American Bank. 10.18 Second Term Note in the sum of $2,200,000 dated August 22, 1996 made by CTI Industries Corporation to First American Bank. 10.19 Revolving Note in the sum of $3,000,000 dated August 22, 1996 made by the Company to First American Bank. 10.20 Mortgage dated August 22, 1996 for benefit of First American Bank. 10.21 Guaranty dated July 1, 1997, by Stephen M. Merrick, Howard W. Schwan and John H. Schwan for benefit of First American Bank. 10.22 Third Term Note in the sum of $275,000 dated July 1, 1997 made by CTI Industries Corporation to First American Bank. 10.23 Fourth Term Note in the sum of $200,000 dated July 1, 1997, made by CTI Industries Corporation to First American Bank. 10.24 First Amendment to Revolving Note dated July 1, 1997 made by CTI Industries Corporation to First American Bank. 10.25 Form of Financial Advisory and Consulting Agreement. 11.1 Computation of Earnings Per Share - Annual. 11.2 Computation of Earnings Per Share - Six Months. *15.1 Letter from Detterbeck & Associates, Ltd. *15.2 Letter from Jacobson, Scott, Gordon & Horewitch 21 Subsidiaries (incorporate description in Prospectus under "The Company") 23.1 Consent of Coopers and Lybrand L.L.P. 23.2 Consent of Fishman Merrick Miller Genelly Springer Klimek & Anderson, P.C. (included in Exhibit 5.1) 24 Power of Attorney (included in signature page) 27 Financial Data Schedule - ---------------------------------- * To be filed supplementally. II-3 Item 28. Undertakings. 1. The Registrant hereby undertakes: (1) That for purposes of determining any liability under the Securities Act, treat the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant under Rule 424(b)(1) or (4) or 497(h) under the Securities Act as part of this Registration Statement as of the time the Commission declared it effective. (2) That for the purpose of determining any liability under the Securities Act, treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the Registration Statement, and that offering of the securities at that time as the initial bona fide offering of those securities. (3) To file, during any period in which it offers or sells securities, a post-effective amendment to this Registration Statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) to reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereto) that, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of Prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in the volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement; (iii) to include any additional or changed material information on the plan of distribution. (4) To remove from registration by means of a post-effective amendment any of the securities being registered that remain unsold at the termination of the offering. (5) To provide to the Underwriter at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriter to permit prompt delivery to each purchaser. 2. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the small business issuer of expenses incurred or paid by a director, officer or controlling person of the small business issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the small business issuer will, unless in the opinion of its counsel the matter has been settled by controlling II-4 precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The Registrant has agreed to indemnify the Underwriter and its officers, directors, partners, employees, agents and controlling persons as to any losses, claims, damages, expenses or liabilities arising out of any untrue statement or omission of a material fact contained in the Registration Statement. The Underwriter has agreed to indemnify the Registrant and its directors, officers and controlling persons as to any losses, claims, damages, expenses or liabilities arising out of any untrue statement or omission in the Registration Statement based on information relating to the Underwriter furnished by it for use in connection with the Registration Statement. II-5 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the Village of Barrington, State of Illinois, on the 24th day of July, 1997. CTI INDUSTRIES CORPORATION By: /s/ Howard W. Schwan --------------------------- Howard W. Schwan, President POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints John H. Schwan and Stephen M. Merrick, separately, as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitition, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments, including post-effective amendments and related registration statements, to this Registration Statement, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do separately and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. In accordance with the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. Signatures Title Date -------------- ------------ -------- /s/ Howard W. Schwan President and Director July 24, 1997 - ------------------------- Howard W. Schwan /s/ John H. Schwan Chairman and Director July 24, 1997 - ------------------------- John H. Schwan /s/ Stephen M. Merrick Chief Executive Officer, July 24, 1997 - ------------------------- Secretary, Chief Financial Stephen M. Merrick Officer and Director /s/ John C. Davis Vice President and Director July 24, 1997 - ------------------------- John C. Davis /s/ Sharon Konny Manager of Finance and July 24, 1997 - ------------------------- Administration Sharon Konny /s/ Stanley M. Brown Director July 24, 1997 - ------------------------- Stanley M. Brown II-6 EX-1 2 UNDERWRITING AGREEMENT EXHIBIT 1.1 1,333,333 Units, Each Unit Consisting of One Share of Common Stock and One Redeemable Warrant CTI INDUSTRIES CORPORATION UNDERWRITING AGREEMENT New York, New York ____________, 1997 JOSEPH STEVENS & COMPANY, INC. 33 Maiden Lane, 8th Floor New York, New York 10038 Ladies and Gentlemen: CTI Industries Corporation, a Delaware corporation (the "Company"), confirms its agreement with Joseph Stevens & Company, Inc. ("JSC") (hereinafter referred to as "you" or the "Underwriter"), with respect to the sale by the Company and the purchase by the Underwriter of 1,333,333 units (the "Units"), each Unit consisting of one (1) share of common stock, ________ par value (the "Common Stock") and one (1) redeemable warrant (the "Redeemable Warrants"). Each Redeemable Warrant is exercisable for one share of Common Stock. The Common Stock and Redeemable Warrants will be separately tradeable upon issuance and are hereinafter referred to as the "Firm Units." The Redeemable Warrants are exercisable commencing ________________, 1997 [the date of the Prospectus] until _____________, 2002 [60 months from the date of the Prospectus], unless previously redeemed by the Company, at an initial exercise price equal to $__________ [150% of the initial public offering price per unit] per share, subject to adjustment. The Redeemable Warrants may be redeemed by the Company, in whole, and not in part, at a redemption price of five cents ($.05) per Redeemable Warrant at any time commencing ______________, 1998 [12 months after the date of the Prospectus] on 30 days' prior written notice provided that the average closing bid price of the Common Stock equals or exceeds 150% of the then exercise price per share (subject to adjustment) for any twenty (20) trading days within a period of thirty (30) consecutive trading days ending on the fifth (5th) trading day prior to the date of the notice of redemption and the Company shall have obtained the prior written consent of JSC. Upon the Underwriter's request, as provided in Section 2(b) of this Agreement, the Company shall also issue and sell to the Underwriter up to an additional 199,999 Units for the purpose of covering over-allotments, if any. Such 199,999 Units are hereinafter collectively referred to as the "Option Units." The Company also proposes to issue and sell to the Underwriter or its designees warrants (the "Underwriter's Warrants"), pursuant to the Underwriter's Warrant Agreement (the "Underwriter's Warrant Agreement"), for the purchase of an additional 133,333 Units (the "Underwriter's Units"). The Underwriter's Units, the shares of Common Stock and the Redeemable Warrants underlying the Underwriter's Units and the shares of Common Stock underlying the Redeemable Warrants underlying the Underwriter's Units are hereinafter collectively referred to as the "Underwriter's Securities". The shares of Common Stock issuable upon exercise of the Redeemable Warrants, including the Redeemable Warrants underlying the Underwriter's Units, are hereinafter referred to as the "Warrant Shares." The Firm Units, the Option Units, the Underwriter's Warrants, the Underwriter's Units and the Warrant Shares are hereinafter collectively referred to as the "Securities" and are more fully described in the Registration Statement and the Prospectus referred to below. 1. Representations and Warranties of the Company. The Company represents and warrants to, and covenants and agrees with, the Underwriter as of the date hereof, and as of the Closing Date (hereinafter defined) and the Option Closing Date (hereinafter defined), if any, as follows: (a) The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") a registration statement, and amendments thereto, on Form SB-2 (Registration No. 333-____), including any related preliminary prospectus or prospectuses (each a "Preliminary Prospectus"), for the registration of the Securities, under the Securities Act of 1933, as amended (the "Act"), which registration statement and amendment or amendments have been prepared by the Company in conformity with the requirements of the Act, and the rules and regulations of the Commission under the Act. The Company will not file any other amendment to such registration statement which the Underwriter shall have objected to in writing after having been furnished with a copy thereof. Except as the context may otherwise require, such registration statement, as amended, on file with the Commission at the time it becomes effective (including the prospectus, financial statements, schedules, exhibits and all other documents filed as a part thereof or incorporated therein (including, but not limited to, those documents or that information incorporated by reference therein) and all information deemed to be a part thereof as of such time pursuant to paragraph (b) of Rule 430A of the rules and regulations under the Act), is hereinafter called the "Registration Statement," and the form of prospectus in the form first filed with the Commission pursuant to Rule 424(b) of the rules and regulations under the Act is hereinafter called the "Prospectus." For purposes hereof, "Rules and Regulations" mean the rules and regulations adopted by the Commission under either the Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as applicable. (b) Neither the Commission nor any state regulatory authority has issued any order preventing or suspending the use of any Preliminary Prospectus, the Registration Statement or the Prospectus or any part of any thereof and no proceedings for a stop order suspending the effectiveness of the Registration Statement or any of the Company's securities have been instituted or are pending or threatened. Each of the Preliminary Prospectus, the Registration Statement and the Prospectus, at the respective times of filing thereof, conformed with the requirements of the Act and the Rules and Regulations, and none of the Preliminary Prospectus, the Registration Statement nor the Prospectus, at the respective times of filing thereof, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they 2 were made, not misleading; provided, however, that this representation and warranty does not apply to statements made or statements omitted in reliance upon and in conformity with written information furnished to the Company with respect to the Underwriter by or on behalf of the Underwriter expressly for use in such Preliminary Prospectus, the Registration Statement or the Prospectus. The Company has filed all reports, forms or other documents required to be filed under the Act and the Exchange Act and the respective Rules and Regulations thereunder, and all such reports, forms or other documents, when so filed or as subsequently amended, complied in all material respects with the Act and the Exchange Act and the respective Rules and Regulations thereunder. (c) When the Registration Statement becomes effective and at all times subsequent thereto up to the Closing Date and each Option Closing Date, if any, and during such longer period as the Prospectus may be required to be delivered in connection with sales by the Underwriter or a dealer, the Registration Statement and the Prospectus will contain all statements which are required to be stated therein in accordance with the Act and the Rules and Regulations, and will conform to the requirements of the Act and the Rules and Regulations; and, at and through such dates, neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; provided, however, that this representation and warranty does not apply to statements made or statements omitted in reliance upon and in conformity with written information furnished to the Company with respect to the Underwriter by or on behalf of the Underwriter expressly for use in the Preliminary Prospectus, Registration Statement or the Prospectus or any amendment thereof or supplement thereto. (d) Each of the Company and its wholly-owned subsidiary, CTI Balloons Ltd., a corporation under the laws of the United Kingdom ("Subsidiary"), has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation. Each of the Company and the Subsidiary is duly qualified and licensed and in good standing as a foreign corporation in each jurisdiction in which its ownership or leasing of any properties or the character of its operations require such qualification or licensing. Except as set forth in the Prospectus, neither the Company nor the Subsidiary owns, directly or indirectly, an interest in any corporation, partnership, trust, joint venture or other business entity. Each of the Company and the Subsidiary has all requisite power and authority (corporate and other), and has obtained any and all necessary authorizations, approvals, orders, licenses, certificates, franchises and permits of and from all governmental or regulatory officials and bodies (including, without limitation, those having jurisdiction over environmental or similar matters), to own or lease its properties and conduct its business as described in the Prospectus; each of the Company and the Subsidiary is and has been doing business in compliance with all such authorizations, approvals, orders, licenses, certificates, franchises and permits and with all federal, state, local and foreign laws, rules and regulations to which it is subject; and neither the Company nor the Subsidiary has received any notice of proceedings relating to the revocation or modification of any such authorization, approval, order, license, certificate, franchise or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would materially and adversely affect the condition, financial or otherwise, or the earnings, prospects, stockholders' equity, value, operations, properties, business or results of 3 operations of the Company or the Subsidiary. The disclosure in the Registration Statement concerning the effects of federal, state, local and foreign laws, rules and regulations on the Company's business and the Subsidiary's business as currently conducted and as contemplated are correct in all respects and do not omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. (e) The Company ____________, and ____________ (collectively, the "Recapitalization Agreement Participants") have entered into a recapitalization agreement (the "Recapitalization Agreement") in substantially the form filed as Exhibit ____ to the Registration Statement, which provided for, among other things, the following: i) The Company restated its Certificate of Incorporation to provide for Common Stock and Class B Common Stock. The shares of Class B Common Stock contain rights identical to shares of Common Stock, except that shares of Class B Common Stock, voting separately as a class, have the right to elect four of the Company's seven directors of the Company. Shares of Common Stock and Class B Common Stock, voting together as a class, vote on all other matters including the election of the remaining directors of the Company. ii) The Company effected a 1 for 2.6 reverse stock split of both its Common Stock and Class B Common Stock. iii) The holders of the Company's then outstanding Convertible Preferred Stock shall upon __________ convert all outstanding shares of such Convertible Preferred Stock into 2,857,143 shares of Class B Common Stock. The actions effected pursuant to the Recapitalization Agreement have been duly and validly authorized and have been or will be, as the case may be, duly and validly consummated by the Company and, to the best of the Company's knowledge, by each of the Recapitalization Agreement Participants, in compliance with applicable law, and constitute valid and binding obligations of the Company in accordance with the terms of the Recapitalization Agreement and as a result of such transactions, the Company shall have a duly authorized, issued and outstanding capitalization as set forth in the Prospectus under "Capitalization" and "Description of Capital Stock" and will have the adjusted capitalization set forth therein on the Closing Date and the Option Closing Date, if any, based upon the assumptions set forth therein, and neither the Company nor the Subsidiary is a party to or bound by any instrument, agreement or other arrangement providing for it to issue any capital stock, rights, warrants, options or other securities, except for this Agreement, the Underwriter's Warrant Agreement and the Warrant Agreement (as defined in Section 1(ff) hereof of this Agreement) and as described in the Prospectus. The Securities and all other securities issued or issuable by the Company on or prior to the Closing Date and each Option Closing Date, if any, conform or, when issued and paid for, will conform, in all respects to the descriptions thereof contained in the Registration Statement and the Prospectus. All issued and outstanding securities of the Company and the Subsidiary have been duly authorized and validly issued and are fully paid and non-assessable; the holders thereof have no rights of rescission with respect thereto and are not subject to personal liability by reason of being such holders; and none of such securities were issued in 4 violation of the preemptive rights of any holder of any security of the Company or any similar contractual right granted by the Company or the Subsidiary. The Securities to be sold by the Company hereunder and pursuant to the Underwriter's Warrant Agreement and the Warrant Agreement are not and will not be subject to any preemptive or other similar rights of any stockholder, have been duly authorized and, when issued, paid for and delivered in accordance with the terms hereof and thereof, will be validly issued, fully paid and non-assessable and conform to the descriptions thereof contained in the Prospectus; the holders thereof will not be subject to any liability solely as such holders; all corporate action required to be taken for the authorization, issue and sale of the Securities has been duly and validly taken; and the certificates representing the Securities, when delivered by the Company, will be in due and proper form. Upon the issuance and delivery pursuant to the terms hereof and the Underwriter's Warrant Agreement of the Securities to be sold by the Company hereunder and thereunder to the Underwriter, the Underwriter will acquire good and marketable title to such Securities, free and clear of any lien, charge, claim, encumbrance, pledge, security interest, defect or other restriction or equity of any kind whatsoever asserted against the Company or any affiliate (within the meaning of the Rules and Regulations) of the Company. (f) The audited financial statements of the Company and the Subsidiary together with the related notes thereto, included in the Registration Statement, each Preliminary Prospectus and the Prospectus fairly present the financial position, income, changes in stockholders' equity and the results of operations of the Company and the Subsidiary at the respective dates and for the respective periods to which they apply. Such financial statements have been prepared in conformity with generally accepted accounting principles and the Rules and Regulations, consistently applied throughout the periods involved. There has been no adverse change or development involving a material prospective change in the condition, financial or otherwise, or in the earnings, prospects, stockholders' equity, value, operations, properties, business or results of operations of the Company and the Subsidiary taken as a whole, whether or not arising in the ordinary course of business, since the date of the financial statements included in the Registration Statement and the Prospectus; and the outstanding debt, the property, both tangible and intangible, and the businesses of each of the Company and the Subsidiary conform in all respects to the descriptions thereof contained in the Registration Statement and the Prospectus. The financial information set forth in the Prospectus under the headings "The Company," "Capitalization," "Financial Statements" and "Management's Discussion and Analysis of Results of Operations and Financial Condition" fairly presents, on the basis stated in the Prospectus, the information set forth therein and such financial information has been derived from or compiled on a basis consistent with that of the audited financial statements included in the Prospectus. (g) Each of the Company and the Subsidiary (i) has paid all federal, state, local and foreign taxes for which it is liable, including, but not limited to, withholding taxes and amounts payable under Chapters 21 through 24 of the Internal Revenue Code of 1986, as amended (the "Code"), and has furnished all information returns it is required to furnish pursuant to the Code, (ii) has established adequate reserves for such taxes which are not due and payable, and (iii) does not have any tax deficiency or claims outstanding, proposed or assessed against it. 5 (h) No transfer tax, stamp duty or other similar tax is payable by or on behalf of the Underwriter in connection with (i) the issuance by the Company of the Securities, (ii) the purchase by the Underwriter of the Securities from the Company, (iii) the consummation by the Company of any of its obligations under this Agreement or the Underwriter's Warrant Agreement, or (iv) resales of the Securities in connection with the distribution contemplated hereby. (i) Each of the Company and the Subsidiary maintains insurance policies, including, but not limited to, general liability, property, personal and product liability insurance, and surety bonds which insure the Company and the Subsidiary and the employees of each against such losses and risks generally insured against by comparable businesses. Neither the Company nor the Subsidiary (i) has failed to give notice or present any insurance claim with respect to any insurable matter under the appropriate insurance policy or surety bond in a due and timely manner, (ii) does have any disputes or claims against any underwriter of such insurance policies or surety bonds, or has failed to pay any premiums due and payable thereunder, or (iii) has failed to comply with all conditions contained in such insurance policies and surety bonds. There are no facts or circumstances under any such insurance policy or surety bond which would relieve any insurer of its obligation to satisfy in full any valid claim of the Company or the Subsidiary. (j) There is no action, suit, proceeding, inquiry, arbitration, investigation, litigation or governmental proceeding (including, without limitation, those pertaining to environmental or similar matters), domestic or foreign, pending or threatened against (or circumstances that may give rise to the same), or involving the properties or business of, the Company or the Subsidiary which (i) questions the validity of the capital stock of the Company, this Agreement, the Underwriter's Warrant Agreement, the Recapitalization Agreement, the Warrant Agreement or the Consulting Agreement (as defined in Section 1(gg) hereof) or of any action taken or to be taken by the Company pursuant to or in connection with this Agreement, the Underwriter's Warrant Agreement, the Warrant Agreement or the Consulting Agreement, (ii) is required to be disclosed in the Registration Statement which is not so disclosed (and such proceedings as are summarized in the Registration Statement are accurately summarized in all respects), or (iii) might materially and adversely affect the condition, financial or otherwise, or the earnings, prospects, stockholders' equity, value, operations, properties, business or results of operations of the Company and the Subsidiary taken as a whole. (k) The Company has full legal right, power and authority to authorize, issue, deliver and sell the Securities, to enter into this Agreement, the Underwriter's Warrant Agreement, the Recapitalization Agreement, the Warrant Agreement and the Consulting Agreement and to consummate the transactions provided for in such agreements; and each of this Agreement, the Underwriter's Warrant Agreement, the Warrant Agreement and the Consulting Agreement have been duly and properly authorized, executed and delivered by the Company. Each of this Agreement, the Underwriter's Warrant Agreement, the Recapitalization Agreement, the Warrant Agreement and the Consulting Agreement constitutes a legal, valid and binding agreement of the Company, enforceable against the Company in accordance with its terms (except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting the enforcement of creditors' rights and the application of equitable principles in any motion, legal 6 or equitable, and except as obligations to indemnify or contribute to losses may be limited by applicable law). None of the Company's issue and sale of the Securities, execution or delivery of this Agreement, the Underwriter's Warrant Agreement, the Recapitalization Agreement, the Warrant Agreement or the Consulting Agreement, its performance hereunder and thereunder, its consummation of the transactions contemplated herein and therein, or the conduct of its business as described in the Registration Statement and the Prospectus and any amendments or supplements thereto, conflicts with or will conflict with or results or will result in any breach or violation of any of the terms or provisions of, or constitutes or will constitute a default under, or result in the creation or imposition of any lien, charge, claim, encumbrance, pledge, security interest, defect or other restriction or equity of any kind whatsoever upon, any property or assets (tangible or intangible) of the Company or the Subsidiary pursuant to the terms of (i) the certificate of incorporation or by-laws of the Company or the Subsidiary, (ii) any license, contract, indenture, mortgage, lease, deed of trust, voting trust agreement, stockholders' agreement, note, loan or credit agreement or other agreement or instrument evidencing an obligation for borrowed money, or any other agreement or instrument to which either the Company or the Subsidiary is a party or by which it is or may be bound or to which its properties or assets (tangible or intangible) are or may be subject, or (iii) any statute, judgment, decree, order, rule or regulation applicable to the Company or the Subsidiary of any arbitrator, court, regulatory body or administrative agency or other governmental agency or body (including, without limitation, those having jurisdiction over environmental or similar matters), domestic or foreign, having jurisdiction over the Company or the Subsidiary or any of their activities or properties. (l) No consent, approval, authorization or order of, and no filing with, any arbitrator, court, regulatory body, administrative agency, government agency or other body, domestic or foreign, is required for the issuance of the Securities pursuant to the Prospectus and the Registration Statement, this Agreement, the Underwriter's Warrant Agreement and the Warrant Agreement, the performance of this Agreement, the Underwriter's Warrant Agreement, the Warrant Agreement and the Consulting Agreement and the transactions contemplated hereby and thereby, except such as have been obtained under the Act, state securities laws and the rules of the National Association of Securities Dealers, Inc. (the "NASD") in connection with the Underwriter's purchase and distribution of the Securities. (m) All executed agreements, contracts or other documents or copies of executed agreements, contracts or other documents filed as exhibits to the Registration Statement to which the Company or the Subsidiary is a party or by which it may be bound or to which its assets, properties or business may be subject have been duly and validly authorized, executed and delivered by the Company or the Subsidiary, and constitute legal, valid and binding agreements of the Company and the Subsidiary, enforceable against the Company or the Subsidiary, as the case may be, in accordance with their respective terms (except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting the enforcement of creditors' rights and the application of equitable principles in any motion, legal or equitable, and except as obligations to indemnify or contribute to losses may be limited by applicable law). The descriptions in the Registration Statement of agreements, contracts and other documents are accurate and fairly present the information required to be shown with respect thereto by Form SB-2; and there are no agreements, contracts or other documents which are required by the Act 7 to be described in the Registration Statement or filed as exhibits to the Registration Statement which are not described or filed as required; and the exhibits which have been filed are complete and correct copies of the documents of which they purport to be copies. (n) Subsequent to the respective dates as of which information is set forth in the Registration Statement and the Prospectus, and except as may otherwise be indicated or contemplated herein or therein, neither the Company nor the Subsidiary has (i) issued any securities or incurred any liability or obligation, direct or contingent, for borrowed money, (ii) entered into any transaction other than in the ordinary course of business, or (iii) declared or paid any dividend or made any other distribution on or in respect of any class of its capital stock; and, subsequent to such dates, and except as may otherwise be disclosed in the Prospectus, there has not been any change in the capital stock, debt (long or short term) or liabilities or any material change in the condition, financial or otherwise, or the earnings, prospects, stockholders' equity, value, operations, properties, business or results of operations of the Company and the Subsidiary taken as a whole. (o) No default exists in the due performance and observance of any term, covenant or condition of any license, contract, indenture, mortgage, lease, deed of trust, voting trust agreement, stockholders' agreement, note, loan or credit agreement or any other agreement or instrument evidencing an obligation for borrowed money, or any other agreement or instrument to which the Company or the Subsidiary is a party or by which the Company or the Subsidiary is or may be bound or to which the property or assets (tangible or intangible) of the Company or the Subsidiary is or may be subject. (p) Each of the Company and the Subsidiary has generally enjoyed a satisfactory employer-employee relationship with its employees and is in compliance with all federal, state, local and foreign laws, rules and regulations respecting employment, employment practices, terms and conditions of employment and wages and hours. There are no pending investigations involving the Company or the Subsidiary by the United States Department of Labor or any other governmental agency responsible for the enforcement of any federal, state, local or foreign laws, rules and regulations relating to employment. There is no unfair labor practice charge or complaint against the Company or the Subsidiary pending before the National Labor Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage pending or threatened against or involving the Company, or any predecessor entity, and none has ever occurred. No representation question exists respecting the employees of the Company or the Subsidiary, and no collective bargaining agreement or modification thereof is currently being negotiated by the Company or the Subsidiary. No grievance or arbitration proceeding is pending under any expired or existing collective bargaining agreements of the Company or the Subsidiary. No labor dispute with the employees of the Company or the Subsidiary exists or is imminent. (q) Neither the Company nor the Subsidiary maintains, sponsors or contributes to any program or arrangement that is an "employee pension benefit plan," an "employee welfare benefit plan" or a "multiemployer plan," as such terms are defined in Sections 3(2), 3(l) and 3(37), respectively, of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") ("ERISA Plans"). Neither the Company nor the Subsidiary maintains or contributes, now or at any time previously, to a defined benefit plan, as defined in Section 3(35) of ERISA. 8 No ERISA Plan (or any trust created thereunder) has engaged in a "prohibited transaction" within the meaning of Section 406 of ERISA or Section 4975 of the Code which could subject the Company or the Subsidiary to any tax penalty on prohibited transactions and which has not adequately been corrected. Each ERISA Plan is in compliance with all material reporting, disclosure and other requirements of the Code and ERISA as they relate to any such ERISA Plan. Determination letters have been received from the Internal Revenue Service with respect to each ERISA Plan which is intended to comply with Code Section 401(a), stating that such ERISA Plan and the attendant trust are qualified thereunder. Neither the Company nor the Subsidiary has ever completely or partially withdrawn from a "multiemployer plan." (r) Neither the Company nor the Subsidiary, nor any of their respective employees, directors, stockholders or affiliates (within the meaning of the Rules and Regulations), has taken or will take, directly or indirectly, any action designed to or which has constituted or which might be expected to cause or result in, under the Exchange Act or otherwise, the stabilization or manipulation of the price of any security of the Company, whether to facilitate the sale or resale of the Securities or otherwise. (s) To the best of the Company's knowledge, none of the trademarks, trade names, service marks, service names, copyrights, patents and patent applications, and none of the licenses and rights to the foregoing, presently owned or held by the Company and the Subsidiary are in dispute or are in conflict with the right of any other person or entity. Each of the Company and the Subsidiary (i) owns or has the right to use, free and clear of all liens, charges, claims, encumbrances, pledges, security interests, defects or other restrictions or equities of any kind whatsoever, all trademarks, trade names, service marks, service names, copyrights, patents and patent applications, and licenses and rights with respect to the foregoing, used in the conduct of its business as now conducted or proposed to be conducted without infringing upon or otherwise acting adversely to the right or claimed right of any person, corporation or other entity under or with respect to any of the foregoing and (ii) is not obligated or under any liability whatsoever to make any payments by way of royalties, fees or otherwise to any owner or licensee of, or other claimant to, any trademark, trade name, service mark, service name, copyright, patent or patent application except as set forth in the Registration Statement or the Prospectus. There is no action, suit, proceeding, inquiry, arbitration, investigation, litigation or governmental or other proceeding, domestic or foreign, pending or threatened (or circumstances that may give rise to the same) against the Company which challenges the exclusive rights of the Company with respect to any trademarks, trade names, service marks, service names, copyrights, patents, patent applications or licenses or rights to the foregoing used in the conduct of its business. (t) Each of the Company and the Subsidiary owns and has the unrestricted right to use all trade secrets, know-how (including all unpatented and/or unpatentable proprietary or confidential information, systems or procedures), inventions, technology, designs, processes, works of authorship, computer programs and technical data and information that are material to the development, manufacture, operation and sale of all products and services sold or proposed to be sold by the Company and the Subsidiary, free and clear of and without violating any right, lien, or claim of others, including, without limitation, former employers of its employees. 9 (u) Each of the Company and the Subsidiary has good and marketable title to, or valid and enforceable leasehold estates in, all items of real and personal property stated in the Prospectus to be owned or leased by it, free and clear of all liens, charges, claims, encumbrances, pledges, security interests, defects or other restrictions or equities of any kind whatsoever, other than liens for taxes not yet due and payable. (v) Coopers & Lybrand LLP, whose reports are filed with the Commission as a part of the Registration Statement, are independent certified public accountants as required by the Act and the Rules and Regulations. (w) Except upon the consent of the Underwriter, all officers and directors, and holders of shares of Common Stock, and securities exercisable, convertible or exchangeable for share of Common Stock, has executed an agreement (the "Lock-Up Agreements") pursuant to which he, she or it has agreed not to, directly or indirectly, offer, sell, transfer, pledge, assign, hypothecate or otherwise encumber any shares or convertible securities whether or not owned, or otherwise dispose of any interest therein, without the prior written consent of the Underwriter, under Rule 144 or otherwise, for a period commencing on the date hereof and ending eighteen months following the effective date of the Registration Statement (the "Lock-Up Period"); provided, however, that private sales or transfers shall be permitted so long as the transferee agrees in writing to be bound by the terms of this Paragraph (w) as a precondition to such sale or transfer. Such persons have further agreed in the Lock-Up Agreements that, for a period extending twenty-four (24) months following the effective date of the Registration Statement, all public sales of such securities issued by the Company shall be made through JSC in accordance with its customary brokerage policies. The Company will cause its transfer agent to mark an appropriate legend on the face of stock certificates representing all of such securities and to place "stop transfer" orders on the Company's stock ledgers. (x) There are no claims, payments, issuances, arrangements or understandings, whether oral or written, for services in the nature of a finder's or origination fee with respect to the sale of the Securities hereunder or any other arrangements, agreements, understandings, payments or issuances that may affect the Underwriter's compensation, as determined by the NASD. (y) The Units, the Common Stock and the Redeemable Warrants have been approved for quotation on The Nasdaq SmallCap Market ("Nasdaq"). (z) Neither the Company, nor the Subsidiary, nor any of their respective directors, officers, stockholders, employees, agents or any other person acting on behalf of the Company or the Subsidiary has, directly or indirectly, given or agreed to give any money, gift or similar benefit (other than legal price concessions to customers in the ordinary course of business) to any customer, supplier, employee or agent of a customer or supplier, or any official or employee of any governmental agency or instrumentality of any government (domestic or foreign) or instrumentality of any government (domestic or foreign) or any political party or candidate for office (domestic or foreign) or any other person who was, is or may be in a position to help or hinder the business of the Company or the Subsidiary (or assist the Company or the Subsidiary in connection with any actual or proposed transaction) which (i) might subject the Company or the Subsidiary, or any other such person to any damage or penalty in any civil, 10 criminal or governmental litigation or proceeding (domestic or foreign), (ii) if not given in the past, might have had a material and adverse effect on the condition, financial or otherwise, or the earnings, business affairs, prospects, stockholders' equity, value, operations, properties, business or results of operations of the Company or the Subsidiary, or (iii) if not continued in the future, might materially and adversely affect the condition, financial or otherwise, or the earnings, business affairs, prospects, stockholders' equity, value, operations, properties, business or results of operations of the Company or the Subsidiary. The Company's and the Subsidiary's internal accounting controls are sufficient to cause the Company to comply with the Foreign Corrupt Practices Act of 1977, as amended. (aa) The Company confirms as of the date hereof that it is in compliance with all provisions of Section 1 of Laws of Florida, Chapter 92-198, An Act Relating to Disclosure of Doing Business with Cuba, and the Company further agrees that if it or any affiliate commences engaging in business with the government of Cuba or with any person or affiliate located in Cuba after the date the Registration Statement becomes or has become effective with the Commission or with the Florida Department of Banking and Finance (the "Department"), whichever date is later, or if the information reported or incorporated by reference in the Prospectus, if any, concerning the Company's, or any affiliate's, business with Cuba or with any person or affiliate located in Cuba changes in any material way, the Company will provide the Department notice of such business or change, as appropriate, in a form acceptable to the Department. (bb) Except as set forth in the Prospectus, no officer, director or stockholder of the Company or the Subsidiary, and no affiliate or associate (as these terms are defined in the Rules and Regulations) of any of the foregoing persons or entities, has or has had, either directly or indirectly, (i) an interest in any person or entity which (A) furnishes or sells services or products which are furnished or sold or are proposed to be furnished or sold by the Company or the Subsidiary, or (B) purchases from or sells or furnishes to the Company or the Subsidiary any goods or services, or (ii) a beneficial interest in any contract or agreement to which the Company or the Subsidiary is a party or by which the Company may be bound. Except as set forth in the Prospectus under "Certain Transactions," there are no existing agreements, arrangements, understandings or transactions, or proposed agreements, arrangements, understandings or transactions, between or among the Company or the Subsidiary, and any officer, director or any person listed in the "Principal Stockholders" section of the Prospectus or any affiliate or associate of any of the foregoing persons or entities. (cc) The minute books of the Company have been made available to the Underwriter, contain a complete summary of all meetings and actions of the directors and stockholders of the Company since the time of its incorporation, and reflect all transactions referred to in such minutes accurately in all respects. (dd) Except and to the extent described in the Prospectus, no holder of any securities of the Company or the Subsidiary or of any options, warrants or other convertible or exchangeable securities of the Company or the Subsidiary has the right to include any securities issued by the Company or the Subsidiary in the Registration Statement or any registration statement to be filed by the Company or to require the Company to file a registration statement. 11 Except as set forth in the Prospectus, no person or entity holds any anti-dilution rights with respect to any securities of the Company or the Subsidiary. (ee) Any certificate signed by any officer of the Company and delivered to the Underwriter or to Underwriter's Counsel (as defined in Section 4(d) herein), shall be deemed a representation and warranty by the Company to the Underwriter as to the matters covered thereby. (ff) The Company has entered into a warrant agreement, substantially in the form filed as Exhibit ___ to the Registration Statement (the "Warrant Agreement"), with Continental Stock Transfer & Trust Company, in form and substance satisfactory to the Underwriter, with respect to the Redeemable Warrants and providing for the payment of warrant solicitation fees contemplated by Section 4(x) hereof. The Warrant Agreement has been duly and validly authorized by the Company and, assuming due execution by the parties thereto other than the Company, constitutes a valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms (except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting the enforcement of creditors' rights and the application of equitable principles in any action, legal or equitable, and except as obligations to indemnify or contribute to losses may be limited by applicable law). (gg) The Company has entered into a financial advisory and consulting agreement substantially in the form filed as Exhibit ____ to the Registration Statement (the "Consulting Agreement") with the Underwriter, with respect to the rendering of consulting services by the Underwriter to the Company. The Consulting Agreement provides that the Underwriter shall be retained by the Company commencing on the consummation of the proposed public offering and ending 24 months thereafter, at a monthly retainer of $2,000, all of which is payable on consummation of the proposed public offering. The Consulting Agreement has been duly and validly authorized by the Company and assuming due execution by the parties thereto other than the Company, constitutes a valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms (except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting enforcement of creditors' rights and the application of equitable principles in any action, legal or equitable, and except as rights to indemnity or contribution may be limited by applicable law). (hh) The Company has filed a Form 8-A with the Commission providing for the registration under the Exchange Act of the Securities and such Form 8-A has been declared effective by the Commission. 2. Purchase, Sale and Delivery of the Securities. (a) On the basis of the representations, warranties, covenants and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to the Underwriter, and the Underwriter agrees to purchase from the Company, the Firm Units at a price equal to $____ per Unit [90% of the initial public offering price]. 12 (b) In addition, on the basis of the representations, warranties, covenants and agreement, herein contained, but subject to the terms and conditions herein set forth, the Company hereby grants an option to the Underwriter to purchase all or any part of the Option Units at a price equal to $________ per Unit [90% of the initial public offering price]. The option granted hereby will expire forty-five (45) days after (i) the date the Registration Statement becomes effective, if the Company has elected not to rely on Rule 430A under the Rules and Regulations, or (ii) the date of this Agreement if the Company has elected to rely upon Rule 430A under the Rules and Regulations, and may be exercised in whole or in part from time to time only for the purpose of covering over-allotments which may be made in connection with the offering and distribution of the Firm Units upon notice by the Underwriter to the Company setting forth the number of Option Units as to which the Underwriter is then exercising the option and the time and date of payment and delivery for any such Option Units. Any such time and date of delivery (an "Option Closing Date") shall be determined by the Underwriter, but shall not be later than seven (7) full business days after the exercise of said option, nor in any event prior to the Closing Date, unless otherwise agreed upon by the Underwriter and the Company. Nothing herein contained shall obligate the Underwriter to exercise the option granted hereby. No Option Units shall be delivered unless the Firm Units shall be simultaneously delivered or shall theretofore have been delivered as herein provided. (c) Payment of the purchase price for, and delivery of certificates for, the Firm Units shall be made at the offices of the Underwriter at 33 Maiden Lane, New York, New York 10038, or at such other place as shall be agreed upon by the Underwriter and the Company. Such delivery and payment shall be made at 10:00 a.m. (New York City time) on _________, 1997 or at such other time and date as shall be agreed upon by the Underwriter and the Company, but not less than three (3) nor more than seven (7) full business days after the effective date of the Registration Statement (such time and date of payment and delivery being herein called the "Closing Date"). In addition, in the event that any or all of the Option Units are purchased by the Underwriter, payment of the purchase price for, and delivery of certificates for, such Option Units shall be made at the above mentioned office of the Underwriter or at such other place as shall be agreed upon by the Underwriter and the Company. Delivery of the certificates for the Firm Units and the Option Units, if any, shall be made to the Underwriter against payment by the Underwriter of the purchase price for the Firm Units and the Option Units, if any, to the order of the Company by New York Clearing House funds. Certificates for the Firm Units and the Option Units, if any, shall be in definitive, fully registered form, shall bear no restrictive legends and shall be in such denominations and registered in such names as the Underwriter may request in writing at least two (2) business days prior to the Closing Date or the relevant Option Closing Date, as the case may be. The certificates for the Firm Units and the Option Units, if any, shall be made available to the Underwriter at such offices or such other place as the Underwriter may designate for inspection, checking and packaging no later than 9:30 a.m. on the last business day prior to the Closing Date or the relevant Option Closing Date, as the case may be. (d) On the Closing Date, the Company shall issue and sell to the Underwriter or its designees the Underwriter's Warrants for an aggregate purchase price of $.0001 per warrant, which warrants shall entitle the holders thereof to purchase an aggregate of an additional 200,000 Units. The Underwriter's Warrants shall be exercisable for a period of four (4) years commencing one (1) year from the effective date of the Registration Statement at a 13 price equaling one hundred and twenty percent (120%) of the initial public offering price of the Units. The Underwriter's Warrant Agreement and the form of the certificates for the Underwriter's Warrant shall be substantially in the form filed as Exhibit ____ to the Registration Statement. Payment for the Underwriter's Warrants shall be made on the Closing Date. 3. Public Offering of the Units. As soon after the Registration Statement becomes effective as the Underwriter deems advisable, the Underwriter shall make a public offering of the Firm Units and such of the Option Units as the Underwriter may determine (other than to residents of or in any jurisdiction in which qualification of the Units is required and has not become effective) at the price and upon the other terms set forth in the Prospectus. The Underwriter may from time to time increase or decrease the public offering price after distribution of the Units has been completed to such extent as the Underwriter, in its sole discretion, deems advisable. The Underwriter may enter into one or more agreements as the Underwriter, in its sole discretion, deems advisable with one or more broker-dealers who shall act as dealers in connection with such public offering. 4. Covenants and Agreements of the Company. The Company covenants and agrees with the Underwriter as follows: (a) The Company shall use its best efforts to cause the Registration Statement and any amendments thereto to become effective as promptly as practicable and will not at any time, whether before or after the effective date of the Registration Statement, file any amendment to the Registration Statement or supplement to the Prospectus or file any document under the Act or the Exchange Act before termination of the offering of the Securities to the public by the Underwriter of which the Underwriter shall not previously have been advised and furnished with a copy, or to which the Underwriter shall have objected or which is not in compliance with the Act, the Exchange Act and the Rules and Regulations. (b) As soon as the Company is advised or obtains knowledge thereof, the Company will advise the Underwriter and confirm the same in writing, (i) when the Registration Statement, as amended, becomes effective, when any post-effective amendment to the Registration Statement becomes effective and, if the provisions of Rule 430A promulgated under the Act will be relied upon, when the Prospectus has been filed in accordance with said Rule 430A, (ii) of the issuance by the Commission of any stop order or of the initiation, or the threatening, of any proceeding the outcome of which may result in the suspension of the effectiveness of the Registration Statement or any order preventing or suspending the use of the Preliminary Prospectus or the Prospectus, or any amendment or supplement thereto, or the institution of any proceedings for that purpose, (iii) of the issuance by the Commission or by any state securities commission of any proceedings for the suspension of the qualification of any of the Securities for offering or sale in any jurisdiction or of the initiation, or the threatening, of any proceeding for that purpose, (iv) of the receipt of any comments from the Commission, and (v) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information. If the Commission or any state securities regulatory authority shall enter a stop order or suspend such qualification at any time, the Company will make every effort to obtain promptly the lifting of such order. 14 (c) The Company shall file the Prospectus (in form and substance satisfactory to the Underwriter) with the Commission, or transmit the Prospectus by a means reasonably calculated to result in filing the same with the Commission, pursuant to Rule 424(b)(1) of the Rules and Regulations (or, if applicable and if consented to by the Underwriter, pursuant to Rule 424(b)(4) of the Rules and Regulations) within the time period specified in Rule 424(b)(1) (or, if applicable and if consented to by the Underwriter, Rule 424(b)(4)). (d) The Company will give the Underwriter notice of its intention to file or prepare any amendment to the Registration Statement (including any post-effective amendment) or any amendment or supplement to the Prospectus (including any revised prospectus which the Company proposes for use in connection with the offering of any of the Securities which differs from the corresponding prospectus on file at the Commission at the time the Registration Statement becomes effective, whether or not such revised prospectus is required to be filed pursuant to Rule 424(b) of the Rules and Regulations), and will furnish the Underwriter with copies of any such amendment or supplement a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file any such amendment or supplement to which the Underwriter or Orrick, Herrington & Sutcliffe LLP, its counsel ("Underwriter's Counsel"), shall object. (e) The Company shall endeavor in good faith, in cooperation with the Underwriter, at or prior to the time the Registration Statement becomes effective, to qualify the Securities for offering and sale under the securities laws of such jurisdictions as the Underwriter may reasonably designate to permit the continuance of sales and dealings therein for as long as may be necessary to complete the distribution contemplated hereby, and shall make such applications, file such documents and furnish such information as may be required for such purpose; provided, however, the Company shall not be required to qualify as a foreign corporation or file a general or limited consent to service of process in any such jurisdiction. In each jurisdiction where such qualification shall be effected, the Company will, unless the Underwriter agrees that such action is not at the time necessary or advisable, use all reasonable efforts to file and make such statements or reports at such times as are or may reasonably be required by the laws of such jurisdiction to continue such qualification. (f) During the time when a prospectus is required to be delivered under the Act, the Company shall use all reasonable efforts to comply with all requirements imposed upon it by the Act, the Exchange Act and the Rules and Regulations so far as necessary to permit the continuance of sales of or dealings in the Securities in accordance with the provisions hereof and the Prospectus, or any amendments or supplements thereto. If, at any time when a prospectus relating to the Securities is required to be delivered under the Act, any event shall have occurred as a result of which, in the opinion of counsel for the Company or Underwriter's Counsel, the Prospectus, as then amended or supplemented, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading, or if it is necessary at any time to amend or supplement the prospectus to comply with the Act, the Company will notify the Underwriter promptly and prepare and file with the Commission an appropriate amendment or supplement in accordance with Section 10 of the Act, each such amendment or supplement to be satisfactory to Underwriter's Counsel, and the Company will 15 furnish to the Underwriter copies of such amendment or supplement as soon as available and in such quantities as the Underwriter may request. (g) As soon as practicable, but in any event not later than forty five (45) days after the end of the 12-month period beginning on the day after the end of the fiscal quarter of the Company during which the effective date of the Registration Statement occurs (ninety (90) days in the event that the end of such fiscal quarter is the end of the Company's fiscal year), the Company shall make generally available to its security holders, in the manner specified in Rule 158(b) of the Rules and Regulations, and to the Underwriter, an earnings statement which will be in the detail required by, and will otherwise comply with, the provisions of Section 11(a) of the Act and Rule 158(a) of the Rules and Regulations, which statement need not be audited unless required by the Act, covering a period of at least twelve (12) consecutive months after the effective date of the Registration Statement. (h) During a period of seven (7) years after the date hereof, the Company will furnish to its stockholders, as soon as practicable, annual reports (including financial statements audited by independent public accountants) and unaudited quarterly reports of earnings and will deliver to the Underwriter: i) concurrently with furnishing such quarterly reports to its stockholders statements of income of the Company for such quarter in the form furnished to the Company's stockholders and certified by the Company's principal financial and accounting officer; ii) concurrently with furnishing such annual reports to its stockholders, a balance sheet of the Company as at the end of the preceding fiscal year, together with statements of operations, stockholders' equity and cash flows of the Company for such fiscal year, accompanied by a copy of the report thereon of the Company's independent certified public accountants; iii) as soon as they are available, copies of all reports (financial or other) mailed to stockholders; iv) as soon as they are available, copies of all reports and financial statements furnished to or filed with the Commission, the NASD or any securities exchange; v) every press release and every material news item or article of interest to the financial community in respect of the Company, the Subsidiary or their respective affairs which was released or prepared by or on behalf of the Company or the Subsidiary; and vi) any additional information of a public nature concerning the Company and the Subsidiary (and any future subsidiaries) or their respective business which the Underwriter may request. 16 During such seven-year period, if the Company has active subsidiaries, the foregoing financial statements will be on a consolidated basis to the extent that the accounts of the Company and its subsidiaries are consolidated, and will be accompanied by similar financial statements for any significant subsidiary which is not so consolidated. (i) The Company will maintain a transfer and warrant agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar (which may be the same entity as the transfer agent) for the Units, the Common Stock and the Redeemable Warrants. (j) The Company will furnish to the Underwriter, without charge and at such place as the Underwriter may designate, copies of each Preliminary Prospectus, the Registration Statement and any pre-effective or post-effective amendments thereto (one of which will be signed and will include all financial statements and exhibits), the Prospectus, and all amendments and supplements thereto, including any prospectus prepared after the effective date of the Registration Statement, in each case as soon as available and in such quantities as the Underwriter may request. (k) On or before the effective date of the Registration Statement, the Company shall provide the Underwriter with originally-executed copies of duly executed, legally binding and enforceable Lock-Up Agreements which are in form and substance satisfactory to the Underwriter. On or before the Closing Date, the Company shall deliver instructions to its transfer agent authorizing such transfer agent to place appropriate legends on the certificates representing the securities of the Company subject to the Lock-Up Agreements and to place appropriate stop transfer orders on the Company's ledgers. (l) The Company agrees that, for a period of eighteen (18) months commencing on the effective date of the Registration Statement, and except as contemplated by Section 4(v) of this Agreement, it and its present and future subsidiaries will not, without the prior written consent of the Underwriter (i) issue, sell, contract or offer to sell, grant an option for the purchase or sale of, assign, transfer, pledge, distribute or otherwise dispose of, directly or indirectly, any shares of capital stock or any option, right or warrant with respect to any shares of capital stock or any security convertible, exchangeable or exercisable for capital stock, except pursuant to stock options or warrants issued on the date hereof, or (ii) file any registration statement for the offer or sale of securities issued or to be issued by the Company or any present or future subsidiaries. (m) Neither the Company nor any of its officers, directors, stockholders or affiliates (within the meaning of the Rules and Regulations) will take, directly or indirectly, any action designed to stabilize or manipulate the price of any securities of the Company, or which might in the future reasonably be expected to cause or result in the stabilization or manipulation of the price of any such securities. (n) The Company shall apply the net proceeds from the sale of the Securities offered to the public in the manner set forth under "Use of Proceeds" in the Prospectus. No portion of the net proceeds will be used, directly or indirectly, to acquire any securities issued by the Company. 17 (o) The Company shall timely file all such reports, forms or other documents as may be required (including, but not limited to, any Form SR required by Rule 463 under the Act) from time to time under the Act, the Exchange Act, and the Rules and Regulations, and all such reports, forms and documents will comply as to form and substance with the applicable requirements under the Act, the Exchange Act and the Rules and Regulations. (p) The Company shall furnish to the Underwriter as early as practicable prior to each of the date hereof, the Closing Date and each Option Closing Date, if any, but no later than two (2) full business days prior thereto, a copy of the latest available unaudited interim financial statements of the Company (which in no event shall be as of a date more than thirty (30) days prior to the date hereof, the Closing Date or the relevant Option Closing Date, as the case may be) which have been read by the Company's independent public accountants, as stated in their letters to be furnished pursuant to Section 6(j) hereof. (q) The Company shall cause the Units, the Common Stock and the Redeemable Warrants to be quoted on Nasdaq and, for a period of seven (7) years from the date hereof, use its best efforts to maintain the Nasdaq quotation of the Units, the Common Stock and the Redeemable Warrants to the extent outstanding. (r) For a period of five (5) years from the Closing Date, the Company shall at the request of the Underwriter, furnish or cause to be furnished to the Underwriter and at the Company's sole expense, (i) daily consolidated transfer sheets relating to the Units, the Common Stock and the Redeemable Warrants and (ii) a list of holders of all of the Company's securities. (s) For a period of five (5) years from the Closing Date, the Company shall, at the Company's sole expense, (i) promptly provide the Underwriter, upon any and all requests of the Underwriter, with a "blue sky trading survey" for secondary sales of the Company's securities, prepared by counsel to the Company, and (ii) take all necessary and appropriate actions to further qualify the Company's securities in all jurisdictions of the United States in order to permit secondary sales of such securities pursuant to the "blue sky" laws of those jurisdictions, provided that such jurisdictions do not require the Company to qualify as a foreign corporation. (t) As soon as practicable, but in no event more than thirty (30) days after the effective date of the Registration Statement, the Company agrees to take all necessary and appropriate actions to be included in Standard and Poor's Corporation Descriptions and Moody's OTC Manual and to continue such inclusion for a period of not less than seven (7) years. (u) Without the prior written consent of the Underwriter, the Company hereby agrees that it will not, for a period of eighteen (18) months from the effective date of the Registration Statement, adopt, propose to adopt or otherwise permit to exist any employee, officer, director, consultant or compensation plan or arrangement (i) permitting the grant, issue, sale or entry into any agreement to grant, issue or sell any option, warrant or other contract right (a) at an exercise or sale price per share that is less than the greater of the initial public offering price of the Units set forth herein or the fair market value per share of the Common Stock on the date of grant or sale, or (b) upon payment of less than the full purchase or exercise price for such shares of Common Stock or other securities of the Company on the date of grant 18 or issuance; or (ii) permitting the existence of stock appreciation rights, phantom options or similar arrangements; or (iii) permitting the payment for such securities with any form of consideration other than cash; or (iv) permitting the maximum number of shares of Common Stock or other securities of the Company purchasable at any time pursuant to options, warrants or other contract rights to exceed 300,000. (v) Until the completion of the distribution of the Units to the public, and during any period during which a prospectus is required to be delivered, the Company shall not, without the prior written consent of the Underwriter, issue, directly or indirectly, any press release or other communication or hold any press conference with respect to the Company or its activities or the offering contemplated hereby, other than trade releases issued in the ordinary course of the Company's business consistent with past practices with respect to the Company's operations. (w) The Company agrees that: i) For a period of three (3) years after the effective date of the Registration Statement, the Company shall cause one (1) individual selected by the Underwriter, subject to the good faith approval of the Company, to be elected to the Board of Directors of the Company (the "Board"), if requested by the Underwriter. ii) In the event the Underwriter elects not to exercise the right as set forth above, then it may designate one person to attend all meetings of the Company's Board of Directors for a period of five years. Such person shall be entitled to attend all such meetings and to receive all notices and other correspondence and communications sent by the Company to members of its Board of Directors, unless in the opinion of counsel to the Company the release of such information would result in the waiver of the Company's attorney-client privilege. iii) The Company shall reimburse the Underwriter's designee for his or her out-of-pocket expenses reasonably incurred in connection with his or her attendance of the Board meetings. iv) In the event the Underwriter shall not have designated such individual at the time of any meeting of the Board or such person has not been elected or is unavailable to serve, the Company shall notify the Underwriter of each meeting of the Board. (x) Commencing one year from the date hereof, to pay the Underwriter a warrant solicitation fee equal to five percent (5%) of the exercise price of the Redeemable Warrants, payable on the date of the exercise thereof on terms provided in the Warrant Agreement. The Company will not solicit the exercise of the Redeemable Warrants through any solicitation agent other than the Underwriter. The Underwriter will not be entitled to any warrant solicitation fee unless the Underwriter provides bona fide services in connection with 19 any warrant solicitation and the investor designates, in writing, that the Underwriter is entitled to such fee. (y) For a period equal to the lesser of (i) seven (7) years from the date hereof, and (ii) the sale to the public of the Underwriter's Securities, the Company will not take any action or actions which may prevent or disqualify the Company's use of Form SB-2 or S-1 (or other appropriate form) for the registration under the Act of the Underwriter's Securities. (z) For a period of twenty four (24) months after the effective date of the Registration Statement, the Company shall not restate, amend or alter any term of any written employment, consulting or similar agreement entered into between the Company and any officer, director or key employee as of the effective date of the Registration Statement in a manner which is more favorable to such officer, director or key employee, without the prior written consent of the Underwriter. (aa) The Company will use its best efforts to maintain the effectiveness of the Registration Statement for a period of five years after the date hereof. (bb) The Company agrees that, for a period of two (2) years beginning with the effective date of the Registration Statement, JSC shall have a right of first refusal for all sales of any securities made by the Company or any of its present or future affiliates or subsidiaries. (cc) The Company agrees that, from the effective date of the Registration Statement, it shall retain the services of a public relations firm, reasonably acceptable to JSC. 5. Payment of Expenses. (a) The Company hereby agrees to pay (such payment to be made, at the discretion of the Underwriter, on the Closing Date and any Option Closing Date (to the extent not paid on the Closing Date or a previous Option Closing Date)) all expenses and fees (other than fees of Underwriter's Counsel, except as set forth in clause (iv) below), incident to the performance of the obligations of the Company under this Agreement, the Underwriter's Warrant Agreement and the Warrant Agreement, including, without limitation, (i) the fees and expenses of accountants and counsel for the Company, (ii) all costs and expenses incurred in connection with the preparation, duplication, printing, (including mailing and handling charges) filing, delivery and mailing (including the payment of postage, overnight delivery or courier charges with respect thereto) of the Registration Statement and the Prospectus and any amendments and supplements thereto and the printing, mailing (including the payment of postage, overnight delivery or courier charges with respect thereto) and delivery of this Agreement, the Underwriter's Warrant Agreement, the Warrant Agreement, and agreements with selected dealers, and related documents, including the cost of all copies thereof and of each Preliminary Prospectus and of the Prospectus and any amendments thereof or supplements thereto supplied to the Underwriter and such dealers as the Underwriter may request, in such quantities as the Underwriter may request, (iii) the printing, engraving, issuance and delivery of the Securities, (iv) the qualification of the Securities under state or foreign securities or "blue sky" laws and determination of the status of such securities under legal investment laws, 20 including the costs of printing and mailing the "Preliminary Blue Sky Memorandum," the "Supplemental Blue Sky Memorandum" and "Legal Investments Survey," if any, and disbursements, expenses and fees of counsel (such fees not to exceed $45,000) in connection therewith, (v) advertising costs and expenses, including, but not limited to costs and expenses in connection with "road shows," information meetings and presentations, bound volumes and prospectus memorabilia and "tombstone" advertisement expenses, (vi) costs and expenses in connection with due diligence investigations, including, but not limited to, the fees of any independent counsel or consultants, (vii) fees and expenses of a transfer and warrant agent and registrar for the Securities, (viii) applications for assignments of a rating of the Securities by qualified rating agencies, (ix) the fees payable to the Commission and the NASD, and (x) the fees and expenses incurred in connection with the listing of the Securities on Nasdaq and any other exchange. (b) If this Agreement is terminated by the Underwriter in accordance with the provisions of Section 6 or Section 10(a) hereof, the Company shall reimburse and indemnify the Underwriter for all of its actual out-of-pocket expenses, including the fees and disbursements of Underwriter's Counsel, less any amounts already paid pursuant to Section 5(c) hereof. (c) The Company further agrees that, in addition to the expenses payable pursuant to Section 5(a) hereof, it will pay to the Underwriter on the Closing Date by certified or bank cashier's check, or, at the election of the Underwriter, by deduction from the proceeds of the offering of the Firm Units, a non-accountable expense allowance equal to three percent (3%) of the gross proceeds received by the Company from the sale of the Firm Units, thirty thousand dollars ($30,000) of which has been paid to date by the Company. In the event the Underwriter elects to exercise the overallotment option described in Section 2(b) hereof, the Company further agrees to pay to the Underwriter on each Option Closing Date, by certified or bank cashier's check, or, at the Underwriter's election, by deduction from the proceeds of the Option Units purchased on such Option Closing Date, a non-accountable expense allowance equal to three percent (3%) of the gross proceeds received by the Company from the sale of such Option Units. 6. Conditions of the Underwriter's Obligations. The obligations of the Underwriter hereunder shall be subject to the continuing accuracy of the representations and warranties of the Company herein as of the date hereof and as of the Closing Date and each Option Closing Date, if any, as if they had been made on and as of the Closing Date and each Option Closing Date, as the case may be; the accuracy on and as of the Closing Date and each Option Closing Date, if any, of the statements of officers of the Company made pursuant to the provisions hereof; the performance by the Company on and as of the Closing Date and each Option Closing Date, if any, of its covenants and obligations hereunder; and to the following further conditions: (a) The Registration Statement shall have become effective not later than 12:00 p.m., New York time, on the date of this Agreement or such later date and time as shall be consented to in writing by the Underwriter, and, at the Closing Date and each Option Closing Date, if any, no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or shall be pending or contemplated by the Commission and any request on the part of the Commission for 21 additional information shall have been complied with to the reasonable satisfaction of Underwriter's Counsel. If the Company has elected to rely upon Rule 430A of the Rules and Regulations, the price of the Units and any price-related information previously omitted from the effective Registration Statement pursuant to such Rule 430A shall have been transmitted to the Commission for filing pursuant to Rule 424(b) of the Rules and Regulations within the prescribed time period, and prior to the Closing Date the Company shall have provided evidence satisfactory to the Underwriter of such timely filing, or a post-effective amendment providing such information shall have been promptly filed and declared effective in accordance with the requirements of Rule 430A of the Rules and Regulations. (b) The Underwriter shall not have advised the Company that the Registration Statement, or any amendment thereto, contains an untrue statement of fact which, in the Underwriter's opinion, is material, or omits to state a fact which, in the Underwriter's opinion, is material and is required to be stated therein or is necessary to make the statements therein, in light of the circumstances in which they were made not misleading, or that the Prospectus, or any supplement thereto, contains an untrue statement of fact which, in the Underwriter's opinion, is material, or omits to state a fact which, in the Underwriter's opinion, is material and is required to be stated therein or is necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. (c) On or prior to the Closing Date, the Underwriter shall have received from Underwriter's Counsel such opinion or opinions with respect to the organization of the Company, the validity of the Securities, the Registration Statement, the Prospectus and such other related matters as the Underwriter may request and Underwriter's Counsel shall have received such papers and information as they may request in order to enable them to pass upon such matters. (d) On the Closing Date, the Underwriter shall have received the favorable opinion of Fishman & Merrick, P.C., counsel to the Company, dated the Closing Date, addressed to the Underwriter, in form and substance satisfactory to Underwriter's Counsel, to the effect that: i) Each of the Company and the Subsidiary (A) has been duly organized and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation, (B) is duly qualified and licensed and in good standing as a foreign corporation in each jurisdiction in which its ownership or leasing of any properties or the character of its operations requires such qualification or licensing, and (C) has all requisite power and authority (corporate and other) and has obtained any and all necessary authorizations, approvals, orders, licenses, certificates, franchises and permits of and from all governmental or regulatory officials and bodies (including, without limitation, those having jurisdiction over environmental or similar matters), to own or lease its properties and conduct its business as described in the Prospectus; each of the Company and the Subsidiary is and has been doing business in compliance with all such authorizations, approvals, orders, licenses, certificates, franchises and permits obtained by it from governmental or regulatory officials and agencies and all federal, state, local and foreign laws, rules and regulations to which it is subject; 22 and, neither the Company nor the Subsidiary has received any notice of proceedings relating to the revocation or modification of any such authorization, approval, order, license, certificate, franchise or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would materially and adversely affect the condition, financial or otherwise, or the earnings, prospects, stockholders' equity, value, operations, properties, business or results of operations of the Company or the Subsidiary. The disclosure in the Registration Statement concerning the effects of federal, state, local and foreign laws, rules and regulations on the Company's and the Subsidiary's business as currently conducted and as contemplated are correct in all respects and do not omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; ii) neither the Company nor the Subsidiary owns, directly or indirectly, an interest in any corporation, partnership, joint venture, trust or other business entity, other than its wholly owned subsidiary, CTI Balloons, and its joint venture agreement with P&TF, as described in the Registration Statement and the Prospectus. The Company is the registered owner of one hundred percent (100%) of the outstanding capital stock of the Subsidiary; iii) the Company has a duly authorized, issued and outstanding capitalization and as set forth in the Prospectus under "Capitalization," and except as set forth in the Prospectus, neither the Company nor the Subsidiary is a party to or bound by any instrument, agreement or other arrangement providing for it to issue any capital stock, rights, warrants, options or other securities, except for this Agreement, the Underwriter's Warrant Agreement, the Recapitalization Agreement and the Warrant Agreement and as described in the Prospectus. The Securities and all other securities issued or issuable by the Company conform, or when issued and paid for, will conform, in all respects to the descriptions thereof contained in the Registration Statement and the Prospectus. All issued and outstanding securities of each of the Company and the Subsidiary have been duly authorized and validly issued and are fully paid and non-assessable; the holders thereof have no rights of rescission with respect thereto and are not subject to personal liability by reason of being such holders; and none of such securities were issued in violation of the preemptive rights of any holders of any security of the Company or the Subsidiary or any similar contractual right granted by the Company or the Subsidiary. The Securities to be sold by the Company hereunder and under the Underwriter's Warrant Agreement, the Recapitalization Agreement and the Warrant Agreement are not and will not be subject to any preemptive or other similar rights of any stockholder, have been duly authorized and, when issued, paid for and delivered in accordance with the terms hereof and thereof, will be validly issued, fully paid and non-assessable and conform to the descriptions thereof contained in the Prospectus; the holders thereof will not be subject to any liability solely as such holders; all corporate action required to be taken for the authorization, issue and sale of the Securities has been duly and validly taken; and the certificates representing the Securities are in due and proper 23 form. The Underwriter's Warrants constitute valid and binding obligations of the Company to issue and sell, upon exercise thereof and payment therefor, the number and type of securities of the Company called for thereby. Upon the issuance and delivery pursuant to this Agreement, the Underwriter's Warrant Agreement, the Recapitalization Agreement and the Warrant Agreement of the Securities to be sold by the Company hereunder and thereunder, the Underwriter will acquire good and marketable title to such Securities, free and clear of any lien, charge, claim, encumbrance, pledge, security interest, defect or other restriction or equity of any kind whatsoever asserted against the Company or any affiliate (within the meaning of the Rules and Regulations) of the Company. No transfer tax is payable by or on behalf of the Underwriter in connection with (A) the issuance by the Company of the Securities, (B) the purchase by the Underwriter of the Securities from the Company, (C) the consummation by the Company of any of its obligations under this Agreement, the Underwriter's Warrant Agreement, the Recapitalization Agreement or the Warrant Agreement, or (D) resales of the Securities in connection with the distribution contemplated hereby; iv) the Registration Statement is effective under the Act, and, if applicable, filing of all pricing information has been timely made in the appropriate form under Rule 430A, and no stop order suspending the use of the Preliminary Prospectus, the Registration Statement or the Prospectus or any part of any thereof or suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending, threatened or contemplated under the Act; v) each of the Preliminary Prospectus, the Registration Statement, and the Prospectus and any amendments or supplements thereto (other than the financial statements and schedules and other financial and statistical data included therein, as to which no opinion need be rendered) comply as to form in all material respects with the requirements of the Act and the Rules and Regulations; vi) to such counsel's knowledge, (A) there are no agreements, contracts or other documents required by the Act to be described in the Registration Statement and the Prospectus or required to be filed as exhibits to the Registration Statement (or required to be filed under the Exchange Act if upon such filing they would be incorporated, in whole or in part, by reference therein) other than those described in the Registration Statement and the Prospectus and filed as exhibits thereto, and the exhibits which have been filed are correct copies of the documents of which they purport to be copies; (B) the descriptions in the Registration Statement and the Prospectus and any supplement or amendment thereto of agreements, contracts and other documents to which the Company is a party or by which it is bound are accurate and fairly represent the information required to be shown by Form SB-2; (C) except as disclosed in the Registration Statement and the Prospectus, there is no action, suit, proceeding, inquiry, arbitration, investigation, litigation or governmental proceeding (including, without limitation, those pertaining to environmental or similar matters), domestic 24 or foreign, pending or threatened against (or circumstances that may give rise to the same), or involving the properties or business of, the Company which (I) is required to be disclosed in the Registration Statement which is not so disclosed (and such proceedings as are summarized in the Registration Statement are accurately summarized in all respects), or (II) questions the validity of the capital stock of the Company or of this Agreement, the Underwriter's Warrant Agreement, the Warrant Agreement or the Consulting Agreement or of any action taken or to be taken by the Company pursuant to or in connection with any of the foregoing; (D) no statute or regulation or legal or governmental proceeding required to be described in the Prospectus is not described as required; and (E) there is no action, suit or proceeding pending or threatened against or affecting the Company before any court, arbitrator or governmental body, agency or official (or any basis thereof known to such counsel) in which there is a reasonable possibility of an adverse decision which may result in a material adverse change in the condition, financial or otherwise, or the earnings, prospects, stockholders' equity, value, operation, properties, business or results of operations of the Company taken as a whole, which could adversely affect the present or prospective ability of the Company to perform its obligations under this Agreement, the Underwriter's Warrant Agreement, the Warrant Agreement or the Consulting Agreement or which in any manner draws into question the validity or enforceability of this Agreement, the Underwriter's Warrant Agreement, the Warrant Agreement or the Consulting Agreement; vii) the Company has full legal right, power and authority to enter into each of this Agreement, the Underwriter's Warrant Agreement, the Recapitalization Agreement, the Warrant Agreement and the Consulting Agreement and to consummate the transactions provided for herein and therein; and each of this Agreement, the Underwriter's Warrant Agreement, the Recapitalization Agreement, the Warrant Agreement and the Consulting Agreement has been duly authorized, executed and delivered by the Company. Each of this Agreement, the Underwriter's Warrant Agreement, the Recapitalization Agreement, the Warrant Agreement and the Consulting Agreement, assuming due authorization, execution and delivery by each other party thereto, constitutes a legal, valid and binding agreement of the Company, enforceable against the Company in accordance with its terms (except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting the enforcement of creditors' rights and the application of equitable principles in any action, legal or equitable, and except as obligations to indemnify or contribute to losses may be limited by applicable law). None of the Company's execution or delivery of this Agreement, the Underwriter's Warrant Agreement, the Recapitalization Agreement, the Warrant Agreement or the Consulting Agreement, its performance hereunder and thereunder, its consummation of the transactions contemplated herein and therein, or the conduct of its business as described in the Registration Statement and the Prospectus and any amendments or supplements thereto, conflicts with or will conflict with or results or will result in any breach or violation of any of the terms or provisions 25 of, or constitutes or will constitute a default under, or result in the creation or imposition of any lien, charge, claim, encumbrance, pledge, security interest, defect or other restriction or equity of any kind whatsoever upon, any property or assets (tangible or intangible) of the Company or of the Subsidiary pursuant to the terms of (A) the certificate of incorporation or bylaws of the Company or of the Subsidiary, (B) any license, contract, indenture, mortgage, lease, deed of trust, voting trust agreement, stockholders' agreement, note, loan or credit agreement or any other agreement or instrument evidencing an obligation for borrowed money, or any other agreement or instrument to which the Company or the Subsidiary is a party or by which either is or may be bound or to which the properties or assets (tangible or intangible) of either are or may be subject, (C) any statute applicable to the Company or the Subsidiary or (D) any judgment, decree, order, rule or regulation applicable to the Company or the Subsidiary of any arbitrator, court, regulatory body or administrative agency or other governmental agency or body (including, without limitation, those having jurisdiction over environmental or similar matters), domestic or foreign, having jurisdiction over the Company or the Subsidiary or any of their activities or properties; viii) no consent, approval, authorization or order of, and no filing with, any arbitrator, court, regulatory body, administrative agency, government agency or other body, domestic or foreign (other than such as may be required under "blue sky" laws, as to which no opinion need be rendered), is required in connection with the issuance of the Securities pursuant to the Prospectus, the Registration Statement, this Agreement, the Underwriter's Warrant Agreement, the Recapitalization Agreement and the Warrant Agreement, or the performance of this Agreement, the Underwriter's Warrant Agreement, the Recapitalization Agreement, the Warrant Agreement and the Consulting Agreement and the transactions contemplated hereby and thereby; ix) the properties and business of each of the Company and the Subsidiary conform to the description thereof contained in the Registration Statement and the Prospectus; and each of the Company and the Subsidiary has good and marketable title to, or valid and enforceable leasehold estates in, all items of real and personal property stated in the Prospectus to be owned or leased by it, in each case free and clear of all liens, charges, claims, encumbrances, pledges, security interests, defects or other restrictions or equities of any kind whatsoever, other than those referred to in the Prospectus and liens for taxes not yet due and payable; x) neither the Company nor the Subsidiary is in breach of, or in default under, any term or provision of any license, contract, indenture, mortgage, lease, deed of trust, voting trust agreement, stockholders' agreement, note, loan or credit agreement or any other agreement or instrument evidencing an obligation for borrowed money, or any other agreement or instrument to which the Company or the Subsidiary is a party or by which it is or may be bound or to which its property or assets (tangible or intangible) are or may be subject; and 26 each of the Company and the Subsidiary is not in violation of any term or provision of (A) its certificate of incorporation or by-laws, (B) any authorization, approval, order, license, certificate, franchise or permit of any governmental or regulatory official or body, or (C) any judgement, decree, order, statute, rule or regulation to which it is subject; xi) the statements in the Prospectus under "Prospectus Summary," "Risk Factors," "The Company," "Business," "Management," "Principal Stockholders," "Certain Transactions," "Shares Eligible For Future Sale," and "Description of Capital Stock" have been reviewed by such counsel, and insofar as they refer to statements of law, descriptions of statutes, licenses, rules or regulations or legal conclusions, are correct in all material respects; xii) the Units, the Common Stock and the Redeemable Warrants have been accepted for quotation on Nasdaq; xiii) each of the Company and the Subsidiary owns or possesses, free and clear of all liens or encumbrances and right thereto or therein by third parties, the requisite licenses or other rights to use all trademarks, service marks, copyrights, service names, tradenames, patents, patent applications and licenses necessary to conduct its business (including without limitation any such licenses or rights described in the Prospectus as being owned or possessed by the Company or the Subsidiary) and there is no claim or action by any person pertaining to, or proceeding, pending or threatened, which challenges the exclusive rights of the Company or the Subsidiary with respect to any trademarks, service marks, copyrights, service names, trade names, patents, patent applications and licenses used in the conduct of the Company's or the Subsidiary's business (including, without limitation, any such licenses or rights described in the Prospectus as being owned or possessed by the Company or the Subsidiary); xiv) the persons listed under the captions "Principal Stockholders" and in the Prospectus are the respective "beneficial owners" (as such phrase is defined in Rule 13d-3 under the Exchange Act) of the securities set forth opposite their respective names thereunder as and to the extent set forth therein; xv) except as disclosed in the Prospectus, no person, corporation, trust, partnership, association or other entity has the right to include and/or register any securities of the Company or of the Subsidiary in the Registration Statement, require the Company to file any registration statement or, if filed, to include any security in such registration statement; xvi) there are no claims, payments, issuances, arrangements or understandings, whether oral or written, for services in the nature of a finder's or origination fee with respect to the sale of the Securities hereunder or financial consulting arrangement or any other arrangements, agreements, understandings, 27 payments or issuances that may affect the Underwriter's compensation, as determined by the NASD; and xvii) assuming due execution by the parties thereto, the Lock-Up Agreements are legal, valid and binding obligations of the parties thereto, enforceable against such parties and any subsequent holder of the securities subject thereto in accordance with their terms. xviii) the Recapitalization Agreement has been duly and validly authorized, executed and delivered by the Company and constitutes valid and binding obligations of the Company in accordance with the terms of the Recapitalization Agreement, except (i) as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or similar laws affecting creditors' rights generally, (ii) as enforceability of any indemnification or contribution provisions may be limited under applicable laws or the public policies underlying such laws, and (iii) that the remedies of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceedings therefor may be brought. Any and all securities issued or to be issued by the Company pursuant to the Recapitalization Agreement were or will be issued in transactions exempt from the registration requirements of the Act and in accordance with all other applicable state, federal and local laws, rules, regulations and permits. Such counsel shall state that such counsel has participated in conferences with officers and other representatives of the Company and representatives of the independent public accountants for the Company, at which conferences such counsel made inquiries of such officers, representatives and accountants and discussed the contents of the Preliminary Prospectus, the Registration Statement, the Prospectus and related matters and, although such counsel is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Preliminary Prospectus, the Registration Statement or the Prospectus, on the basis of the foregoing, no facts have come to the attention of such counsel which lead them to believe that either the Registration Statement or any amendment thereto, at the time such Registration Statement or amendment became effective, or the Preliminary Prospectus or the Prospectus, or any amendment or supplement thereto, as of the date of the Preliminary Prospectus and the Prospectus, and as of the date of such opinion, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading (it being understood that such counsel need express no opinion with respect to the financial statements and schedules and other financial and statistical data included in the Preliminary Prospectus, the Registration Statement or the Prospectus, or any supplements or amendments thereto). In rendering such opinion, such counsel may rely (a) as to matters involving the application of laws other than the laws of the United States and jurisdictions in which they are admitted, to the extent such counsel deems proper and to the extent specified in such opinion, if at all, upon an opinion or opinions (in form and substance satisfactory to Underwriter's 28 Counsel) of other counsel acceptable to Underwriter's Counsel, familiar with the applicable laws; and (b) as to matters of fact, to the extent they deem proper, on certificates and written statements of responsible officers of the Company or the Subsidiary and certificates or other written statements of officers of departments of jurisdictions having custody of documents respecting the corporate existence or good standing of the Company or the Subsidiary, provided that copies of any such statements or certificates shall be delivered to Underwriter's Counsel, if requested. The opinion of such counsel for the Company shall state that the opinion of any such other counsel is in form satisfactory to such counsel and that the Underwriter and they are justified in relying thereon. Such opinion shall also state that the Underwriters' Counsel is entitled to rely thereon. Such opinion shall not state that it is to be governed or qualified by, or that it is otherwise subject to, any treatise, written policy or other document relating to legal opinions, including without limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991) or any comparable state accord. At each Option Closing Date, if any, the Underwriter shall have received the favorable opinion of Fishman & Merrick, P.C., counsel to the Company, dated the relevant Option Closing Date, addressed to the Underwriter, and in form and substance satisfactory to Underwriter's Counsel confirming as of the Option Closing Date, the statements made by Fishman & Merrick, P.C., in its opinion delivered on the Closing Date. (e) On the Closing Date, the Underwriter shall have received the favorable opinion of Tilton, Fallon, Lungmus & Chestnut, patent counsel to the Company, dated the Closing Date, addressed to the Underwriter, in substantially the form attached hereto as Exhibit A and in form and substance satisfactory to Underwriter's Counsel. At each Option Closing Date, if any, the Underwriter shall have received the favorable opinion of Tilton, Fallon, Lungmus & Chestnut, dated the relevant Option Closing Date, addressed to the Underwriter and in form and substance satisfactory to Underwriter's Counsel confirming, as of the Option Closing Date, the statements made by Tilton, Fallon, Lungmus & Chestnut in its opinion delivered on the Closing Date. (f) On or prior to each of the Closing Date and each Option Closing Date, if any, Underwriter's Counsel shall have been furnished with such documents, certificates and opinions as they may reasonably require for the purpose of enabling them to review or pass upon the matters referred to in Section 6(c) hereof, or in order to evidence the accuracy, completeness or satisfaction of any of the representations, warranties or conditions of the Company herein contained. (g) Prior to the Closing Date and each Option Closing Date, if any, (i) there shall have been no material adverse change or development involving a prospective adverse change in the condition, financial or otherwise, or the earnings, stockholders' equity, value, operations, properties, business or results of operations of the Company or the Subsidiary, whether or not in the ordinary course of business, from the latest dates as of which such matters are set forth in the Registration Statement and the Prospectus; (ii) there shall have been no transaction, not in the ordinary course of business, entered into by the Company or the Subsidiary from the latest date as of which the financial condition of the Company and the Subsidiary is set forth in the Registration Statement and the Prospectus; (iii) the Company shall 29 not be in default under any provision of any instrument relating to any outstanding indebtedness; (iv) neither the Company nor the Subsidiary shall have issued any securities (other than the Securities) or declared or paid any dividend or made any distribution in respect of its capital stock of any class and there shall not have been any change in the capital stock, debt (long or short term) or liabilities or obligations of the Company or the Subsidiary (contingent or otherwise) from the latest dates as of which such matters are set forth in the Registration Statement and the Prospectus; (v) no material amount of the assets of the Company or the Subsidiary shall have been pledged or mortgaged, except as set forth in the Registration Statement and the Prospectus; (vi) no action, suit, proceeding, inquiry, arbitration, investigation, litigation or governmental or other proceeding, domestic or foreign, shall be pending or threatened (or circumstances giving rise to same) against the Company or the Subsidiary or affecting any of its properties or business before or by any court or federal, state or foreign commission, board or other administrative agency wherein an unfavorable decision, ruling or finding may materially and adversely affect the condition, financial or otherwise, or the earnings, stockholders' equity, value, operations, properties, business or results of operations of the Company taken as a whole, except as set forth in the Registration Statement and Prospectus; and (vii) no stop order shall have been issued under the Act with respect to the Registration Statement and no proceedings therefor shall have been initiated, threatened or contemplated by the Commission. (h) At the Closing Date and each Option Closing Date, if any, the Underwriter shall have received a certificate of the Company signed by the principal executive officer and by the chief financial or chief accounting officer of the Company, dated the Closing Date or the relevant Option Closing Date, as the case may be, to the effect that each of such persons has carefully examined the Registration Statement, the Prospectus and this Agreement, and that: i) The representations and warranties of the Company in this Agreement are true and correct, as if made on and as of the Closing Date or the Option Closing Date, as the case may be, and the Company has complied with all agreements and covenants and satisfied all conditions contained in this Agreement on its part to be performed or satisfied at or prior to such Closing Date or Option Closing Date, as the case may be; ii) No stop order suspending the effectiveness of the Registration Statement or any part thereof has been issued, and no proceedings for that purpose have been instituted or are pending or, to the best of each of such person's knowledge, are contemplated or threatened under the Act; iii) The Registration Statement and the Prospectus and, if any, each amendment and each supplement thereto contain all statements and information required to be included therein, and none of the Registration Statement, the Prospectus or any amendment or supplement thereto includes any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading and neither the Preliminary Prospectus nor any supplement thereto included any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the 30 statements therein, in light of the circumstances in which they were made, not misleading; and iv) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, (A) the Company has not incurred any material liabilities or obligations, direct or contingent; (B) the Company has not paid or declared any dividends or other distributions on its capital stock; (C) the Company has not entered into any transactions not in the ordinary course of business; (D) there has not been any change in the capital stock or long-term debt or any increase in the short-term borrowings (other than any increase in short-term borrowings in the ordinary course of business) of the Company (E) the Company has not sustained any material loss or damage to its property or assets, whether or not insured; (F) there is no litigation which is pending or threatened (or circumstances giving rise to same) against the Company or any affiliate (within the meaning of the Rules and Regulations) of the foregoing which is required to be set forth in an amended or supplemented Prospectus which has not been set forth; and (G) there has occurred no event required to be set forth in an amended or supplemented Prospectus which has not been set forth. References to the Registration Statement and the Prospectus in this Section 6(h) are to such documents as amended and supplemented at the date of such certificate. (i) By the Closing Date, the Underwriter will have received clearance from the NASD as to the amount of compensation allowable or payable to the Underwriter, as described in the Registration Statement. (j) At the time this Agreement is executed, the Underwriter shall have received a letter, dated such date, addressed to the Underwriter and in form and substance satisfactory in all respects (including the non-material nature of the changes or decreases, if any, referred to in clause (iii) below) to the Underwriter and Underwriter's Counsel, from Coopers & Lybrand LLP. i) confirming that they are independent certified public accountants with respect to the Company within the meaning of the Act and the Rules and Regulations; ii) stating that it is their opinion that the financial statements of the Company included in the Registration Statement comply as to form in all material respects with the applicable accounting requirements of the Act and the Rules and Regulations and that the Underwriter may rely upon the opinion of Coopers & Lybrand LLP with respect to such financial statements and supporting schedules included in the Registration Statement; iii) stating that, on the basis of a limited review which included a reading of the latest unaudited interim consolidated financial statements of the Company and the Subsidiary, a reading of the latest available minutes of the stockholders and board of directors and the various committees of the board of 31 directors of the Company and the Subsidiary, consultations with officers and other employees of the Company and the Subsidiary responsible for financial and accounting matters and other specified procedures and inquiries, nothing has come to their attention which would lead them to believe that (A) the unaudited consolidated financial statements and supporting schedules of the Company included in the Registration Statement do not comply as to form in all material respects with the applicable accounting requirements of the Act and the Rules and Regulations or are not fairly presented in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited consolidated financial statements of the Company included in the Registration Statement, or (B) at a specified date nor more than five (5) days prior to the effective date of the Registration Statement, there has been any change in the capital stock or long-term debt of the Company and the Subsidiary, or any decrease in the stockholders' equity or net current assets or net assets of the Company and the Subsidiary as compared with amounts shown in the April 30, 1997 balance sheet included in the Registration Statement, other than as set forth in or contemplated by the Registration Statement, or, if there was any change or decrease, setting forth the amount of such change or decrease, and (C) during the period from April 30, 1997 to a specified date not more than five (5) days prior to the effective date of the Registration Statement, there was any decrease in net revenues, net earnings or net earnings per share of Common Stock, in each case as compared with the corresponding period beginning April 30, 1996, other than as set forth in or contemplated by the Registration Statement, or, if there was any such decrease, setting forth the amount of such decrease; iv) setting forth, at a date not later than five (5) days prior to the effective date of the Registration Statement, the amount of liabilities of the Company and the Subsidiary (including a break-down of commercial paper and notes payable to banks); v) stating that they have compared specific dollar amounts, numbers of shares, percentages of revenues and earnings, statements and other financial information pertaining to the Company and the Subsidiary set forth in the Prospectus, in each case to the extent that such amounts, numbers, percentages, statements and information may be derived from the general accounting records, including work sheets, of the Company and the Subsidiary and excluding any questions requiring an interpretation by legal counsel, with the results obtained from the application of specified readings, inquiries and other appropriate procedures (which procedures do not constitute an audit in accordance with generally accepted auditing standards) set forth in the letter and found them to be in agreement; and vi) statements as to such other matters incident to the transaction contemplated hereby as the Underwriter may request. 32 (k) At the Closing Date and each Option Closing Date, if any, the Underwriter shall have received from Coopers & Lybrand LLP a letter, dated as of the Closing Date or the relevant Option Closing Date, as the case may be, to the effect that (i) it reaffirms the statements made in the letter furnished pursuant to Section 6(j), (ii) if the Company has elected to rely on Rule 430A of the Rules and Regulations, to the further effect that Coopers & Lybrand LLP has carried out procedures as specified in clause (v) of Section 6(j) hereof with respect to certain amounts, percentages and financial information as specified by the Underwriter and deemed to be a part of the Registration Statement pursuant to Rule 430A(b) and have found such amounts, percentages and financial information to be in agreement with the records specified in such clause (v). (l) The Company shall have received a letter, dated such date, addressed to the Company, in form and substance satisfactory in all respects to the Underwriter, from Coopers & Lybrand LLP stating that they have not during the immediately preceding five (5) year period brought to the attention of the Company's management any "weakness," as defined in Statement of Auditing Standard No. 60 "Communication of Internal Control Structure Related Matters Noted in an Audit," in any of the Company's internal controls. (m) On each of Closing Date and Option Closing Date, if any, there shall have been duly tendered to the Underwriter the appropriate number of Securities. (n) No order suspending the sale of the Securities in any jurisdiction designated by the Underwriter pursuant to Section 4(e) hereof shall have been issued on either the Closing Date or the Option Closing Date, if any, and no proceedings for that purpose shall have been instituted or shall be contemplated. (o) On or before the effective date of the Registration Statement, the Company shall have executed and delivered to the Underwriter, the Underwriter's Warrant Agreement, substantially in the form filed as Exhibit ___ to the Registration Statement. On or before the Closing Date, the Company shall have executed and delivered to the Underwriter the Underwriter's Warrants in such denominations and to such designees as shall have been provided to the Company. (p) On or before Closing Date, the Units, the Common Stock and the Redeemable Warrants shall have been duly approved for quotation on Nasdaq, subject to official notice of issuance. (q) On or before Closing Date, there shall have been delivered to the Underwriter all of the Lock-Up Agreements, in form and substance satisfactory to Underwriter's Counsel. (r) On or before the Closing Date, the Company shall have (i) executed and delivered to the Underwriter the Consulting Agreement, substantially in the form filed as Exhibit ____ to the Registration Statement and (ii) paid the Underwriter $48,000 representing the retainer fee pursuant to the Consulting Agreement. 33 (s) On or before the effective date of the Registration Statement, the Company and Continental Stock Transfer & Trust Company shall have executed and delivered to the Underwriter the Warrant Agreement, substantially in the form filed as Exhibit ___ to the Registration Statement. (t) At least two (2) full business days prior to the date hereof, the Closing Date and each Option Closing Date, if any, the Company shall have delivered to the Underwriter the unaudited interim consolidated financial statements required to be so delivered pursuant to Section 4(p) of this Agreement. If any condition to the Underwriter's or the Underwriter's obligations hereunder to be fulfilled prior to or at the Closing Date or at any Option Closing Date, as the case may be, is not so fulfilled, the Underwriter may terminate this Agreement or, if the Underwriter so elects, it may waive any such conditions which have not been fulfilled or extend the time for their fulfillment. 7. Indemnification (a) The Company agrees to indemnify and hold harmless each Underwriter (for purposes of this Section 7, "Underwriter" shall include the officers, directors, partners, employees, agents and counsel of the Underwriter, and each person, if any, who controls the Underwriter ("controlling person") within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, from and against any and all losses, claims, damages, expenses or liabilities, joint or several (and actions, proceedings, investigations, inquiries and suits in respect thereof), whatsoever (including but not limited to any and all costs and expenses whatsoever reasonably incurred in investigating, preparing or defending against such action, proceeding, investigation, inquiry or suit commenced or threatened, or any claim whatsoever), as such are incurred, to which the Underwriter or such controlling person may become subject under the Act, the Exchange Act or any other statute or at common law or otherwise or under the laws of foreign countries, arising out of or based upon (A) any untrue statement or alleged untrue statement of a material fact contained (i) in any Preliminary Prospectus, the Registration Statement or the Prospectus (as from time to time amended and supplemented); (ii) in any post-effective amendment or amendments or any new registration statement and prospectus in which is included securities of the Company issued or issuable upon exercise of the Securities; or (iii) in any application or other document or written communication (in this Section 7, collectively referred to as "applications") executed by the Company or based upon written information furnished by the Company filed, delivered or used in any jurisdiction in order to qualify the Securities under the securities laws thereof or filed with the Commission, any state securities commission or agency, the NASD, Nasdaq or any securities exchange; (B) the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading (in the case of the Prospectus, in light of the circumstances in which they were made); or (C) any breach of any representation, warranty, covenant or agreement of the Company contained herein or in any certificate by or on behalf of the Company or any of its officers delivered pursuant hereto, unless, in the case of clause (A) or (B) above, such statement or omission was made in reliance upon and in conformity with written information furnished to the Company with respect to any Underwriter by or on behalf of such Underwriter expressly for use in any Preliminary Prospectus, the 34 Registration Statement or any Prospectus, or any amendment thereof or supplement thereto, or in any application, as the case may be. The indemnity agreement in this Section 7(a) shall be in addition to any liability which the Company may have at common law or otherwise. (b) The Underwriter agrees to indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of the Act, to the same extent as the foregoing indemnity from the Company to the Underwriter but only with respect to statements or omissions, if any, made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any amendment thereof or supplement thereto or in any application made in reliance upon, and in strict conformity with, written information furnished to the Company with respect to any Underwriter by such Underwriter expressly for use in such Preliminary Prospectus, the Registration Statement or Prospectus or any amendment thereof or supplement thereto or in any such application, provided that such written information or omissions only pertain to disclosures in the Preliminary Prospectus, the Registration Statement or the Prospectus directly relating to the transactions effected by the Underwriter in connection with the offering contemplated hereby. The Company acknowledges that the statements with respect to the public offering of the Securities set forth under the heading "Underwriting" and the stabilization legend in the Prospectus have been furnished by the Underwriter expressly for use therein and constitute the only information furnished in writing by or on behalf of the Underwriter for inclusion in any Preliminary Prospectus, the Registration Statement or the Prospectus. The indemnity agreement in this Section 7(b) shall be in addition to any liability which the Underwriter may have at common law or otherwise. (c) Promptly after receipt by an indemnified party under this Section 7 of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against one or more indemnifying parties under this Section 7, notify each party against whom indemnification is to be sought in writing of the commencement thereof (but the failure to so notify an indemnifying party shall not relieve it from any liability which it may have under this Section 7 (except to the extent that it has been prejudiced in any material respect by such failure) or from any liability which it may have otherwise). In case any such action, investigation, inquiry, suit or proceeding is brought against any indemnified party, and it notifies an indemnifying party or parties of the commencement thereof, the indemnifying party or parties will be entitled to participate therein, and to the extent it or they may elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party. Notwithstanding the foregoing, an indemnified party shall have the right to employ its own counsel in any such case but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the employment of such counsel shall have been authorized in writing by the indemnifying parties in connection with the defense of such action at the expense of the indemnifying party, (ii) the indemnifying parties shall not have employed counsel reasonably satisfactory to such indemnified party to have charge of the defense of such action within a reasonable time after notice of commencement of the action, or (iii) such indemnified party shall have reasonably concluded that there may be defenses available to it which are different from or additional to those available to one or all of the indemnifying parties (in which event the indemnifying parties shall not have the right to direct the defense of such action, investigation, inquiry, suit or proceeding on behalf of the indemnified party or parties), 35 in any of which events such fees and expenses of one additional counsel shall be borne by the indemnifying parties. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action, investigation, inquiry, suit or proceeding or separate but similar or related actions, investigations, inquiries, suits or proceedings in the same jurisdiction arising out of the same general allegations or circumstances. An indemnifying party will not, without the prior written consent of the indemnified parties, settle, compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. Anything in this Section 7 to the contrary notwithstanding, an indemnifying party shall not be liable for any settlement of any claim or action effected without its written consent; provided, however, that such consent may not be unreasonably withheld. (d) In order to provide for just and equitable contribution in any case in which (i) an indemnified party makes a claim for indemnification pursuant to this Section 7, but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of this Section 7 provide for indemnification in such case, or (ii) contribution under the Act may be required on the part of any indemnified party, then each indemnifying party shall contribute to the amount paid as a result of such losses, claims, damages, expenses or liabilities (or actions, investigations, inquiries, suits or proceedings in respect thereof) (A) in such proportion as is appropriate to reflect the relative benefits received by each of the contributing parties, on the one hand, and the party to be indemnified, on the other hand, from the offering of the Securities or (B) if the allocation provided by clause (A) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (A) above but also the relative fault of each of the contributing parties, on the one hand, and the party to be indemnified, on the other hand, in connection with the statements or omissions that resulted in such losses, claims, damages, expenses or liabilities, as well as any other relevant equitable considerations. In any case where the Company is a contributing party and the Underwriter is the indemnified party, the relative benefits received by the Company, on the one hand, and the Underwriter, on the other, shall be deemed to be in the same proportion as the total net proceeds from the offering of the Securities (before deducting expenses) bear to the total underwriting discounts received by the Underwriter hereunder, in each case as set forth in the table on the cover page of the Prospectus. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the Underwriter, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The amount paid by an indemnified party as a result of the losses, claims, damages, expenses or liabilities (or actions, investigations, inquiries, suits or proceedings in respect thereof) referred to in the first (1st) sentence of this Section 7(d) shall be deemed to 36 include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action, claim, investigation, inquiry suit or proceeding. Notwithstanding the provisions of this Section 7(d), the Underwriter shall not be required to contribute any amount in excess of the underwriting discount applicable to the Securities purchased by the Underwriter hereunder. No person guilty of fraudulent misrepresentation (within the meaning of Section 12(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7(d), each person, if any, who controls the Company or the Underwriter within the meaning of the Act, each officer of the Company who has signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company or the Underwriter, as the case may be, subject in each case to this Section 7(d). Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit, inquiry, investigation or proceeding, against such party in respect to which a claim for contribution may be made against another party or parties under this Section 7(d), notify such party or parties from whom contribution may be sought, but the omission to so notify such party or parties shall not relieve the party or parties from whom contribution may be sought from any obligation it or they may have hereunder or otherwise than under this Section 7(d), or to the extent that such party or parties were not adversely affected by such omission. Notwithstanding anything in this Section 7 to the contrary, no party will be liable for contribution with respect to the settlement of any action or claim effected without its written consent. The contribution agreement set forth above shall be in addition to any liabilities which any indemnifying party may have at common law or otherwise. 8. Representations, Warranties, Covenants and Agreements to Survive Delivery. All representations, warranties, covenants and agreements of the Company contained in this Agreement, or contained in certificates of officers of the Company submitted pursuant hereto, shall be deemed to be representations, warranties, covenants and agreements at the Closing Date and each Option Closing Date, if any, and such representations, warranties, covenants and agreements of the Company, and the respective indemnity and contribution agreements contained in Section 7 hereof, shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Underwriter, the Company, any controlling person of any Underwriter or the Company, and shall survive the termination of this Agreement or the issuance and delivery of the Securities to the Underwriter. 9. Effective Date. This Agreement shall become effective at 10:00 a.m., New York City time, on the next full business day following the date hereof, or at such earlier time after the Registration Statement becomes effective as the Underwriter, in its discretion, shall release the Securities for sale to the public; provided, however, that the provisions of Sections 5, 7 and 10 of this Agreement shall at all times be effective. For purposes of this Section 9, the Securities to be purchased hereunder shall be deemed to have been so released upon the earlier of dispatch by the Underwriter of telegrams to securities dealers releasing such shares for offering or the release by the Underwriter for publication of the first newspaper advertisement which is subsequently published relating to the Securities. 37 10. Termination. (a) Subject to Section 10(b) hereof, the Underwriter shall have the right to terminate this Agreement: (i) if any domestic or international event or act or occurrence has materially adversely disrupted, or in the Underwriter's opinion will in the immediate future materially adversely disrupt, the financial markets; or (ii) if any material adverse change in the financial markets shall have occurred; or (iii) if trading generally shall have been suspended or materially limited on or by, as the case may be, any of the New York Stock Exchange, the American Stock Exchange, the NASD, the Boston Stock Exchange, the Commission or any governmental authority having jurisdiction over such matters; or (iv) if trading of any of the securities of the Company shall have been suspended, or if any of the securities of the Company shall have been delisted, on any exchange or in any over-the-counter market; or (v) if the United States shall have become involved in a war or major hostilities, or if there shall have been an escalation in an existing war or major hostilities, or a national emergency shall have been declared in the United States; or (vi) if a banking moratorium shall have been declared by any state or federal authority; or (vii) if the Company shall have sustained a material or substantial loss by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act which, whether or not such loss shall have been insured, will, in the Underwriter's opinion, make it inadvisable to proceed with the delivery of the Securities; or (ix) if there shall have occurred any outbreak or escalation of hostilities or any calamity or crisis or there shall have been such a material adverse change in the conditions or prospects of the Company, or if there shall have been such a material adverse change in the general market, political or economic conditions, in the United States or elsewhere, as in the Underwriter's judgment would make it inadvisable to proceed with the offering, sale and/or delivery of the Securities; or (x) if Howard Schwan shall no longer serve the Company in his present capacity. (b) If this Agreement is terminated by the Underwriter in accordance with the provisions of Section 6 or Section 10(a) hereof the Company shall promptly reimburse and indemnify the Underwriter for all its actual out-of-pocket expenses, including the fees and disbursements of Underwriter's Counsel, less amounts previously paid pursuant to Section 5(c) hereof. In addition, the Company shall remain liable for all "blue sky" counsel fees (such fees not to exceed $45,000) and expenses and "blue sky" filing fees. Notwithstanding any contrary provision contained in this Agreement, any election hereunder or any termination of this Agreement (including, without limitation, pursuant to Sections 6 and 10(a) hereof), and whether or not this Agreement is otherwise carried out, the provisions of Section 5 and Section 7 shall not be in any way be affected by such election or termination or failure to carry out the terms of this Agreement or any part hereof. 11. Default by the Company. If the Company shall fail at the Closing Date or any Option Closing Date, as applicable, to sell and deliver the number of Securities which it is obligated to sell hereunder on such date, then this Agreement shall terminate (or, if such default shall occur with respect to any Option Units to be purchased on an Option Closing Date, the Underwriter may, at its option, by notice from the Underwriter to the Company, terminate the Underwriter's obligation to purchase Option Units from the Company on such date) without any liability on the part of any non-defaulting party other than pursuant to Section 5, Section 7 and Section 10 hereof. No action taken pursuant to this Section 11 shall relieve the Company from liability, if any, in respect of such default. 38 12. Notices. All notices and communications hereunder, except as herein otherwise specifically provided, shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Underwriter shall be directed to the Underwriter at Joseph Stevens & Company, Inc., 33 Maiden Lane, 8th Floor, New York, NY 10038, Attention: Mr. Joseph Sorbara, with a copy to Orrick, Herrington & Sutcliffe LLP, 666 Fifth Avenue, New York, New York 10103, Attention: Rubi Finkelstein, Esq. Notices to the Company shall be directed to the Company at CTI Industries Corporation, 22160 North Pepper Road, Barrington, Illinois 60010, Attention: Stephen M. Merrick, with a copy to Fishman & Merrick, P.C., 30 North LaSalle Street, Suite 3500, Chicago, Illinois 60602, Attention: John M. Klimek, Esq. 13. Parties. This Agreement shall inure solely to the benefit of, and shall be binding upon, the Underwriter, the Company and the controlling persons, directors and officers referred to in Section 7 hereof, and their respective successors, legal representatives and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provisions herein contained. No purchaser of Units from the Underwriter shall be deemed to be a successor by reason merely of such purchase. 14. Construction. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York, without giving effect to choice of law or conflict of laws principles. 15. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, and all of which taken together shall be deemed to be one and the same instrument. 16. Entire Agreement; Amendments. This Agreement, the Underwriter's Warrant Agreement and the Consulting Agreement constitute the entire agreement of the parties hereto and supersede all prior written or oral agreements, understandings and negotiations with respect to the subject matter hereof and thereof. This Agreement may not be amended except in a writing signed by the Underwriter and the Company. 39 If the foregoing correctly sets forth the understanding between the Underwriter and the Company, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement between us. Very truly yours, CTI INDUSTRIES CORPORATION By:_____________________________________ Name: Howard W. Schwan Title: President Confirmed and accepted as of the date first above written. JOSEPH STEVENS & COMPANY, INC. By:____________________________________ Name: Title: 40 Exhibit A [FORM OF INTELLECTUAL PROPERTY OPINION] ___________________, 1997 JOSEPH STEVENS & COMPANY, INC. 33 Maiden Lane, 8th Floor New York, New York 10038 Re: Public Offering of CTI Industries Corporation Gentlemen: We have acted as special counsel to CTI INDUSTRIES CORPORATION, a Delaware corporation (the "Company"), in connection with the entering into by the Company of that certain Underwriting Agreement by and between Joseph Stevens & Company, Inc. ("Joseph Stevens"), as underwriter, and the Company, dated _______________, 1997 (the "Underwriting Agreement"). This opinion is provided to you pursuant to Section ____ of the Underwriting Agreement. For the purpose of rendering the opinions set forth below we have reviewed the following (collectively, the "Documents"): (i) the Underwriting Agreement; (ii) that certain Registration Statement filed _____, 1997, together with any and all amendments thereof exhibits thereto (collectively, the "Registration Statement"); (iii) the company's Prospectus dated ___________ __, 1997 (the "Prospectus"); (iv) a search of the United States Patent and Trademark Office records relevant to ownership of any and all: patents and patent applications (including, without limitation, the patents and patent applications listed on Schedule A annexed hereto and hereby incorporated by reference herein (collectively, the "Patents")), and trademarks, trademark applications, service marks and service mark applications (collectively, the "Marks") (including, without limitation, the 41 Joseph Stevens & Company, Inc. __________, 1997 Marks listed on Schedule B annexed hereto and hereby incorporated by reference herein (collectively, the "Trademarks")), owned, purportedly owned or licensed by the Company (including, those patents, patent applications and Marks licensed, without limitation, pursuant to the licenses listed on Schedule C annexed hereto and hereby incorporated by reference herein (collectively, the "Licenses")), conducted by ______________________________ and certified as true and correct as of _______________________, 1997 (no earlier than 5 days prior to the date of the Closing (as defined in the Underwriting Agreement)); (v) a search of the United States Copyright Office records relevant to ownership of any and all copyrighted material (including, without limitation, the copyright in, or license permitting the Company's actual use of, the material licensed or otherwise distributed by the Company and listed on Schedule D annexed hereto and hereby incorporated by reference herein (collectively, the "Copyrighted Material")), owned, purportedly owned or licensed by the Company conducted by _____________________ and certified as true and correct as of __________________, 1997 (no earlier than 5 days prior to the date of the Closing); (vi) an intellectual property litigation search with respect to all Patents, Trademarks, Licenses and Copyrighted Material, listed on Schedules A, B, C and D, respectively; (vii) a search of the Uniform Commercial Code ("UCC") recordation offices, in the following jurisdictions -- [________________, _____________ and _______], with respect to the following two categories of general intangibles: (a) the intellectual property general intangibles of the Company, including, without limitation, the Company's patents, patent applications, inventions, know how, trademarks, service marks, copyrights, service and trade names, intellectual property licenses and other rights, and (b) the intellectual property general intangibles licensed to the Company, including, without limitation, the patents, patent applications, inventions, know how, trademarks, service marks, copyrights, service and trade names and other intellectual property rights licensed to the Company pursuant to the Licenses (listed on Schedule C), said search certified to us as complete and accurate by ________________ and current through ________________________, 1997 (no earlier than 5 days prior to the date of the Closing) and said jurisdictions being the only jurisdictions in 42 Joseph Stevens & Company, Inc. __________, 1997 which filing of UCC financing statements or other documents may be filed to effectively evidence a security or other interest in said general intangibles; and (viii) any and all records, documents, instruments and agreements in our possession or under our control relating to the Company. We have also examined such corporate records, documents, instruments and agreements, and inquired into such other matters, as we have deemed necessary or appropriate as a basis for the opinions set forth herein. Whenever our opinion herein is qualified by the phrase "to the best of our knowledge" or "to the best of our knowledge, after due inquiry," such language means that, based upon (i) our inquiries of officers of the Company, (ii) our review of the Documents, and (iii) our review of such other corporate records, documents, instruments and agreements described in the first sentence of this paragraph, we believe that such opinions are factually correct. To the best of our knowledge, as to all matters of fact represented to you by the Company, we advise you that nothing has come to our attention that would cause us to believe that such facts are incorrect, incomplete or misleading or that reliance thereon is not warranted under the circumstances. We call to your attention that our opinion is limited to such facts as they exist on the date hereof and do not take into account any change of circumstances, fact or law subsequent thereto. Based upon and subject to the foregoing, we are of the opinion that: 1. To the best of our knowledge, after due inquiry, except as described in the Registration Statement, the Company owns or has the right to use, free and clear of all liens, encumbrances, pledges, security interests, defects or other restrictions or equities of any kind whatsoever, (i) all patents and patent applications (including, without limitation, the Patents), (ii) all trademarks and service marks (including, without limitation, the Trademarks), (iii) all copyrights (including, without limitation, the Copyrighted Material), (iv) all service and trade names, (v) all intellectual property licenses (including, without limitation, the Licenses), and 43 Joseph Stevens & Company, Inc. __________, 1997 (vi) all technology used in, contemplated to be used in or required for, the conduct of the Company's business. 2. To the best of our knowledge, after due inquiry, the Company possesses all material intellectual property licenses or rights used in, or required for, the conduct of its business (including, the Licenses and without limitation, any such licenses or rights described in the Registration Statement as being owned, possessed or licensed by the Company, as the case may be), such licenses and rights are in full force and effect, and the Company's products, methods and services do not infringe any unlicensed intellectual property of any third parties. 3. To the best of our knowledge, after due inquiry, there is no claim or action, pending, threatened or potential, which affects or could affect the rights of the Company with respect to any trademarks, service marks, copyrights, service names, trade names, patents, patent applications or licenses used in, or required for, the conduct of the Company's business and all trademarks, service marks, copyrights, trade names, and patents owned or licensed to the Company are valid. 4. To the best of our knowledge, after due inquiry, there is no intellectual property based claim or action, pending, threatened or potential, which affects or could affect the rights of the Company with respect to any products, services, processes or licenses, including, without limitation, the Licenses used in the conduct of the Company's business. 5. To the best of our knowledge, after due inquiry, except as described in the Registration Statement, the Company is not under any obligation to pay royalties or fees to any third party with respect to any material, technology or intellectual properties developed, employed, licensed or used by the Company. 6. To the best of our knowledge, after due inquiry, the statements in the Registration Statement under the headings, "Risk Factors - Patents, Trademarks and Proprietary Information" and "Business - Patents, Trademarks and Proprietary Information", are accurate in all material respects, fairly represent the information disclosed therein and do not omit to state any fact necessary to make the statements made therein complete and accurate. 7. To the best of our knowledge, after due inquiry, the statements in the Registration Statement and the Prospectus do not contain any untrue statement of a material fact with respect to the intellectual property position of the Company, or omit to state any material fact relating to the intellectual property position of 44 Joseph Stevens & Company, Inc. __________, 1997 the Company which is required to be stated in the Registration Statement and the Prospectus or is necessary to make the statements therein not misleading. We call your attention to the fact that the members of this firm are licensed to practice law in the State of ______________ and before the United States Patent and Trademark Office as Registered Patent Attorneys. Accordingly, we express no opinion with respect to the laws, rules and regulations of any jurisdictions other than the State of ___________ and the United States of America. The opinions expressed herein are for the sole benefit of, and may be relied upon only by, the several Underwriters named in Schedule A to the Underwriting Agreement and Orrick, Herrington & Sutcliffe LLP. 45 EX-3.(I) 3 SECOND RESTATED CERTIFICATE OF INCORPORATION EXHIBIT 3.1 SECOND RESTATED CERTIFICATE OF INCORPORATION OF CTI INDUSTRIES CORPORATION CTI Industries Corporation, a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: 1. The name of the corporation is CTI Industries Corporation. The date of the filing of its original Certificate of Incorporation of the Corporation with the Secretary of State, under the name Container Merger Company, Inc., was October 14, 1983. 2. This Restated Certificate of Incorporation restates, integrates and further amends the Certificate of Incorporation of the Corporation, as amended, in its entirety and has been adopted in accordance with the provisions of Sections 242 and 245 of the General Corporation Law of the State of Delaware, as amended, to read as herein set forth in full: FIRST: The name of the corporation (hereinafter called the "Corporation") is: CTI INDUSTRIES CORPORATION SECOND: The address, including the street, number, city and county of the registered office of the corporation in the State of Delaware is 1209 Orange Street, City of Wilmington, County of New Castle, and the name of the registered agent of the corporation in the State of Delaware at such address is The Corporation Trust Company. THIRD: The nature of the business and of the purposes to be conducted and promoted by the corporation shall be to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: A. This Corporation is authorized to issue three classes of capital stock to be designated respectively Common Stock ("Common Stock"), Class B Common Stock ("Class B Common Stock") and Preferred Stock. The total number of shares of capital stock that the Corporation is authorized to issue is Fourteen Million One Hundred Thousand (14,100,000). The total number of shares of Common Stock this Corporation shall have authority to issue is Eleven Million (11,000,000). The total number of shares of Class B Common Stock this Corporation shall have authority to issue is One Million One Hundred Thousand (1,100,000). The total number of shares of Preferred Stock the Company shall have the authority to issue is Two Million (2,000,000). The Common Stock shall have a par value of $.065 per share, the Class B Common Stock shall have a par value of $.91 per share and the Preferred Stock shall have a par value of $.91 per share. Upon the conversion of the Preferred Stock to shares of Class B Common Stock as provided in Section 6.02 of Paragraph D of this Article Fourth, any additional shares of Preferred Stock may be issued from time to time with such designations, preferences, conversion rights, cumulative, relative, participating, option or other rights, qualifications, limitations or restrictions thereof as shall be stated and expressed in the resolution or resolutions providing for the issuance of such Preferred Stock adopted by the Boardof Directors pursuant to the authority in this paragraph given. 1 B. Upon the effective date of this Second Restated Certificate of Incorporation (i) a reverse stock split of the Company's Preferred Stock shall automatically take place whereby current holders of Preferred Stock will receive 1 share of Preferred Stock for every 2.6 shares of Preferred Stock then held and (ii) a reverse stock split of the Company's Common Stock shall automatically take place whereby current holders of Common Stock will receive 1 share of Common Stock for every 2.6 shares of Common Stock then held. The reverse stock splits provided for above will take effect automatically and immediately without the need for replacement certificates to be issued by the Company. The Company shall, however, issue replacement certificates as soon as practicable. C. The powers, preferences, rights, restrictions, and other matters relating to the Common Stock and Class B Common Stock are as follows: 1. Dividends. The holders of the Common Stock and Class B Common Stock shall participate equally and pro rata in dividends, if any, declared by the Company on a per share basis. 2. Liquidation. In the event of any voluntary or involuntary liquidation (whether complete or partial), dissolution or winding up of the Corporation, the holders of Common Stock and Class B Common Stock shall participate equally, on a per share basis, in the assets of the Corporation available for distribution to its stockholders, whether from capital, surplus or earnings. 3. Voting Rights. 3.01 General Voting Rights. Except in circumstances in which the holders of Common Stock and Class B Common Stock, respectively, shall be required to vote separately as a class, with respect to all matters upon which the Corporation's stockholders shall vote or be entitled to vote, the holders of all Common Stock and Class B Common Stock shall vote together as a single class with each holder being entitled to one vote per share on all such matters. 3.02 Election of Directors. For so long as there shall be issued and outstanding more than 500,000 shares of Class B Common Stock. (a) By-Laws; Number of Directors. Notwithstanding the provisions of Article Seventh hereof, the by-laws of the Corporation shall provide for the election of seven directors and such provision may not be amended, modified, altered or repealed except by the approval of the holders of two-thirds of the outstanding shares of Class B Common Stock voting separately as a class, provided, however, that the number of directors shall in no event be reduced below seven without the additional approval of the holders of two-thirds of the outstanding shares of Common Stock voting separately as a class. 2 (b) Election of Directors. (i) Four of the seven directors of the Corporation shall be elected by the holders of a majority of the outstanding shares of Class B Common Stock voting separately as a class; (ii) The remaining three directors shall be elected by the holders of a majority of the outstanding shares of Common Stock and Class B Common Stock voting together as a single class. 3.03 Amendments to Class B Common Stock. After the initial issuance of Class B Common Stock upon the conversion of the Preferred Stock, the Corporation shall not (i) issue additional shares of Class B Common Stock (except for additional issuances upon stock dividends, stock splits, or recapitalizations with respect to outstanding shares of Class B Common Stock) or (ii) amend the terms of the Class B Common Stock in any manner that would adversely affect the rights of the holders of Common Stock except with the approval of the holders of two-thirds of the outstanding shares of Common Stock. 3.04 Quorum. At any meeting of the stockholders of the Corporation, the presence in person or by proxy of a majority in number of the issued and outstanding shares of Common Stock and Class B Common Stock, as a single class, shall be sufficient to constitute a quorum. 3.05 Action Without Meeting. Any action required or permitted to be taken at any meeting of the stockholders of the Corporation, may be taken without a meeting, if prior to such action a written consent thereto is signed by the holders of shares of Common Stock and/or Class B Common Stock necessary to approve such action if such action was taken at a meeting of stockholders. 4. Transfer. 4.01 No person holding shares of Class B Common Stock of record (hereinafter called "Class B Holder") may transfer, and the Corporation shall not register the transfer of, such shares of Class B Common Stock, whether by sale, assignment, gift, bequest, appointment, operation of law or otherwise, except to a Permitted Transferee. A Permitted Transferee shall mean: (a) Stephen M. Merrick, John H. Schwan, Howard W. Schwan, Frances Ann Rohlen, and Philip W. Colburn, their respective spouses, issue, and the spouses of such issue (collectively referred to as "Family Members"); 3 (b) The trustee or trustees of a trust or trusts (including a voting trust) for the primary benefit of any one or more Family Members (collectively referred to as "Family Trusts"); (c) A corporation or partnership controlled (as defined below) by one or more Family Members or Family Trusts (collectively referred to as "Family Entities"); and (d) The estate of such Class B Holder. 4.02 Notwithstanding anything to the contrary set forth herein, any Class B Holder may pledge such Holder's shares of Class B Common Stock to a pledgee pursuant to a bona fide pledge of such shares as collateral security for indebtedness due to the pledgee, provided that such shares shall not be transferred to or registered in the name of the pledgee and shall remain subject to the provisions of this Section 4. In the event of foreclosure or other similar action by the pledgee, such pledged shares of Class B Common Stock may only be transferred to a Permitted Transferee of the pledgor or converted into shares of Common Stock as the pledgee may elect. 4.03 The following events shall result in the conversion of the applicable shares of Class B Common Stock into shares of Common Stock: (a) a Class B Holder shall transfer or attempt to transfer Class B Common Stock to a person or entity not a Permitted Transferee; (b) a Class B Holder shall transfer or attempt to transfer to any person or entity not a Permitted Transferee, including, without limitation, a pledgee, the right to vote any Class B Common Stock, whether by agreement, voting trust or otherwise; (c) a Family Trust holding Class B Common Stock shall cease to be a trust for the primary benefit of any one or more Family Members; (d) a Family Entity holding Class B Common Stock shall cease to be controlled by one or more Family Members or Family Trusts. For purposes of this Section 4, "controlled" means: (i) in the case of a corporation, the ownership, beneficially and of record, of shares of capital stock representing a majority of the equity ownership of, and economic interest in, such corporation, as well as a majority of all votes entitled to vote for the election of directors; and (ii) in the case of a partnership, the ownership, beneficially and of record, of partnership interests representing a majority of the equity as a majority of the partnership interests entitled to participate in the management of the partnership. If any of the foregoing events shall occur, all shares of Class B Common Stock subject to such transfer or attempted transfer or then held by such Family Trust or Family Entity, whichever applicable, shall, without further act on anyone's part, be converted into shares of 4 Common Stock effective upon the date of such event occurs, and stock certificates formerly representing such shares of Class B Common Stock shall thereupon and thereafter be deemed to represent the like number of shares of Common Stock. The Corporation may, in connection with preparing a list of shareholders entitled to vote at any meeting of shareholders, or as a condition to the transfer or the resignation of shares of Class B Common Stock on the Corporation's books, require the furnishing of such affidavits, documents or other proof as it deems necessary to establish that any person is a Permitted Transferee or to ascertain that none of the events described in this subparagraph 4.03 occurred. 4.04 Shares of Class B Common Stock shall be registered in the names of the beneficial owners thereof and not in "street" or "nominee" name. For this purposes, a "beneficial owner" of any shares of Class B Common Stock shall mean a person who, or any entity which, possesses the power, either singly or jointly, to direct the voting or disposition of such shares. The Corporation shall note on the certificates for shares of Class B Common Stock the existence of the restrictions on transfer imposed by this Section 4. 5. Conversion. 5.01 Conversion Rights and Procedure. (a) Right of Conversion. Each holder of shares of Class B Common Stock shall be entitled to exercise all or a portion of the conversion rights provided herein at any time or from time to time. (b) Rate of Conversion. Upon exercise of the right of conversion hereunder with respect to shares of Class B Common Stock, the holder thereof shall be entitled to receive that number of shares of Common Stock ("Conversion Shares") equal to the number of shares of Class B Common Stock tendered subject to adjustment as provided in Section 4.02. (c) Method of Conversion. A holder of shares of Class B Common Stock shall exercise such holder's conversion rights hereunder by (i) delivering or mailing to the Corporation, by certified or registered mail, return receipt requested, a written notice stating such holder's intention to exercise such rights and specifying the number of shares of Class B Common Stock as to which the conversion right is exercised and (ii) accompanying such notice with a certificate or certificates representing such shares duly endorsed in blank or accompanied with a stock power duly endorsed in blank. The right of exercise shall be deemed to have been exercised on the date that such notice shall be delivered to the Corporation or mailed in accordance with this section ("Exercise Time"). Each share of Class B Common Stock shall be canceled after it has been converted as provided herein. (d) Delivery of Certificates. Certificates for Conversion Shares shall be delivered to the holder named therein within 15 days after the Exercise Time. Unless all of the Class B Common Stock evidenced by the certificate delivered to the Corporation shall 5 have been converted, the Corporation shall within such 15 day period prepare a new certificate, substantially identical to that surrendered, representing the balance of the shares of Class B Common Stock formerly represented by the certificate which shall not have been converted and shall within the said 15 day period deliver such certificate to the person designated as the holder thereof. (e) The Corporation covenants and agrees that: (i) At all times during which any shares of Class B Common Stock are issued and outstanding, the Corporation shall reserve and maintain a sufficient number of authorized and unissued shares of Common Stock sufficient to issue shares of Common Stock upon conversion of all of the then issued and outstanding Class B Common Stock, including additional shares which may become issuable by reason of an adjustment pursuant to Section 5.02 hereof. The Corporation shall not issue any shares of Common Stock if, after the issuance thereof, the number of authorized and unissued shares of Common Stock would then be insufficient to issue shares of Common Stock to holders of the then issued and outstanding Class B Common Stock if all of such holders were to exercise their rights of conversion hereunder; (ii) The Conversion Shares issuable upon any conversion of any shares of Class B Common Stock shall be deemed to have been issued to the person exercising such conversion privilege at the Exercise Time, and the person exercising such conversion privilege shall be deemed for all purposes to have become the record holder of such Common Stock shares at the Exercise Time. (iii) All Conversion Shares which may be issued upon any conversion of any shares of Class B Common Stock will, upon issuance, be fully paid and non-assessable and free from all taxes, liens and charges with respect to the issue thereof. (f) Notwithstanding the above, the shares of Class B Common Stock then outstanding shall be automatically converted into shares of Common Stock upon the conversion terms then in effect on July 23, 2002. 6 5.02 Adjustment Provisions. (a) Subdivision or Combination of Stock. In case at any time the Company shall in any manner subdivide its outstanding shares of Common Stock into a greater number of shares or combine such shares of Common Stock into a smaller number of shares, then the number of shares of Common Stock into which a share of Class B Common Stock may be converted shall be adjusted to reflect such subdivision or combination of shares of Common Stock. (b) Reorganization, Reclassification, Consolidation, Merger or Sale. If any reorganization or reclassification of the capital stock of the Company, or any consolidation or merger of the Company with another corporation, or the sale of all or substantially all of the Company's assets to another corporation shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities, or assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provisions shall be made whereby the holders of Class B Common Stock shall thereafter have the right to purchase and receive such shares of stock, securities, or assets as may be issued or payable with respect to or exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such stock immediately theretofore purchasable and receivable upon the conversion of Class B Common Stock had such reorganization, reclassification, consolidation, merger or sale not taken place, and in any such case appropriate provision shall be made with respect to the rights and interests of the holder of the Class B Common Stock to the end that the provisions hereof shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise of the rights represented hereby. In the event of a merger or consolidation of the Company with or into another corporation as a result of which a number of shares of common stock of the surviving corporation greater or lesser than the number of shares of Common Stock of the Company outstanding immediately prior to such merger or consolidation are issuable to holders of Common Stock of the Company, then the number of shares of Common Stock subject to issuance upon conversion of a share of Class B Common Stock shall be adjusted in the same manner as though there were a subdivision or combination of the outstanding shares of Common Stock of the Company. The Company shall not effect any such consolidation, merger, or sale, unless prior to the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation or merger of the corporation into or for the securities of which the previously outstanding stock of the Company shall be exchanged in connection with such consolidation or merger, or the corporation purchasing such assets, as the case may be, shall assume, by written instrument executed and mailed or delivered to the holder hereof at the last address of such holder appearing on the books of the company, the obligation to deliver to such holder such shares of stock, securities, or assets as, in accordance with the foregoing provisions, such holder may be entitled to purchase. The provisions of this Section 5.02(b) governing the substitution of another corporation for the Company shall similarly apply to successive instances in which 7 the corporation then deemed to be the Company hereunder shall either sell all or substantially all of its properties and assets to any other corporation, shall consolidate with or merge into any other corporation, or shall be the surviving corporation of the merger into it of any other corporation as a result of which the holders of any of its stock or other securities shall be deemed to have become the holders of, or shall become entitled to, the stock or other securities of any corporation other than the corporation at the time deemed to be the Company hereunder. (c) Notice of Adjustment. The Company shall give to the holder of the Class B Common Stock prompt written notice of every adjustment of the Conversion terms by first class mail, postage prepaid, addressed to the address of such holder as shown on the books of the Company, which notice shall state the adjustment, and shall set forth in reasonable detail the method of calculation and the facts upon which such calculation was based. D. The powers, preferences, rights, restrictions, and other matters relating to the Preferred Stock are as follows: 1. Dividends 1.01 Preferred Stock Dividends. The holders of shares of Preferred Stock shall be entitled to receive dividends at the rate of 13% per annum of the par value, payable out of funds legally available therefore. Such dividends shall be payable only when, as, and if declared by the Board of Directors. Such dividends shall accrue from day to day whether or not earned or declared. If declared, all dividends which shall have accrued shall be payable on the first day of March, June, September and December for so long as any shares of the Preferred Stock shall remain outstanding. If at any time the Corporation shall pay less than the total amount of dividends due on outstanding Preferred Stock at the time of the payment, such payment shall be distributed among the holders of the Preferred Stock so that an equal amount shall be paid with respect to each outstanding share of Preferred Stock. 1.02 Dividends Cumulative. Dividends on each share of the Preferred Stock shall be cumulative from the date of issuance of such share, whether or not at the time such dividend shall accrue or become due or at any other time there shall be profits, surplus or other funds of the Corporation legally available for the payment of dividends. Dividends shall accrue on each share of Preferred Stock from and including the date of issuance of such share to and including the date upon which the holder of such share shall have converted such share to Common stock in accordance with Section 4 hereof or such share shall have been purchased and redeemed by the Corporation. 1.03 Restriction on Common Stock Dividends. So long as any shares of Preferred Stock are outstanding, no dividends whatsoever shall be declared or paid upon, nor shall any distribution be made upon or with respect to, any shares of Common Stock. 2. Liquidation. 2.01 Rights Upon Liquidation. In the event of any voluntary or involuntary liquidation (whether complete or partial), dissolution or winding up of the Corporation, the holders of Preferred Stock shall be entitled to be paid out of the assets of the Corporation 8 available for distribution to its stockholders, whether from capital, surplus or earnings, an amount in cash per share equal to the Liquidating Value. No distribution shall be made on any Common Stock of the Corporation by reason of any voluntary or involuntary liquidation (whether complete or partial), dissolution or winding up of the Corporation unless each holder shall have received the full amount of the Liquidating Value with respect to all shares of Preferred Stock held by such holder. The consolidation or merger of the Corporation into or with any other entity or entities which results in the exchange of outstanding shares of the Corporation for securities or other consideration issued or paid or caused to be issued or paid by any such entity or affiliate thereof, and the sale or transfer by the Corporation of all or substantially all its assets, shall be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of the provisions of this Section 2.01. 2.02 Liquidating Value. The Liquidating Value with respect to each share of Preferred Stock outstanding shall be the sum of (i) the par value and (ii) all unpaid dividends accrued thereon to the date of final distribution. 2.03 Allocation of Liquidation Payments. If upon any dissolution, liquidation (whether complete or partial), or winding up of the Corporation, the assets of the Corporation available for distribution to the stockholders shall be insufficient to pay to the holders of outstanding Preferred Stock the full amount to which they shall be entitled pursuant to Section 2.01 hereof, each holder of Preferred Stock shall be entitled to receive an amount equal to the product derived by multiplying the total amount available for distribution by a fraction the numerator of which shall be the number of shares of Preferred Stock held by such person and the denominator of which the total number of shares of Preferred Stock then outstanding. 3. Voting Rights. 3.01 General Voting Rights. Except in circumstances in which the holders of Preferred Stock and Common Stock respectively shall be required to vote separately as a class, with respect to all matters upon which the Corporation's stockholders shall vote or be entitled to vote, the holders of all Preferred Stock and Common Stock shall vote together as a single class with each holder being entitled to one vote per share on all such matters. 3.02 Election of Directors. For so long as there shall be issued and outstanding more than 250,000 shares of Preferred Stock: (a) By-Laws; Number of Directors. Notwithstanding the provisions of Article Seventh hereof, the by-laws of the Corporation shall provide for the election of five directors and may not be amended, modified, altered or repealed except by the approval of the holders of two-thirds of the outstanding shares of Preferred Stock voting separately as a class. (b) Election of Directors. (i) Four of the five directors of the Corporation shall be elected by the holders of a majority of the outstanding shares of Preferred Stock voting separately as a class; 9 (ii) One director shall be elected by the holders of a majority of the outstanding shares of Common Stock and Preferred Stock voting together as a single class. If at any time after December 31, 1996, there shall be outstanding less than 250,000 shares of Preferred Stock, the foregoing provisions shall thereafter no longer be in effect and all directors of the Corporation thereafter shall be elected by the holders of the outstanding Common Stock and Preferred Stock voting together as a single class. 3.03 Voting in Certain Circumstances. The following actions shall require the approval of the holders of two-thirds of the outstanding shares of Common Stock and Preferred Stock voting together as a single class, by written consent, or in person or by proxy at a special meeting of stockholders called for such purpose: (i) Any amendment of the Certificate of Incorporation of the Corporation; (ii) Any merger or consolidation of the Corporation or any subsidiary of the Corporation with any other corporation; (iii) Authorization of or the taking of any action to dissolve, liquidate or wind up the business of the Corporation; or (iv) The sale, lease transfer or other disposition of all or any substantial part of the corporation's assets in any one or a series of related transactions. 3.04 Quorum. At any meeting of the stockholders of the Corporation, the presence in person or by proxy of a majority in number of the issued and outstanding shares of Common Stock and Preferred Stock, as a single class, shall be sufficient to constitute a quorum. 4. Conversion Rights. 4.01 Conversion Rights and Procedure. (a) Right of Conversion. Each holder of shares of Preferred Stock shall be entitled to exercise all or a portion of the conversion rights provided herein at any time or from time to time. (b) Rate of Conversion. Upon exercise of the right of conversion hereunder with respect to shares of Preferred Stock, the holder thereof shall be entitled to receive that number of shares of Common Stock determined by dividing the Conversion Value per share of a share of Preferred Stock multiplied by the number of shares of Preferred Stock converted and divided by the Conversion Price of the Common Stock. The "Conversion Value" per share of each share of Preferred Stock shall be the sum of the par value of such share and all accrued and unpaid dividends thereon as of the date of conversion. Subject to adjustment as provided in Section 4.02, the "Conversion Price" per 10 share of Common Stock shall be Thirty-five Cents ($.35) per share. The shares of Common Stock to be issued upon conversion of shares of Preferred Stock as provided herein are referred to herein as "Conversion Shares." (c) Method of Conversion. A holder of shares of Preferred Stock shall exercise such holder's conversion rights hereunder by (i) delivering or mailing to the Corporation, by certified or registered mail, return receipt requested, a written notice stating such holder's intention to exercise such rights and specifying the number of shares of Preferred Stock as to which the conversion right is exercised and (ii) accompanying such notice with a certificate or certificates representing such shares duly endorsed in blank or accompanied with a stock power duly endorsed in blank. The right of exercise shall be deemed to have been exercised on the date that such notice shall be delivered to the Corporation or mailed in accordance with this section ("Exercise Time"). (d) Delivery of Certificates. Certificates for Conversion Shares shall be delivered to the holder named therein within 15 days after the Exercise Time. Unless all of the Preferred Stock evidenced by the certificate delivered to the Corporation shall have been converted or redeemed, the Corporation shall within such 15 day period prepare a new certificate, substantially identical to that surrendered, representing the balance of the shares of Preferred Stock formerly represented by the certificate which shall not have been converted or redeemed and shall within the said 15 day period deliver such certificate to the person designated as the holder thereof. (e) The Corporation covenants and agrees that: (i) At all times during which any shares of Preferred Stock are issued and outstanding, the Corporation shall reserve and maintain a sufficient number of authorized and unissued shares of Common Stock sufficient to issue shares of Common Stock upon conversion of all of the then issued and outstanding Preferred Stock, including additional shares which may become issuable by reason of an adjustment in the conversion rate pursuant to Section 4.02 hereof. The Corporation shall not issue any shares of Common Stock if, after the issuance thereof, the number of authorized and unissued shares of Common Stock would then be insufficient to issue shares of Common Stock to holders of the then issued and outstanding Preferred Stock if all of such holders were to exercise their rights of conversion hereunder; (ii) The Conversion Shares issuable upon any conversion of any shares of Preferred Stock shall be deemed to have been issued to the person exercising such conversion privilege at the Exercise Time, and the person exercising such conversion privilege shall be deemed for all purposes to 11 have become the record holder of such Common Stock shares at the Exercise Time. (iii) All Conversion Shares which may be issued upon any conversion of any shares of Preferred Stock will, upon issuance, be fully paid and non-assessable and free from all taxes, liens and charges with respect to the issue thereof. 4.02 Anti-dilution Provisions. (a) Anti-dilution; Initial Conversion Price. In order to prevent dilution of the rights granted hereunder, the Conversion Price per share of Common Stock and the number of shares of Common Stock which a holder of Preferred Stock shall be entitled to receive upon exercise of the conversion rights herein shall be subject to adjustment from time to time in accordance with this Section 4.02. For purposes of this section the initial Conversion Price of each share of Common Stock shall be Thirty-five Cents ($.35). The Conversion Price per share of Common Stock shall be the initial Conversion Price, as adjusted from time to time pursuant to the provisions of this Section 4.02. (b) Adjustment of Conversion Price; Resulting Adjustment of Number of Shares of Common Stock Upon Conversion. The initial Conversion Price per share of Common Stock shall be subject to adjustment from time to time as hereinafter provided (such price or such price as last adjusted pursuant to the terms hereof, as the case may be, is herein called the "Conversion Price"). Upon each adjustment of the Conversion Price, the holder of shares of Preferred Stock shall be entitled to receive upon exercise of the conversion rights provided herein, at the Conversion Price resulting from such adjustment, the number of shares of Common Stock obtained by multiplying the number of shares of Preferred Stock converted by the Conversion Value per share of Preferred Stock and dividing the product thereof by the Conversion Price resulting from such adjustment. (c) Adjustment of Conversion Price Upon Issuance of Common Stock. If and whenever after the date hereof the Corporation shall issue or sell any shares of its common Stock for a consideration per share less than the Conversion Price in effect immediately prior to the time of such issue or sale (except if such issue or sale shall be made pursuant to the exercise of Executive options, as defined below), then, forthwith upon such issue or sale, the Conversion Price shall be reduced to the price, calculated to the nearest cent, determined by dividing (a) the sum of (i) the number of shares of Common Stock outstanding immediately prior to such issue or sale multiplied by the then existing Conversion Price and (ii) the consideration, if any, received by the Company upon such issue or sale, by (b) the total number of shares of Common Stock outstanding immediately after such issue or sale. No adjustment of the Conversion Price, however, shall be made in an amount less than $0.01 per share, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which together with all adjustment so carried forward shall amount to $0.01 per share or more. The provisions of this subparagraph (c) shall not apply with respect to Executive Options. "Executive Options" shall mean and include options to purchase Common Stock of the Corporation which may be granted from time to time by act of the 12 Board of Directors of the Corporation to executives or employees of the Corporation not exceeding, in the aggregate 500,000 shares. For the purposes of this paragraph (c), the following paragraphs 4.02 (d) to 4.02(m), inclusive, subject to the exception set forth above, shall also be applicable: (d) Issuance of Rights or Options. In case at any time the Company shall in any manner grant (whether directly or by assumption in a merger or otherwise) any rights to subscribe for or to purchase, or any options for the purchase of, Common Stock or any stock or securities convertible into or exchangeable for Common Stock, (such rights or options being herein called "Options" and such convertible or exchangeable stock or securities being herein called "Convertible Securities"), whether or not such Options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such Options or upon conversion or exchange of such Convertible Securities (determined as provided in the following sentence) shall be less than the Conversion Price in effect immediately prior to the time of granting such Options, then the total maximum number of shares of Common Stock issuable upon the exercise of all such Options or upon conversion or exchange of the total maximum amount of such Convertible Securities shall be deemed to have been issued for such price per share as of the date of the granting of such Options and thereafter shall be deemed to be outstanding. The price per share for which Common Stock is issuable, as referred to in the preceding sentence, shall be determined by dividing (a) the sum of (i) the total amount, if any, received or receivable by the Company as consideration for the granting of such Options, plus (ii) the minimum aggregate amount of additional consideration payable to the Company upon the exercise of all such Options, plus (iii) in the case of all such Options that relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue or sale of all such Convertible Securities [to the extent not counted under the immediately preceding clause (ii)] and upon the conversion or exchange of all such Convertible Securities into Common Stock, by (b) the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon the conversion or exchange of all such Convertible Securities. The consideration received or receivable by the Company shall in each case be determined in accordance with paragraph 4.02(h) below. Except as otherwise provided in paragraph 4.02(f) below, no adjustment of the Conversion Price shall be made upon the actual issue of such Common Stock or of such Convertible Securities upon exercise of such Options or upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities. (e) Issuance of Convertible Securities. In case the Company shall in any manner issue (whether directly or by assumption in a merger or otherwise) or sell any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange (determined as provided in the following sentence) shall be less than the Conversion Price in effect immediately prior to the time of such issue or sale, then the total maximum number of shares of Common Stock issuable upon conversion or exchange of all such convertible securities shall be deemed to have been issued for such price per share as of the date of the issue or sale of such Convertible Securities and 13 thereafter shall be deemed to be outstanding, provided that (a) except as otherwise provided in paragraph 4.02(f) below, no adjustment of the Conversion Price shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities, and (b) if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustment of the Conversion Price have been or are to be made pursuant to other provisions of this paragraph 4, no further adjustment of the Conversion Price shall be made by reason of such issue or sale. The price per share for which Common Stock is issuable, as referred to in the preceding sentence, shall be determined by dividing (i) the sum of (A) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus (B) the minimum aggregate amount of additional consideration, if any, payable upon the conversion or exchange of such Convertible Securities into Common Stock, by (ii) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of such Convertible Securities. The consideration received or receivable by the Company shall in each case be determined in accordance with paragraph 4.02(h) below. (f) Change in Option Price or Conversion Rate. Upon the happening of any of the following events, namely, if the purchase price provided for in any Option referred to in paragraph 4.02 (d) above and still outstanding, the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities referred to in paragraph 4.02(d) or 4.02(e) above and still outstanding, or the rate at which any such Convertible Securities are convertible into or exchangeable for Common Stock shall change at any time (other than under or by reason of provisions designed to protect against dilution), the Conversion Price in effect at the time of such event shall forthwith be readjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities provide for such changed purchase price, additional consideration, or conversion rate, as the case may be, at the time initially granted, issued, or sold. On the expiration of any Option referred to in paragraph 4.02(d) above prior to the exercise thereof or the termination of right to convert or exchange any Convertible Securities referred to in paragraph 4.02(d) or 4.02(e) above prior to the exercise of such right, the Conversion Price then in effect hereunder shall forthwith be increased to the Conversion Price which would have been in effect at the time of such expiration or termination had such Option or Convertible Securities, to the extent outstanding immediately prior to such expiration or termination, never been issued, and the Common Stock issuable thereunder shall no longer be deemed to be outstanding for the purposes of any calculation under paragraph 4.02(d) or 4.02(e) above. (g) Determination of Consideration Upon Dividend or Other Distribution. In case the Company shall declare a dividend or make any other distribution upon any stock of the Company payable in Common Stock, Options or Convertible Securities, any Common Stock, Options, or Convertible Securities, as the case may be, issuable in payment of such dividend or distribution shall be deemed to have been issued or sold without consideration. (h) Consideration for Stock. In case any shares of Common Stock, Options or Convertible Securities shall be issued or sold for cash, the consideration 14 received therefor shall be deemed to be the amount received by the Company therefor, without deduction therefrom of any expenses incurred or any reasonable underwriting commissions or concessions paid or allowed by the Company (or deducted from amounts received by the Company) in connection therewith. In case any shares of Common Stock, Options or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company shall be deemed to be the fair value of such consideration as determined reasonably and in good faith by the Board of Directors of the Company, without deduction of any expenses incurred or any reasonable underwriting commissions or concessions paid or allowed by the Company (or deducted from amounts received by the Company) in connection therewith. The amount of consideration deemed to be received by the Company pursuant to the foregoing provisions of this paragraph 4.02(h) upon any issuance and/or sale, pursuant to an established compensation plan of the Company, to directors, officers or employees of the Company or any subsidiary of the Company in connection with their employment of shares of Common Stock, Options or convertible Securities, shall be increased by the amount of any tax benefit realized by the Company as a result of such issuance and/or sale, the amount of such tax benefit being the amount by which the federal and/or state income or other tax liability of the Company shall be reduced by reason of any deduction or credit in respect of such issuance and/or sale. In case any Common Stock, Options or Convertible Securities shall be issued in connection with any merger or consolidation in which the Company is the surviving Corporation (other than any consolidation or merger in which the previously outstanding shares of Common Stock of the Company shall be changed into or exchanged for the stock or other securities of another corporation), the amount of consideration received therefor shall be deemed to be the fair value as determined reasonably in good faith by the Board of Directors of the Company of such portion of the assets and business of the non-surviving corporation as such Board may determine to be attributable to such shares of Common Stock, Options or convertible Securities, as the case may be. In the event of any consolidation or merger of the Company in which the Company is not the surviving corporation or in which the previously outstanding shares of Common Stock of the Company shall be changed into or exchanged for the stock or other securities of another corporation, or in the event of any sale or all or substantially all of the assets of the Company for stock or other securities of any corporation, the Company shall be deemed to have issued a number of shares of its Common Stock for all outstanding stock or securities of the other corporation of the nature received in exchange for the Company's Common Stock computed on the basis of the actual exchange ratio on which the transaction was predicated and for a consideration equal to the fair market value on the date of such transaction of all such stock or securities of the other corporation, and if such calculation results in adjustment of the Conversion Price, the determination of the number of shares of Common Stock issuable upon conversion of the Preferred Stock immediately prior to such merger, consolidation or sale, for purposes of paragraph 4.02(l) below, shall be made after giving effect to such adjustment of the Conversion Price. In case any shares of Common Stock shall be issued (or issuable) pursuant to any Options for the purchase of the same, the consideration deemed to be received (or receivable) therefor shall be deemed to be the total amount, if any, received (or total minimum amount receivable) by the Company as consideration for the granting of such Options, plus the aggregate amount of additional consideration paid (or minimum amount payable) to the Company upon the exercise of such Options. In case 15 any shares of Common Stock shall be issued (or issuable) upon the conversion or exchange of any Convertible Securities, the consideration deemed to be the total amount received (or receivable) therefore shall be deemed to be the total amount received (or total minimum amount receivable) by the Company as consideration for the granting of any Options to subscribe to or purchase such Convertible Securities, plus the total amount of additional consideration paid (or minimum amount payable) to the Company as consideration for issue or sale of such Convertible Securities, plus the total amount of additional consideration, if any, paid (or minimum amount payable) to the Company upon the conversion or exchange thereof. (i) Record Date. In case the Company shall take a record of the holders of its Common stock for the purpose of entitling them to receive a dividend or other distribution payable in Common Stock, Options or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution. (j) Treasury Shares. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock for the purposes of this Section 4.02. (k) Subdivision or Combination of Stock. In case at any time the Company shall in any manner subdivide its outstanding shares of Common Stock into a greater number of shares or combine such shares of Common Stock into a smaller number of shares, then the Conversion Price in effect immediately subsequent to such subdivision or combination shall be equal to the product of (a) the Conversion Price in effect immediately prior to such subdivision or combination multiplied by (b) a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately prior to such subdivision or combination and the denominator of which is the number of shares of Common Stock outstanding immediately thereafter. (l) Reorganization, Reclassification, Consolidation, Merger or Sale. If any reorganization or reclassification of the capital stock of the Company, or any consolidation or merger of the Company with another corporation, or the sale of all or substantially all of the Company's assets to another corporation shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities, or assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provisions shall be made whereby the holder thereof shall thereafter have the right to purchase and receive such shares of stock, securities, or assets as may be issued or payable with respect to or exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such stock immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby had such reorganization, reclassification, consolidation, merger or sale not taken place, and in any such case appropriate provision shall be made with respect to the rights and interests of the holder of the Preferred to the end that the provisions hereof (including, without limitation, provision 16 for adjustment of the Conversion Price and of the number of shares purchasable and receivable upon the Conversion of the Preferred) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise of the rights represented hereby (including an immediate adjustment, by reason of such consolidation or merger, of the Conversion Price to the value of the Common Stock reflected by terms of such consolidation or merger if the value so reflected is less than the Conversion Price in effect immediately prior to such consolidation or merger). In the event of a merger or consolidation of the Company with or into another corporation as a result of which a number of shares of common stock of the surviving corporation greater or lesser than the number of shares of Common Stock of the Company outstanding immediately prior to such merger or consolidation are issuable to holders of Common Stock of the Company, then the Conversion Price in effect immediately prior to such merger or consolidation shall be adjusted in the same manner as though there were a subdivision or combination of the outstanding shares of Common Stock of the Company. The Company shall not effect any such consolidation, merger, or sale, unless prior to the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation or merger of the corporation into or for the securities of which the previously outstanding stock of the Company shall be exchanged in connection with such consolidation or merger, or the corporation purchasing such assets, as the case may be, shall assume, by written instrument executed and mailed or delivered to the holder hereof at the last address of such holder appearing on the books of the company, the obligation to deliver to such holder such shares of stock, securities, or assets as, in accordance with the foregoing provisions, such holder may be entitled to purchase. If a purchase, tender, or exchange offer is made to and accepted by the holders of more than 50% of the outstanding shares of the Common Stock of the Company, the Company shall not effect any consolidation, merger, or sale with the Person having made such offer or with any Affiliate of such Person unless, prior to the consummation of such consolidation, merger, or sale, the holder of the Preferred shall have been given a reasonable opportunity to then elect to receive either the stock, securities, or assets then issuable upon the Conversion of the Preferred. As used herein, the term "Person" shall mean and include an individual, a partnership, a corporation, a trust, a joint venture, an unincorporated organization, and a government or any department or agency thereof, and an "Affiliate" of any Person shall mean any Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, such other Person. A Person shall be deemed to control a corporation if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such corporation, whether through the ownership of voting securities by contract, or otherwise. The provisions of this Section 4.02(l) governing the substitution of another corporation for the Company shall similarly apply to successive instances in which the corporation then deemed to be the Company hereunder shall either sell all or substantially all of its properties and assets to any other corporation, shall consolidate with or merge into any other corporation, or shall be the surviving corporation of the merger into it of any other corporation as a result of which the holders of any of its stock or other securities shall be deemed to have become the holders of, or shall become entitled to, the stock or 17 other securities of any corporation other than the corporation at the time deemed to be the Company hereunder. (m) Notice of Adjustment. The Company shall give to the holder of the Preferred Stock prompt written notice of every adjustment of the Conversion price by first class mail, postage prepaid, addressed to the address of such holder as shown on the books of the Company, which notice shall state the Conversion Price resulting from such adjustment and the increase or decrease, if any, in the number of shares purchasable at such price upon the conversion of the Preferred Stock, and shall set forth in reasonable detail the method of calculation and the facts upon which such calculation was based. 5. Redemption. 5.01 Right to Redeem. From and after January 1, 2000, the Corporation shall have the right to redeem all or any part of the then outstanding shares of Preferred Stock at any time or from time to time expressed by resolution of its Board of Directors, in the manner prescribed in this Section 5, provided that in (i) any single redemption, the Corporation shall redeem not less than 100,000 shares of Preferred Stock and (ii) the Corporation shall not be entitled to redeem shares of Preferred Stock unless at or prior to the Redemption Date the Corporation shall have paid to all holders of Preferred Stock all dividends on the Preferred Stock accrued to the last day of the calendar quarter immediately preceding the Redemption Date. 5.02 Redemption Notice. Before making any redemption of Preferred Stock hereunder, the Corporation shall mail by certified or registered mail, return receipt requested, to each record holder of any Preferred Stock at the address shown on the Corporation's records, a written notice ('Redemption Notice") stating: (i) the number of shares of Preferred Stock held by record by such holder which the Corporation proposes to redeem, (ii) the date (herein called the "Redemption Date") on which the Corporation proposes to pay the Redemption Price for the shares to be redeemed, (iii) the Redemption Price which is to be paid for each share repurchased; and (iv) the place at which the shares to be redeemed may be surrendered in exchange for the Redemption Price for such shares. Upon the mailing of a Redemption Notice, subject to the right of the holder to convert the shares to be redeemed to Common Stock as provided herein, the Corporation shall have the right, and shall become obligated, to redeem the Preferred Stock specified in such notice on the date specified in such notice as the Redemption Date. Each Redemption Notice shall be mailed at least 35 days before the Redemption Date, provided that if the Corporation fails to pay the Redemption Price on such date, the Redemption Date shall be the date on which the Corporation actually pays the Redemption Price. 5.03 Allocation of Redeemed Shares. With respect to any redemption, the Corporation shall designate, by resolution of its Board of Directors, the aggregate number of shares of Preferred Stock to be redeemed. The number of shares of Preferred Stock to be redeemed from each holder thereof in any redemption shall be determined by multiplying the aggregate number of shares of Preferred Stock to be redeemed by a fraction, the numerator of which shall be the total number of shares of Preferred Stock held by such holder and the denominator of which shall be the total number of shares of Preferred Stock then outstanding. 18 5.04 Right of Holder to Convert. Notwithstanding the provision of this Section 5, a holder of shares of Preferred Stock shall have the right to convert the shares of Preferred Stock as to which a Redemption Notice shall have been give to such holder by converting such shares to Common Stock at any time prior to the Redemption Date in accordance with the provisions of Section 4 hereof. Any conversion of shares of Preferred Stock made by a holder after the date of a Redemption Notice and prior to the Redemption Date shall be deemed to be conversion of the shares to be redeemed pursuant to the Redemption Notice and, thereafter, (i) with respect to such shares, the Corporation shall not have the right or obligation to redeem such shares and (ii) the aggregate number of shares to be redeemed by the Corporation shall be reduced by the number of shares converted to Common Stock by such holder. 5.05 Redemption Price. (a) For each share of Preferred Stock which shall be redeemed by the Corporation at any time, the Corporation shall be obligated to pay to the holder of such share an amount (herein called the "Redemption Price") equal to the par value of such share. The Corporation shall be obligated to pay on any Redemption Date both the Redemption Price for each share redeemed and all dividends which shall have accrued (computed on a daily basis) on each share redeemed to and including the Redemption Date and which shall not previously have been paid. Such payments which the Corporation shall be obligated to make on any redemption Date shall be deemed to become "due" for all purposes of this Section regardless of whether the Corporation shall be able or legally permitted to make such payments on the Redemption Date. (b) Each holder of Preferred Stock shall be entitled to receive on or at any time after the Redemption Date the full Redemption Price, plus accrued dividends, for each share of Preferred Stock held by such holder which the Corporation shall be obligated to redeem on such Redemption Date upon surrender by such holder at the Corporation's principal office of the certificate representing such share duly endorsed in blank or accompanied by appropriate form of assignment duly endorsed in blank. After payment by the Corporation of the full Redemption price for any share of Preferred Stock redeemed, plus accrued dividends thereon, all rights of the holder of such share shall (whether or note the certificate representing such share shall have been surrendered for cancellation) cease and terminate with respect to such share. 6. Required Conversion. 6.01 Public Offering. Notwithstanding anything contained herein to the contrary, upon the Closing by the Company of a public offering of its securities for gross proceeds equal to or greater than $5,000,000 all shares of Preferred Stock then outstanding shall, without further act on anyone's part, be converted into an aggregate of 1,098,901 shares of Class B Common Stock effective upon such Closing, and stock certificates formerly representing such shares of Preferred Stock shall thereafter be deemed to represent such number of shares of Class B Common Stock. 6.02 Effect of Conversion. Upon the conversion of all shares of Preferred Stock to shares of Class B Common Stock, any additional shares of Preferred Stock issued shall not be 19 subject to the foregoing provisions, but may be issued from time to time with such designations, preferences, conversion rights, cumulative, relative, participating, option or other rights, qualifications, limitations or restrictions thereof as shall be stated and expressed in the resolution or resolutions providing for the issuance of such Preferred Stock adopted by the Board of Directors pursuant to the authority in this paragraph given. FIFTH: The books of the Corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the board of directors or in the by-laws of the Corporation. SIXTH: Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation as the case may be, and also on this Corporation. SEVENTH: For the management of the business and for the conduct of the affairs of the Corporation and in further definition, limitation and regulation of the powers of the Corporation and of its directors and stockholders, it is further provided: (a) The number of directors of the Corporation shall be as specified in the by-laws of the Corporation, but such number may from time to time be increased or decreased in such manner as shall be provided in the by-laws of the Corporation. The number of directors shall not be less than the minimum prescribed by law. The election of directors need not be by ballot. Directors need not be stockholders. (b) In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the board of directors is expressly authorized and empowered to make, alter, amend and repeal by-laws, subject to the power of the stockholders to alter or repeal by-laws made by the board of directors. 20 (c) Any director or any officers elected or appointed by the stockholders or by the board of directors may be removed at any time in such manner as shall be provided in the by-laws of the Corporation. (d) In the absence of fraud, no contract or other transaction between the Corporation and any other corporation and no act of the Corporation, shall in any way be affected or invalidated by the fact that any of the directors of the Corporation are peculiarly or otherwise interested in, or are directors or officers of, such other corporation; and in the absence of fraud, any director, individually, or any firm of which any director may be a member, may be a party to, or may be peculiarly or otherwise interested in, any contract or transaction of the Corporation, provided in any case, that the fact that he or such firm is so interested shall be disclosed or shall have been known to the Board of Directors or the majority thereof; and any director of the Corporation, who is also a director or officer of any such other corporation, or who is also interested may be counted in determining the existence of quorum at any seating of the Board of Directors of the Corporation which shall authorize any such contract, act or transaction, may vote thereat to authorize any such contract, act or transaction, with like force and effect as if he were not such director or officer of such other corporation, or not so interested. EIGHTH: (a) The Corporation shall have power to indemnify any person who was or is party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by the reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any criminal action or proceedings, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (b) The Corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, 21 employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense of and in a manner he reasonably believes to be in or not opposed to the best interests of the Corporation and except that no indemnification shall be made in respect of any claim, issue or matter he reasonably believes to be in or not opposed to the best interest of the Corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of this duty to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. (c) No director of the Corporation shall be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability for (1) any breach of the director's duty of loyalty to the Corporation or its stockholders; (2) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (3) acts under Section 174 of the Delaware General Corporation law; or (4) any transaction from which the director derived an improper personal benefit. (d) Expenses incurred in defending a civil or criminal action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized by the board of directors in the specific case upon receipt of an undertaking by or on behalf of the director or officer, to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the Corporation as authorized in this Article Eighth. Such expenses incurred by other employees or agents may be so paid upon such terms and conditions, if any, as the board of directors deems appropriate. (e) Any indemnification under paragraphs (a), (b) and (c) (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in paragraphs (a), (b) and (c). Such determination shall be made (1) by the board of directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2), if such a quorum is not obtainable, or, even if obtainable and a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. (f) The indemnification provided by this Article Eighth shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any by-laws, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee 22 or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (g) The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article Eighth. (h) For the purpose of this Article Eighth, reference to "the Corporation" shall include all constituent corporations absorbed in a consolidation or merger as well as the resulting or surviving corporation so that any person who is or was a director, officer, employee or agent of such a constituent corporation or is or was serving at the request of such constituent corporation, partnership, joint venture, trust or other enterprise shall stand in the same position under the provisions of this section with respect to the resulting or surviving corporation in the same capacity. NINTH: From time to time any of the provision of this Restated Certificate of Incorporation may be amended, altered or repealed, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted in the manner and at the time prescribed by said laws, and all rights at any time conferred upon the stockholders of the Corporation by this Certificate are granted subject to the provisions of this Article Ninth. 23 IN WITNESS WHEREOF, CTI Industries Corporation has caused the Certificate to be signed by Howard W. Schwan, being the President of the Corporation this 22nd day of July, 1997. By: /s/ Howard W. Schwan -------------------- Howard W. Schwan, President ATTEST: /s/ Stephen M. Merrick ------------------- Secretary 24 STATE OF ILLINOIS ) ) ss COUNT OF COOK ) BE IT REMEMBERED, that personally appeared before me, the undersigned, a Notary Public authorized to take acknowledgment of deed by the laws of the place where the foregoing Restated Certificate of Incorporation was signed Howard W. Schwan, the President who signed the foregoing Restated Certificate of Incorporation, known to me personally to be such, and I having make known to him the contents of said Restated Certificate of Incorporation, he acknowledged that the same to be his act and deed, and that the facts therein stated are truly set forth. GIVEN UNDER my hand and seal this 22nd day of July, 1997. /s/ Cheryl J. Stevens ------------------ Notary Public 25 EX-3.(II) 4 AMENDED AND RESTATED BY-LAWS EXHIBIT 3.2 AMENDED AND RESTATED BY - LAWS OF CTI INDUSTRIES CORPORATION ARTICLE I - OFFICES SECTION 1. REGISTERED OFFICE. The registered office shall be established and maintained at 1209 Orange Street, City of Wilmington, County of New Castle in the State of Delaware. Section 2. OTHER OFFICES. The corporation may have other offices, either within or without the State of Delaware, at such place or places as the Board of Directors may from time to time appoint or the business of corporation may require. ARTICLE II - MEETING OF STOCKHOLDERS SECTION 1. ANNUAL MEETINGS. Annual meetings of stockholders for the election of directors and for such other business as may be stated in the notice of meeting, shall be held at such place, either within or without the State of Delaware, and at such time and date as the Board of Directors, by resolution, shall determine and as set forth in the notice of the meeting. In the event the Board of Directors fails to so determine the time, date and place of meeting, the annual meeting of stockholders shall be held at the registered office of the corporation in Delaware on the 2nd Tuesday in April at 10:00 a.m. If the date of the annual meeting shall fall upon a legal holiday, the meeting shall be held on the next succeeding business day. At each annual meeting, the stockholders entitled to vote shall elect a Board of Directors and may transact such other corporate business as shall be stated in the notice of the meeting. SECTION 2. OTHER MEETINGS. Meetings of stockholders for any purpose other than the election of directors may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting. SECTION 3. VOTING. Each Stockholder entitled to vote in accordance with the terms and provisions of the Certificate of Incorporation and these By-Laws shall be entitled to one vote, in person or by proxy, for each share of stock entitled to vote held 1 by such stockholder, but no proxy shall be voted after three years from its date unless such proxy provides for a longer period. Upon the demand of any stockholder, the vote for directors and upon any question before the meeting shall be by ballot. All elections for directors shall be decided by plurality vote; all other questions shall be decided by majority vote except as otherwise provided by the Certificate of Incorporation or the laws of the State of Delaware. SECTION 4. FIXING OF RECORD DATE. For the purpose of determining the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or to receive payment of any dividend, or other distribution or allotment of any rights, or to exercise any rights in respect of any change, conversion or exchange of shares or for the purpose of any other lawful action, the Board of Directors of the corporation may fix in advance a record date which shall not be more than sixty days and, not less than ten days, or in the case of a merger or consolidation, not less than twenty days, before the date of such meeting. If no record date is fixed, the record date for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders shall be the date on which notice of the meeting is mailed, and the record date for the determination of shareholders for any other purpose shall be the date on which the Board of Directors adopts the resolution relating thereto. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting. SECTION 5. QUORUM. Except as otherwise required by law, by the Certificate of Incorporation or by these By-Laws, the presence, in person or by proxy, of stockholders holding a majority of the stock of the corporation entitled to vote shall constitute a quorum at all meetings of the stockholders. In case a quorum shall not be present at any meeting, a majority in interest of the stockholders entitled to vote thereat, present in person or by proxy, shall have power to adjourn the meeting from time to time for a period not to exceed thirty days from the originally scheduled date of the meeting, without notice other than announcement at the meeting, until the requisite amount of stock entitled to vote shall be present. At any such adjourned meeting at which the requisite amount of stock entitled to vote shall be represented, any business may be transacted which might have been transacted at the meeting as originally noticed; but only those stockholders entitled to vote at the meeting as originally noticed shall be entitled to vote at any adjournment or adjournments thereof. SECTION 6. SPECIAL MEETINGS. Special meetings of the stockholders, for any purpose, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called by 2 the president and shall be called by the president or secretary at a request in writing of a majority of the directors or stockholders entitled to vote. Such request shall state the purpose of the proposed meeting. SECTION 7. NOTICE OF MEETINGS. Written notice, stating the place, date and time of the meeting, and the general nature of the business to be considered, shall be given to each stockholder entitled to vote thereat at this address as it appears on the records of the corporation, not less than ten or more than sixty days before the date of the meeting, either personally or by mail, by or at the direction of the president, or the secretary, or the officer or persons calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, addressed to the shareholder at this address as it appears on the records of the corporation, with postage thereon prepaid. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting of the time and place thereof are announced at the meeting at which the adjournment is taken. Whenever any notice whatever is required to be given under the provision of any law, or under the provisions of the Certificate of Incorporation of the Corporation or these By-Laws, a waiver thereof in writing signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed proper notice. SECTION 8. BUSINESS TRANSACTED. No business other than that stated in the notice shall be transacted at any meeting without the unanimous consent of all the stockholders entitled to vote thereat. ARTICLE III - DIRECTORS SECTION 1. NUMBER AND TERM. The number of directors shall be five (5). The directors shall be elected at the annual meeting of the stockholders and each director shall be elected to serve until his successor shall be elected and shall qualify. Each director shall be elected for a term of one year and until his successor is elected and qualified, except as otherwise provided herein or required by law. SECTION 2. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at such place or places, on such date or dates, and at such time or times as shall have been established by the Board of Directors and publicized among all directors. A notice of such regular meeting shall not be required. 3 SECTION 3. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by the President or any two directors and shall be held at such place, on such date and at such time as they or he shall fix. Notice of the place, date and time of each such special meeting shall be given each director by whom it is not waived, by mailing written notice not less than three days before the meeting or, by telegraphing the same not less than 18 hours before the meeting, to each director at his business address. If mailed, such notice shall be deemed to be delivered, when deposited in the United States mail so addressed, with postage thereon prepaid. If notice be given by telegram, such notice shall be deemed to be delivered when the telegram is delivered to the telegram company. The attendance of a director at any meeting shall constitute a waive of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of any regular or special meeting of the Board of Directors need be specified in the notice of waiver of notice of such meeting. SECTION 4. QUORUM. At any meeting of the Board of Directors not less than four shall constitute a quorum for all purposes. If a quorum shall fail to attend any meeting, a majority of these present may adjourn the meeting to another place, date or time without further notice or waiver thereof. SECTION 5. PARTICIPATION AND MEETINGS BY CONFERENCE TELEPHONE. Members of the Board of Directors, or of any committee thereof, may participate in a meeting of such board or committee by means of conference telephone or similar communications equipment that enable all persons participating in a meeting to hear each other. Such participation shall constitute presence in person at such meeting for all purposes. SECTION 6. CONDUCT OF BUSINESS. The act of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, except as otherwise provided herein or provided by law; provided, however, that the following actions shall require the affirmative vote or consent of four directors (i) any amendment to these by-laws, (ii) any change in the person appointed as, or the compensation, authority or position of, the Chief Executive Officer or the President, (iii) the issuance by the Corporation of any securities or (iv) the approval or recommendation to shareholders of any amendment to the Certificate of Incorporation of the Corporation. At any meeting of the Board of Directors, business shall be transacted in such order and manner it as the board may, from time to time determine. SECTION 7. RESIGNATIONS. Any director, member of a committee or other officer may resign at any time. Such 4 resignation shall be made in writing, and shall take effect at the time specified therein and if no time be specified, at the time of its receipt by the President or Secretary. The acceptance of a resignation shall not be necessary to make it effective. SECTION 8. VACANCIES. If the office of any director, member of a committee or other officer becomes vacant, the remaining directors in office though less than a quorum by a majority vote, may appoint any qualified person to fill such vacancy, who shall hold office for the unexpired term and until his successor shall be duly chosen. SECTION 9. REMOVAL. Any director or directors may be removed either for or without cause at any time by the affirmative vote of the holders of a majority of all the shares of stock outstanding and entitled to vote, at a special meeting of the stockholders called for this purpose, or by written consent as provided by law, and the vacancies thus created may be filled, at the meeting held for the purpose of removal, or by written consent as provided by law, by the affirmative vote of a majority in interest of the stockholders entitled to vote; provided, however, that any director elected by the vote of holder of Preferred Stock may be removed by the affirmative vote of the holders of two-thirds of the outstanding Preferred Stock and any vacancy created by the removal of such a director may be filled by the affirmative vote of the holders of the outstanding Preferred Stock. SECTION 10. INCREASE OF NUMBER. The number of directors may be increased or decreased by amendment of these By-laws by the affirmative vote of a majority of the directors, though less than a quorum, or, by the affirmative vote of a majority in interest of the stockholders, at the annual meeting or at a special meeting called for that purpose, and by like vote the additional directors may be chosen at such meeting to hold office until the next annual election and until their successors are elected and qualify. SECTION 11. COMPENSATION. Directors shall not receive any stated salary for their services as directors or as member of committees, but by resolution of the board a fixed fee and expenses of attendance may be allowed for attendance at each meeting. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity as an officer, agent or otherwise, and receiving compensation therefor. SECTION 12. ACTION WITHOUT MEETING. Any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting, if prior to such action a written consent thereto is 5 signed by all members of the board, or of such committee as the case may be, and such written consent is filed with the minutes of proceedings of the board or committee. SECTION 13. PRESUMPTION OF ASSENT. A director of the corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be conclusively presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. ARTICLE IV - OFFICERS SECTION 1. OFFICERS. The officers of the corporation shall consist of a Chief Executive Officer, a President, a Treasurer, and a Secretary, and shall be elected by the Board of Directors and shall hold office until their successors are elected and qualified. In addition, the Board of Directors may elect one or more Vice-Presidents and such Assistant Secretaries and Assistant Treasurers at it may deem proper. None of the officers of the corporation need be directors. The officers shall be elected at the first meeting of the Board of Directors after each annual meeting. More than two offices may be held by the same person. SECTION 2. OTHER OFFICERS AND AGENTS. The Board of Directors may appoint such officers and agents as it may deem advisable, who shall hold their officers for such terms and shall exercise such power and perform such duties as shall be determined from time to time by the Board of Directors. SECTION 3. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall be the chief execute officer of the corporation and shall have the general powers and duties of supervision and management usually vested in the chief executive officer of a corporation. Except as limited or authorized in some other manner by the Board of Directors, he shall have power to bind the corporation and to sign all contracts and other instruments of the corporation. He shall have general supervision and direction of all of the officers and agents of the corporation and, except as provided by law, in these By-Laws or by resolution of the Board of Directors, he shall appoint and remove, employ and discharge, prescribe the duties and fix the compensation of all employees or agents of the Corporation. 6 SECTION 4. PRESIDENT. The President shall be the chief operating officer of the corporation and shall have the general powers and duties to perform or supervise all matters covering the operation of the corporation's business and shall have such other powers and duties as may be designated by the Board of Directors from time to time. Except as limited by the Board of Directors, he shall have authority and power to bind the Corporation and sign contracts and other instruments for the Corporation. He shall preside over the day to day activities of the corporation and shall have general supervision, direction and control for the business of the corporation. In the absence or disability of the Chief Executive Officer, he shall perform the duties and have the powers of the Chief Executive Officer. SECTION 5. VICE-PRESIDENT. Each Vice-President shall have such powers and shall perform such duties as shall be assigned to him by the directors. SECTION 6. TREASURER. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate account of receipts and disbursements in books belonging to the corporation. He shall deposit all moneys and other valuables in the name and to the credit of the corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the corporation as may be ordered by the Board of Directors, or the President, taking proper vouchers for such disbursements. He shall render to the President and Board of Directors at the regular meetings of the Board of Directors, or whenever they may request it, an account of al his transactions as Treasurer and of the financial condition of the corporation. If required by the Board of Directors, he shall give the corporation a bond for the faithful discharge of his duties in such amount and with such surety as the board shall prescribe. SECTION 7. SECRETARY. The Secretary shall give, or cause to be given notice of all meetings of stockholders and directors, and all other notices required by law or by these ByLaws, and in case of his absence or refusal or neglect so to do, any such notice may be given by any person thereunto directed by the President, or by the directors, or stockholders, upon whose requisition the meeting is called as provided in these By-laws. He shall record all the proceedings of the meetings of the corporation and of directors in a book to be kept for that purpose. He shall keep in safe custody the seal of the corporation, and when authorized by the Board of Directors, affix the same to any instrument requiring it, and when so affixed, it shall be attested by his signature or by the signature of any assistant secretary. 7 SECTION 8. ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. Assistant Treasurers and Assistant Secretaries, if any, shall be elected and shall have such powers and shall perform such duties as shall be assigned to them, respectively, by the directors. SECTION 9. SALARIES. The salaries of the officers shall be fixed from time to time by the Board of Directors and no officer shall be prevented form receiving such salary by reason of the fact that he is also a director of the corporation. ARTICLE V. SECTION 1. CERTIFICATES OF STOCK. Every holder of stock in the corporation shall be entitled to have a certificate, signed by, or in the name of the corporation by, the Board of Directors, or the president or a vice-president and the treasurer or an assistant treasurer, or the secretary of the corporation, certifying the number of shares owned by him in the corporation. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations, or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock provided that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Where a certificate is countersigned (1) by a transfer agent other than the corporation or its employee, or (2) by a registrar other than the corporation or its employee, the signatures of such officers may be facsimiles. SECTION 2. LOST CERTIFICATES. New certificates of stock may be issued in the place of any certificate therefore issued by the corporation, alleged to have been lost or destroyed, and the directors may, in their discretion, require the owner of the lost or destroyed certificate or his legal representatives, to give the corporation a bond, in such sum as they may direct, not exceeding double the value of the stock, to indemnify the corporation against it on account of the alleged loss of any such new certificate. 8 SECTION 3. TRANSFER OF SHARES. The shares of stock of the corporation shall be transferable only upon its books by the holders thereof in person or by their duly authorized attorneys or legal representatives, and upon such transfer the old certificates shall be surrendered to the corporation by the delivery thereof to the person in charge of the stock and transfer books and ledgers, or to such other persons as the directors may designate, by who they shall be canceled, and new certificates shall thereupon be issued. A record shall be made of such transfer and whenever a transfer shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of the transfer. SECTION 4. DIVIDENDS. Subject to the provisions of the Certificate of Incorporation the Board of Directors may, out of funds legally available therefore at any regular or special meeting, declare dividends upon the capital stock of the corporation as and when they deem expedient. Before declaring any dividends there may be set apart out of any funds of the corporation available for dividends, such sum or sums as the directors from time to time in their discretion deem proper working capital or as a reserve fund to meet contingencies or for equalizing dividends or for such other purposes as the directors shall deem conductive to the interests of the corporation. SECTION 5. SEAL. The corporate seal shall be circular in form and shall contain the name of the corporation, the year of its creation and the words "CORPORATE SEAL DELAWARE." Said seal may be used by causing it or facsimile thereof to be impressed or affixed or otherwise reproduced. ARTICLE VI - FISCAL YEAR SECTION 1. FISCAL YEAR. The fiscal year of the corporation shall be determined by resolution of the Board of Directors. ARTICLE VII - NOTICES SECTION 1. NOTICES. Whenever notice is required to be give to any stockholder, directors, officer or agent, such requirement shall not be construed to mean personal notice. Such notice may in any instance be effectively give by depositing a writing in a post office or letter box in a prepaid, sealed wrapper, or by dispatching a prepaid telegram, addressed to such stockholder, directors, officer or agent at his or her address as the same appears on the books of the corporation. The time when such notice is dispatch shall be the time of the given of the notice. 9 SECTION 2. WAIVERS. A written waiver of any notice, signed by a stockholder, director, officer, or agent, whether before or after the time of the event for which notice is to be given, shall be deemed equivalent to the notice required to be given to such stockholder, directors, officer or agent. Neither the business nor the purpose of any meeting need to be specified in such a waiver. ARTICLE VIII - AMENDMENTS Subject to the provisions of the Restated Certificate of Incorporation under which the power to alter, amend or modify these By-Laws is restricted to the holders of Preferred Stock, these By-Laws may be altered and repealed and By-Laws may be made at any annual meeting of the stockholders or at any special meeting thereof if notice thereof is contained in the notice of such special meeting by the affirmative vote of a majority of the stock issued and outstanding or entitled to vote thereat, or by the regular meeting of the Board of Directors, at any regular meeting of the Board of Directors, or at any special meeting of the Board of Directors, if notice thereof is contained in the notice of such special meeting. ARTICLE IX INDEMNIFICATION OF OFFICERS DIRECTORS, EMPLOYEES AND AGENTS SECTION 1. The corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed 10 to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. SECTION 2. The corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that his is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation, unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnify for such expenses which the Court of Chancery or such other court shall deem proper. SECTION 3. No director of the corporation shall be liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability for (a) any breach of the director's duty of loyalty to the corporation or its stockholders; (b) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (c) acts under Section 174 of the Delaware General Corporation Law; or (d) any transaction from which the director derived an improper personal benefit. SECTION 4. Expenses incurred in defending a civil or criminal action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors in the specific case upon receipt of an undertaking by or on behalf of the director or officer, to repay such amount unless it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in this Article Ninth. Such expenses (including attorneys' fees) incurred by other employees or agents may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. SECTION 5. Any indemnification under Section 5 (1), (2) and (3) (unless ordered by a Court) shall be made by the corporation only as authorized in the specific case upon a 11 determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Sections (1), (2) and (3). Such determination shall be made (a) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (b) if such a quorum is not obtainable, or, even if obtainable and a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (c) by the stockholders. SECTION 6. The indemnification provided by this Article Ninth shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any by-laws, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. SECTION 7. The corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article Ninth. SECTION 8. For the purposes of this Article Ninth, reference to "the corporation" shall include all constituent corporations absorbed in a consolidation or merger as well as the resulting or surviving corporation so that any person who is or was a director, officer, employee or agent of such a constituent corporation or is or was serving at the request of such constituent corporation, partnership, joint venture, trust or other enterprise shall stand in the same position under the provisions of this section with respect to the resulting or surviving corporation in the same capacity. EX-4 5 UNDERWRITER'S WARRANT AGREEMENT EXHIBIT 4.2 CTI IINDUSTRIES CORPORATION AND JOSEPH STEVENS & COMPANY, INC. ----------------- UNDERWRITER'S WARRANT AGREEMENT ________, 1997 UNDERWRITER'S WARRANT AGREEMENT dated as of _______ ____, 1997 by and between CTI INDUSTRIES CORPORATION, a Delaware corporation (the "Company"), and JOSEPH STEVENS & COMPANY, INC. ("Joseph Stevens") (Joseph Stevens is hereinafter referred to variously as the "Holder" or the "Underwriter"). W I T N E S S E T H: WHEREAS, the Company proposes to issue to the Underwriter or its designee(s) warrants ("Warrants") to purchase up to 133,333 Units (as defined in Section 1 hereof, each Unit consisting of one (1) share of common stock, $____ par value per share, of the Company ("Common Stock") and one (1) redeemable Common Stock purchase warrant, each to purchase one additional share of Common Stock ("Redeemable Warrants")); and WHEREAS, the Underwriter has agreed pursuant to the underwriting agreement (the "Underwriting Agreement") dated as of the date hereof by and between the Underwriter and the Company to act as the underwriter in connection with the proposed public offering of 1,333,333 Units at a public offering price of $____ per Unit; and WHEREAS, the Warrants to be issued pursuant to this Agreement will be issued on the Closing Date (as such term is defined in the Underwriting Agreement) by the Company to the Underwriter in consideration for, and as part of the Underwriter's compensation in connection with the Underwriting Agreement; NOW, THEREFORE, in consideration of the premises, the payment by the Underwriter to the Company of thirteen dollars and thirty-three cents ($13.33) the agreements herein set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Grant. The Underwriter (or its designee(s)) is hereby granted the right to purchase, at any time from __________, 1998 [one year from the date hereof] until 5:00 p.m., New York time, on __________, 2002, [5 years from the date hereof] up to 133,333 Units at an initial exercise price (subject to adjustment as provided in Section 8 hereof) of $__________ [120% of the IPO price per Unit] per Unit subject to the terms and conditions of this Agreement. A "Unit" consists of one (1) share of Common Stock and one (1) Redeemable Warrant. Each Redeemable Warrant is exercisable to purchase one additional share of Common Stock at an initial exercise price of $__________ [150% of the IPO price per Unit] per share, commencing on the date of issuance (the "Initial Exercise Date") and ending, at 5:00 p.m. New York time on __________, 2002 [60 months from the date hereof] (the "Redeemable Warrant Expiration Date") at which time the Redeemable Warrants shall expire. Except as set forth herein, the Units issuable upon exercise of the Warrants are in all respects identical to the Units being purchased by the Underwriters for resale to the public pursuant to the terms and provisions of the Underwriting Agreement. 2. Warrant Certificates. The warrant certificates (the "Warrant Certificates") delivered and to be delivered pursuant to this Agreement shall be in the form set forth in Exhibit A attached hereto and made a part hereof, with such appropriate insertions, omissions, substitutions and other variations as required or permitted by this Agreement. 3. Exercise of Warrant. 3.1 Method of Exercise. The Warrants are initially exercisable at an initial exercise price per Unit set forth in Section 6 hereof payable by certified or official bank check in New York Clearing House funds, subject to adjustment as provided in Section 8 hereof. Upon surrender of a Warrant Certificate, together with the annexed Form of Election to 2 Purchase duly executed and payment of the Exercise Price (as hereinafter defined) for the Units purchased at the Company's principal offices in Barrington, Illinois, (located at 22160 North Pepper Road, Barrington, Illinois 60010) the registered holder of a Warrant Certificate ("Holder" or "Holders") shall be entitled to receive a certificate or certificates for the shares of Common Stock so purchased and a certificate or certificates for the Redeemable Warrants so purchased. The purchase rights represented by each Warrant Certificate are exercisable at the option of the Holder thereof, in whole or in part (but not as to fractional shares of the Common Stock and Redeemable Warrants underlying the Warrants). In the event the Company redeems all of the outstanding Redeemable Warrants, the Redeemable Warrants underlying the Warrants may only be exercised if such exercise is simultaneous with the exercise of the Warrants. Warrants may be exercised to purchase all or part of the Units represented thereby. In the case of the purchase of less than all the Units purchasable under any Warrant Certificate, the Company shall cancel said Warrant Certificate upon the surrender thereof and shall execute and deliver a new Warrant Certificate of like tenor for the balance of the Units purchasable thereunder. 3.2 Exercise by Surrender of Warrant. In addition to the method of payment set forth in Section 3.1 and in lieu of any cash payment required thereunder, the Holder(s) of the Warrants shall have the right at any time and from time to time to exercise the Warrants in full or in part by surrendering the Warrant Certificate in the manner specified in Section 3.1 in exchange for the number of Units equal to the product of (x) the number of Units as to which the Warrants are being exercised, multiplied by (y) a fraction, the numerator of which is the Market Price (as defined in Section 3.3 hereof) of the Units minus the Exercise Price of the Units and the denominator of which is the Market Price per Unit. Solely for the purposes of 3 this Section 3.2, Market Price shall be calculated either (i) on the date on which the form of election attached hereto is deemed to have been sent to the Company pursuant to Section 14 hereof ("Notice Date") or (ii) as the average of the Market Price for each of the five trading days immediately preceding the Notice Date, whichever of (i) or (ii) results in a greater Market Price. 3.3 Definition of Market Price. (a) As used herein, the phrase "Market Price of the Units," the Common Stock or the Redeemable Warrants, respectively, at any date shall be deemed to be the last reported sale price, or, in case no such reported sale takes place on such day, the average of the last reported sale prices for the last three (3) trading days, in either case as officially reported by the principal securities exchange on which the Units, the Common Stock or the Redeemable Warrants, as the case may be, are listed or admitted to trading or by the Nasdaq National Market ("Nasdaq/NM") or the Nasdaq Small Cap Market ("Nasdaq Small Cap"), or, if the Units, the Common Stock or the Redeemable Warrants, as the case may be, are not listed or admitted to trading on any national securities exchange or quoted by the National Association of Securities Dealers Automated Quotation System ("Nasdaq"), the average closing bid price as furnished by the National Association of Securities Dealers, Inc. ("NASD") through Nasdaq or similar organization if Nasdaq is no longer reporting such information. (b) If the Market Price of the Units cannot be determined pursuant to Section 3.3(a), the Market Price of the Units at any date shall be deemed to be the sum of the Market Price of the Common Stock and the Market Price of the Redeemable Warrants. (c) If the Market Price of the Common Stock cannot be determined pursuant to Section 3.3(a) above, the Market Price of the Common Stock shall be determined in good 4 faith (using customary valuation methods) by resolution of the members of the Board of Directors of the Company, based on the best information available to it. (d) If the Market Price of the Redeemable Warrants cannot be determined pursuant to Section 3.3(a) above, the Market Price of a Redeemable Warrant shall equal the difference between the Market Price of the Common Stock and the Exercise Price of the Redeemable Warrant. 4. Issuance of Certificates. Upon the exercise of the Warrants, the issuance of certificates for shares of Common Stock and Redeemable Warrants or other securities, properties or rights underlying such Warrants, and upon the exercise of the Redeemable Warrants, the issuance of certificates for shares of Common Stock or other securities, properties or rights underlying such Redeemable Warrants shall be made forthwith (and in any event such issuance shall be made within five (5) business days thereafter) without charge to the Holder thereof including, without limitation, any tax which may be payable in respect of the issuance thereof, and such certificates shall (subject to the provisions of Sections 5 and 7 hereof) be issued in the name of, or in such names as may be directed by, the Holder thereof. The Warrant Certificates and the certificates representing the shares of Common Stock and the Redeemable Warrants underlying the Warrants and the shares of Common Stock underlying each Redeemable Warrant or other securities, property or rights shall be executed on behalf of the Company by the manual or facsimile signature of the then present Chairman or Vice Chairman of the Board of Directors or President or Vice President of the Company under its corporate seal reproduced thereon, attested to by the manual or facsimile signature of the then present Secretary or Assistant Secretary or Treasurer or Assistant Treasurer of the Company. 5 Warrant Certificates shall be dated the date of execution by the Company upon initial issuance, division, exchange, substitution or transfer. 5. Restriction On Transfer of Warrants. The Holder of a Warrant Certificate, by its acceptance thereof, covenants and agrees that the Warrants are being acquired as an investment and not with a view to the distribution thereof; that the Warrants may not be sold, transferred, assigned, hypothecated or otherwise disposed of, in whole or in part, for a period of one (1) year from the date hereof, except to officers or partners of the Underwriter. 6. Exercise Price. 6.1 Initial and Adjusted Exercise Price. Except as otherwise provided in Section 8 hereof, the initial exercise price of each Warrant shall be $____ per Unit [120% of the IPO price per Unit]. The adjusted exercise price shall be the price which shall result from time to time from any and all adjustments of the initial exercise price in accordance with the provisions of Section 8 hereof. 6.2 Exercise Price. The term "Exercise Price" herein shall mean the initial exercise price or the adjusted exercise price, depending upon the context. 7. Registration Rights. 7.1 Registration Under the Securities Act of 1933. The Warrants, the shares of Common Stock and the Redeemable Warrants underlying the Warrants and the shares of Common Stock issuable upon exercise of the Redeemable Warrants underlying the Warrants and the other securities issuable upon exercise of the Warrants (collectively, the "Warrant Securities") have been registered under the Securities Act of 1933, as amended (the "Act") pursuant to the Company's Registration Statement on Form SB-2 (Registration No. __________) (the "Registration Statement"). All the representations and warranties of the Company contained 6 in the Underwriting Agreement relating to the Registration Statement, the Preliminary Prospectus and Prospectus (as such terms are defined in the Underwriting Agreement) and made as of the dates provided therein, are hereby incorporated by reference. The Company agrees and covenants promptly to file post effective amendments to such Registration Statement as may be necessary to maintain the effectiveness of the Registration Statement as long as any Warrants are outstanding. In the event that, for any reason, whatsoever, the Company shall fail to maintain the effectiveness of the Registration Statement, upon exercise, in part or in whole, of the Warrants, certificates representing the shares of Common Stock and the Redeemable Warrants underlying the Warrants, and upon exercise, in whole or in part of the Redeemable Warrants, certificates representing the shares of Common Stock underlying the Redeemable Warrants and the other securities issuable upon exercise of the Warrants shall bear the following legend: The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended ("Act"), and may not be offered, sold, pledged, hypothecated, assigned or transferred except pursuant to (i) an effective registration statement under the Act, (ii) to the extent applicable, Rule 144 under the Act (or any similar rule under such Act relating to the disposition of securities), or (iii) an opinion of counsel, if such opinion shall be reasonably satisfactory to counsel to the issuer, that an exemption from registration under such Act is available. 7.2 Piggyback Registration. If, at any time commencing after the date hereof and expiring seven (7) years thereafter, the Company proposes to register any of its securities under the Act (other than pursuant to Form S-8, S-4 or a comparable registration statement) the Company will give written notice by registered mail, at least thirty (30) days prior to the filing of each such registration statement, to the Underwriter and to all other Holders of the Warrants and/or the Warrant Securities of its intention to do so. If the Underwriter or other Holders of the Warrants and/or Warrant Securities notifies the Company within twenty (20) days after 7 receipt of any such notice of its or their desire to include any such securities in such proposed registration statement, the Company shall afford the Underwriter and such Holders of the Warrants and/or Warrant Securities the opportunity to have any such Warrant Securities registered under such registration statement. Notwithstanding the provisions of this Section 7.2, the Company shall have the right at any time after it shall have given written notice pursuant to this Section 7.2 (irrespective of whether a written request for inclusion of any such securities shall have been made) to elect not to file any such proposed registration statement, or to withdraw the same after the filing but prior to the effective date thereof. 7.3 Demand Registration. (a) At any time commencing after the date hereof and expiring five (5) years thereafter, the Holders of the Warrants and/or Warrant Securities representing a "Majority" (as hereinafter defined) of such securities (assuming the exercise of all of the Warrants and the Redeemable Warrants underlying the Warrants) shall have the right (which right is in addition to the registration rights under Section 7.2 hereof), exercisable by written notice to the Company, to have the Company prepare and file with the Securities and Exchange Commission (the "Commission"), on one occasion, a registration statement and such other documents, including a prospectus, as may be necessary in the opinion of both counsel for the Company and counsel for the Underwriter and Holders, in order to comply with the provisions of the Act, so as to permit a public offering and sale of their respective Warrant Securities for nine (9) consecutive months by such Holders and any other Holders of the Warrants and/or Warrant Securities who notify the Company within ten (10) days after receiving notice from the Company of such request. 8 (b) The Company covenants and agrees to give written notice of any registration request under this Section 7.3 by any Holder or Holders to all other registered Holders of the Warrants and the Warrant Securities within ten (10) days from the date of the receipt of any such registration request. (c) Notwithstanding anything to the contrary contained herein, if the Company shall not have filed a registration statement for the Warrant Securities within the time period specified in Section 7.4(a) hereof pursuant to the written notice specified in Section 7.3(a) of a Majority of the Holders of the Warrants and/or Warrant Securities, the Company shall have the option, upon the written notice of election of a Majority of the Holders of the Warrants and/or Warrant Securities to repurchase (i) any and all Warrant Securities at the higher of the Market Price per share of Common Stock on (x) the date of the notice sent pursuant to Section 7.3(a) or (y) the expiration of the period specified in Section 7.4(a) and (ii) any and all Warrants at such Market Price less the Exercise Price of such Warrant. Such repurchase shall be in immediately available funds and shall close within two (2) days after the later of (i) the expiration of the period specified in Section 7.4(a) or (ii) the delivery of the written notice of election specified in this Section 7.3(c). (d) In addition to the registration rights under Section 7.2 and subsection (a) of this Section 7.3, at any time commencing after the date hereof and expiring five (5) years thereafter, any Holder of Warrants and/or Warrant Securities shall have the right, exercisable by written request to the Company, to have the Company prepare and file, on one occasion, with the Commission a registration statement so as to permit a public offering and sale for nine (9) consecutive months by any such Holder of its Warrant Securities provided, however, that the provisions of Section 7.4(b) hereof shall not apply to any such registration request and 9 registration and all costs incident thereto shall be at the expense of the Holder or Holders making such request. 7.4 Covenants of the Company With Respect to Registration. In connection with any registration under Section 7.2 or 7.3 hereof, the Company covenants and agrees as follows: (a) The Company shall use its best efforts to file a registration statement within thirty (30) days of receipt of any demand therefor, shall use its best efforts to have any registration statement declared effective at the earliest possible time, and shall furnish each Holder desiring to sell Warrant Securities such number of prospectuses as shall reasonably be requested. (b) The Company shall pay all costs (excluding fees and expenses of Holder(s)' counsel and any underwriting or selling commissions), fees and expenses in connection with all registration statements filed pursuant to Sections 7.2 and 7.3(a) hereof including, without limitation, the Company's legal and accounting fees, printing expenses, blue sky fees and expenses. The Holder(s) will pay all costs, fees and expenses in connection with any registration statement filed pursuant to Section 7.3(d). If the Company shall fail to comply with the provisions of Section 7.4(a), the Company shall, in addition to any other equitable or other relief available to the Holder(s), be liable for any or all incidental or special damages sustained by the Holder(s) requesting registration of their Warrant Securities, excluding consequential damages. (c) The Company will take all necessary action which may be required in qualifying or registering the Warrant Securities included in a registration statement for offering and sale under the securities or blue sky laws of such states as reasonably are 10 requested by the Holder(s), provided that the Company shall not be obligated to execute or file any general consent to service of process or to qualify as a foreign corporation to do business under the laws of any such jurisdiction. (d) The Company shall indemnify the Holder(s) of the Warrant Securities to be sold pursuant to any registration statement and each person, if any, who controls such Holders within the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), against all loss, claim, damage, expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Act, the Exchange Act or otherwise, arising from such registration statement but only to the same extent and with the same effect as the provisions pursuant to which the Company has agreed to indemnify the Underwriters contained in Section 7 of the Underwriting Agreement. The Company further agree(s) that upon demand by an indemnified person, at any time or from time to time, it will promptly reimburse such indemnified person for any loss, claim, damage, liability, cost or expense actually and reasonably paid by the indemnified person as to which the Company has indemnified such person pursuant hereto. Notwithstanding the foregoing provisions of this Section 7.4(d) any such payment or reimbursement by the Company of fees, expenses or disbursements incurred by an indemnified person in any proceeding in which a final judgment by a court of competent jurisdiction (after all appeals or the expiration of time to appeal) is entered against the Company or such indemnified person as a direct result of the Holder(s) or such person's gross negligence or willful misfeasance will be promptly repaid to the Company. 11 (e) The Holder(s) of the Warrant Securities to be sold pursuant to a registration statement, and their successors and assigns, shall severally, and not jointly, indemnify the Company, its officers and directors and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against all loss, claim, damage or expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of such Holders, or their successors or assigns, for specific inclusion in such registration statement to the same extent and with the same effect as the provisions contained in Section 7 of the Underwriting Agreement pursuant to which the Underwriters have agreed to indemnify the Company. The Holder(s) further agree(s) that upon demand by an indemnified person, at any time or from time to time, they will promptly reimburse such indemnified person for any loss, claim, damage, liability, cost or expense actually and reasonably paid by the indemnified person as to which the Holder(s) have indemnified such person pursuant hereto. Notwithstanding the foregoing provisions of this Section 7.4(e) any such payment or reimbursement by the Holder(s) of fees, expenses or disbursements incurred by an indemnified person in any proceeding in which a final judgment by a court of competent jurisdiction (after all appeals or the expiration of time to appeal) is entered against the Company or such indemnified person as a direct result of the Company or such person's gross negligence or willful misfeasance will be promptly repaid to the Holder(s). 12 (f) Nothing contained in this Agreement shall be construed as requiring the Holder(s) to exercise their Warrants prior to the initial filing of any registration statement or the effectiveness thereof. (g) The Company shall not permit the inclusion of any securities other than the Warrant Securities to be included in any registration statement filed pursuant to Section 7.3 hereof, or permit any other registration statement to be or remain effective during the effectiveness of a registration statement filed pursuant to Section 7.3 hereof, without the prior written consent of the Holders of the Warrants and Warrant Securities representing a Majority of such securities (assuming the exercise of all of the Warrants and the Redeemable Warrants underlying the Warrants). (h) The Company shall furnish to each Holder participating in the offering and to each underwriter, if any, a signed counterpart, addressed to such Holder or underwriter, of (i) an opinion of counsel to the Company, dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, an opinion dated the date of the closing under the underwriting agreement), and (ii) a "cold comfort" letter dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, a letter dated the date of the closing under the underwriting agreement) signed by the independent public accountants who have issued a report on the Company's financial statements included in such registration statement, in each case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial 13 statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities. (i) The Company shall as soon as practicable after the effective date of the registration statement, and in any event within 15 months thereafter, make "generally available to its security holders" (within the meaning of Rule 158 under the Act) an earnings statement (which need not be audited) complying with Section 11(a) of the Act and covering a period of at least 12 consecutive months beginning after the effective date of the registration statement. (j) The Company shall deliver promptly to each Holder participating in the offering requesting the correspondence and memoranda described below and to the managing underwriter, if any, copies of all correspondence between the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff with respect to the registration statement and permit each Holder and underwriter to do such investigation, upon reasonable advance notice, with respect to information contained in or omitted from the registration statement as it deems reasonably necessary to comply with applicable securities laws or rules of the NASD. Such investigation shall include access to books, records and properties and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such reasonable times and as often as any such Holder or underwriter shall reasonably request. (k) The Company shall enter into an underwriting agreement with the managing underwriter selected for such underwriting by Holders holding a Majority of the Warrant Securities requested to be included in such underwriting, which may be the 14 Underwriter. Such agreement shall be satisfactory in form and substance to the Company, each Holder and such managing underwriter, and shall contain such representations, warranties and covenants by the Company and such other terms as are customarily contained in agreements of that type used by the managing underwriter. The Holders shall be parties to any underwriting agreement relating to an underwritten sale of their Warrant Securities and may, at their option, require that any or all of the representations, warranties and covenants of the Company to or for the benefit of such underwriters shall also be made to and for the benefit of such Holders. Such Holders shall not be required to make any representations or warranties to or agreements with the Company or the underwriters except as they may relate to such Holders and their intended methods of distribution. (l) In addition to the Warrant Securities, upon the written request therefor by any Holder(s), the Company shall include in the registration statement any other securities of the Company held by such Holder(s) as of the date of filing of such registration statement, including without limitation, restricted shares of Common Stock, options, warrants or any other securities convertible into shares of Common Stock. (m) For purposes of this Agreement, the term "Majority" in reference to the Holders of Warrants or Warrant Securities shall mean in excess of fifty percent (50%) of the then outstanding Warrants or Warrant Securities that (i) are not held by the Company, an affiliate, officer, creditor, employee or agent thereof or any of their respective affiliates, members of their family, persons acting as nominees or in conjunction therewith and (ii) have not been resold to the public pursuant to a registration statement filed with the Commission under the Act. 15 8. Adjustments to Exercise Price and Number of Securities. 8.1 Subdivision and Combination. In case the Company shall at any time subdivide or combine the outstanding shares of Common Stock, the Exercise Price shall forthwith be proportionately decreased in the case of subdivision or increased in the case of combination. 8.2 Stock Dividends and Distributions. In case the Company shall pay dividend in, or make a distribution of, shares of Common Stock or of the Company's capital stock convertible into Common Stock, the Exercise Price shall forthwith be proportionately decreased. An adjustment made pursuant to this Section 8.2 shall be made as of the record date for the subject stock dividend or distribution. 8.3 Adjustment in Number of Securities. Upon each adjustment of the Exercise Price pursuant to the provisions of this Section 8, the number of Warrant Securities issuable upon the exercise at the adjusted Exercise Price of each Warrant shall be adjusted to the nearest whole number by multiplying a number equal to the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Securities issuable upon exercise of the Warrants immediately prior to such adjustment and dividing the product so obtained by the adjusted Exercise Price. 8.4 Definition of Common Stock. For the purpose of this Agreement, the term "Common Stock" shall mean (i) the class of stock designated as Common Stock in the Certificate of Incorporation of the Company as may be amended or restated as of the date hereof, or (ii) any other class of stock resulting from successive changes or reclassifications of such Common Stock consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. 16 8.5 Merger or Consolidation or Sale. (a) In case of any consolidation of the Company with, or merger of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger which does not result in any reclassification or change of the outstanding Common Stock), the corporation formed by such consolidation or merger shall execute and deliver to the Holder a supplemental warrant agreement providing that the holder of each Warrant then outstanding or to be outstanding shall have the right thereafter (until the expiration of such Warrant) to receive, upon exercise of such Warrant, the kind and amount of shares of stock and other securities and property receivable upon such consolidation, merger, sale or transfer by a holder of the number of shares of Common Stock of the Company for which such Warrant might have been exercised immediately prior to such consolidation, merger, sale or transfer. Such supplemental warrant agreement shall provide for adjustments which shall be identical to the adjustments provided in this Section 8. The above provision of this subsection shall similarly apply to successive consolidations or mergers. (b) In the event of (i) the sale by the Company of all or substantially all of its assets, or (ii) the engagement by the Company or any of its affiliates in a "Rule 13e-3 transaction" as defined in paragraph (a)(3) of Rule 13e-3 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended, or (iii) a distribution to the Company's stockholders of any cash, assets, property, rights, evidences of indebtedness, securities or any other thing of value, or any combination thereof, the Holders of the unexercised Warrants shall receive notice of such sale, transaction or distribution twenty (20) days prior to the date of such sale or the record date for such transaction or distribution, as applicable, and, if they exercise such Warrants prior to such date, they shall be entitled, in addition to the shares of Common 17 Stock issuable upon the exercise thereof, to receive such property, cash, assets, rights, evidence of indebtedness, securities or any other thing of value, or any combination thereof, on the payment date of such sale, transaction or distribution. 8.6 No Adjustment of Exercise Price in Certain Cases. No adjustment of the Exercise Price shall be made if the amount of said adjustment shall be less than ten cents (10(cent)) per Warrant Security, provided, however, that in such case any adjustment that would otherwise be required then to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with any adjustment so carried forward, shall amount to at least ten cents (10(cent)) per Warrant Security. 8.7 Adjustment of Redeemable Warrants' Exercise Price. With respect to any of the Redeemable Warrants whether or not the Redeemable Warrants have been exercised (or are exercisable) and whether or not the Redeemable Warrants are issued and outstanding, the Redeemable Warrant exercise price and the number of shares of Common Stock underlying such Redeemable Warrants shall be automatically adjusted in accordance with Section 8 of the Warrant Agreement between the Company and Continental Stock Transfer & Trust Company dated __________, 1997 (the "Redeemable Warrant Agreement"), upon the occurrence of any of the events described therein. Thereafter, the underlying Redeemable Warrants shall be exercisable at such adjusted Redeemable Warrant exercise price for such adjusted number of underlying shares of Common Stock or other securities, properties or rights. 9. Exchange and Replacement of Warrant Certificates. Each Warrant Certificate is exchangeable without expense, upon the surrender thereof by the registered Holder at the principal executive office of the Company, for a new Warrant Certificate of like tenor and 18 date representing in the aggregate the right to purchase the same number of Units in such denominations as shall be designated by the Holder thereof at the time of such surrender. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of the Warrants, if mutilated, the Company will make and deliver a new Warrant Certificate of like tenor, in lieu thereof. 10. Elimination of Fractional Interests. The Company shall not be required to issue certificates representing fractions of shares of Common Stock or Redeemable Warrants upon the exercise of the Warrants, or fractions of shares of Common Stock upon the exercise of the Redeemable Warrants underlying the Warrants, it being the intent of the parties that all fractional interests shall be eliminated by rounding any fraction up to the nearest whole number of shares of Common Stock or Redeemable Warrants, as the case may be, or other securities, properties or rights. 11. Reservation and Listing of Securities. The Company shall at all times reserve and keep available out of its authorized shares of Common Stock, solely for the purpose of issuance upon the exercise of the Warrants and the Redeemable Warrants, such number of shares of Common Stock or other securities, properties or rights as shall be issuable upon the exercise thereof. The Company covenants and agrees that, upon exercise of the Warrants and payment of the Exercise Price therefor, all shares of Common Stock and other securities issuable upon such exercise shall be duly and validly issued, fully paid, non-assessable and not subject to the preemptive rights of any stockholder. The Company further covenants and agrees that 19 upon exercise of the Redeemable Warrants underlying the Warrants and payment of the respective Redeemable Warrant exercise price therefor, all shares of Common Stock and other securities issuable upon such exercises shall be duly and validly issued, fully paid, non-assessable and not subject to the preemptive rights of any stockholder. As long as the Warrants shall be outstanding, the Company shall use its best efforts to cause all shares of Common Stock issuable upon the exercise of the Warrants and the Redeemable Warrants and all Redeemable Warrants underlying the Warrants to be listed (subject to official notice of issuance) on all securities exchanges on which the Common Stock or the Redeemable Warrants issued to the public in connection herewith may then be listed and/or quoted on Nasdaq National Market or Nasdaq Small Cap Market. 12. Notices to Warrant Holders. Nothing contained in this Agreement shall be construed as conferring upon the Holders the right to vote or to consent or to receive notice as a stockholder in respect of any meetings of stockholders for the election of directors or any other matter, or as having any rights whatsoever as a stockholder of the Company. If, however, at any time prior to the expiration of the Warrants and their exercise, any of the following events shall occur: (a) the Company shall take a record of the holders of its shares of Common Stock for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of current or retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company; or (b) the Company shall offer to all the holders of its Common Stock any additional shares of capital stock of the Company or securities convertible into or 20 exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor; or (c) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or merger) or a sale of all or substantially all of its property, assets and business as an entirety shall be proposed; then, in any one or more of said events, the Company shall give written notice of such event at least twenty (20) days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the stockholders entitled to such dividend, distribution, convertible or exchangeable securities or subscription rights, or entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notice shall specify such record date or the date of closing the transfer books, as the case may be. Failure to give such notice or any defect therein shall not affect the validity of any action taken in connection with the declaration or payment of any such dividend, or the issuance of any convertible or exchangeable securities, or subscription rights, options or warrants, or any proposed dissolution, liquidation, winding up or sale. 13. Redeemable Warrants. The form of the certificate representing Redeemable Warrants (and the form of election to purchase shares of Common Stock upon the exercise of Redeemable Warrants and the form of assignment printed on the reverse thereof) shall be substantially as set forth in Exhibit "A" to the Redeemable Warrant Agreement. Each Redeemable Warrant issuable upon exercise of the Warrants shall evidence the right to initially purchase one fully paid and non-assessable share of Common Stock at an initial purchase price of $__________ [150% of the IPO price per Unit] per share commencing on the Initial Exercise Date and ending at 5:00 p.m. New York time on the Redeemable Warrant Expiration Date at 21 which time the Redeemable Warrants shall expire. The exercise price of the Redeemable Warrants and the number of shares of Common Stock issuable upon the exercise of the Redeemable Warrants are subject to adjustment, whether or not the Warrants have been exercised and the Redeemable Warrants have been issued, in the manner and upon the occurrence of the events set forth in Section 8 of the Redeemable Warrant Agreement, which is hereby incorporated herein by reference and made a part hereof as if set forth in its entirety herein. Subject to the provisions of this Agreement and upon issuance of the Redeemable Warrants underlying the Warrants, each registered holder of such Redeemable Warrants shall have the right to purchase from the Company (and the Company shall issue to such registered holders) up to the number of fully paid and non-assessable shares of Common Stock (subject to adjustment as provided herein and in the Redeemable Warrant Agreement), free and clear of all preemptive rights of stockholders, provided that such registered holder complies with the terms governing exercise of the Redeemable Warrants set forth in the Redeemable Warrant Agreement, and pays the applicable exercise price, determined in accordance with the terms of the Redeemable Warrant Agreement. Upon exercise of the Redeemable Warrants, the Company shall forthwith issue to the registered holder of any such Redeemable Warrant in his name or in such name as may be directed by him, certificates for the number of shares of Common Stock so purchased. Except as otherwise provided herein, the Redeemable Warrants underlying the Warrants shall be governed in all respects by the terms of the Redeemable Warrant Agreement. The Redeemable Warrants shall be transferable in the manner provided in the Redeemable Warrant Agreement, and upon any such transfer, a new Redeemable Warrant Certificate shall be issued promptly to the transferee. The Company covenants to, and agrees with, the Holder(s) that without the prior written consent of the Holder(s), the Redeemable Warrant Agreement will 22 not be modified, amended, cancelled, altered or superseded, and that the Company will send to each Holder, irrespective of whether or not the Warrants have been exercised, any and all notices required by the Redeemable Warrant Agreement to be sent to holders of Redeemable Warrants. 14. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been duly made when delivered, or mailed by registered or certified mail, return receipt requested: (a) If to the registered Holder of the Warrants, to the address of such Holder as shown on the books of the Company; or (b) If to the Company, to the address set forth in Section 3 hereof or to such other address as the Company may designate by notice to the Holders. (c) If to the Underwriter, to Joseph Stevens & Company, Inc., 33 Maiden Lane, New York, New York, 10038, Attention: Joseph Sorbara. 15. Supplements and Amendments. The Company and the Underwriter may from time to time supplement or amend this Agreement without the approval of any Holders of Warrant Certificates (other than the Underwriter) in order to cure any ambiguity, to correct or supplement any provision contained herein which may be defective or inconsistent with any provisions herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company and the Underwriter may deem necessary or desirable and which the Company and the Underwriter deem shall not adversely affect the interests of the Holders of Warrant Certificates. 23 16. Successors. All the covenants and provisions of this Agreement shall be binding upon and inure to the benefit of the Company, the Holders and their respective successors and assigns hereunder. 17. Termination. This Agreement shall terminate at the close of business on __________, 2004 [7 years from the date hereof]. Notwithstanding the foregoing, the indemnification provisions of Section 7 shall survive such termination until the close of business on __________, 2009 [12 years from the date hereof.] 18. Governing Law, Submission to Jurisdiction. This Agreement and each Warrant Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be construed in accordance with the laws of said State without giving effect to the rules of said State governing the conflicts of laws. The Company, the Underwriter and the Holders hereby agree that any action, proceeding or claim against it arising out of, or relating in any way to, this Agreement shall be brought and enforced in the courts of the State of New York or of the United States of America for the Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company, the Underwriter and the Holders hereby irrevocably waive any objection to such exclusive jurisdiction or inconvenient forum. Any such process or summons to be served upon any of the Company, the Underwriter and the Holders (at the option of the party bringing such action, proceeding or claim) may be served by transmitting a copy thereof, by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address as set forth in Section 14 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the party so served in any action, proceeding or claim. The Company, the Underwriter and the Holders agree that the prevailing 24 party(ies) in any such action or proceeding shall be entitled to recover from the other party(ies) all of its/their reasonable legal costs and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor. 19. Entire Agreement; Modification. This Agreement (including the Underwriting Agreement to the extent portions thereof are referred to herein) and the Redeemable Warrant Agreement contain the entire understanding between the parties hereto with respect to the subject matter hereof and may not be modified or amended except by a writing duly signed by the party against whom enforcement of the modification or amendment is sought. 20. Severability. If any provision of this Agreement shall be held to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision of this Agreement. 21. Captions. The caption headings of the Sections of this Agreement are for convenience of reference only and are not intended, nor should they be construed as, a part of this Agreement and shall be given no substantive effect. 22. Benefits of this Agreement. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company and the Underwriter and any other registered Holder(s) of the Warrant Certificates or Warrant Securities any legal or equitable right, remedy or claim under this Agreement; and this Agreement shall be for the sole and exclusive benefit of the Company and the Underwriter and any other Holder(s) of the Warrant Certificates or Warrant Securities. 23. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and such counterparts shall to either constitute but one and the same instrument. 25 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written. CTI INDUSTRIES CORPORATION By:_________________________ Howard W. Schwan President Officer Attest: _________________ Secretary JOSEPH STEVENS & COMPANY, INC. By: ___________________________ Name: Title: EXHIBIT A [FORM OF WARRANT CERTIFICATE] THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE. THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN. EXERCISABLE ON OR BEFORE 5:00 P.M., NEW YORK TIME, ________, 2002 No. W- ____ Warrants WARRANT CERTIFICATE This Warrant Certificate certifies that __________, or registered assigns, is the registered holder of __________ Warrants to purchase initially, at any time from ____________, 1998 [one year from the effective date of the Registration Statement] until 5:00 p.m. New York time on ____________, 2002 [five years from the effective date of the Registration Statement] ("Expiration Date"), up to ______________ Units, each Unit consisting of one (1) fully-paid and non-assessable share of common stock, ____ par value ("Common Stock") of CTI INDUSTRIES CORPORATION, a Delaware corporation (the "Company"), and one (1) redeemable warrant ("Redeemable Warrants") (each Redeemable Warrant entitling the holder to purchase one fully-paid and non-assessable share of Common Stock), at the initial exercise price, subject to adjustment in certain events (the "Exercise Price"), of $_____________ [120% of the public offering price per Unit] per Unit upon surrender of this Warrant Certificate and payment of the Exercise Price at an office or agency of the Company, or by surrender of this Warrant Certificate in lieu of cash payment, but subject to the conditions set forth herein and in the warrant agreement dated as of _________________, 1997 between the Company and Joseph Stevens & Company, Inc. (the "Warrant Agreement"). Payment of the Exercise Price shall be made by certified or official bank check in New York Clearing House funds payable to the order of the Company or by surrender of this Warrant Certificate. 1 No Warrant may be exercised after 5:00 p.m., New York time, on the Expiration Date, at which time all Warrants evidenced hereby, unless exercised prior thereto, hereby shall thereafter be void. The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Warrants issued pursuant to the Warrant Agreement, which Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to for a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Company and the holders (the words "holders" or "holder" meaning the registered holders or registered holder) of the Warrants. The Warrant Agreement provides that upon the occurrence of certain events the Exercise Price and the type and/or number of the Company's securities issuable thereupon may, subject to certain conditions, be adjusted. In such event, the Company will, at the request of the holder, issue a new Warrant Certificate evidencing the adjustment in the Exercise Price and the number and/or type of securities issuable upon the exercise of the Warrants; provided, however, that the failure of the Company to issue such new Warrant Certificates shall not in any way change, alter, or otherwise impair, the rights of the holder as set forth in the Warrant Agreement. Upon due presentment for registration of transfer of this Warrant Certificate at an office or agency of the Company, a new Warrant Certificate or Warrant Certificates of like tenor and evidencing in the aggregate a like number of Warrants shall be issued to the transferee(s) in exchange for this Warrant Certificate, subject to the limitations provided herein and in the Warrant Agreement, without any charge except for any tax or other governmental charge imposed in connection with such transfer. Upon the exercise of less than all of the Warrants evidenced by this Certificate, the Company shall forthwith issue to the holder hereof a new Warrant Certificate representing such Warrant. The Company may deem and treat the registered holder(s) hereof as the absolute owner(s) of this Warrant Certificate (notwithstanding any notation of ownership or other writing hereon made by anyone), for the purpose of any exercise hereof, and of any distribution to the holder(s) hereof, and for all other purposes, and the Company shall not be affected by any notice to the contrary. All terms used in this Warrant Certificate which are defined in the Warrant Agreement shall have the meanings assigned to them in the Warrant Agreement. 2 IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed under its corporate seal. Dated as of , 1997 CTI INDUSTRIES CORPORATION [SEAL] By:__________________________ Howard W. Schwan President Officer Attest: ________________________ Secretary 3 [FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.1] The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to purchase _____________ Units and herewith tenders in payment for such securities a certified or official bank check payable in New York Clearing House Funds to the order of CTI Industries Corporation in the amount of $__________, all in accordance with the terms of Section 3.1 of the Underwriter's Warrant Agreement dated as of ___________, 1997 between CTI Industries Corporation and Joseph Stevens & Company, Inc. The undersigned requests that certificates for such securities be registered in the name of _______________ whose address is __________________________ and that such certificates be delivered to ______________________________ whose address is ____________________________. Dated: Signature ___________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate.) ______________________________________ (Insert Social Security or Other Identifying Number of Holder) 4 [FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.2] The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to purchase ____________ Units all in accordance with the terms of Section 3.2 of the Underwriter's Warrant Agreement dated as of ______________, 1997 between CTI Industries Corporation and Joseph Stevens & Company, Inc. The undersigned requests that certificates for such securities be registered in the name of __________________ whose address is _______________________ and that such certificates be delivered to _____________________ whose address is ____________________________________. Dated: Signature ___________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate.) _____________________________________ (Insert Social Security or Other Identifying Number of Holder) 5 [FORM OF ASSIGNMENT] (To be executed by the registered holder if such holder desires to transfer the Warrant Certificate.) FOR VALUE RECEIVED _____________ hereby sells, assigns and transfers unto (Please print name and address of transferee) this Warrant Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint ________________ Attorney, to transfer the within Warrant Certificate on the books of the within-named Company, with full power of substitution. Dated: ______________________ Signature: _________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate.) _____________________________________ (Insert Social Security or Other Identifying Number of Holder) EX-4 6 FORM OF WARRANT AGREEMENT AND WARRANT EXHIBIT 4.3 CTI INDUSTRIES CORPORATION AND CONTINENTAL STOCK TRANSFER & TRUST COMPANY ---------------- WARRANT AGREEMENT Dated as of ______________, 1997 - - WARRANT AGREEMENT, dated this ___ day of ________ 1997 [the effective date of the Registration Statement], by and between CTI INDUSTRIES CORPORATION, a Delaware corporation (the "Company"), and CONTINENTAL STOCK TRANSFER & TRUST COMPANY. WITNESSETH: WHEREAS, in connection with (i) the offering (the "Offering") to the public of 1,333,333 units (the "Units"), each Unit consisting of one share of the Company's common stock, ____ par value per share (the "Common Stock"), and one redeemable warrant (the "Warrants"), such redeemable warrant entitling the holder thereof to purchase one share of Common Stock, (ii) the over-allotment option granted to Joseph Stevens & Company, Inc. (the "Underwriter"), in the public offering referred to above, to purchase up to an additional 199,999 Units (the "Over-Allotment Option") and (iii) the sale to the Underwiter of warrants (the "Underwriter's Warrants") to purchase up to 133,333 Units. WHEREAS, the Company desires to provide for the issuance of certificates representing the Warrants; and WHEREAS, the Company desires the Warrant Agent (as defined in Section 1(r) hereof) to act on behalf of the Company, and the Warrant Agent is willing to so act, in connection with the issuance, registration, transfer and exchange of certificates representing the Warrants and the exercise of the Warrants. NOW, THEREFORE, in consideration of the premises and the mutual agreements hereinafter set forth and for the purpose of defining the terms and provisions of the Warrants and the certificates representing the Warrants and the respective rights and obligations thereunder of the Company, the Underwriter, the holders of certificates representing the Warrants and the Warrant Agent, the parties hereto agree as follows: SECTION 1. Definitions. As used herein, the following terms shall have the followingmeanings, unless the context shall otherwise require: (a) "Act" shall mean the Securities Act of 1933, as amended. (b) "Commission" shall mean the Securities and Exchange Commission. (c) "Common Stock" shall have the meaning set forth in Section 8(d) hereof. (d) "Company" shall have the meaning assigned to such term in the first (1st) paragraph of this Agreement. (e) "Corporate Office" shall mean the office of the Warrant Agent at which at any particular time its principal business in New York, New York shall be administered, which office is located on the date hereof at 2 Broadway, New York, New York 10004. (f) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (g) "Exercise Date" shall mean, subject to the provisions of Section 5(b) hereof, as to any Warrant, the date on which the Warrant Agent shall have received both (i) the Warrant Certificate representing such Warrant, with the exercise form thereon duly executed by the Registered Holder (as defined in Section 1(m) hereof) thereof or his attorney duly authorized in writing, and (ii) payment in cash or by check made payable to the Warrant Agent for the account of the Company of an amount in lawful money of the United States of America equal to the applicable Purchase Price (as defined in Section 1(k) hereof). (h) "Initial Warrant Exercise Date" shall mean __________, 1997 [the effective date of the Registration Statement]. (i) "Initial Warrant Redemption Date" shall mean __________, 1998 [the date twelve (12) months after the effective date of the Registration Statement]. (j) "NASD" shall mean the National Association of Securities Dealers, Inc. 2 (k) "Purchase Price" shall mean, subject to modification and adjustment as provided in Section 8 hereof, $__________ per Share [150% of the IPO price per Unit]. (l) "Redemption Date" shall mean the date (which may not occur before the Initial Warrant Redemption Date) fixed for the redemption of the Warrants in accordance with the terms hereof. (m) "Registered Holder" shall mean the person in whose name any certificate representing the Warrants shall be registered on the books maintained by the Warrant Agent pursuant to Section 6(b) hereof. (n) "Underwriter's Warrant Agreement" shall mean the agreement dated as of __________, 1997 between the Company and the Underwriter relating to and governing the terms and provisions of the Underwriter's Warrants. (o) "Subsidiary" or "Subsidiaries" shall mean any corporation or corporations, as the case may be, of which stock having ordinary power to elect a majority of the board of directors of such corporation or corporations (regardless of whether or not at the time the stock of any other class or classes of such corporation shall have or may have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned by the Company or by one or more Subsidiaries, or by the Company and one or more Subsidiaries. (p) "Transfer Agent" shall mean Continental Stock Transfer & Trust Company, of New York, New York or its authorized successor. (q) "Underwriting Agreement" shall mean the underwriting agreement dated _______________, 1997 [the effective date of the Registration Statement] between the Company and the Underwriter relating to the purchase for resale to the public of ________ Units (without giving effect to the Over-Allotment Option). 3 (r) "Warrant Agent" shall mean Continental Stock Transfer & Trust Company of New York, New York or its authorized successor. (s) "Warrant Certificate" shall mean a certificate representing each of the Warrants substantially in the form annexed hereto as Exhibit A. (t) "Warrant Expiration Date" shall mean, unless the Warrants are redeemed as provided in Section 9 hereof prior to such date, 5:00 p.m. (New York time) on __________, 2002 [the 60 month anniversary of issuance] or, if such date shall in the State of New York be a holiday or a day on which banks are authorized to close, then 5:00 p.m. (New York time) on the next following day which in the State of New York is not a holiday or a day on which banks are authorized to close, subject to the Company's right, prior to the Warrant Expiration Date, with the consent of the Underwriter, to extend such Warrant Expiration Date on five (5) business days prior written notice to the Registered Holders. SECTION 2. Warrants and Issuance of Warrant Certificates. (a) One Warrant shall initially entitle the Registered Holder of the Warrant Certificate representing such Warrant to purchase at the Purchase Price therefor from the Initial Warrant Exercise Date until the Warrant Expiration Date one (1) share of Common Stock upon the exercise thereof, subject to modification and adjustment as provided in Section 8 hereof. (b) Upon execution of this Agreement, Warrant Certificates representing 133,333 Warrants to purchase up to an aggregate of 1,333,333 shares of Common Stock (subject to modification and adjustment as provided in Section 8 hereof), shall be executed by the Company and delivered to the Warrant Agent (c) Upon exercise of the Over-Allotment Option, in whole or in part, Warrant Certificates representing up to 199,999 Warrants to purchase up to an aggregate of 4 199,999 shares of Common Stock (subject to modification and adjustment as provided in Section 8 hereof) shall be executed by the Company and delivered to the Warrant Agent. (d) Upon exercise of the Underwriter's Warrants as provided therein, Warrant Certificates representing 133,333 Warrants to purchase up to an aggregate of 133,333 shares of Common Stock (subject to modification and adjustment as provided in Section 8 hereof and in the Underwriter's Warrant Agreement), shall be countersigned, issued and delivered by the Warrant Agent upon written order of the Company signed by its Chairman of the Board, President or a Vice President and by its Treasurer or an Assistant Treasurer or its Secretary or an Assistant Secretary. (e) From time to time, up to the Warrant Expiration Date, the Warrant Agent shall countersign and deliver Warrant Certificates in required denominations of one or whole number multiples thereof to the person entitled thereto in connection with any transfer or exchange permitted under this Agreement. No Warrant Certificates shall be issued except (i) Warrant Certificates initially issued hereunder, (ii) Warrant Certificates issued upon any transfer or exchange of Warrants, (iii) Warrant Certificates issued in replacement of lost, stolen, destroyed or mutilated Warrant Certificates pursuant to Section 7 hereof, and (iv) Warrant Certificates issued pursuant to the Underwriter's Warrant Agreement (including Warrants in excess of the 133,333 Underwriter's Warrants issued as a result of the antidilution provisions contained in the Underwriter's Warrant Agreement) and (v) at the option of the Company, Warrant Certificates in such form as may be approved by its Board of Directors, to reflect any adjustment or change in the Purchase Price, the number of shares of Common Stock purchasable upon the exercise of a Warrant or the redemption price therefor. 5 SECTION 3. Form and Execution of Warrant Certificates. (a) The Warrant Certificates shall be substantially in the form annexed hereto as Exhibit A (the provisions of which are hereby incorporated herein) and may have such letters, numbers or other marks of identification or designation and such legends, summaries or endorsements printed, lithographed or engraved thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Warrants may be listed, or to conform to usage. The Warrant Certificates shall be dated the date of issuance thereof (whether upon initial issuance, transfer, exchange or in lieu of mutilated, lost, stolen or destroyed Warrant Certificates). (b) Warrant Certificates shall be executed on behalf of the Company by its Chairman of the Board, President or any Vice President and by its Treasurer or an Assistant Treasurer or its Secretary or an Assistant Secretary, by manual signatures or by facsimile signatures printed thereon, and shall have imprinted thereon a facsimile of the Company's seal. Warrant Certificates shall be manually countersigned by the Warrant Agent and shall not be valid for any purpose unless so countersigned. In case any officer of the Company who shall have signed any of the Warrant Certificates shall cease to be such officer of the Company before the date of issuance of the Warrant Certificates or before countersignature by the Warrant Agent and issue and delivery thereof, such Warrant Certificates, nevertheless, may be countersigned by the Warrant Agent and issued and delivered with the same force and effect as though the officer of the Company who signed such Warrant Certificates had not ceased to hold such office. 6 SECTION 4. Exercise. (a) Warrants in denominations of one or whole number multiples thereof may be exercised commencing at any time on or after the Initial Warrant Exercise Date, but not after the Warrant Expiration Date, upon the terms and subject to the conditions set forth herein (including the provisions set forth in Sections 5 and 9 hereof) and in the applicable Warrant Certificate. A Warrant shall be deemed to have been exercised immediately prior to the close of business on the Exercise Date, provided that the Warrant Certificate representing such Warrant, with the exercise form thereon duly executed by the Registered Holder thereof or his attorney duly authorized in writing, together with payment in cash or by check made payable to the Warrant Agent for the account of the Company of an amount in lawful money of the United States of America equal to the applicable Purchase Price, have been received by the Warrant Agent. The person entitled to receive the securities deliverable upon such exercise shall be treated for all purposes as the holder of such securities as of the close of business on the Exercise Date. As soon as practicable on or after the Exercise Date and in any event within five (5) business days after such date, the Warrant Agent, on behalf of the Company, shall cause to be issued to the person or persons entitled to receive the same a Common Stock certificate or certificates for the shares of Common Stock deliverable upon such exercise, and the Warrant Agent shall deliver the same to the person or persons entitled thereto. Upon the exercise of any Warrants, the Warrant Agent shall promptly notify the Company in writing of such fact and of the number of securities delivered upon such exercise and, subject to Section 4(b) hereof, shall cause all payments in cash or by check made payable to the order of the Company in respect of the Purchase Price to be deposited promptly in the Company's bank account or delivered to the Company. 7 (b) At any time upon the exercise of any Warrants after one year and one day from the date hereof, the Warrant Agent shall, on a daily basis, within two business days after such exercise, notify the Underwriter, its successors or assigns of the exercise of any such Warrants and shall, on a weekly basis (subject to collection of funds constituting the tendered Purchase Price, but in no event later than five business days after the last day of the calendar week in which such funds were tendered), for services rendered by the Underwriter to the Registered Holders of the Warrants then being exercised, remit to the Underwriter an amount equal to five percent (5%) of the Purchase Price of such Warrants then being exercised unless the Underwriter shall have notified the Warrant Agent that the payment of such amount with respect to such Warrant is violative of the General Rules and Regulations promulgated under the Exchange Act, or the rules and regulations of the NASD or applicable state securities or "blue sky" laws, or the Warrants are those underlying the Underwriter's Warrants in which event, the Warrant Agent shall have to pay such amount to the Company; provided, that, the Warrant Agent shall not be obligated to pay any amounts pursuant to this Section 4(b) during any week that such amounts payable are less than $1,000 and the Warrant Agent's obligation to make such payments shall be suspended until the amount payable aggregates $1,000, and provided further, that, in any event, any such payment (regardless of amount) shall be made not less frequently than monthly. (c) The Company shall not be obligated to issue any fractional share interests or fractional warrant interests upon the exercise of any Warrant or Warrants, nor shall it be obligated to issue scrip or pay cash in lieu of fractional interests. Any fractional interest shall be eliminated by rounding any fraction up to the next full share or Warrant, as the case may be, or other securities, properties or rights. 8 SECTION 5. Reservation of Shares, Listing, Payment of Taxes, etc. (a)The Company covenants that it will at all times reserve and keep available out of its authorized Common Stock, solely for the purpose of issuance upon the exercise of Warrants, such number of shares of Common Stock as shall then be issuable upon the exercise of all outstanding Warrants. The Company covenants that, upon exercise of the Warrants and payment of the Purchase Price for the shares of Common Stock underlying the Warrants, all shares of Common Stock which shall be issuable upon such exercise shall be duly and validly issued, fully paid, non-assessable, free from all preemptive or similar rights, and free from all taxes, liens and charges with respect to the issuance thereof, and that upon issuance such shares shall be listed or quoted on each securities exchange, if any, on which the other shares of outstanding Common Stock are then listed or quoted, or if not then so listed or quoted on each place (whether the Nasdaq Stock Market, Inc., the NASD OTC Electronic Bulletin Board, the National Quotation Bureau "pink sheets" or otherwise) on which the other shares of outstanding Common Stock are listed or quoted. (b) The Company covenants that if any securities reserved for the purpose of exercise of Warrants hereunder require registration with, or approval of, any governmental authority under any federal securities law before such securities may be validly issued or delivered upon such exercise, then the Company will file a registration statement under the federal securities laws or a post-effective amendment to a registration statement, use its best efforts to cause the same to become effective, keep such registration statement current while any of the Warrants are outstanding and deliver a prospectus which complies with Section 10(a)(3) of the Act, to the Registered Holder exercising the Warrant (except, if in the opinion of counsel to the Company, such registration is not required under the federal securities law or if the Company receives a letter from the staff of the Commission stating that it would not take any 9 enforcement action if such registration is not effected). The Company will use its best efforts to obtain appropriate approvals or registrations under the state "blue sky" securities laws of all states in which Registered Holders reside. Warrants may not be exercised by, nor may shares of Common Stock be issued to, any Registered Holder in any state in which such exercise would be unlawful. (c) The Company shall pay all documentary, stamp or similar taxes and other governmental charges that may be imposed with respect to the issuance of Warrants, or the issuance or delivery of any shares of Common Stock upon exercise of the Warrants; provided, however, that if shares of Common Stock are to be delivered in a name other than the name of the Registered Holder of the Warrant Certificate representing any Warrant being exercised, then no such delivery shall be made unless the person requesting the same has paid to the Warrant Agent the amount of transfer taxes or charges incident thereto, if any. (d) The Warrant Agent is hereby irrevocably authorized as the Transfer Agent to requisition from time to time certificates representing shares of Common Stock or other securities required upon exercise of the Warrants, and the Company will comply with all such requisitions. SECTION 6. Exchange and Registration of Transfer. (a) Warrant Certificates may be exchanged for other Warrant Certificates representing an equal aggregate number of Warrants or may be transferred in whole or in part. Warrant Certificates to be so exchanged shall be surrendered to the Warrant Agent at its Corporate Office, and the Company shall execute and the Warrant Agent shall countersign, issue and deliver in exchange therefor the Warrant Certificate or Certificates which the Registered Holder making the exchange shall be entitled to receive. 10 (b) The Warrant Agent shall keep, at such office, books in which, subject to such reasonable regulations as it may prescribe, it shall register Warrant Certificates and the transfer thereof. Upon due presentment for registration of transfer of any Warrant Certificate at such office, the Company shall execute and the Warrant Agent shall issue and deliver to the transferee or transferees a new Warrant Certificate or Certificates representing an equal aggregate number of Warrants. (c) With respect to any Warrant Certificates presented for registration of transfer, or for exchange or exercise, the subscription or assignment form, as the case may be, on the reverse thereof shall be duly endorsed or be accompanied by a written instrument or instruments of subscription or assignment, in form satisfactory to the Company and the Warrant Agent, duly executed by the Registered Holder thereof or his attorney duly authorized in writing. (d) No service charge shall be made for any exchange or registration of transfer of Warrant Certificates. However, the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. (e) All Warrant Certificates surrendered for exercise or for exchange shall be promptly cancelled by the Warrant Agent. (f) Prior to due presentment for registration or transfer thereof, the Company and the Warrant Agent may deem and treat the Registered Holder of any Warrant Certificate as the absolute owner thereof of each Warrant represented thereby (notwithstanding any notations of ownership or writing thereon made by anyone other than the Company or the Warrant Agent) for all purposes and shall not be affected by any notice to the contrary. SECTION 7. Loss or Mutilation. Upon receipt by the Company and the Warrant Agent of evidence satisfactory to them of the ownership of and the loss, theft, destruction or 11 mutilation of any Warrant Certificate and (in the case of loss, theft or destruction) of indemnity satisfactory to them, and (in case of mutilation) upon surrender and cancellation thereof, the Company shall execute and the Warrant Agent shall countersign and deliver in lieu thereof a new Warrant Certificate representing an equal number of Warrants. Applicants for a substitute Warrant Certificate shall also comply with such other reasonable regulations and pay such other reasonable charges as the Warrant Agent may prescribe. SECTION 8. Adjustments to Purchase Price and Number of Securities. (a) Subdivision and Combination. In case the Company shall at any time subdivide or combine the outstanding shares of Common Stock, the Purchase Price shall forthwith be proportionately decreased in the case of subdivision or increased in the case of combination. (b) Stock Dividends and Distributions. In case the Company shall pay dividend in, or make a distribution of, shares of Common Stock or of the Company's capital stock convertible into Common Stock, the Purchase Price shall forthwith be proportionately decreased. An adjustment made pursuant to this Section 8(b) shall be made as of the record date for the subject stock dividend or distribution. (c) Adjustment in Number of Securities. Upon each adjustment of the Purchase Price pursuant to the provisions of this Section 8, the number of Warrant Securities issuable upon the exercise at the adjusted Purchase Price of each Warrant shall be adjusted to the nearest whole number by multiplying a number equal to the Purchase Price in effect immediately prior to such adjustment by the number of Warrant Securities issuable upon exercise of the Warrants immediately prior to such adjustment and dividing the product so obtained by the adjusted Purchase Price. 12 (d) Definition of Common Stock. For the purpose of this Agreement, the term "Common Stock" shall mean (i) the class of stock designated as Common Stock in the Certificate of Incorporation of the Company as may be amended or restated as of the date hereof, or (ii) any other class of stock resulting from successive changes or reclassifications of such Common Stock consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. In the event the Company shall after the date hereof issue Common Stock with greater or superior voting rights than the shares of Common Stock outstanding as of the date hereof, each Holder, at its option, may receive upon exercise of any Warrant either shares of Common Stock or a like number of such securities with greater or superior voting rights. (e) Merger or Consolidation or Sale. (i) In case of any consolidation of the Company with, or merger of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger which does not result in any reclassification or change of the outstanding Common Stock), the corporation formed by such consolidation or surviving such merger shall execute and deliver to the Holder a supplemental warrant agreement providing that the holder of each Warrant then outstanding or to be outstanding shall have the right thereafter (until the expiration of such Warrant) to receive, upon exercise of such Warrant, the kind and amount of shares of stock and other securities and property receivable upon such consolidation, merger, sale or transfer by a Holder of the number of shares of Common Stock of the Company for which such Warrant might have been exercised immediately prior to such consolidation, merger, sale or transfer. Such supplemental warrant agreement shall provide for adjustments which shall be identical to the adjustments provided in this Section 8. The above provision of this subsection shall similarly apply to successive consolidations or mergers. 13 (ii) In the event of (A) the sale by the Company of all or substantially all of its assets, or (B) the engagement by the Company or any of its affiliates in a "Rule 13e-3 transaction" as defined in paragraph (a)(3) of Rule 13e-3 of the General Rules and Regulations under the Exchange Act or (C) a distribution to the Company's stockholders of any cash, assets, property, rights, evidences of indebtedness, securities or any other thing of value, or any combination thereof, the Holders of the unexercised Warrants shall receive notice of such sale, transaction or distribution twenty (20) days prior to the date of such sale or the record date for such transaction or distribution, as applicable, and, if they exercise such Warrants prior to such date, they shall be entitled, in addition to the shares of Common Stock issuable upon the exercise thereof, to receive such property, cash, assets, rights, evidence of indebtedness, securities or any other thing of value, or any combination thereof, on the payment date of such sale, transaction or distribution. (f) No Adjustment of Exercise Price in Certain Cases. No adjustment of the Exercise Price shall be made if the amount of said adjustment shall be less than ten cents (10(cent)) per share of Common Stock, provided, however, that in such case any adjustment that would otherwise be required then to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with any adjustment so carried forward, shall amount to at least ten cents (10(cent)) per share of Common Stock. SECTION 9. Redemption. (a) Commencing on the Initial Warrant Redemption Date, the Company may (but only with the prior written consent of the Underwriter), on thirty (30) days' prior written notice, redeem all of the Warrants, in whole and not in part, at a redemption price of five cents ($.05) per Warrant; provided, however, that before any such call for redemption of Warrants can take place, the (i) average closing bid price for the Common Stock, as reported by the 14 National Association of Securities Dealers Automated Quotation System, or (ii) if not so quoted, as reported by any other recognized quotation system on which the Common Stock is quoted, shall have for any twenty (20) trading days within a period of thirty (30) consecutive trading days ending on the fifth (5th) trading day prior to the date on which the notice contemplated by Sections 9(b) and 9(c) hereof is given, equalled or exceeded 150% of the then exercise price per share of Common Stock (subject to adjustment in the event of any stock splits or other similar events as provided in Section 8 hereof). (b) In case the Company shall exercise its right to redeem all of the Warrants, it shall give or cause to be given notice to the Registered Holders of the Warrants, by mailing to such Registered Holders a notice of redemption, first class, postage prepaid, at their last address as shall appear on the records of the Warrant Agent. Any notice mailed in the manner provided herein shall be conclusively presumed to have been duly given whether or not the Registered Holder receives such notice. Not less than five (5) business days prior to the mailing to the Registered Holders of the Warrants of the notice of redemption, the Company shall deliver or cause to be delivered to the Underwriter or its successors or assigns a similar notice telephonically and confirmed in writing, together with a list of the Registered Holders (including their respective addresses and number of Warrants beneficially owned by them) to whom such notice of redemption has been or will be given. (c) The notice of redemption shall specify (i) the redemption price, (ii) the date fixed for redemption, which shall in no event be less than thirty (30) days after the date of mailing of such notice, (iii) the place where the Warrant Certificates shall be delivered and the redemption price shall be paid, and (iv) that the Underwriter is the Company's exclusive warrant solicitation agent and shall receive the commission contemplated by Section 4(b) hereof and (v) that the right to exercise the Warrant shall terminate at 5:00 p.m. (New York time) on the 15 business day immediately preceding the date fixed for redemption. The date fixed for the redemption of the Warrants shall be the "Redemption Date" for purposes of this Agreement. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity of the proceedings for such redemption except as to a holder (A) to whom notice was not mailed or (B) whose notice was defective. An affidavit of the Warrant Agent or the Secretary or Assistant Secretary of the Company that notice of redemption has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. (d) Any right to exercise a Warrant shall terminate at 5:00 p.m. (New York time) on the business day immediately preceding the Redemption Date. The redemption price payable to the Registered Holders shall be mailed to such persons at their addresses of record. (e) The Company shall indemnify the Underwriter and each person, if any, who controls the Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act against all loss, claim, damage, expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Act, the Exchange Act or otherwise, arising from the registration statement or prospectus referred to in Section 5(b) hereof to the same extent and with the same effect (including the provisions regarding contribution) as the provisions pursuant to which the company has agreed to indemnify the Underwriter contained in Section 7 of the Underwriting Agreement. (f) Five business days prior to the Redemption Date, the Company shall furnish to the Underwriter (i) opinions of counsel to the Company, dated such date and addressed to the Underwriter, and (ii) a "cold comfort" letter dated such date addressed to the Underwriter, signed by the independent public accountants who have issued a report on the Company's financial statements included in such registration statement, in each case covering 16 substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities, including, without limitation, those matters covered in Sections 6(d), 6(e) and 6(j) of the Underwriting Agreement. (g) The Company shall as soon as practicable after the Redemption Date, and in any event within 15 months thereafter, make "generally available to its security holders" (within the meaning of Rule 158 under the Act) an earnings statement (which need not be audited) complying with Section 11(a) of the Act and covering a period of at least 12 consecutive months beginning after the Redemption Date. (h) The Company shall deliver within five business days prior to the Redemption Date copies of all correspondence between the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff with respect to such registration statement and permit the Underwriter to do such investigation, upon reasonable advance notice, with respect to information contained in or omitted from the registration statement as it deems reasonably necessary to comply with applicable securities laws or rules of the NASD. Such investigation shall include access to books, records and properties and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such reasonable times and as often as the Underwriter shall reasonably request. 17 SECTION 10. Concerning the Warrant Agent. (a) The Warrant Agent acts hereunder as agent and in a ministerial capacity for the Company and the Underwriter, and its duties shall be determined solely by the provisions hereof. The Warrant Agent shall not, by issuing and delivering Warrant Certificates or by any other act hereunder, be deemed to make any representations as to the validity or value or authorization of the Warrant Certificates or the Warrants represented thereby or of any securities or other property delivered upon exercise of any Warrant or whether any stock issued upon exercise of any Warrant is fully paid and non-assessable. (b) The Warrant Agent shall not at any time be under any duty or responsibility to any holder of Warrant Certificates to make or cause to be made any adjustment of the Purchase Price provided in this Agreement, or to determine whether any fact exists which may require any such adjustment, or with respect to the nature or extent of any such adjustment, when made, or with respect to the method employed in making the same. It shall not (i) be liable for any recital or statement of fact contained herein or for any action taken, suffered or omitted by it in reliance on any Warrant Certificate or other document or instrument believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties, (ii) be responsible for any failure on the part of the Company to comply with any of its covenants and obligations contained in this Agreement or in any Warrant Certificate, or (iii) be liable for any act or omission in connection with this Agreement except for its own gross negligence or willful misconduct. (c) The Warrant Agent may at any time consult with counsel satisfactory to it (who may be counsel for the Company or the Underwriter) and shall incur no liability or responsibility for any action taken, suffered or omitted by it in good faith in accordance with the opinion or advice of such counsel. 18 (d) Any notice, statement, instruction, request, direction, order or demand of the Company shall be sufficiently evidenced by an instrument signed by the Chairman of the Board of Directors, President or any Vice President (unless other evidence in respect thereof is herein specifically prescribed). The Warrant Agent shall not be liable for any action taken, suffered or omitted by it in accordance with such notice, statement, instruction, request, direction, order or demand. (e) The Company agrees to pay the Warrant Agent reasonable compensation for its services hereunder and to reimburse it for its reasonable expenses hereunder; the Company further agrees to indemnify the Warrant Agent and hold it harmless against any and all losses, expenses and liabilities, including judgments, costs and counsel fees, for anything done or omitted by the Warrant Agent in the execution of its duties and powers hereunder except losses, expenses and liabilities arising as a result of the Warrant Agent's gross negligence or willful misconduct. (f) The Warrant Agent may resign its duties and be discharged from all further duties and liabilities hereunder (except liabilities arising as a result of the Warrant Agent's own gross negligence or willful misconduct), after giving thirty (30) days' prior written notice to the Company. At least fifteen (15) days prior to the date such resignation is to become effective, the Warrant Agent shall cause a copy of such notice of resignation to be mailed to the Registered Holder of each Warrant Certificate at the Company's expense. Upon such resignation the Company shall appoint in writing a new warrant agent. If the Company shall fail to make such appointment within a period of thirty (30) days after it has been notified in writing of such resignation by the resigning Warrant Agent, then the Registered Holder of any Warrant Certificate may apply to any court of competent jurisdiction for the appointment of a new warrant agent. Any new warrant agent, whether appointed by the Company or by such a 19 court, shall be a bank or trust company having a capital and surplus, as shown by its last published report to its stockholders, of not less than ten million dollars ($10,000,000) or a stock transfer company doing business in New York, New York. After acceptance in writing of such appointment by the new warrant agent is received by the Company, such new warrant agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named herein as the warrant agent, without any further assurance, conveyance, act or deed; but if for any reason it shall be necessary or expedient to execute and deliver any further assurance, conveyance, act or deed, the same shall be done at the expense of the Company and shall be legally and validly executed and delivered by the resigning Warrant Agent. Not later than the effective date of any such appointment, the Company shall file notice thereof with the resigning Warrant Agent and shall forthwith cause a copy of such notice to be mailed to the Registered Holder of each Warrant Certificate. (g) Any corporation into which the Warrant Agent or any new warrant agent may be converted or merged, any corporation resulting from any consolidation to which the Warrant Agent or any new warrant agent shall be a party, or any corporation succeeding to the corporate trust business of the Warrant Agent or any new warrant agent shall be a successor warrant agent under this Agreement without any further act, provided that such corporation is eligible for appointment as successor to the Warrant Agent under the provisions of the preceding paragraph. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed to the Company and to the Registered Holders of each Warrant Certificate. (h) The Warrant Agent, its subsidiaries and affiliates, and any of its or their officers or directors, may buy and hold or sell Warrants or other securities of the Company and otherwise deal with the Company in the same manner and to the same extent and with like effect 20 as though it were not Warrant Agent. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity. (i) The Warrant Agent shall retain for a period of two (2) years from the date of exercise any Warrant Certificate received by it upon such exercise. SECTION 11. Modification of Agreement. The Warrant Agent and the Company may by supplemental agreement make any changes or corrections in this Agreement (a) that they shall deem appropriate to cure any ambiguity or to correct any defective or inconsistent provision or manifest mistake or error herein contained, or (b) that they may deem necessary or desirable and which shall not adversely affect the interests of the holders of Warrant Certificates; provided, however, that this Agreement shall not otherwise be modified, supplemented or altered in any respect except with the consent in writing of the Registered Holders holding not less than sixty-six and two-thirds percent (66- 2/3%) of the Warrants then outstanding; provided, further, that no change in the number or nature of the securities purchasable upon the exercise of any Warrant, and no change that increases the Purchase Price of any Warrant, other than such changes as are specifically set forth in this Agreement as originally executed, shall be made without the consent in writing of each Registered Holders affected by such change. In addition, this Agreement may not be modified, amended or supplemented without the prior written consent of the Underwriter or its successors or assigns, other than to cure any ambiguity or to correct any defective or inconsistent provision or manifest mistake or error herein contained or to make any such change that the Warrant Agent and the Company deem necessary or desirable and which shall not adversely affect the interests of the Underwriter or its successors or assigns. 21 SECTION 12. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been made when delivered or mailed first-class postage prepaid or delivered to a telegraph office for transmission, if to the Registered Holder of a Warrant Certificate, at the address of such holder as shown on the registry books maintained by the Warrant Agent; if to the Company at CTI Industries Corporation, 22160 North Pepper Road, Barrington, Illinois, Attention: Stephen Merrick, President, or at such other address as may have been furnished to the Warrant Agent in writing by the Company; and if to the Warrant Agent, at its Corporate Office. Copies of any notice delivered pursuant to this Agreement shall be delivered to Joseph Stevens & Company, Inc., 33 Maiden Lane, 8th Floor, New York, NY 10038, Attention: Joseph Sorbara, Chief Executive Officer or at such other address as may have been furnished to the Company and the Warrant Agent in writing. SECTION 13. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without giving effect to conflicts of laws rules or principals. SECTION 14. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Company, the Warrant Agent and their respective successors and assigns and the holders from time to time of Warrant Certificates or any of them. Except as hereinafter stated, nothing in this Agreement is intended or shall be construed to confer upon any other person any right, remedy or claim or to impose upon any other person any duty, liability or obligation. The Underwriter is, and shall at all times irrevocably be deemed to be, a third-party beneficiary of this Agreement, with full power, authority and standing to enforce the rights granted to it hereunder. 22 SECTION 15. Counterparts. This Agreement may be executed in several counterparts, which taken together shall constitute a single document. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. CTI INDUSTRIES CORPORATION CONTINENTAL STOCK TRANSFER & TRUST COMPANY, INC. As Warrant Agent By:________________________________ By:____________________________ Name: Name: Title: Title: 23 EXHIBIT A No. W ___________ VOID AFTER ____________________, 2002 _________ WARRANTS REDEEMABLE WARRANT CERTIFICATE TO PURCHASE SHARES OF COMMON STOCK CTI INDUSTRIES CORPORATION CUSIP _________ THIS CERTIFIES THAT, FOR VALUE RECEIVED or registered assigns (the "Registered Holder") is the owner of the number of Redeemable Warrants (the "Warrants") specified above. One Warrant initially entitles the Registered Holder to purchase, subject to the terms and conditions set forth in this Certificate and the Warrant Agreement (as hereinafter defined), one fully paid and non-assessable share of Common Stock, $____ par value per share, of CTI Industries Corporation., a Delaware corporation (the "Company"), at any time from _____________, 1997 [the effective date of the Registration Statement] and prior to the Expiration Date (as hereinafter defined) upon the presentation and surrender of this Warrant Certificate with the Subscription Form on the reverse hereof duly executed, at the corporate office of Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York 10004 as Warrant Agent, or its successor (the "Warrant Agent"), accompanied by payment of $__________ [150% of the initial public offering price per Unit] subject to adjustment (the "Purchase Price"), in lawful money of the United States of America in cash or by check made payable to the Warrant Agent for the account of the Company. This Warrant Certificate is, and each Warrant represented hereby are, issued pursuant to and are subject in all respects to the terms and conditions set forth in the Warrant Agreement (the "Warrant Agreement"), dated __________, 1997 [the effective date of the Registration Statement], by and between the Company and the Warrant Agent. In the event of certain contingencies provided for in the Warrant Agreement, the Purchase Price and the number of shares of Common Stock subject to purchase upon the exercise of each Warrant represented hereby are subject to modification or adjustment. Each Warrant represented hereby is exercisable at the option of the Registered Holder, but no fractional interests will be issued. In the case of the exercise of less than all of the Warrants represented hereby, the Company shall cancel this Warrant Certificate upon the surrender hereof and shall execute and deliver a new Warrant Certificate or Warrant Certificates of like tenor, which the Warrant Agent shall countersign, for the balance of such Warrants. A-1 The term "Expiration Date" shall mean 5:00 p.m. (New York time) on __________, 2002 [the 60 month anniversary of the issuance of the Warrant]. If such date shall in the State of New York be a holiday or a day on which banks are authorized to close, then the Expiration Date shall mean 5:00 p.m. (New York time) on the next day which in the State of New York is not a holiday or a day on which banks are authorized to close. The Company shall not be obligated to deliver any securities pursuant to the exercise of this Warrant unless a registration statement under the Securities Act of 1933, as amended (the "Act"), with respect to such securities is effective or an exemption thereunder is available. The Company has covenanted and agreed that it will file a registration statement under the Federal securities laws, use its best efforts to cause the same to become effective, to keep such registration statement current, if required under the Act, while any of the Warrants are outstanding, and deliver a prospectus which complies with Section 10(a)(3) of the Act to the Registered Holder exercising this Warrant. This Warrant shall not be exercisable by a Registered Holder in any state where such exercise would be unlawful. This Warrant Certificate is exchangeable, upon the surrender hereof by the Registered Holder at the corporate office of the Warrant Agent, for a new Warrant Certificate or Warrant Certificates of like tenor representing an equal aggregate number of Warrants, each of such new Warrant Certificates to represent such number of Warrants as shall be designated by such Registered Holder at the time of such surrender. Upon due presentment and payment of any tax or other charge imposed in connection therewith or incident thereto, for registration of transfer of this Warrant Certificate at such office, a new Warrant Certificate or Warrant Certificates representing an equal aggregate number of Warrants will be issued to the transferee in exchange therefor, subject to the limitations provided in the Warrant Agreement. Prior to the exercise of any Warrant represented hereby, the Registered Holder shall not be entitled to any rights of a stockholder of the Company, including, without limitation, the right to vote or to receive dividends or other distributions, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided in the Warrant Agreement. Subject to the provisions of the Warrant Agreement, this Warrant may be redeemed at the option of the Company, in whole and not in part, at a redemption price of $.05 per Warrant, at any time commencing __________, 1998 [twelve (12) months from issuance] provided that the average closing bid price for the Company's Common Stock, as reported by the National Association of Securities Dealers Automated Quotation System (or, if not so quoted, as reported by any other recognized quotation system on which the price of the Common Stock is quoted), shall have, for any twenty (20) trading days within a period of thirty (30) consecutive trading days ending on the fifth (5th) trading day prior to the date on which the Notice of Redemption (as defined below) is given, equalled or exceeded 150% of the then exercise price per share (subject to adjustment in the event of any stock splits or other similar events). Notice of redemption (the "Notice of Redemption") shall be given not later than the thirtieth (30th) day before the date fixed for redemption, all as provided in the Warrant Agreement. On and after the date fixed for redemption, the Registered Holder shall have no rights with respect to this Warrant except to receive the $.05 per Warrant upon surrender of this Certificate. Prior to due presentment for registration of transfer hereof, the Company and the Warrant Agent may deem and treat the Registered Holder as the absolute owner hereof and of each A-2 Warrant represented hereby (notwithstanding any notations of ownership or writing hereon made by anyone other than a duly authorized officer of the Company or the Warrant Agent) for all purposes and shall not be affected by any notice to the contrary, except as provided in the Warrant Agreement. This Warrant Certificate shall be governed by and construed in accordance with the laws of the State of New York without giving effect to conflicts of laws. This Warrant Certificate is not valid unless countersigned by the Warrant Agent. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed, manually or in facsimile by two of its officers thereunto duly authorized and a facsimile of its corporate seal to be imprinted hereon. Dated: ___________, 1997 CTI INDUSTRIES CORPORATION [SEAL] By: ________________________________ Name: Title: ATTEST: By: ________________________________ Name: COUNTERSIGNED: Title: CONTINENTAL STOCK TRANSFER & TRUST COMPANY, as Warrant Agent By: _________________________ Authorized Officer A-3 SUBSCRIPTION FORM To Be Executed by the Registered Holder in Order to Exercise Warrant The undersigned Registered Holder hereby irrevocably elects to exercise _____ Warrants represented by this Warrant Certificate, and to purchase the securities issuable upon the exercise of such Warrants, and requests that certificates for such securities shall be issued in name of PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER ------------------------------- ------------------------------- (please print or type name and address) and be delivered to ------------------------------- ------------------------------- (please print or type name and address) and if such number of Warrants shall not be all the Warrants evidenced by this Warrant Certificate, that a new Warrant Certificate for the balance of such Warrants be registered in the name of, and delivered to, the Registered Holder at the address stated below. A-4 IMPORTANT: PLEASE COMPLETE THE FOLLOWING: 1. If the exercise of this Warrant was solicited by Joseph Stevens & Company, Inc. please check the following box 2. The exercise of this Warrant was solicited by -------------------------- 3. If the exercise of this Warrant was not solicited, please check the following box Dated: ______________________ X_________________________________ _________________________________ _________________________________ Address _________________________________ Social Security or Taxpayer Identification Number _________________________________ Signature Guaranteed _________________________________ A-5 ASSIGNMENT To Be Executed by the Registered Holder in Order to Assign Warrants FOR VALUE RECEIVED, __________________________, hereby sells, assigns and transfers unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER ---------------------------------- ---------------------------------- ---------------------------------- (please print or type name and address) ________________________ of the Warrants represented by this Warrant Certificate, and hereby irrevocably constitutes and appoints ____________________ Attorney to transfer this Warrant Certificate on the books of the Company, with full power of substitution in the premises. Dated: _______________________ X__________________________ __________________________ Signature Guaranteed THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER AND MUST BE GUARANTEED BY A COMMERCIAL BANK OR TRUST COMPANY OR A MEMBER FIRM OF THE AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE, MIDWEST STOCK EXCHANGE OR BOSTON STOCK EXCHANGE. A-6 EX-5 7 OPINION WITH CONSENT EXHIBIT 5.1 July 24, 1997 CTI Industries Corporation 22160 North Pepper Road Barrington, Illinois 60010 Attention: President Re: CTI Industries Corporation Registration Statement on Form SB-2 Ladies and Gentlemen: CTI Industries Corporation (the "Company") has filed with the United States Securities and Exchange Commission (the "Commission"), a Registration Statement on Form SB-2 (Commission Registration No. _________), with respect to which this opinion is to be an exhibit, relating to the proposed sale: 1. By the Company of 1,333,333 previously unissued units ("Units"), consisting of up to 1,333,333 previously unissued shares of its common stock, $.065 par value ("Common Stock") and 1,333,333 previously unissued five year redeemable warrants ("Warrants") and 1,333,333 previously unissued shares of Common Stock underlying these Warrants ("Underlying Common Stock"); 2. By the Company of 199,999 previously unissued Units ("Over-Allotment Units"), consisting of 199,999 previously unissued shares of Common Stock ("Over- Allotment Common Stock"), 199,999 previously unissued Warrants ("Over-Allotment Warrants") and 199,999 previously unissued shares of Common Stock underlying the Over- Allotment Warrants ("Over-Allotment Underlying Common Stock"); CTI Industries Corporation July 24, 1997 Page 2 3. Of 133,333 previously unissued underwriter's purchase options ("Underwriter's Purchase Options"), consisting of 133,333 previously unissued Units ("Underwriter's Units"), consisting of 133,333 previously unissued shares of Common Stock ("Underwriter's Common Stock"), 133,333 previously unissued Warrants ("Underwriter's Warrants") and 133,333 previously unissued shares of Common Stock underlying the Underwriter's Warrants ("Underwriter's Underlying Common Stock"). The Registration Statement, as amended, is herein referred to as the "Registration Statement". We have acted as securities counsel for the Company in connection with the transactions that are the subject matter of the Registration Statement and are familiar with the various corporate proceedings relating thereto. In connection with the Registration Statement, we have examined such corporate records of the Company and such other instruments, documents and certificates as we have deemed necessary as a basis for this opinion. For purposes of this opinion, we have assumed (i) the accuracy and completeness of all data supplied by the Company, its officers, directors or agents, (ii) that the transactions set forth in the Registration Statement are consummated as set forth therein, (iii) that the Commission shall have issued an order under the Securities Act of 1933, as amended, declaring effective the Registration Statement, and (iv) that all requisite authorizations, approvals, consents or exemptions under the securities laws of the various states and other jurisdictions of the United States of America shall have been obtained. Based upon the foregoing, we are of the opinion that the Units, the Common Stock, the Warrants, the Underlying Common Stock, the Over-Allotment Units, the Over-Allotment Common Stock, the Over-Allotment Warrants, the Over-Allotment Underlying Common Stock, the Underwriter's Purchase Options, the Underwriter's Units, the Underwriter's Common Stock, the Underwriter's Warrants and the Underwriter's Underlying Common Stock to be sold in accordance with the Registration Statement, are duly authorized and upon issuance, delivery and sale thereof, for the consideration specified in the Registration Statement, will be legally issued, fully paid and non-assessable. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and as a part of, or as an exhibit to, any document that may be filed with respect to the proposed transactions under the securities laws of the various states and other jurisdictions of the United States. We also consent to be named in the Registration Statement and in the Prospectus which constitutes a part thereof as the counsel that will pass upon certain legal matters for the Company in connection with the sale of the Company's securities. Very truly yours, /s/ Fishman Merrick Miller Genelly Springer Klimek & Anderson, P.C. ------------------------------------------------------------------- Fishman Merrick Miller Genelly Springer Klimek & Anderson, P.C. EX-10 8 1997 STOCK OPTION PLAN EXHIBIT 10.1 CTI INDUSTRIES CORPORATION 1997 STOCK OPTION PLAN 1. PURPOSE OF THE PLAN The purposes of the CTI Industries Corporation 1997 Stock Option Plan (the "Plan") are to enable the Company to attract and retain the services of officers and other key employees with managerial, professional or supervisory responsibilities, to retain able consultants and advisors and to motivate such persons to use their best efforts on behalf of the Company. 2. GENERAL PROVISIONS 2.1 Definitions As used in the Plan: (a) "Board of Directors" means the Board of Directors of the Company. (b) "Code" means the Internal Revenue Code of 1986, including any and all amendments thereto. (c) "Committee" means the committee appointed by the Board of Directors from time to time to administer the Plan pursuant to Section 2.2. (d) "Common Stock" means the Company's Common Stock, $.075 par value. (e) "Fair Market Value" means, with respect to a specific date, the value of the Common Stock as determined in good faith by the Committee on the basis of such quotations and other considerations as the Committee deems appropriate. (f) "Incentive Stock Option" means an option granted under the Plan which is intended to qualify as an incentive stock option under Section 422 of the Code. (g) "Non-Qualified Stock Option" means an option granted under the Plan which is not an Incentive Stock Option. (h) "Participant" means a person to whom a Stock Option has been granted under the Plan. (i) "Stock Option" means an Incentive Stock Option or a Non-Qualified Stock Option granted under the Plan. 1 (j) "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of the granting of the Stock Option, each of the corporations other than the last corporation in the unbroken chain owns 50% or more of the total voting power of all classes of stock in one of the other corporations in such chain. 2.2 Administration of the Plan (a) The Plan shall be administered by the Committee which shall at all times consist of two (2) or more persons, each of whom shall be a member of the Board of Directors. The Board of Directors may from time to time remove members from, or add members to, the Committee. Vacancies on the Committee, howsoever caused, shall be filled by the Board of Directors. The Committee shall select one of its members as Chairman, and shall hold meetings at such times and places as it may determine. (b) The Committee shall have the full power, subject to and within the limits of the Plan, to: (i) interpret and administer the Plan, and Stock Options granted under it; (ii) make and interpret rules and regulations for the administration of the Plan and to make changes in and revoke such rules and regulations (and in the exercise of this power, shall generally determine all questions of policy and expediency that may arise and may correct any defect, omission, or inconsistency in the Plan or any agreement evidencing the grant of any Stock Option in a manner and to the extent it shall deem necessary to make the Plan fully effective); (iii) determine those persons to whom Stock Options shall be granted and the number of Stock Options to be granted to any person; (iv) determine the terms of Stock Options granted under the Plan, consistent with the provision of the Plan; and (v) generally, exercise such powers and perform such acts in connection with the Plan as are deemed necessary or expedient to promote the best interests of the Company. The interpretation and construction by the Committee of any provision of the Plan or of any Stock Option shall be final, binding and conclusive. (c) The Committee may act only by a majority of its members then in office; however, the Committee may authorize any one (1) or more of its members or any officer of the Company to execute and deliver documents on behalf of the Committee. (d) No member of the Committee shall be liable for any action taken or omitted to be taken or for any determination made by him or her in good faith with respect to the Plan, and the Company shall indemnify and hold harmless each member of the Committee against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim with the approval of 2 the Committee) arising out of any act or omission in connection with the administration or interpretation of the Plan, unless arising out of such person's own fraud or bad faith. 2.3 Effective Date The Plan shall become effective upon its adoption by the Board of Directors, and Stock Options may be granted upon such adoption and from time to time thereafter, subject, however, to approval of the Plan by affirmative vote of the holders of a majority of the shares of the Common Stock, within 12 months after the adoption of the Plan by the Board of Directors. If the Plan is not approved, this Plan and all Stock Options previously granted thereunder shall become null and void. 2.4 Duration If approved by the shareholders of the Company, as provided in Section 2.3, unless sooner terminated by the Board of Directors, the Plan shall remain in effect for a period of ten (10) years following its adoption by the Board of Directors. 2.5 Shares Subject to the Plan The maximum number of shares of Common Stock which may be subject to Stock Options granted under the Plan shall be 300,000. The Stock Options shall be subject to adjustment in accordance with Section 4.1, as appropriate, and shares to be issued upon exercise of Stock Options may be either authorized and unissued shares of Common Stock or authorized and issued shares of Common Stock purchased or acquired by the Company for any purpose. If a Stock Option or portion thereof shall expire or is terminated, cancelled or surrendered for any reason without being exercised in full, the unpurchased shares of Common Stock which were subject to such Stock Option or portion thereof shall be available for future grants of Stock Options under the Plan. 2.6 Amendments The Plan may be suspended, terminated or reinstated, in whole or in part, at any time by the Board of Directors. The Board of Directors may from time to time make such amendments to the Plan as it may deem advisable, including, with respect to Incentive Stock Options, amendments deemed necessary or desirable to comply with Section 422 of the Code and any regulations issued thereunder; provided, however, that without the approval of the Company's shareholders no amendment shall be made which: (a) Increases the maximum number of shares of Common Stock which may be subject to Stock Options granted under the Plan (other than as provided in Section 4.1, as appropriate); or (b) Extends the term of the Plan; or 3 (c) Increases the period during which a Stock Option may be exercised beyond ten (10) years from the date of grant; or (d) Otherwise materially increases the benefits accruing to Participants under the Plan; or (e) Materially modifies the requirements as to eligibility for participation in the Plan. Except as otherwise provided herein, termination or amendment of the Plan shall not, without the consent of a Participant, affect such Participant's rights under any Stock Options previously granted to such Participant. 2.7 Participants and Grants Stock Options may be granted by the Committee to (i) officers and other salaried employees of the Company and its Subsidiaries with managerial, professional or supervisory responsibilities and (ii) consultants and advisors who render bona fide services to the Company and its Subsidiaries, in each case, where the Committee determines that such officer, employee, consultant or advisor has the capacity to make a substantial contribution to the success of the Company. The Committee may grant Stock Options to purchase such number of shares of Common Stock (subject to the limitations of Section 2.5) as the Committee may, in its sole discretion, determine. In granting Stock Options under the Plan, the Committee, on an individual basis, may vary the number of Incentive Stock Options or Non-Qualified Stock Options as between Participants and may grant Incentive Stock Options and/or Non-Qualified Stock Options to a Participant in such amounts as the Committee may determine in its sole discretion. 3. STOCK OPTIONS 3.1 General All Stock Options granted under the Plan shall be evidenced by written agreements executed by the Company and the Participant to whom granted, which agreement shall state the number of shares of Common Stock which may be purchased upon the exercise thereof and shall contain such investment representations and other terms and conditions as the Committee may from time to time determine, or, in the case of Incentive Stock Options, as may be required by Section 422 of the Code, or any other applicable law. 3.2 Price Subject to the provisions of Section 3.6(d) and 4.1, the purchase price per share of Common Stock subject to a Stock Option shall, in no case, be less than one hundred percent (100%) 4 of the Fair Market Value of a share of Common Stock on the date the Stock Option is granted; provided, however, that the Board of Directors may authorize the grant a Non-Qualified Stock Option with a purchase price per share less than the Fair Market Value if the amount of the difference between the option purchase price and the Fair Market Value is designated in the resolution authorizing the option. 3.3 Period The duration or term of each Stock Option granted under the Plan shall be for such period as the Committee shall determine but in no event more than ten (10) years from the date of grant thereof. 3.4 Exercise Subject to Section 4.4, Stock Options may be exercisable immediately upon granting of the Stock Option or at such other time or times as the Committee shall specify when granting the Stock Option. Once exercisable, a Stock Option shall be exercisable, in whole or in part, by delivery of a written notice of exercise to the Secretary of the Company at the principal office of the Company specifying the number of shares of Common Stock as to which the Stock Option is then being exercised together with payment of the full purchase price for the shares being purchased upon such exercise. Until the shares of Common Stock as to which a Stock Option is exercised are issued, the Participant shall have none of the rights of a shareholder of the Company with respect to such shares. 3.5 Payment The purchase price for shares of Common Stock as to which a Stock Option has been exercised and any amount required to be withheld, as contemplated by Section 4.3, may be paid: (a) In United States dollars in cash, or by check, bank draft or money order payable in United States dollars to the order of the Company; or (b) By the delivery by the Participant to the Company of whole shares of Common Stock having an aggregate Fair Market Value on the date of payment equal to the aggregate of the purchase price of Common Stock as to which the Stock Option is then being exercised or by the withholding of whole shares of Common Stock having such Fair Market Value upon the exercise of such Stock Option; or (c) By a combination of both (a) and (b) above. 5 The Committee may, in its discretion, impose limitations, conditions and prohibitions on the use by a Participant of shares of Common Stock to pay the purchase price payable by such Participant upon the exercise of a Stock Option. 3.6 Special Rules for Incentive Stock Options Notwithstanding any other provision of the Plan, the following provisions shall apply to Incentive Stock Options granted under the Plan: (a) Incentive Stock Options shall only be granted to Participants who are employees of the Company or its Subsidiaries. (b) To the extent that the aggregate Fair Market Value of Common Stock, with respect to which Incentive Stock Options are exercisable for the first time by a Participant during any calendar year under this Plan and any other Plan of the Company or a Subsidiary, exceeds $100,000, such Stock Options shall be treated as Non-Qualified Stock Options. (c) Any Participant who disposes of shares of Common Stock acquired upon the exercise of an Incentive Stock Option by sale or exchange either within two (2) years after the date of the grant of the Incentive Stock Option under which the shares were acquired or within one (1) year of the acquisition of such shares, shall promptly notify the Secretary of the Company at the principal office of the Company of such disposition, the amount realized, the purchase price per share paid upon the exercise and the date of disposition. (d) No Incentive Stock Option shall be granted to a Participant who, at the time of the grant, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock either of the Company or any parent or Subsidiary of the Company, unless the purchase price of the shares of Common Stock purchasable upon exercise of such Incentive Stock Option is at least one hundred ten percent (110%) of the Fair Market Value (at the time the Incentive Stock Option is granted) of the Common Stock and the Incentive Stock Option is not exercisable more than five (5) years from the date it is granted. 3.7 Termination of Employment (a) In the event a Participant's employment by, or relationship with, the Company shall terminate for any reason other than those reasons specified in Sections 3.7(b), (c), (d) or (e) hereof while such Participant holds Stock Options granted under the Plan, then all rights of any kind under any outstanding Option held by such Participant which shall not have previously lapsed or terminated shall expire immediately. 6 (b) If a Participant's employment by, or relationship with, the Company or its Subsidiaries shall terminate as a result of such Participant's total disability, each Stock Option held by such Participant (which has not previously lapsed or terminated) shall be exercisable by such Participant for a period of six months after termination but only to the extent the Option is otherwise exercisable during that period. Notwithstanding the foregoing, the Committee may in the event of such disability accelerate the date after which a Stock Option is exercisable, in whole or in part, which change shall be in the Committee's sole discretion and be final, binding and conclusive. For purposes of this paragraph, "total disability" shall mean permanent mental or physical disability as determined by the Committee. (c) In the event of the death of a Participant, each Stock Option held by such Participant (which has not previously lapsed or terminated) shall be exercisable by the executor or administrator of the Participant's estate or by the person or persons to whom the deceased Participant's rights thereunder shall have passed by will or by the laws of descent or distribution, for a period of six (6) months after such Participant's death but only to the extent the Option is otherwise exercisable during that period. Notwithstanding the foregoing, the Committee may in the event of such death accelerate the date after which a Stock Option is exercisable, in whole or in part, which change shall be in the Committee's sole discretion and be final, binding and conclusive. (d) If a Participant's employment by the Company shall terminate by reason of such Participant's retirement in accordance with Company policies, each Stock Option held by such Participant at the date of termination (which has not previously lapsed or terminated) shall be exercisable for a period of three (3) months after termination, but only to the extent the Option is otherwise exercisable during that period. (e) In the event the Company terminates the employment of a Participant who at the time of such termination was an officer of the Company and had been continuously employed by the Company during the two (2) year period immediately preceding such termination, for any reason except "good cause" (hereafter defined) and except upon such Participant's death, total disability or retirement in accordance with Company policies, each Stock Option held by such Participant (which has not previously lapsed or terminated and which has been held by such Participant for more than six (6) months prior to such termination) shall be exercisable for a period of three (3) months after such termination, but only to the extent the Option is otherwise exercisable during that period. A termination for "good cause" shall be deemed to have occurred only if the Participant in question (i) is terminated by written notice for dishonesty, because of his conviction of a felony, or because of his violation of any material provision of any employment or other agreement with the Company or any 7 of its Subsidiaries, or (ii) shall voluntarily resign or terminate his employment with the company or any of its Subsidiaries under or followed by such circumstances as would constitute a breach of any material provision of any employment or other agreement between him and the Company or any of its Subsidiaries, or (iii) shall have committed an act of dishonesty not discovered by the Company or any of its Subsidiaries prior to the cessation of his employment with the Company or any of its Subsidiaries, but which would have resulted in his discharge if discovered prior to such date, or (iv) shall, either before or after cessation of his employment with the Company or any of its Subsidiaries, without the written consent of the company or any of its Subsidiaries, use (except for the benefit of the Company or any of its Subsidiaries) or disclose to any other person any confidential information relating to the business or any trade secrets of the Company or any of its Subsidiaries obtained as a result of or in connection with such employment. 3.8 Effect of Leaves of Absence It shall not be considered a termination of employment when a Participant is on military or sick leave or such other type leave of absence which is considered as continuing intact the employment relationship of the Participant with the Company or any of its Subsidiaries. In case of such leave of absence, the employment relationship shall be deemed to have continued until the later of (i) the date when such leave shall have lasted ninety (90) days in duration, or (ii) the date as of which the Participant's right to employment shall have no longer been guaranteed either by statute or contract. 4. MISCELLANEOUS PROVISIONS 4.1 Adjustments Upon Changes in Capitalization (a) In the event of changes to the outstanding shares of Common Stock of the Company through reorganization, merger, consolidation, recapitalization, reclassification, stock split-up, stock dividend, stock consolidation or otherwise, or in the event of a sale of all or substantially all of the assets of the Company, an appropriate and proportionate adjustment shall be made in the number and kind of shares as to which Stock Options may be granted. A corresponding adjustment changing the number or kind of shares and/or the purchase price per share of unexercised Stock Options or portions thereof which shall have been granted prior to any such change shall likewise be made. (b) Notwithstanding the foregoing, in the case of a reorganization, merger or consolidation, or sale of all or substantially all of the assets of the Company, in lieu of adjustments as aforesaid, the Committee may in its discretion 8 accelerate the date after which a Stock Option may or may not be exercised or the stated expiration date thereof. Adjustments or changes under this Section shall be made by the Committee, whose determination as to what adjustments or changes shall be made, and the extent thereof, shall be final, binding and conclusive. 4.2 Non-Transferability No Stock Option shall be transferable except by will or the laws of descent and distribution, nor shall any Stock Option be exercisable during the Participant's lifetime by any person other than the Participant or his guardian or legal representative. 4.3 Withholding The Company's obligations under this Plan shall be subject to applicable federal, state and local tax withholding requirements. Federal, state and local withholding tax due at the time of a grant or upon the exercise of any Stock Option may, in the discretion of the Committee, be paid in shares of Common Stock already owned by the Participant or through the withholding of shares otherwise issuable to such Participant, upon such terms and conditions as the Committee shall determine. If the Participant shall fail to pay, or make arrangements satisfactory to the Committee for the payment, to the Company of all such federal, state and local taxes required to be withheld by the Company, then the Company shall, to the extent permitted by law, have the right to deduct from any payment of any kind otherwise due to such Participant an amount equal to any federal, state or local taxes of any kind required to be withheld by the Company. 4.4 Compliance with Law and Approval of Regulatory Bodies No Stock Option shall be exercisable and no shares will be delivered under the Plan except in compliance with all applicable federal and state laws and regulations including, without limitation, compliance with all federal and state securities laws and withholding tax requirements. Any share certificate issued to evidence shares for which a Stock Option is exercised may bear legends and statements the Committee shall deem advisable to assure compliance with federal and state laws and regulations. No Stock Option shall be exercisable and no shares will be delivered under the Plan, until the Company has obtained consent or approval from regulatory bodies, federal or state, having jurisdiction over such matters as the Committee may deem advisable. In the case of the exercise of a Stock Option by a person or estate acquiring the right to exercise the Stock Option as a result of the death of the Participant, the Committee may require reasonable evidence as to the ownership of the Stock Option and may require consents and releases of taxing authorities that it may deem advisable. 9 4.5 No Right to Employment Neither the adoption of the Plan nor its operation, nor any document describing or referring to the Plan, or any part thereof, nor the granting of any Stock Options hereunder, shall confer upon any Participant under the Plan any right to continue in the employ of the Company or any Subsidiary, or shall in any way affect the right and power of the Company or any Subsidiary to terminate the employment of any Participant at any time with or without assigning a reason therefore, to the same extent as might have been done if the Plan had not been adopted. 4.6 Exclusion from Pension Computations By acceptance of a grant of a Stock Option under the Plan, the recipient shall be deemed to agree that any income realized upon the receipt or exercise thereof or upon the disposition of the shares received upon exercise will not be taken into account as "base remuneration", "wages", "salary" or "compensation" in determining the amount of any contribution to or payment or any other benefit under any pension, retirement, incentive, profit-sharing or deferred compensation plan of the Company or any Subsidiary. 4.7 Abandonment of Options A Participant may at any time abandon a Stock Option prior to its expiration date. The abandonment shall be evidenced in writing, in such form as the Committee may from time to time prescribe. A Participant shall have no further rights with respect to any Stock Option so abandoned. 4.8 Interpretation of the Plan Headings are given to the Sections of the Plan solely as a convenience to facilitate reference, such headings, numbering and paragraphing shall not in any case be deemed in any way material or relevant to the construction of the Plan or any provision hereof. The use of the masculine gender shall also include within its meaning the feminine. The use of the singular shall also include within its meaning the plural and vice versa. 4.9 Use of Proceeds Funds received by the Company upon the exercise of Stock Options shall be used for the general corporate purposes of the Company. 4.10 Construction of Plan The place of administration of the Plan shall be in the State of Illinois, and the validity, construction, interpretation, administration and effect of the Plan and of its rules and regulations, and rights relating to the Plan, shall be determined solely in accordance with the laws of the State of Illinois. BOARD OF DIRECTORS APPROVAL _____________________________ SHAREHOLDER APPROVAL _____________________________ 10 EX-10 9 EMPLOYMENT AGREEMENT EXHBIT 10.2 E M P L O Y M E N T A G R E E M E N T THIS AGREEMENT, made and entered into this 29th day of April, 1996 effective for the term provided herein, by and between CTI Industries Corporation, a Delaware corporation (the "Company") and John C. Davis (hereinafter referred to as the "Executive"). WHEREAS, the Executive is a founder of the Company and is, and since the inception of the Company has been, an executive officer of the Company; WHEREAS, the Company desires to be assured of the continued association and services of the Executive and the Executive is willing to provide such continued services as Executive Vice President- Sales of the Company on the terms provided herein; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows: 1. Employment, Duties and Authority. 1.1 The Company agrees to continue Executive in its employ, and Executive agrees to remain in the employ of the Company, for the period stated in paragraph 3 hereof and upon the other terms and conditions herein provided. 1.2 During the period of his employment hereunder, Executive agrees to serve as Executive Vice President-Sales, and to be responsible for the marketing and sale of the Company's products, reporting directly to the President of the Company. 1.3 During the term of Executive's employment hereunder, Executive shall devote his full energies, interest, abilities and productive time to the performance of his duties and responsibilities hereunder and will perform such duties and responsibilities faithfully and with reasonable care for the welfare of the Company. 2. Compensation and Benefits. 2.1 Salary. The Company shall pay to Executive during the initial term of employment hereunder a salary at an annual rate of $150,000. The salary shall be paid by the Company to Executive in 26 equal bi-weekly installments, less amounts which the Company may be required to withhold from such payments by applicable federal, state or local laws or regulations. The annual rate of salary shall be subject to review and adjustment by the Board of Directors from time to time but, during the initial term shall not be less than $150,000. 2.2 Benefits; Expense Reimbursement. 2.2.1 The Executive shall be entitled to, and shall receive, all other benefits of employment available to other executives of the Company generally, including, without limitation, participation in any hospital, surgical, medical or other group health plans or accident benefits, life insurance benefits, 1 pension or profit-sharing plans, bonus plans or vacation plans as shall be instituted by the Company, in its sole discretion. 2.2.2 During the term hereof, the Company shall reimburse Executive for all reasonable and necessary expenses incurred by Executive in the performance of his duties hereunder, including without limitation, travel (including all automobile expenses), meals, lodging, office supplies or equipment subject to such reasonable limitations, restrictions and reporting standards as the Board of Directors of the Company may from time to time establish. Executive shall provide to the Company promptly after incurring any such expenses a detailed report thereof and such information relating thereto as the Company shall from time to time require. Such information shall be sufficient to support the deductibility of all such expenses by the Company for federal income tax purposes. 3. Term. The employment of Executive hereunder shall be for a term commencing on February 1, 1996 and expiring on January 31, 1998. Upon the expiration of the initial term or any renewal term of Executive's employment hereunder, the term of such employment automatically shall be renewed for an additional term of one year commencing on February 1 and expiring on the succeeding January 31 unless Executive or the Company shall give notice of the termination of Executive's employment and this Agreement by written notice to the other more than 60 days prior to the date of expiration of the initial or any renewal term. In the event that such notice of termination shall be given timely this Agreement shall terminate on the date of expiration of such initial or renewal term. 4. Termination. 4.1 The Company shall be entitled to terminate this Agreement prior to the expiration of its term or any renewal term on the occurrence of an event of default with respect to Executive as provided herein. 4.2 For purposes of this Agreement, an event of default with respect to Executive shall include: 4.2.1 Any failure by Executive to perform his duties, responsibilities or obligations hereunder in a faithful and diligent manner or with reasonable care and (if such failure can be cured) the failure by Executive to cure such failure within 10 days after written notice thereof shall have been given to Executive by the Company; or 4.2.2 Commission by Executive of any material act of dishonesty as an employee of the Company or of disloyalty to the Company, or any wrongful or unauthorized appropriation, taking or misuse of funds, property or business opportunities of the Company. 4.3 Executive shall be entitled to terminate his employment with the Company under this Agreement prior to the expiration of its term upon the occurrence of an event of default with respect to the Company. 2 4.4 For purposes of this Agreement an event of default with respect to the Company shall include: 4.4.1 Any failure by the Company to perform its obligations to Executive under this Agreement and (if such failure can be cured) the failure by the Company to cure such failure within 10 days after written notice thereof shall have been given to the Company by Executive; 4.4.2 The Company shall: (a) admit in writing its inability to pay its debts generally as they become due, (b) file a petition for relief under any chapter of Title 11 of the United States Code or a petition to take advantage of any insolvency provision under the laws of the United States of America or any state thereof, (c) make a assignment for the benefit of its creditors, (d) consent to the appointment of a receiver of itself or of the whole or any substantial part of its property, (e) suffer the entry of an order for relief under any chapter of Title 11 of the United Sates Code, or (f) file a petition or answer seeking reorganization under the Federal Bankruptcy Laws or any other applicable law or statute of the United States of America or any state thereof. 4.5 In the event of termination of this Agreement and Executive's employment hereunder by the Company pursuant to paragraph 4.1 hereof, all rights and obligations of the Company and Executive hereunder shall terminate on the date of such termination, subject to the following: 4.5.1 Executive shall be entitled to receive (subject to any rights of setoff or counterclaim by the Company) all salary and benefits which shall have accrued prior to the date of such termination and the obligation of the Company for the payment of salary or benefits shall terminate as at the date of such termination; 4.5.2 All rights of the Company or Executive which shall have accrued hereunder prior to the date of such termination, and all provisions of this Agreement provided herein to survive termination of employment of Executive hereunder, shall survive such termination and the Company and Executive shall continue to be bound by such provisions in accordance with the terms thereof; 3 4.6 In the event of termination of the Agreement by Executive in accordance with paragraph 4.3 hereof, all rights and obligations of the Company and Executive hereunder shall terminate on the date of such termination, subject to the following: 4.6.1 Executive shall be entitled to receive all salary and benefits which shall have accrued prior to the date of such termination and the Company's obligation for the payment of salary and benefits shall terminate as of the date of such termination; 4.6.2 All rights of the Company or Executive which shall have accrued hereunder prior to the date of such termination and the obligations of Executive pursuant to paragraphs 5, 6 and 7 provided herein to survive termination of employment of Executive hereunder shall survive such termination and the Executive shall continue to be bound by such provisions in accordance with their terms. 4.7 In the event of the death of Executive during the term or any renewal term hereof, all rights and obligations of the Company and Executive hereunder shall terminate on the date of such termination, subject to the following: 4.7.1 Executive's personal representative, shall be entitled to receive all salary and benefits which shall have accrued prior to the date of such termination and the Company's obligations for the payment of salary and benefits shall terminate as of the date of such termination; 4.7.2 All rights of the Company or Executive which shall have accrued hereunder prior to the date of such termination and the obligations of Executive pursuant to paragraphs 5, 6 and 7 provided herein to survive termination of employment of Executive hereunder shall survive such termination and the Executive shall continue to be bound by such provisions in accordance with their terms. The obligations of paragraphs 5, 6 and 7 shall be binding upon the heirs, legatees or personal or legal representatives of Executive. 5. Confidential Information. 5.1 "Confidential Information" means information disclosed by the Company to Executive, or developed or obtained by Executive during his employment by the Company, either before the date or during the term of this Agreement, provided that such information is not generally known in the business and industry in which the Company is or may subsequently become engaged, relating to or concerning the business, projects, products, processes, formulas, know-how, techniques, designs or methods of the Company, whether relating to research, development, manufacture, purchasing, accounting, engineering, marketing, merchandising, selling or otherwise. Without limitation, Confidential Information shall include all know-how, technical information, inventions, ideas, concepts, processes and designs relating to products of the Company, whether now existing or hereafter developed, and all prices, customer names, customer lists, marketing and other relationships, whether contractual or not, between the Company, its suppliers, customers, employees, agents, consultants and independent contractors. 4 5.2 Executive agrees that, during the term hereof or while Executive shall receive compensation hereunder and after termination of his employment with the Company for so long as the Confidential Information shall not be generally known or generally disclosed (except by Executive or by means of wrongful use or disclosure), Executive shall not use any Confidential Information, except on behalf of the Company during the term hereof, or disclose any Confidential Information to any person, firm, partnership, company, corporation or other entity, except as authorized by the Board of Directors of the Company. 6. Inventions. 6.1 "Inventions" shall mean discoveries, concepts, ideas, designs, methods, formulas, know-how, techniques or any improvements thereon, whether patentable or not, made, conceived or developed, in whole or in part, by Executive. 6.2 Executive covenants and agrees to communicate and fully disclose to the Board of Directors of the Company any and all Inventions made or conceived by him during the term hereof or while receiving any compensation or payment from the Company and further agrees that any and all such Inventions which he may conceive or make, during the term hereof or while receiving any compensation or payments from the Company, shall be at all times and for all purposes regarded as acquired and held by him in a fiduciary capacity and solely for the benefit of the Company and shall be the sole and exclusive property of the Company. The provisions of this subparagraph shall not apply to an invention for which no equipment, supplies, facilities or trade secret information of the Company was used and which was developed entirely on the Executive's own time, unless (a) the invention relates (i) to the business of the Company, or (ii) to the Company's actual or demonstrably anticipated research or development, or (b) the invention relates from any work performed by Executive for the Company. 6.3 Executive also covenants and agrees that he will assist the Company in every proper way upon request to obtain for its benefit patents for any and all inventions referred to in paragraph 6.2 hereof in any and all countries. All such patents and patent applications are to be, and remain, the exclusive property of the Company for the full term thereof and to that end, the Executive covenants and agrees that he will, whenever so requested by the Company or its duly authorized agent, make, execute and deliver to the Company, its successors, assigns or nominees, without charge to the Company except for out of pocket expenses, any all applications, applications for divisions, renewals, reissues, specifications, oaths, assignments and all other instruments which the Company shall deem necessary or appropriate in order to apply for and obtain patents of the United States or foreign countries for any and all Inventions referred to in paragraph 6.2 hereof or in order to assign and convey to the Company, its successors, assigns or nominees, the sole and exclusive right, title and interest in and to such Inventions, applications or patents. Executive likewise covenants and agrees that his obligations to execute any such instruments or papers shall continue after the expiration or termination of this Agreement with respect to any and all such Inventions, and such obligations shall be binding upon his heirs, executors, assigns, administrators or other legal representatives. 5 7. Writings and Working Papers. Executive covenants and agrees that any and all books, textbooks, letters, pamphlets, drafts, memoranda or other writings of any kind written by him for or on behalf of the Company or in the performance of Executive's duties hereunder, Confidential Information referred to in paragraph 5 hereof and all notes, records and drawings made or kept by him of work performed in connection with his employment by the Company shall be and are the sole and exclusive property of the Company and the Company shall be entitled to any and all copyrights thereon or other rights relating thereto. Executive agrees to execute any and all documents or papers of any nature which the Company or its successors, assigns or nominees deem necessary or appropriate to acquire, enhance, protect, perfect, assign, sell or transfer its rights under this paragraph. Executive also agrees that upon request he will place all such notes, records and drawings in the Company's possession and will not take with him without the written consent of a duly authorized officer of the Company any notes, records, drawings, blueprints or other reproductions relating or pertaining to or connected with his employment of the business, books, textbooks, pamphlets, documents work or investigations of the Company. The obligations of this paragraph shall survive the term of employment hereunder or the termination or expiration of the term or any renewal term hereof. 8. Specific Enforcement. Executive is obligated under this Agreement to render service of a special, unique, unusual, extraordinary and intellectual character, thereby giving this Agreement peculiar value so that the loss of such service or violation by Executive of this Agreement could not reasonably or adequately be compensated in damages in an action at law. Therefore, in addition to other remedies provided by law, the Company shall have the right during the term or any renewal term of this Agreement (or thereafter with respect to obligations continuing after the expiration or termination of this Agreement) to compel specific performance hereof by Executive or to obtain injunctive relief against violations hereof by Executive, and if the Company prevails in any proceeding therefor, it will also be entitled to recover all costs and expenses incurred by the Company in connection therewith, including attorneys' fees. 9. Assignment. The rights and duties of a party hereunder shall not be assignable by that party, except that the Company may assign this Agreement and all rights and obligations hereunder to, and may require the assumption thereof by, any corporation or any other business entity which succeeds to all or substantially all the business of the Company through merger, consolidation or corporate reorganization or by acquisition of all or substantially all of the assets of the Company. 10. Binding Effect. This Agreement shall be binding upon the parties hereto and their respective successors in interest, heirs and personal representatives and, to the extent permitted herein, the assigns of the Company. 11. Severability. If any provision of this Agreement or any part hereof or application hereof to any person or circumstance shall be finally determined by a court of competent jurisdiction to be invalid or 6 unenforceable to any extent, the remainder of this Agreement, or the remainder of such provision or the application of such provision to persons or circumstances other than those as to which it has been held invalid or unenforceable, shall not be affected thereby and each provision of this Agreement shall remain in full force and effect to the fullest extent permitted by law. The parties also agree that, if any portion of this Agreement, or any part hereof or application hereof, to any person or circumstance shall be finally determined by a court of competent jurisdiction to be invalid or unenforceable to any extent, any court may so modify the objectionable provision so as to make it valid, reasonable and enforceable. 12. Notices. All notices, or other communications required or permitted to be given hereunder shall be in writing and shall be delivered personally or mailed, certified mail, return receipt requested, postage prepaid, to the parties as follows: If to the Company: CTI Industries Corporation 22160 N. Pepper Road Barrington, Illinois 60010 If to Executive: John C. Davis ---------------------------- ---------------------------- Any notice mailed in accordance with the terms hereof shall be deemed received on the third day following the date of mailing. Either party may change the address to which notices to such party may be given hereunder by serving a proper notice of such change of address to the other party. 13. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior written or oral negotiations, representations, agreements, commitments, contracts or understandings with respect thereto. No modification, alteration or amendment to this Agreement may be made unless the same shall be in writing and signed by both of the parties hereto. 14. Waivers. No failure by either party to exercise any of such party's rights hereunder or to insist upon strict compliance with respect to any obligation hereunder, and no custom or practice of the parties at variance with the terms hereof, shall constitute a waiver by either party to demand exact compliance with the terms hereof. Waiver by either party of any particular default by the other party shall not affect or impair such party's rights in respect to any subsequent default of the same or a different nature, nor shall any delay or omission of either party to exercise any rights arising from any default by the other party affect or impair such party's rights as to such default or any subsequent default. 7 15. Governing Law; Jurisdiction. 15.1 For purposes of construction, interpretation and enforcement, this Agreement shall be deemed to have been entered into under the laws of the State of Illinois and its validity, effect, performance, interpretation, construction and enforcement shall be governed by and subject to the laws of the State of Illinois. 15.2 Any and all suits for any and every breach of this Agreement may be instituted and maintained in any court of competent jurisdiction in the State of Illinois and the parties hereto consent to the jurisdiction and venue in such court and the service of process by certified mail to the addresses for the parties provided for notices herein. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. CTI INDUSTRIES CORPORATION By: s/s Stephen M. Merrick ---------------------- Authorized Officer Attest: - ------------------------------ Secretary EXECUTIVE: /s/ John C. Davis ---------------- 8 EX-10 10 STOCK REDEMPTION AGREEMENT EXHIBIT 10.3 STOCK REDEMPTION AGREEMENT THIS AGREEMENT is entered into this 1st day of March, 1996, by and between John C. Davis, an individual residing at ______________________ ("Seller") and CTI Industries Corporation, a Delaware corporation, having its principal place of business at 22160 North Pepper Road, Barrington, Illinois (the "Company). WHEREAS, Seller (as Trustee under the John C. Davis Trust) is the owner of 1,348,797 shares of the common stock of the Company (such shares hereinafter referred to as the "Shares"); WHEREAS, Seller desires to sell and Company desires to purchase and redeem certain of the Shares on the terms and conditions provided herein; and WHEREAS, Seller desires to grant to the Company a series of options to purchase and redeem the remaining Shares on the terms and conditions provided herein; WHEREAS, the Company desires to grant to Seller a series of options to sell to the Company certain of the Shares on the terms and conditions provided herein; and WHEREAS, the Company and Seller are parties to an Employment Agreement of even date (the "Employment Agreement"). NOW, THEREFORE, in consideration of the premises and of the terms, covenants and conditions hereinafter contained, the parties hereto agree as follows: 1. Sale and Purchase of Shares. Subject to and on the terms and conditions hereof, in reliance on the representations and warranties herein and for the consideration herein, Seller agrees to sell to the Company, and the Company agrees to purchase and redeem from Seller, 266,667 Shares at the price of Seventy-Five Cents ($.75) as follows: 1.1 On the 10th day of each month commencing March 10, 1996, and continuing through February 10, 1998, the Company shall pay to Seller for the redemption of Shares the amount of $8,333.33. Payments shall be made by Company check mailed to Seller on or before the dates due at the address of Seller provided herein. 1.2 Upon making each payment provided for in paragraph 1.1 above, the Company shall be deemed to have purchased that number of Shares arrived at by dividing the payment amount by the Purchase Price, as defined in paragraph 4.1, at the time of the payment. 1.3 After the Company shall have purchased a total of 266,667 Shares pursuant to the terms of this paragraph 1 and paragraph 2, it shall have no further obligations to make payments under this paragraph 1. 1 2. Company's Option. Subject to and on the terms and conditions hereof, Seller hereby grants to the Company the option to purchase up to 866,666 Shares (less that number of Shares purchased pursuant to paragraph 1) for a period commencing on the date of this Agreement and terminating January 31, 1998 as follows: 2.1 The exercise price of the option shall be the Purchase Price, as defined in paragraph 4.1, at the time of the exercise of the option. 2.2 The Company shall exercise the option by giving written notice of the exercise to Seller, specifying the number of Shares being redeemed, together with a check in the amount of the exercise price. The option may be exercised in whole or part until termination but can be exercised no more often than once a month during its term. 2.3 After the Company shall have purchased a total of 866,666 Shares pursuant to the terms of paragraph 1 and paragraph 2, it shall have no further option to purchase Shares under this paragraph 2. 3. Seller's Option. Subject to the terms and conditions hereof, the Company hereby grants Seller the option to sell to the Company up to 866,666 Shares (less Shares purchased by the Company pursuant to paragraphs 1 and 2) for a period commencing on February 1, 1998 and terminating January 31, 2001, as follows: 3.1 Seller shall exercise its option to have the Company purchase Shares during any fiscal quarter (commencing November 1, February 1, May 1, and August 1) during the option period by providing written notice of such exercise to the Company within ten (10) days of the end of such fiscal quarter. 3.2 The Company shall make payments to Seller for the redemption of Shares within thirty (30) days of the end of each calendar quarter for which the option has been exercised. Such payments shall be equal to one-half of the Company's Net Profit After Taxes for that quarter (as defined in paragraph 4.3) to the extent that Net Profits After Taxes exceeds $250,000 for such quarter. For example, if Net Profits After Taxes is $300,000 for a fiscal quarter for which the option has been exercised, the payment would equal $25,000 (.5 x ($300,000-$250,000)). Notwithstanding the above, the maximum payments the Company shall be obligated to make for redemption of Shares under this paragraph in any fiscal year shall be $150,000. In the event the Company shall pay to Seller under this paragraph an amount in excess of this amount, the Company may apply such excess to amounts it would be obligated to pay in future quarters for which the option has been exercised. 3.3 The Company shall be deemed to have redeemed that number of Shares arrived at by dividing the amount of each payment by the Purchase Price, as defined in paragraph 4.1, at the time of the payment. 3.4 After the Company shall have redeemed pursuant to the terms of paragraph 1, paragraph 2 and paragraph 3, a total of 866,666 Shares, the Company shall have no further obligations to purchase Shares under this paragraph 3. 2 4. Certain Definitions. 4.1 "Purchase Price" shall mean for any Shares purchased and redeemed by the Company from the date of this Agreement to October 31, 1977, the sum of $.75 per share and shall mean for all periods after November 1, 1977, an amount equal to the greater of (i) $.75 per share or (ii) 140% of the Book Value Per Share determined on a fiscal quarterly basis. 4.2 "Book Value Per Share" shall mean the Company's stockholder's equity as indicated on the Company's financial statements at the end of any fiscal quarter divided by the Company's then outstanding shares on a fully diluted basis. The determination of Book Value Per Share as calculated by the Company's internal accountants shall be final and binding on the parties for purposes of this paragraph. The Book Value Per Share as of the end of any fiscal quarter shall be used in calculating the Purchase Price for redemptions made during the following fiscal quarter. 4.3 "Net Profits After Taxes" shall mean the Company's Net Income as indicated on the Company's financial statements, after accruing for taxes and extraordinary items. The determination of Net Profit After Taxes as calculated by the Company's internal accountants shall be final and binding on the parties for purposes of this paragraph. 5. Delivery of Certificates. Upon payment of any amounts to Seller by the Company for the purchase and redemption of Shares, pursuant to paragraphs 1, 2 or 3, Seller shall deliver certificates to the Company representing the Shares so purchased and such Shares shall be cancelled and shall become authorized but unissued shares of the common stock of the Company. In the event Seller delivers certificates for a number of Shares in excess of the Shares to be redeemed, the Company shall return to Seller a certificate representing the balance of the Shares. 6. Restrictions on Repurchase. In the event that, at any time, the purchase and redemption of any of the Shares is prohibited by, or would violate, any applicable law or regulation, or any contract or instrument to which the Company is a party or by which it is obund, the obligation of the Company to purchase and redeem Shares hereunder, and to make payment therefor, shall be postponed and such purchase and payment shall not be made at such time but, at such time as such purchase, redemption and payment may be made, the Company, and Davis, shall be obligated to consummate such purchase and redemption and the Company shall make all payemnts therefor to Davis. With respect to any periodic payments provided for herein which are postponed by reason of this paragraph, such payments shall commence on the same periodic basis at such time as the purchase, redemption and payments are premitted to be made in accordance with the provisions hereof. The parties acknowledge that Certificates for all of the Shares are presently held by Bnak of America as security for the obligations of Davis to such Bank and that (i) this Agreement is subject to the rights of such Bank and (ii) no purchase or redemption of the Shares may be made unless nad until the Shares are released by the Bank. 3 7. Term and Termination. 7.1 This Agreement shall be for a term commencing on the date hereof, and expiring February 1, 2001, subject to any obligations of the parties to pay for or deliver Shares hereunder. 7.2 The Company shall be entitled to terminate this Agreement prior to the expiration of its term by written notice to Seller upon the occurrence of an Event of Default with respect to Seller. For purposes of this Agreement, an Event of Default with respect to Seller shall mean and include any violation by Seller of any of his obligations herein and (if such violation can be cured) the failure by Seller to cure such violation within 15 days after written notice thereof, specifying the violation, shall have been given to Seller by the Company, or the occurrence of any uncured event of default under the Employment Agreement. 7.3 Seller shall be entitled to terminate this Agreement prior to the expiration of its term by written notice to the Company upon the occurrence of an Event of Default with respect to the Company. An Event of Default with respect to the Company shall mean and include any violation by the Company of any of its obligations herein and the failure by the Company to cure such violation within 15 days after written notice thereof shall have been given to the Company by Seller. The nonpayment by the Company of the disputed portion of any amount claimed to be due Seller hereunder shall not constitute an Event of Default, if the Company shall contest the obligation of the Company to make such payment in good faith, until 10 days after a final award of an arbitrator shall have been entered determining that such amount is due and such amount then remains unpaid. 7.4 In the event of termination of this Agreement by the Company pursuant to paragraph 7.2 hereof: 7.4.1 Seller shall be entitled to receive (subject to any rights of setoff or counterclaim by the Company) all amounts due for Shares purchased prior to the date of such termination. Except as provided in the foregoing sentence, all obligations of the Company hereunder, shall terminate and be of no further force or effect on the date of termination of the Agreement by the Company pursuant to paragraph 7.2; 7.4.2 All rights of the Company which shall have accrued hereunder prior to the date of such termination, and all provisions of this Agreement provided herein to survive expiration or termination of this Agreement, shall survive such termination; 7.4.3 The Company's option to purchase Shares under paragraph 2 shall survive such termination; and 7.4.4 Seller shall deliver to the Company certificates for all Shares purchased by the Company pursuant to paragraphs 1, 2 or 3 hereof to the date of such termination. 7.5 In the event of termination of this Agreement by Seller in accordance with paragraph 7.3 hereof: 4 7.5.1 Seller shall be entitled to receive all amounts due for Shares purchased prior to the date of termination and the obligation and rights of the Seller to sell further Shares shall cease and terminate as of the date of such termination; and 7.5.2 All rights of Seller which shall have accrued hereunder prior to the date of such termination shall survive such termination. 7.6 This Agreement shall not terminate upon the death or incapacity of Seller, but shall be binding on Seller's representatives. 8. Representations, Warranties and Acknowledgments of Seller. Seller represents and warrants to the Company that the following are true and correct as of the date hereof, and acknowledges, as follows: 8.1 Seller is the sole owner of, and has good and marketable title to, the Shares free and clear of any and all contracts, options, commitments, agreements, liens, claims or encumbrances whether or not of record, subject only to the pledge of the Shares to Bank of America as described herein. 8.2 Seller has the full right, power and authority to sell and transfer the Shares in accordance with the terms hereof subject only to the pledge of the Shares to Bank of America as provided herein. 8.3 Seller acknowledges that he was a founder of the Company and is an officer of the Company and is fully aware of the financial condition of the Company and the status of the Company's past, current and prospective operations. 8.5 Seller acknowledges that (i) there is not now, and has never been, an active trading market for the common stock of the Company, (ii) there is no established market price or value for the common stock of the Company, (iii) neither the Company nor any other person associated with the Company has made any representation or statement to Seller concerning the condition of the Company, financial or otherwise, or the value of the common stock of the Company, (iv) Seller is not relying on any information in connection with this transaction other than his personal knowledge of the Company and deems such information to be sufficient for Seller's purposes in this transaction, (v) Seller has determined that the price and terms for the purchase of the Shares hereunder are fair and appropriate and (vi) in the event that a trading market does develop for common stock of the Company the market price for such shares may exceed the price per share for the Shares being purchased hereunder. 9. Further Assurances. Seller and the Company shall take such other and further actions, execute such other and further documents as shall be reasonably necessary or appropriate to effect and consummate the sale contemplated herein. 10. Voting of Shares. For so long as the Shares have not been redeemed by the Company pursuant to the terms of this Agreement, Seller shall vote such Shares for and in his name place and stead. After the Company has made payment for any Shares pursuant to the terms of this Agreement, such Shares shall be deemed to be redeemed and become treasury shares of the Company not subject to be voted. 5 11. Arbitration. 11.1 Any and all claims or controversies under, with respect to, or relating to this Agreement shall be settled and adjudicated by arbitration under the rules of the American Arbitration Association. The parties hereto shall be bound by the decision or award of the arbitrator(s) with respect to any such claim or controversy and the prevailing party shall be entitled to obtain a judgment on any such decision or award in any court of competent jurisdiction. 11.2 In any arbitration hereunder: (i) the parties shall have the full right of discovery prior to hearing with respect to any party, or any entity with respect to which a party is a shareholder, owner, officer, employee, consultant or agent, to the full extent and on the same terms as provided in the Federal Rules of Civil Procedure; and (ii) the hearing shall be held within 90 days after the date of the notice of arbitration and the decision of the arbitration shall be issued within 30 days after the date of the hearing. 11.3 Notwithstanding any other provisions of this Agreement, if either party shall give notice of violation of this Agreement to the other party pursuant to paragraph 7 hereof and the other party shall, by notice to such party given within 15 days after the effective date of such notice of violation, contest the occurrence of a violation: 11.3.1 The matter shall be submitted to arbitration in accordance with this paragraph 11; 11.3.2 The party giving the notice of violation shall not be entitled to terminate this Agreement until a final decision of an arbitrator has been issued finding that a violation as claimed did occur; 11.3.3 Pending the decision of the arbitrator, the parties shall be bound to continue to perform the Agreement in accordance with its terms; 11.3.4 In the event that either party shall have given notice of the violation of this Agreement and the arbitrator shall determine that a violation by the other party did occur and was not cured, the non-breaching party shall have the option to (i) enforce the provisions of this Agreement against the breaching party in accordance with the decision of the arbitrator or (ii) elect to terminate this Agreement effective fifteen days after the date of the notice of the violation, in which case the parties shall transfer such Shares and make such payments to the other to place the parties in the position they would have been in if this Agreement had been terminated on such date. 12. Notices. All notices or other communications required or permitted to be given hereunder shall be in writing and shall be delivered or personally mailed, certified mail, return receipt requested, postage pre-paid, to the parties as follows: 6 If to Seller, to: John C. Davis ------------------------ ------------------------ ------------------------ If to Company, to: Stephen M. Merrick CTI Industries Corporation 22160 North Pepper Road Barrington, Illinois 60010 Any notice mailed in accordance with the terms hereof shall be deemed received on the third day following date of mailing. 13. Entire Agreement. This Agreement constitutes together with the Consulting Agreement the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes all prior written or oral warranties, representations, inducements, understandings, commitments, agreements or contracts. This Agreement may not be modified except by a writing signed by all of the parties. 14. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective, heirs, personal representatives, successors and assigns. 15. Governing Law. This Agreement shall be governed by and construed and enforced in all respects in accordance with the laws of the State of Illinois. IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the day and year first above written. CTI INDUSTRIES CORPORATION By:/s/ Stephen M. Merrick ----------------------- Stephen M. Merrick, President SELLER: /s/ John C. Davis --------------- JOHN C. DAVIS 7 EX-10 11 AGREEMENT BETWEEN CTI AND JOHN C. DAVIS EXHIBIT 10.4 AGREEMENT THIS AGREEMENT is made and entered into this 27th day of June, 1997 by and among CTI Industries Corporation, a Delaware corporation (the "Company") and John C. Davis ("Davis"). WHEREAS, the Company and Davis have entered into an Employment Agreement dated April 29, 1996 ("Employment Agreement") and a Stock Redemption Agreement dated March 1, 1996 ("Redemption Agreement"). WHEREAS, the parties desire to enter into an agreement amending and extending the Employment Agreement and the Redemption Agreement. NOW, THEREFORE, in consideration of the premises and of the terms, covenants and conditions hereinafter contained, the parties hereto agree as follows: 1. Amendment to Employment Agreement. The Employment Agreement is hereby amended as follows: 1.1 The term of the Employment Agreement is extended to January 31, 2000. 1.2 Commencing February 1, 1998, the annual rate of salary payable to Executive under the Employment Agreement shall be $120,000. 1.3 Commencing on the date on which the present lease for the automobile now provided to Davis expires (on or about December 31, 1997), the Company shall provide to Davis for the remaining term of the Employment Agreement an automobile allowance of $500 per month. 1.4 Effective on February 1, 1998 and for the remaining term of the Employment Agreement, the Company shall reimburse Davis for the regular monthly dues (excluding any periodic charges) for one country club (not to exceed $450); provided that such dues shall not be payable during any fiscal quarter of the Company if the sales revenues of the Company during the preceding fiscal quarter shall be less than the sales forecast approved by management of the Company. 1.5 Davis contemplates that he will commence activities as an independent consultant and sales agent at some point prior to January 31, 2000 and may provide such services to, and receive compensation from, companies other than the Company. The Company consents to such activities on the part of Davis provided that (i) such activities shall not interfere with the performance by Davis of his duties under the Employment Agreement and (ii) Davis shall not perform services for any company which is engaged in the manufacture, marketing or sale of any product which is manufactured, marketed or sold by the Company. 1.6 Except as amended by the foregoing, the Employment Agreement shall remain in full force and effect in accordance with its terms. 2. Amendment to Redemption Agreement. The Redemption Agreement is hereby amended as follows: 2.1 For the period from March 1, 1998 through February 28, 2000, the Company shall have the option and right to purchase up to 866,666 shares (less the number of shares purchased and redeemed pursuant to paragraph 1 of the Redemption Agreement) of Common Stock of the Company from Davis at the price of $.75 per share. The option may be exercised at any time or from time to time with respect to all, or any portion, of the shares subject to the option by written notice to Davis. 2.2 For the period from March 1, 1998 through February 28, 2000, the Company shall have the obligation to purchase and redeem from Davis, and Davis shall have the obligation to sell and deliver to the Company, up to 866,666 shares (less the number of shares purchased and redeemed pursuant to paragraph 1 of the Redemption Agreement and paragraph 2.1 of this Agreement) at the price of $.75 per share on the terms provided in this paragraph: 2.2.1 For such period, the Company shall have the obligation to pay to Davis, as the purchase price for shares of Common Stock to be purchased and redeemed from him: (A) An amount equal to two percent (2%) of the profits of the Company, before provision for income tax, determined on a fiscal quarterly basis (commencing with the first fiscal quarter of 1988 - the period from November 1, 1997 to February 28, 1998) and on the basis of generally accepted accounting principles consistently applied, and, (B) An amount equal to two percent (2%) (but not exceeding the sum of $8,000) of the amount by which revenues of the Company from the sale of mylar and latex balloons and associated items and accessories exceed the sum of $1,300,000. 2.2.2 The amount to be paid pursuant to paragraph 2.2.1(A) shall be determined and paid on a fiscal quarterly basis within 45 days after the end of each such quarter. The amount to be paid pursuant to paragraph 2.2.1(B) shall be determined on a monthly basis and paid within 30 days after the last day of the 2 month for which the payment is due. 2.2.3 Notwithstanding the other provisions of this Agreement, for any period in which any amount would otherwise be due to Davis hereunder, if at such time, all of the shares subject to purchase and redemption by the Company hereunder shall have been purchased and redeemed, no amount shall be due from the Company to Davis hereunder for such period. 2.2.4 The provisions of this paragraph 2 of this Agreement shall supersede in their entirety the provisions of paragraphs 2 and 3 of the Redemption Agreement. Except as provided herein, the Redemption Agreement shall remain in full force and effect in accordance with its terms. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. CTI INDUSTRIES CORPORATION By: /s/ Stephen M. Merrick ---------------------------- DAVIS: /s/ John C. Davis ---------------------------- 3 EX-10 12 STOCK PURCHASE WARRANT EXHIBIT 10.6 The securities represented by this Warrant have not been registered under the Securities Act of 1933, and thus may not be transferred unless registered under that Act or unless an exemption from registration is available. Warrant dated December 3, 1996, to purchase 200,000 Shares of Common Stock on or before December 31, 2002. STOCK PURCHASE WARRANT TO PURCHASE COMMON STOCK OF CTI INDUSTRIES CORPORATION This certifies that, for value received, _____________, or his assigns, is entitled to subscribe for and purchase from CTI INDUSTRIES CORPORATION, a Delaware corporation (hereinafter called the "Company"), at a price of Thirty-five cents ($.35) per share (subject to adjustment as set forth in paragraph 3 below) and at any time after the date hereof to and including December 31, 2002, 200,000 (subject to adjustment as set forth in paragraph 3 below) fully paid and non-assessable shares of the Company's common stock, par value $.075 per share (hereinafter referred to as the "Common Stock"). This Warrant is subject to the following provisions, terms and conditions: 1. Exercise; Issuance of Certificates; Payment for Shares. The rights represented by this Warrant may be exercised by the holder hereof at any time within the period specified above, in whole or in part (but not as to a fractional share of Common Stock), by the surrender of this Warrant (properly endorsed if required) at the principal office of the Company (or such other office of the Company as it may designate by notice in writing to the holder hereof at the address of such holder appearing on the books of the Company) (a) specifying the number of shares of Common Stock being purchased and (b) accompanied by a check payable to the Company for the purchase price for such shares. The Company agrees that the shares so purchased shall be deemed to be issued to the holder hereof as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares as aforesaid. Certificates for the shares so purchased shall be delivered to the holder hereof within a reasonable time, not exceeding ten days, after the rights represented by this Warrant shall have been so exercised, and, unless this Warrant has expired, a new Warrant of like tenor, representing the right to purchase the number of shares, if any, with respect to which this Warrant shall not then have been exercised, shall also be delivered to the holder hereof within such time. 2. Shares to be Fully Paid; Reservation of Shares. The Company covenants and agrees: 1 (a) that all shares of Common Stock which may be issued upon exercise of the rights represented by this Warrant will, upon issuance, be fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof; (b) without limiting the generality of the foregoing, that the Company will from time to time take all such action as may be required to assure that the par value, if any, per share of Common Stock is at all times equal to or less than the then effective Warrant Purchase Price (as hereinafter defined) per share of Common Stock issuable pursuant to this Warrant; (c) that, during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized, and reserved for the purpose of issue or transfer upon exercise of the rights evidenced by this Warrant, a sufficient number of shares of Common Stock to provide for the full exercise of the rights represented by this Warrant; (d) that the Company will take all such action as may be necessary to assure that the Common Stock issuable upon the exercise hereof may be so issued without violation of any applicable law or regulation; and (e) that the Company will not take any action which would result in any adjustment of the Warrant Purchase Price if (I) the total number of shares of Common Stock issuable after such action upon exercise of this Warrant, together with all shares of Common Stock then outstanding and all shares of Common Stock then issuable upon exercise of all Options (as hereinafter defined) and upon conversion of all Convertible Securities (as hereinafter defined) then outstanding, would exceed (ii) the total number of shares of Common Stock then authorized by the Company's Articles of Incorporation (all such issued and issuable Common Stock being called the "Potentially Outstanding Common Stock"). In the event any stock or securities of the Company other than Common Stock are issuable upon the exercise hereof, the Company will take or refrain from taking any action referred to in clauses (a) through (e) of this paragraph 2 as though such clauses apply, equally, to such other stock or securities then issuable upon the exercise hereof. 3. Warrant Purchase Price. The provisions set forth in paragraphs 1 and 2 above are, however, subject to the following: 3.1 Adjustment of Warrant Purchase Price; Resulting Adjustment of Number of Purchasable Shares. The initial Warrant Purchase Price of Thirty-five Cents ($.35) per share of Common Stock shall be subject to adjustment from time to time as hereinafter provided (such price or such price as last adjusted pursuant to the terms hereof, as the case may be, is herein called the "Warrant Purchase Price"). Upon each adjustment of the Warrant Purchase Price, the holder of this Warrant shall thereafter be entitled to purchase, at the Warrant Purchase Price resulting from such adjustment, the number of shares of 2 Common Stock obtained by multiplying the Warrant Purchase Price in effect immediately prior to such adjustment by the number of shares of Common Stock purchasable pursuant hereto immediately prior to such adjustment and dividing the product thereof by the Warrant Purchase Price resulting from such adjustment. 3.2 Adjustment of Warrant Purchase Price Upon Issuance of Stock. If and whenever after the date hereof the Company shall issue or sell any shares of its Common Stock for a consideration per share less than the Warrant Purchase Price in effect immediately prior to the time of such issue or sale (except if such issue or sale shall be made pursuant to the exercise of Options or Convertible Securities, as defined below, outstanding on the date hereof), then, forthwith upon such issue or sale, the Warrant Purchase Price shall be reduced to the price, calculated to the nearest cent, determined by dividing (a) the sum of (I) the number of shares of Common Stock outstanding immediately prior to such issue or sale multiplied by the then existing Warrant Purchase Price and (ii) the consideration, if any, received by the Company upon such issue or sale, by (b) the total number of shares of Common Stock outstanding immediately after such issue or sale. No adjustment of the Warrant Purchase Price, however, shall be made in an amount less than $0.01 per share, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which together with all adjustments so carried forward shall amount to $0.01 per share or more. For purposes of this paragraph 3.2, the following paragraphs 3.3 to 3.15, inclusive, subject to the exception set forth above, shall also be applicable: 3.3 Issuance of Rights or Options. In case at any time the Company shall in any manner grant (whether directly or by assumption in a merger or otherwise) any rights to subscribe for or to purchase, or any options for the purchase of, Common Stock or any stock or securities convertible into or exchangeable for Common Stock (such rights or options being herein called "Options" and such convertible or exchangeable stock or securities being herein called "Convertible Securities"), whether or not such Options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such Options or upon conversion or exchange of such Convertible Securities (determined as provided in the following sentence) shall be less than the Warrant Purchase Price in effect immediately prior to the time of granting of such Options, then the maximum number of shares of Common Stock issuable upon the exercise of all such Option or upon conversion or exchange of the total maximum amount of such Convertible Securities shall be deemed to have been issued for such price per share as of the date of the granting of such Options and thereafter shall be deemed to be outstanding. The price per share for which Common Stock is issuable, as referred to in the preceding sentence, shall be determined by dividing (a) the sum of (I) the total amount, if any, received or receivable by the Company as consideration for the granting of such Options, plus (ii) the minimum aggregate amount of additional consideration payable to the Company upon the exercise of all such Options, plus (iii) in the case of all such Options that relate to Convertible Securities, the minimum aggregate amount of 3 additional consideration, if any, payable upon the issue or sale of all such Convertible Securities (to the extent not counted under the immediately preceding clause (ii) and upon the conversion or exchange of all such Convertible Securities into Common Stock, by (b) the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon the conversion or exchange of all such Convertible Securities. The consideration received or receivable by the Company shall in each case be determined in accordance with paragraph 3.7 below. Except a otherwise provided in paragraph 3.5 below, no adjustment of the Warrant Purchase Price shall be made upon the actual issue of such Common Stock or of such Convertible Securities upon exercise of such Options or upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities. 3.4 Issuance of Convertible Securities. In case the Company shall in any manner issue (whether directly or by assumption in a merger or otherwise) or sell any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange (determined as provided in the following sentence) shall be less than the Warrant Purchase Price in effect immediately prior to the time of such issue or sale, then the total maximum number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall be deemed to have been issued for such price per share as of the date of the issue or sale of such Convertible Securities and thereafter shall be deemed to be outstanding, provided that (a) except as otherwise provided in paragraph 3.5 below, no adjustment of the Warrant Purchase Price shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities, and (b) if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustments of the Warrant Purchase Price have been or are to be made pursuant to other provisions of this paragraph 3, no further adjustment of the Warrant Purchase Price shall be made by reason of such issue or sale. The price per share for which Common Stock is issuable, as referred to in the preceding sentence, shall be determined by dividing (I) the sum of (A) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus (B) the minimum aggregate amount of additional consideration, if any, payable upon the conversion or exchange of such Convertible Securities into Common Stock, by (ii) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of such Convertible Securities. The consideration received or receivable by the Company shall in each case be determined in accordance with paragraph 3.7 below. 3.5 Change in Option Price or Conversion Rate. Upon the happening of any of the following events, namely, if the purchase price provided for in any Option referred to in paragraph 3.3 above and still outstanding, the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities referred to in paragraph 3.3 or 3.4 above and still outstanding, or the rate at which any such Convertible Securities are convertible into or exchangeable for Common Stock shall change at any time (other than under or by reason of provisions designed to protect against dilution), the Warrant 4 Purchase Price in effect at the time of such event shall forthwith be readjusted to the Warrant Purchase Price which would have been in effect at such time had such Options or Convertible Securities provided for such changed purchase price, additional consideration, or conversion rate, as the case may be, at the time initially granted, issued, or sold. On the expiration of any Option referred to in paragraph 3.3 above prior to the exercise thereof or the termination of any right to convert or exchange any Convertible Securities referred to in paragraph 3.3 or 3.4 above prior to the exercise of such right, the Warrant Purchase Price then in effect hereunder shall forthwith be increased to the Warrant Purchase Price which would have been in effect at the time of such expiration or termination had such Option or Convertible Securities, to the extent outstanding immediately prior to such expiration or termination, never been issued, and the Common Stock issuable thereunder shall no longer be deemed to be outstanding for the purposes of any calculation under paragraph 3.3 or 3.4 above. 3.6 Determination of Consideration Upon Dividend or Other Distribution. In case the Company shall declare a dividend or make any other distribution upon any stock of the Company payable in Common Stock, Options or Convertible Securities, any Common Stock, Options or Convertible Securities, as the case may be, issuable in payment of such dividend or distribution shall be deemed to have been issued or sold without consideration. 3.7 Consideration for Stock. In case any shares of Common Stock, Options or Convertible Securities shall be issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the Company therefor, without deduction therefrom of any expenses incurred or any reasonable underwriting commissions or concessions paid or allowed by the Company (or deducted from amounts received by the Company) in connection therewith. In case any shares of Common Stock, Options or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company shall be deemed to be the fair value of such consideration as determined reasonably and in good faith by the Board of Directors of the Company, without deduction of any expenses incurred or any reasonable underwriting commissions or concessions paid or allowed by the Company (or deducted from amounts received by the Company) in connection therewith. The amount of consideration deemed to be received by the Company pursuant to issuance and/or sale, pursuant to an established compensation plan of the Company, to directors, officers or employees of the Company or any subsidiary of the Company in connection with their employment of shares of Common stock, Options or Convertible Securities, shall be increased by the amount of any tax benefit realized by the Company as a result of such issuance and/or sale, the amount of such tax benefit being the amount by which the federal and/or state income or other tax liability of the Company shall be reduced by reason of any deduction or credit in respect of such issuance and/or sale. In case any Common Stock, Options or Convertible Securities shall be issued in connection with any merger or consolidation in which the Company is the surviving corporation (other than any consolidation or merger in which the previously outstanding shares of Common Stock of the Company shall be changed into or exchanged for the stock or other securities 5 of another corporation), the amount of consideration received therefor shall be deemed to be the fair value as determined reasonably and in good faith by the Board of Directors of the Company of such portion of the assets and business of the non-surviving corporation as such Board may determined to be attributable to such shares of Common Stock, Options or Convertible Securities, as the case may be. In the event of any consolidation or merger of the Company in which the Company is not the surviving corporation or in which the previously outstanding shares of Common Stock of the Company shall be changed into or exchanged for the stock or other securities of another corporation, or in the event of any sale of all or substantially all of the assets of the Company for stock or other securities of any corporation, the Company shall be deemed to have issued a number of shares of its Common Stock computed on the basis of the actual exchange ratio on which the transaction was predicated and for a consideration equal to the fair market value on the date of such transaction of all such stock or securities of the other corporation, and if such calculation results in adjustment of the Warrant Purchase Price, the determination of the number of shares of Common Stock issuable upon exercise of the Warrants immediately prior to such merger, consolidation or sale, for purposes of paragraph 3.13 below, shall be made after giving effect to such adjustment of the Warrant Purchase Price. In case any shares of Common Stock shall be issued (or issuable) pursuant to any Options for the purchase of the same, the consideration deemed to be received (or receivable) therefor shall be deemed to be the total amount, if any, received (or total minimum amount receivable) by the Company as consideration for the granting of such Options, plus the aggregate amount of additional consideration paid (or minimum amount payable) to the Company upon the exercise of such Options. In case any shares of Common Stock shall be issued (or issuable) upon the conversion or exchange of any Convertible Securities, the consideration deemed to be received (or receivable) therefor shall be deemed to be the total amount received (or total minimum amount receivable) by the Company as consideration for the granting of any Options to subscribe to or purchase such Convertible Securities, plus the total amount of additional consideration paid (or minimum amount payable) to the Company as consideration for the issue or sale of such Convertible Securities, plus the total amount of additional consideration, if any, paid (or minimum amount payable) to the Company upon the conversion or exchange thereof. 3.8 Record Date. In case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution payable in Common Stock, Options or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution. 3.9 Treasury Shares. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common stock for the purposes of this paragraph 3. 6 3.10 Liquidating Dividends. The Company will not declare a dividend upon Common Stock payable otherwise than out of consolidated earnings or consolidated earned surplus, determined in accordance with generally accepted accounting principles, including the making of appropriate deductions for minority interests, if any, in subsidiaries, and otherwise than in Common Stock, unless the holder of this Warrant shall have consented to such dividend in writing. 3.11 Subdivision or Combination of Stock. In case at any time the Company shall in any manner subdivide its outstanding shares of Common stock into a greater number of shares or combine such shares of Common Stock into a smaller number of shares, then the Warrant Purchase Price in effect immediately subsequent to such subdivision or combination shall be equal tot he product of (a) the Warrant Purchase Price in effect immediately prior to such subdivision or combination multiplied by (b) a fraction the numerator of which is the number of shares of Common Stock outstanding immediately prior to such subdivision or combination and the denominator of which is the number of shares of Common Stock outstanding immediately thereafter. 3.12 Reorganization, Reclassification, Consolidation, Merger or Sale. If any reorganization or reclassification of the capital stock of the Company, or any consolidation or merger of the Company with another corporation, or the sale of all or substantially all of the Company's assets to another corporation shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provisions shall be made whereby the holder hereof shall thereafter have the right to purchase and receive, upon the basis and upon the terms and conditions specified in this Warrant and in lieu of the shares of Common Stock of the Company immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, such shares of stock, securities, or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of such stock equal to the number of shares of such stock immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby had such reorganization, reclassification, consolidation, merger or sale not taken place, and in any such case appropriate provision shall be made with respect to the rights and interests of the holder of this Warrant to the end that the provisions hereof (including, without limitation, provisions for adjustment of the Warrant Purchase Price and of the number of shares purchasable and receivable upon the exercise of this Warrant) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise of the rights represented hereby (including an immediate adjustment, by reason of such consolidation or merger, of the Warrant Purchase Price to the value for the Common Stock reflected by the terms of such consolidation or merger if the value so reflected is less than the Warrant Purchase Price in effect immediately prior to such consolidation or merger). In the event of a merger or consolidation of the Company with or into another corporation as a result of which the number of shares of common stock of the surviving corporation greater or lesser than the number of shares of Common Stock of the Company outstanding 7 immediately prior to such merger or consolidation are issuable to holders of Common Stock of the Company, then the Warrant Purchase Price in effect immediately prior to such merger or consolidation shall be adjusted in the same manner as though there were a subdivision or combination of the outstanding shares of Common Stock of the Company. The Company shall not effect any such consolidation, merger, or sale, unless prior to the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation or merger of the corporation into or for the securities of which the previously outstanding stock of the Company shall be exchanged in connection with such consolidation or merger, or the corporation purchasing such assets, as the case may be, shall assume, by written instrument executed and mailed or delivered to the holder hereof at the last address of such holder appearing on the books of the Company, the obligation to deliver to such holder such shares of stock, securities, or assets as, in accordance with the foregoing provisions, such holder may be entitled to purchase. If a purchase, tender, or exchange offer is made to and accepted by the holders of more than 50% of the outstanding shares of Common Stock of the Company, the Company shall not effect any consolidation, merger, or sale with the Person having made such offer or with any Affiliate of such Person unless, prior to the consummation of such consolidation, merger, or sale, the holder of this Warrant shall have been given a reasonable opportunity to then elect to receive either the stock, securities, or assets then issuable upon the exercise of this Warrant. As used herein, the term "Person" shall mean and include an individual, a partnership, a corporation, a trust, a joint venture, an unincorporated organization, and a government or any department or agency thereof, and an "Affiliate" of any controlling, controlled by, or under direct or indirect common control with, such other Person. A Person shall be deemed to control a corporation if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such corporation, whether through the ownership of voting securities, by contract, or otherwise. The provisions of this paragraph 3.3 governing the substitution of another corporation for the Company shall similarly apply to successive instances in which the corporation then deemed to be the Company hereunder shall either sell all or substantially all of its properties and assets to any other corporation, shall consolidate with or merge into any other corporation, or shall be the surviving corporation of the merger into it of any other corporation as a result of which the holders of any of its stock or other securities shall be deemed to have become the holders of, or shall become entitled to, the stock or other securities of any corporation other than the corporation at the time deemed to be the Company hereunder. 3.13 Duty to Make Fair Adjustments in Certain Cases. If any event occurs as to which, in the opinion of the Board of Directors of the Company, the other provisions of this paragraph 3 are not strictly applicable or, if strictly applicable, would not fairly protect the purchase rights of this Warrant in accordance with the essential intent and principles hereof, the Board of Directors shall make such adjustments in the Warrant Purchase Price as it deems necessary to protect such purchase rights as aforesaid, but in no event shall any such adjustment have the effect of increasing the Warrant Purchase Price as otherwise determined pursuant to this paragraph 3. 8 3.14 Notice of Adjustment. The Company shall give to the holder of this Warrant prompt written notice of every adjustment of the Warrant Purchase Price, by first class mail, postage prepaid, addressed to the address of such holder as shown on the books of the Company, which notice shall state the Warrant Purchase Price resulting from such adjustment and the increase or decrease, if any, in the number of shares purchasable at such price upon the exercise of this Warrant, and shall set forth in reasonable detail the method of calculation and the facts upon which such calculation was based. 3.15 Other Notices. In case at any time: (a) the Company shall declare any cash dividend upon its Common Stock payable at a rate in excess of the rate of the last cash dividend theretofore paid; (b) the Company shall declare any dividend upon its Common Stock payable in stock or make any special dividend or other distribution (other than regular cash dividends) to the holders of its Common Stock; (c) the Company shall offer for subscription to the holders of any of its Common Stock any additional shares of stock of any class or other rights; (d) there shall be any capital reorganization of the Company or any reclassification of its capital stock or any consolidation or merger of the Company with, or sale of all or substantially all of its assets to, another corporation; or (e) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of such cases, the Company shall give, by first class mail, postage prepaid, addressed to the holder of this Warrant at the address of such holder as shown on the books of the Company, (i) at least 20 days' prior written notice of the date on which the books of the Company shall close or a record shall be taken for such dividend, distribution or subscription rights or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, and (ii) in the case of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, at least 20 days prior written notice of the date when the same shall take place. Any notice required by clause (i) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of Common Stock shall be entitled thereto, and any notice required by clause (ii) shall also specify the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be. 9 4. Issue Tax. The issuance of certificates for shares of Common Stock upon the exercise of this Warrant shall be made without charge to the holder of this Warrant for any issuance tax in respect thereof. 5. Closing of Books. The Company will at no time close its transfer books against the transfer of this Warrant or of any shares of Common Stock issued or issuable upon the exercise of this Warrant in any manner which interferes with the timely exercise of this Warrant. 6. No Voting Rights. This Warrant shall not entitle the holder hereof to any voting rights or other rights as a stockholder of the Company. 7. Warrants Transferable. Subject to the restrictions referred to in the legend set forth on the face of this Warrant, this Warrant and all rights hereunder are transferable to any person, in whole or in part, without charge to the holder hereof, at the office of the Company referred to in paragraph 1 above, by the holder hereof in person or by duly authorized attorney, upon surrender of this Warrant properly endorsed. Each taker and holder of this Warrant, by taking or holding the same, consents and agrees that this Warrant, when endorsed in blank, shall be deemed negotiable, and that the holder hereof, when this Warrant shall have been so endorsed, may be treated by the Company and all other persons dealing with this Warrant as the absolute owner hereof for any purpose and as the person entitled to exercise the rights represented by this Warrant, or to the transfer hereof on the books of the Company, any notice to the contrary notwithstanding. Until such transfer on such books, however, the Company may treat the registered holder hereof as the owner for all purposes. 8. Warrant Exchangeable for Different Denominations. This Warrant is exchangeable, upon its surrender by the holder hereof at the office of the Company referred to in paragraph 1 above, for new Warrants of like tenor representing in the aggregate the right to subscribe for and purchase the number of Shares which may be subscribed for and purchased hereunder, each of such new Warrants to represent the right to subscribe for and purchase such number of shares as shall be designated by said holder hereof at the time of such surrender. 9. Descriptive Headings and Governing Law. The descriptive headings of the several paragraphs of this Warrant are inserted for convenience of reference only and do not constitute a part of this Warrant. This Warrant is being delivered and is intended to be performed in the State of Illinois and shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of such State. 10. Certain Covenants of the Company. So long as this Warrant remains outstanding, in whole or in part, the Company will, unless the holder of this Warrant otherwise consents in writing: (a) within 60 days after the end of each of the first three quarterly fiscal periods in each fiscal year of the Company, deliver to the holder of this Warrant (i) a consolidated balance sheet of the Company and its subsidiaries, if any, as at the end of such period, and (ii) consolidated statements of income and of surplus of the Company 10 and its subsidiaries, if any, for such period and (in the case of the second and third such quarterly periods) for the period from the beginning of the current fiscal year to the end of such quarterly period, setting forth in each case in comparative form the consolidated figures for the corresponding periods of the previous fiscal year, all in reasonable detail and certified as prepared in accordance with generally accepted accounting principles consistently applied, subject to exchanges resulting from year-end audit adjustments, by the principal financial officer of the Company; and (b) within 90 days after the end of each fiscal year of the Company, deliver to the holder of this Warrant (i) a consolidated balance sheet of the Company and its subsidiaries, if any, as at the end of such year, and (ii) consolidated statements of income and of surplus of the Company and its subsidiaries, if any, for such year, setting forth in each case in comparative form the consolidated figures for the previous fiscal year, all in reasonable detail and accompanied by an opinion thereon of independent public accountants, which opinion shall state that such financial statements have been prepared in accordance with generally accepted accounting principles consistently applied and that the audit by such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards; and (c) as soon as practicable, notify the holder of this Warrant in writing of any potentially material adverse development concerning the Company; and permit such holder of his representative to examine the books and records of the company at any time during regular business hours and make copies of any portions thereof desired to be copied by such holder or his representative. IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officers under its corporate seal and this Warrant to be dated this ______ day of ____________, 1997. CTI INDUSTRIES CORPORATION By:_____________________________________ President (CORPORATE SEAL) Attest: - -------------------------- Secretary 11 SUBSCRIPTION AGREEMENT Dated: ______________, 199__ To: CTI Industries Corporation 22160 N. Pepper Road Barrington, Illinois The undersigned, pursuant to the provisions set forth in the within Warrant, hereby agrees to subscribe for and purchase shares of the Common Stock covered by such Warrant, and makes payment herewith in full therefor at the price per share provided by such Warrant. Signature___________________________ Address_____________________________ ____________________________________ ASSIGNMENT FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers all of the rights of the undersigned under the within Warrant, with respect to the number of shares of Common stock set forth below, unto: Name of Assignee Address Number of Shares Dated: __________________, 199__ Signature___________________________ Witness_____________________________ 12 EX-10 13 SUBSCRIPTION AGREEMENT EXHIBIT 10.7 SUBSCRIPTION AGREEMENT THIS AGREEMENT the 8th day of March, 1996 by and among CTI Industries Corporation, a Delaware corporation, (the "Company") and ______________, an Illinois _____________ ("Investors"). WHEREAS, the Company is engaged in the business of designing, developing, manufacturing, marketing or selling metallized balloons, latex balloons, laminated film, printed film and other products and items; WHEREAS, the Company has authorized up to 4,000,000 shares of Preferred Stock of the Company, par value Thirty-Five Cents ($.35) per share; WHEREAS, the Company is willing to sell, issue and deliver shares of Preferred Stock and the Investor is willing to purchase shares of Preferred Stock of the Company on the terms provided herein. NOW, THEREFORE, in consideration of the premises and of the terms, covenants, and conditions hereinafter contained, the parties hereto agree as follows: 1. Subscription. Subject to and on the terms and conditions hereof, Investor hereby subscribes for, and agrees to purchase, and the Company agrees to sell, issue and deliver 2,571,428.5 shares of Preferred Stock of the Company, par value $.35 per share, at the price of Thirty-Five Cents ($.35) per share or an aggregate purchase price of $900,000. 2. Payment. In consideration of the issuance of the shares of Preferred Stock and subject to the terms and conditions hereof, the Investor shall pay to the Company on the date hereof the sum of $700,000 and, on or before March 31, 1996 the sum of $200,000. Upon receipt of payment, the Company shall issue and deliver to Investor duly executed certificates representing the number of shares of Preferred Stock then being purchased. 3. Representations and Warranties of the Company. The Company represents and warrants to Investor that each of the following is true and correct as of the date hereof: 3.1 The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware which is presently the only state where the nature of its business and assets require such qualification. 1 3.2 The Company is authorized to issue up to 12,000,000 shares of capital stock, of which 8,000,000 shares are designated as Common Stock, par value $.075 per share and 4,000,000 shares shall be designated as Preferred Stock, par value $.35 per share. 3.3 Attached hereto is a true and accurate copy of the Restated Certificate of Incorporation of the Company providing the rights, preferences and qualifications with respect to the Preferred Stock of the Company. 3.4 There are presently issued and outstanding 2,833,188 shares of Common Stock of the Company. 3.5 Except as provided in paragraph 3.4 (i) there are no contracts, options or other agreements or understandings pursuant to which the Company is or may be obligated to issue Common Stock, Preferred Stock or any other security of the Company, (ii) there are no obligations of the Company outstanding which may be converted into securities of the Company and (iii) there are no securities of the Company issued or outstanding. 3.6 All shares of Common Stock of the Company issued and outstanding are duly authorized and validly issued, fully paid and nonassessable. 3.7 No holder of any outstanding and issued Common Stock or any other security of the Company has any preemptive right or right of first refusal with respect to the issuance by the Company of its stock. 3.8 This Agreement and the issuance of the shares of Preferred Stock hereunder have been duly authorized and this Agreement, when executed and delivered, shall constitute a valid and binding obligation of the Company enforceable in accordance with its terms. All shares of Preferred Stock to be issued hereunder, when issued in accordance with the terms hereof, shall be duly authorized, validly issued, fully paid and non-assessable. 4. Representations, Acknowledgements and Agreements of Investor. The Investor hereby represents and warrants to the Company and acknowledges and agrees as follows: 4.1 Investor or its representative has reviewed this Agreement and the Exhibits hereto and has full and complete knowledge concerning the business, prospects and condition, financial and otherwise, of the Company. 4.2 Investor acknowledges that investment in the Preferred Stock of the Company is speculative and involves a high degree of risk of loss. 2 4.3 Investor acknowledges and understands that the shares of Preferred Stock purchased by Investor hereunder have not been registered under the Securities Act of 1933, as amended ("Act"), or under the laws of any State, in reliance upon exemptions therefrom provided in such laws and further understands that such securities, or the sale thereof, have not been approved or disapproved by the Securities & Exchange Commission or by any other federal or state agency. 4.4 Investor represents, warrants and agrees that Investor is acquiring the shares of Preferred Stock hereunder solely for its own account, for investment, and not with a view to the distribution or resale thereof. Investor further represents that Investor's financial condition is such that Investor is not under any present necessity or constraint to dispose of such securities to satisfy any existing or contemplated debt or undertaking. Investor (i) has not offered or sold such securities within the meaning of the Act, (ii) does not have in mind the sale of such securities either currently or after the passage of a fixed or determinable period of time or upon the occurrence or non-occurrence of any predetermined event or circumstance, (iii) has no present or contemplated agreement, undertaking, arrangement, obligation, indebtedness or commitment providing for or which is likely to compel a disposition of the securities and (iv) is not aware of any circumstances presently in existence which are likely in the future to promote a disposition of the securities. 4.5 Investor confirms its understanding, and agrees, as follows: 4.5.1 Certificates for the shares of Preferred Stock purchased hereunder will bear substantially the following legend: "The Securities represented by this Certificate were acquired on __________________, without registration under the Securities Act of 1933, as amended. No transfer or sale of these Securities or interest therein may be made except under an effective registration statement under said Act covering such security unless the Company has received an opinion of counsel satisfactory to it that such transfer or sale does not require registration under said Act." 4.5.2 Investor shall be bound by the terms of the foregoing legend and agrees that an appropriate transfer restrictions will be noted on the Company's records. 3 4.6 Investor and each member of Investor, is an "Accredited Investor" as defined in Rule 501(a) of Regulation D promulgated under the Act and shall provide such information and execute such certificates to the Company as shall be reasonably requested by the Company or its counsel to assure that Investor, and each member of Investor, does meet the requirements of such provisions. 5. Entire Agreement. This Agreement and the documents referred to herein constitute the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes all prior written or oral warranties, representations, agreements, commitments or understandings. 6. Benefit. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns. 7. Notices. Any notice required or permitted under this Agreement shall be given in writing and shall be given by personal delivery or by depositing the same with the United States Post Office, by registered or certified mail, postage prepaid and addressed: If to the Company: President CTI Industries Corporation 22160 N. Pepper Road Barrington, IL 60010 If to Investor: CTI Investors, LLC c/o Stephen M. Merrick 30 N. LaSalle Street Suite 3500 Chicago, IL 60602 Any notice mailed in accordance with the provisions of this Agreement shall be deemed given or effective on the third day following the date of mailing. Any party to this Agreement may change the address to which notices to such party shall be given by proper notice given hereunder. 8. Severability. If any provision of this Agreement or any part hereof or application hereof to any person or circumstance shall be finally determined by a court of competent jurisdiction to be invalid or unenforceable to any extent, the remainder of this Agreement, or the remainder of such provision or the application of such provision to persons or circumstances other than those as to which it has been held invalid or unenforceable, shall not be affected thereby and each provision of this Agreement shall remain in full force and effect to the fullest extent permitted by law. The parties also agree that, if any portion of this Agreement, or any part hereof or application hereof, to any person or circumstance shall be finally determined by a court of competent jurisdiction to be invalid or 4 unenforceable to any extent, any court may so modify the objectionable provision so as to make it valid, reasonable and enforceable. 9. Waivers. No failure by any party to exercise any of such party's rights hereunder or to insist upon strict compliance with respect to any obligation hereunder, and no custom or practice of the parties at variance with the terms hereof, shall constitute a waiver by any party to demand exact compliance with the terms hereof. Waiver by any party of any particular default by any other party shall not affect or impair such party's rights in respect to any subsequent default of the same or of a different nature, nor shall any delay or omission of any party to exercise any right arising from any default by any other party affect or impair such party's rights as to such default or any subsequent default. 10. Governing Law. This Agreement shall be governed by and shall be interpreted and enforced in accordance with, the laws of the State of Illinois. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. CTI INDUSTRIES CORPORATION By: _____________________________ Authorized Officer INVESTOR: By: _____________________________ Authorized Representative 5 EX-10 14 SUBSCRIPTION AGREEMENT EXHIBIT 10.8 SUBSCRIPTION AGREEMENT THIS AGREEMENT is made and entered into this 20th day of June, 1997 by and among CTI Industries Corporation, a Delaware corporation, having its principal place of business at 22160 N. Pepper Road, Barrington, Illinois 60010 (the "Company") and the individual whose name and signature is set forth on the signature page hereof ("Investor"). WHEREAS, the Company is offering to a limited number of accredited Investors the purchase of unsecured subordinated promissory notes of the Company in the aggregate principal amount of up to $950,000 and warrants to purchase common stock of the Company at the price per share of $1.20 per share for an aggregate purchase price in the principal amount of the unsecured subordinated promissory notes. NOW, THEREFORE, in consideration of the premises and of the terms, covenants and conditions hereinafter contained, the parties hereto agree as follows: 1. Subscription. 1.1 The undersigned Investor hereby subscribes for the purchase of (i) a 10% Unsecured Subordinated Promissory Note of the Company, in the form attached hereto as Exhibit A, (sometimes hereinafter referred to as the "Note"), in the principal amount set forth on the signature page of this agreement and (ii) a Warrant, in the form attached hereto as Exhibit B, to purchase Common Stock of the Company at the purchase price per share of $1.20 for that number of shares determined by dividing the principal amount of the Note issued hereunder by the Warrant purchase price per share. The purchase price for the Note and the Warrant issued hereunder shall be the principal amount of the Note to be issued hereunder. With this Subscription Agreement, the Investor tenders to the Company a check, payable to the Company, in the amount of the purchase price. 1.2 The Investor acknowledges that this Agreement shall not be binding upon the Company unless and until the Company accepts this subscription and executes this Agreement and that the Company reserves the right, in the sole discretion of the Company, to accept or reject this subscription. 2. Representations and Warranties of the Company. The Company represents and warrants to Investor as follows: 2.1 The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and is qualified to do business and in good standing in the State of Illinois. Illinois and Delaware are the only states where the nature of the 1 assets and business of the Company require such qualification. CTI Balloons Ltd. is a corporation duly organized and validly existing under the laws of the United Kingdom and has its principal place of business in Rugby, United Kingdom. The Company owns all of the issued and outstanding capital stock of CTI Balloons, Ltd. 2.2 The Company is authorized to issue 8,000,000 shares of Common Stock, par value $.075 per share, and 4,000,000 shares of Preferred Stock, par value $.35 per share. There are presently issued and outstanding 3,467,322 shares of Common Stock or warrants to purchase Common Stock and 2,857,143 shares of Preferred Stock. 2.3 The Board of Directors of the Company has proposed the adoption of, and has submitted to the shareholders for approval, the 1997 CTI Industries Corporation Stock Option Plan pursuant to which the Company may issue options to purchase up to 300,000 shares of Common Stock of the Company. 2.4 The Company has entered into a letter of intent with Joseph Stevens & Company, Inc., a copy of which has been provided to the Investor, pursuant to which the Company may offer, in a public offering, shares of Common Stock and warrants to purchase common stock of the Company. In connection with such proposed public offering and in the event of its completion and consummation: 2.4.1 Joseph Stevens & Company, Inc. would receive options to purchase shares of Common Stock of the Company as provided herein; 2.4.2 It is contemplated that the outstanding shares of Preferred Stock of the Company will be converted to shares of Class B Common Stock which will have certain voting rights but which will not have dividend or other rights or preferences in relation to the Common Stock of the Company; 2.4.3 It is contemplated that there will be a reverse split of the outstanding Common Stock of the Company in the amount of approximately one share for each 2.6 shares outstanding. There can be no assurance that the contemplated public offering of the Common Stock of the Company will be completed on the terms provided in such letter of intent or on any other terms. 2.5 Except as provided in paragraphs 2.2, 2.3 and 2.4 hereof, (i) there are no contracts, options or other agreements or understandings pursuant to which the Company is or may be obligated to issue Common Stock or any other security, (ii) there are no obligations of the Company outstanding which may be converted into securities and (iii) there are no securities of the Company issued or outstanding. All shares of Common Stock and Preferred Stock of the Company presently issued and outstanding are duly authorized and validly issued, fully paid and non-assessable. No holder of outstanding shares of the Common Stock or Preferred Stock of the Company has any preemptive right or right of first refusal with respect to the issuance by the Company of any of its stock. 2 2.6 Investor has been provided with copies of the audited statement of income and balance sheet of the Company as of October 31, 1996 and for the year then ended and the unaudited statement of income and balance sheet of the Company as of April 30, 1997 and for the six months then ended. Such financial statements fairly present the financial condition of the Company as of the dates thereof and the results of operation of the Company for the periods then ended. 2.7 This Agreement, the offering contemplated herein, the Note and the Warrant have been duly authorized by the Board of Directors of the Company and this Agreement, the Note and the Warrant, when executed and delivered on behalf of the Company, shall constitute valid and binding obligations of the Company, enforceable in accordance with their terms. The execution and performance of this Agreement and the Note and Warrant to be issued hereunder will not violate, with or without the giving of notice or the passage of time, any applicable law or regulation and will not conflict with, or result in the breach of, any of the terms, conditions or provisions of, or constitute a default under, any corporate charter, bylaw, agreement or other instrument to which the Company is a party or by which it, or any of its property, is bound. 2.8 Except as set forth in the audit letter of counsel to the Company dated May 14, 1997, a copy of which has been provided to Investor, there are no actions, suits, proceedings or investigations pending, threatened against or affecting the Company, at law or in equity, or before any federal, state, or municipal agency or any instrumentality which involves the likelihood of any judgment of liability, not fully covered by insurance, against the Company or which may result in any material adverse change in the business, operations, properties, assets or condition, financial or otherwise, of the Company. 3. Representations, Warranties and Acknowledgments of Investor. The Investor represents and warrants to the Company, and acknowledges and agrees, as follows: 3.1 Investor has been associated with the Company for a number of years and has full and detailed knowledge and information concerning the business, condition and prospects of the Company. Investor has reviewed this Agreement and all documents referred to herein and, in entering into this transaction, is not relying on information other than that contained in this Agreement or referred to herein or in any statement or document provided to Investor and executed by an officer of the Company. 3.2 Investor has had a reasonable opportunity to ask questions of and receive answers from the Company concerning the Company and the offering by it if the Notes and Warrants herein and all such questions, if any, have been answered to the full satisfaction of the undersigned. 3 3.3 The Investor has such knowledge and experience in financial and business matters that the undersigned is capable of evaluating the merits and risks involved in an investment in the Note and Warrant which are a highly speculative investment involving a high degree of risk and that the Investor could lose his or her entire investment. 3.4 The Investor understands that (a) the Note, the Warrant and any shares of Common Stock of the Company issued by reason of the exercise of the Warrant (hereinafter sometimes referred to as the "Securities"), have not been registered under the Securities Act of 1933, as amended (the "Act") or the securities law of any state, based on exemptions from such registration requirements for non-public offerings and (b) the Securities are and will be "restricted securities" as said term is defined in Rule 144 of the Rules promulgated under the Act; (c) in the event that the Company does proceed with a public offering of its Common Stock as provided in paragraph 2.4 hereof, the Investor will be required to execute an agreement with the underwriter pursuant to which the Investor will not be permitted to sell any shares of Common Stock received upon the exercise of the Warrant for a period of 18 months from the effective date of the public offering; (d) the Securities may not be sold or otherwise transferred unless they have first been registered under the Act and all applicable state securities laws, or unless exemptions from such registration provisions are available with respect to such resale or transfer; (e) the Company is under no obligation to register any of the Securities or to take any action to make any exemption from any such registration provisions available; (f) the Securities will bear a legend to the effect that the transfer of the securities represented thereby is subject to the provisions hereof; and (g) stop transfer instructions will be placed on the records of the Company or with the transfer agent for the Note, the Warrant and any shares of Common Stock of the Company issued by reason of the exercise of the Warrant. 3.5 The Investor is acquiring the Note and Warrant, and any shares of Common Stock received by reason of exercise of the Warrant, solely for the account of Investor, for investment purposes only, and not with a view to the resale or distribution thereof. Investor further represents that his or her financial condition is such that he or she is not under any present necessity or constraint to dispose of such securities to satisfy any existing or contemplated debt or undertaking. Investor (I) has not offered or sold any of the Securities within the meaning of the Act, (ii) does not have in mind the sale of any of the Securities either currently or after the passage of a fixed or determinable period of time or upon the occurrence or non-occurrence of any predetermined event or circumstance, (iii) has no present or contemplated agreement, undertaking, arrangement, obligation, indebtedness or commitment providing for or which is likely to compel a disposition of any of the Securities and (iv) is not aware of any circumstance presently in existence which is likely in the future to promote a disposition of the Securities. 3.6 The Investor will not sell or otherwise transfer any of the Securities, or any interest therein, unless and until (a) such Securities first shall have been registered under the Act and all applicable state securities laws or (b) the Investor first shall have delivered to the Company a written opinion of counsel, which counsel and opinion (in form and substance) shall be reasonably satisfactory to the Company, to the effect that the proposed sale or transfer is exempt from the registration provisions of the Act and all applicable state securities laws. 4 3.7 The Investor (a) is a natural person, is at least 21 years of age and is under no legal disability to contract, (b) is a resident of the State specified on the signature page hereof and has no present intention of changing his residence from such State, and (c) has full power and authority to execute and deliver this Agreement and to perform the obligations of the Investor hereunder. This Agreement is a legally binding obligation of the Investor in accordance with its terms. 3.8 The Investor is an "accredited investor" as such term is defined in Regulation D of the Rules and Regulations promulgated under the Act. 3.9 Investor acknowledges and understands that: THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND ARE BEING OFFERED AND SOLD IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SAID ACT AND SUCH LAWS. THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OF THIS OFFERING OR THE ACCURACY ADEQUACY OF THE INFORMATION PROVIDED HEREIN. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. 4. Indemnity. The Investor agrees to indemnify the Company, and each of its officers, directors, employees and agents, and hold them harmless from and against any and all losses, damages, liabilities, costs and expenses which any of them may sustain or incur in connection with the breach by Investor of any representation, warranty or covenant made by the Investor herein. 5. Notices. All notices or other communications required or permitted to be given hereunder shall be in writing and shall be (i) delivered personally, (ii) mailed, postage prepaid, or (iii) telecopied and a copy mailed to the parties, as follows: If to the Company Mr. Stephen M. Merrick Chief Executive Officer CTI Industries Corporation 22160 North Pepper Road Barrington, IL 60010 5 If to Investor: At the address shown on the signature page hereof Any notice mailed or telecopied in accordance with the provisions hereof shall be deemed received on the third day following the date of mailing or transmission. Either party hereto may change the address to which notices to such party may be given hereunder by serving a proper notice of such change of address to the other party. 6. Entire Agreement. This Agreement and the Note and Warrant constitutes the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes all prior written or oral negotiations, representations, understandings, commitments, contracts or agreements with respect to the subject matter hereof. This Agreement and the Note and Warrant may not be modified except by written instrument signed by the parties hereto. 7. Severability. Whenever possible, each paragraph of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law. If any paragraph of this Agreement shall be unenforceable or invalid under applicable law, such paragraph shall be ineffective only to the extent and duration of such unenforceability or invalidity and the remaining substance of such paragraph and the remaining paragraphs of this Agreement shall in such event continue to be binding and in full force and effect. 8. Waivers. No failure by any party to exercise any of such party's rights hereunder or to insist upon strict compliance with respect to any obligation hereunder, and no custom or practice of the parties at variance with the terms hereof, shall constitute a waiver by any party to demand exact compliance with the terms hereof. Waiver by and party of any particular default by any other party shall not affect or impair such party's rights in respect to any subsequent default of the same or of a different nature, nor shall any delay or omission of any party to exercise any right arising from any default by any other party affect or impair such party's rights as to such default or any subsequent default. 9. Benefit and Assignment. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, personal representatives and successors in interest. This Agreement and any rights or obligations hereunder may not be assigned by any party hereto. 10. Governing Law; Actions. This Agreement shall be governed by and shall be interpreted and enforced in accordance with, the laws of the State of Illinois. The Investor (a) agrees that any legal suit, action or proceeding arising out of or related to this Agreement shall be instituted exclusively in Illinois Circuit Courts, County of Cook, or in the United States District Court for the Northern District of Illinois, each and any of which shall apply Illinois law, without reference to its conflicts of laws rules and principles, (b) waives any objection Investor may have now or hereafter to the venue of any such suit, action or proceeding, and (c) irrevocably consents to the 6 jurisdiction of the Illinois Circuit Courts, County of Cook, and the United States District Court for the Northern District of Illinois in any such suit, action or proceeding. The Investor further agrees to accept and acknowledge service of any and all process which may be served in any such suit, action or proceeding in the Illinois Circuit Courts, County of Cook or the United States District Court for the Northern District of Illinois. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 7 IN WITNESS WHEREOF, Investor has executed this Subscription Agreement this ____ day of June, 1997. INVESTOR: ________________________________________ (Signature) ________________________________________ (Print Name) ________________________________________ ________________________________________ (Address) Social Security #____________________ Principal Amount of Note Subscribed For: ________________________________________ ACCEPTANCE OF SUBSCRIPTION: CTI INDUSTRIES CORPORATION By:________________________________________ ________________________________________ Title Date:______________________________________ 8 EXHIBIT A TO EXHIBIT 10.8 THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NO INTEREST IN THIS NOTE MAY BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (ii) AN EXEMPTION FROM REGISTRATION UNDER SAID ACT AND WHERE THE HOLDER HAS FURNISHED TO THE COMPANY AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT AN EXEMPTION FROM REGISTRATION UNDER SAID ACT IS AVAILABLE. CTI INDUSTRIES CORPORATION 10% UNSECURED SUBORDINATED PROMISSORY NOTE $__________________________ As of June , 1997 Chicago, Illinois FOR VALUE RECEIVED, the undersigned, CTI Industries Corporation, a Delaware corporation (the "Payor"), having its executive office and principal place of business 22160 N. Pepper Road, Barrington, IL 60010, hereby promises to ________________________________________ (the "Payee"), having an address at ________________________________________ on June 30, 1999 (the "Maturity Date"), at the Payee's address set forth hereinabove or, at such other place as the Payee shall hereafter specify in writing, the principal sum of ___________________________________, ($__________), in legal tender of the United States of America. This Note may be prepaid, in whole or in part, at the option of the Company at any time without premium or penalty. This Note is part of an issue of notes (the "Notes") being issued in the principal amount of up to aggregate of $950,000 together with warrants to purchase Common Stock of the Company. This Note is unsecured and shall rank pari passu with all other Notes. 1. Interest and Payment 1.1 The unpaid principal amount hereof outstanding from time to time shall bear simple interest from the date hereof at the rate of 10% per annum until the first to occur of 1 the Maturity Date or the date on which the entire principal balance hereof shall have been paid. 1.2 Interest shall accrue and be payable on a calendar quarterly basis on each September 30, December 31, March 31, and June 30 during which any portion of the principal amount of this Note shall be outstanding. 1.3 If payment of the principal amount hereof and interest accrued thereon, is not made on or before the Maturity Date, interest shall thereafter accrue and be payable at an interest rate equal to the lessor of (i) the prime rate plus 8% or (ii) the maximum rate permitted by law. For purposes of this Note, "prime rate" shall mean the prime rate, as adjusted from time to time, as established and reported by the First National Bank of Chicago, in Chicago, Illinois, from time to time or, if such rate is no longer reported by such bank, then the rate established by any comparable bank as its prime rate, from time to time. 2. Replacement of Note. 2.1. In case this Note is mutilated, destroyed, lost or stolen, the Payor shall, at its sole expense, execute, register and deliver, a new Note, in exchange and substitution for this Note, if mutilated, or in lieu of and substitution for this Note, if destroyed, lost or stolen. In the case of destruction, loss or theft, the Payee shall furnish to the Payor indemnity reasonably satisfactory to the Payor, and in any such case, and in the case of mutilation, the Payee shall also furnish to the Payor evidence to its reasonable satisfaction of the mutilation, destruction, loss or theft of this Note and of the ownership thereof. Any replacement Note so issued shall be in the same outstanding principal amount as this Note and dated the date to which interest shall have been paid on this Note, or if no interest shall have yet been paid, dated the date of this Note. 2.2. Every Note issued pursuant to the provisions of Section 2.1 hereof in substitution for this Note shall constitute an additional contractual obligation of the Payor, whether or not this Note shall be found at any time, or be enforceable by anyone. 3. Events of Default. If any of the following conditions, events or acts shall occur, this Note shall become immediately due and payable: 3.1. The dissolution of the Payor or any vote in favor thereof by the Board of Directors and stockholders of the Company; or 3.2. The Payor's insolvency, assignment for the benefit of creditors, application for or appointment of a receiver, filing of a voluntary or involuntary petition under any provision of the Federal Bankruptcy Code or amendments thereto or any other federal or state statute affording relief to debtors; or there shall be commenced against the Payor any such proceeding or filed against the Payor any such application or petition which proceeding, application or petition is not dismissed or withdrawn within sixty (60) days of commencement or filing as the case may be; or 2 3.3. The failure by the Payor to make any payment of any amount of principal on, or accrued interest under, this Note, or any of the Notes as and when the same shall become due and payable; or 3.4. The sale by the Payor of all or substantially all of its assets (other than the sale of inventory in the ordinary course of business), or the merger or consolidation by the Payor with or into another corporation, except for mergers or consolidations where the Payor is the surviving entity or where the surviving entity expressly accepts and assumes all of the obligations of the Payor under all of the Notes; or 3.5. The commencement of a proceeding to foreclose the security interest or lien in any property or assets to satisfy the security interest or lien therein of any secured creditor of the Payor whose debt is in excess of $100,000; or 3.6. The entry of a final judgment for the payment of money in excess of $100,000 by a court of competent jurisdiction against the Payor, which judgment the Payor shall not discharge (or provide for such discharge) in accordance with its terms within sixty (60) days of the date of entry thereof, or procure a stay of execution thereof within sixty (60) days from the date of entry thereof and, within such sixty (60) day period, or such longer period during which execution of such judgment shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal; or 3.7. Any attachment or levy, or the issuance of any note of eviction against the assets or properties of the Payor involving an amount in excess of $100,000 which attachment, levy or issuance is not dismissed, bonded, or otherwise terminated within sixty (60) days of the effectiveness of such attachment, levy or issuance; or 3.8. The default in the due observance or performance of any material covenant, condition or agreement on the part of the Payor to be observed or performed pursuant to the terms of this Note and such default shall continue uncured for thirty (30) days after written notice thereof, specifying such default, shall have been given to the Payor by the holder of the Note; then, in any such event and at any time thereafter (and, in the case of an event described in Subsection 3.5 or a default in payment of accrued interest and/or principal as described in Subsection 3.3, upon 30 days written notice), while such event is continuing, the Payee shall have the right to declare an event of default hereunder ("Event of Default"), provided that upon the occurrence of an event described in Subsections 3.1 or 3.2 such event shall be deemed to be an Event of Default hereunder whether or not the Payee makes such a declaration (an "Automatic Default"), and the indebtedness evidenced by this Note shall immediately upon such declaration or Automatic Default become due and payable, both as to principal and interest, without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived, notwithstanding anything contained herein to the contrary. 3 4. If any one or more defaults shall occur and be continuing, the Payee may proceed to protect and enforce such Payee's rights either by suit in equity or by action at law, or both, whether for the specific performance of any covenant, condition or agreement contained in this Note or in any agreement or document referred to herein or in aid of the exercise of any power granted in this Note or in any agreement or document referred to herein, or proceed to enforce the payment of this Note or to enforce any other legal or equitable right of the Payee of this Note. No right or remedy herein or in any other agreement or instrument conferred upon the holder of this Note is intended to be exclusive of any other right or remedy, and each and every such right or remedy shall be cumulative and shall be in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or by statute or otherwise. 5. Unconditional Obligation; Fees; Waivers; Other. 5.1. The obligations to make the payments provided for in this Note are absolute and unconditional and not subject to any defense, set-off, counterclaim, rescission, recoupment or adjustment whatsoever. 5.2. No forbearance, indulgence, delay or failure to exercise any right or remedy with respect to this Note shall operate as a waiver, nor as an acquiescence in any default, nor shall any single or partial exercise of any right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy. 5.3. This Note may not be modified except by a writing duly executed by the Payor and the Payee. 5.4. The Payor hereby expressly waives demand and presentment for payment, notice of nonpayment, notice of dishonor, protest, notice of protest, bringing of suit, and dili gence in taking any action to collect amounts called for hereunder, and shall be directly and primarily liable for the payment of all sums owing and to be owing hereon, regardless of and without any notice, diligence, act or omission with respect to the collection of any amount called for hereunder or in connection with any right, lien, interest or property at any and all times which the Payee had or is existing as security for any amount called for hereunder. 5.5. The Payor shall bear all of its expenses, including attorneys' fees incurred in connection with the preparation of this Note. 6. Subordination. The payment of principal and interest on this Note shall be subordinate in payment and right of payment to the payment or provision for payment in full of all other indebtedness existing as of now or hereafter incurred by the Payor. 4 7. Restrictions on Transfer. By its acceptance of this Note, the Payee acknowledges that this Note is subject to the provisions of Payee's Subscription Agreement submitted to the Payor subscribing for this Note, this Note has not been registered under the securities laws of the United States of America or any state thereof and Payee represents that this Note has been acquired for investment and no interest in this Note may be offered for sale, sold, delivered after sale, transferred, pledged, or hypothecated in the absence of registration and qualification of this Note under applicable federal and state securities laws or an opinion of counsel reasonably satisfactory to the Payor that such registration and qualification are not required. In addition, this Note may only be transferred to a person deemed to be an "accredited investor" as such term is defined under Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended. 8. Miscellaneous. 8.1. The headings of the various paragraphs of this Note are for convenience of reference only and shall in no way modify any of the terms or provisions of this Note. 8.2. All notices required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given when personally delivered, delivered by Federal Express or other national overnight courier, three days after mailing if sent by registered or certified mail, return receipt requested, postage prepaid, or on the date of delivery if delivered by telecopy, receipt confirmed, provided that a confirmation copy is sent on the next business day by registered or certified mail, return receipt requested and postage prepaid, to the address of the intended recipient set forth in the preamble to this Note or at such other address as the intended recipient shall have hereafter given to the other party hereto pursuant to the provisions hereof. 8.3. This Note and the obligations of the Payor and the rights of the Payee shall be governed by and construed in accordance with the laws of the State of Illinois, without regard to its conflicts of laws rules or principles, with respect to contracts made and to be fully performed therein. 8.4. Any legal suit, action or proceeding arising out of or relating to this Note will be instituted exclusively in the Circuit Court of Cook County, Illinois, or in the United States District Court for the Northern District of Illinois, each and any of which shall apply Illinois law without reference to its conflicts of laws principles or rules. The Payor and the Payee (by accepting this Note) each waives any objection which the Payor or the Payee may have now or hereafter to the venue of any such suit, action or proceeding, and irrevocably consents to the jurisdiction of the Illinois Circuit Courts, County of Cook and the United States District Court for the Northern District of Illinois in any such suit, action or proceeding. The Payor and Payee (by accepting this Note) each further agree to accept and acknowledge service of any and all process which may be served in any such suit, action or proceeding in the Illinois Circuit Courts, County of Cook or in the United States District Court for the Northern District of Illinois . 5 8.5. This Note shall bind the Payor and its successors and assigns. 8.6 Except in the ordinary course of business (which includes, but is not limited to, borrowing monies), Payor will not borrow any additional amounts without the written consent of a majority of the holders of Notes; such majority to be determined not by reference to the number of holders of the Notes but by reference to the then outstanding principal amount of the Notes. CTI INDUSTRIES CORPORATION By: ___________________________ Howard W. Schwan, President ATTEST: _______________________ , Secretary 6 EXHIBIT B TO EXHIBIT 10.8 The securities represented by this Warrant have not been registered under the Securities Act of 1933, and thus may not be transferred unless registered under that Act or unless an exemption from registration is available. Warrant dated June 30, 1997, to purchase _________ Shares of Common Stock on or before June 30, 2002. STOCK PURCHASE WARRANT TO PURCHASE COMMON STOCK OF CTI INDUSTRIES CORPORATION This certifies that, for value received, , or his assigns, is entitled to subscribe for and purchase from CTI INDUSTRIES CORPORATION, a Delaware corporation (hereinafter called the "Company"), at a price of One Dollar Twenty cents ($1.20) per share (subject to adjustment as set forth in paragraph 3 below) and at any time after the date hereof to and including June 30, 2002, (subject to adjustment as set forth in paragraph 3 below) fully paid and non-assessable shares of the Company's common stock, par value $.075 per share (hereinafter referred to as the "Common Stock"). This Warrant is subject to the following provisions, terms and conditions: 1. Exercise; Issuance of Certificates; Payment for Shares. The rights represented by this Warrant may be exercised by the holder hereof at any time within the period specified above, in whole or in part (but not as to a fractional share of Common Stock), by the surrender of this Warrant (properly endorsed if required) at the principal office of the Company (or such other office of the Company as it may designate by notice in writing to the holder hereof at the address of such holder appearing on the books of the Company) (a) specifying the number of shares of Common Stock being purchased and (b) accompanied by a check payable to the Company for the purchase price for such shares. The Company agrees that the shares so purchased shall be deemed to be issued to the holder hereof as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares as aforesaid. Certificates for the shares so purchased shall be delivered to the holder hereof within a reasonable time, not exceeding ten days, after the rights represented by this Warrant shall have been so exercised, and, unless this Warrant has expired, a new Warrant of like tenor, representing the right to purchase the number of shares, if any, with respect to which this Warrant shall not then have been exercised, shall also be delivered to the holder hereof within such time. 1 2. Shares to be Fully Paid; Reservation of Shares. The Company covenants and agrees: (a) that all shares of Common Stock which may be issued upon exercise of the rights represented by this Warrant will, upon issuance, be fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof; (b) without limiting the generality of the foregoing, that the Company will from time to time take all such action as may be required to assure that the par value, if any, per share of Common Stock is at all times equal to or less than the then effective Warrant Purchase Price (as hereinafter defined) per share of Common Stock issuable pursuant to this Warrant; (c) that, during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized, and reserved for the purpose of issue or transfer upon exercise of the rights evidenced by this Warrant, a sufficient number of shares of Common Stock to provide for the full exercise of the rights represented by this Warrant; (d) that the Company will take all such action as may be necessary to assure that the Common Stock issuable upon the exercise hereof may be so issued without violation of any applicable law or regulation; and (e) that the Company will not take any action which would result in any adjustment of the Warrant Purchase Price if (I) the total number of shares of Common Stock issuable after such action upon exercise of this Warrant, together with all shares of Common Stock then outstanding and all shares of Common Stock then issuable upon exercise of all Options (as hereinafter defined) and upon conversion of all Convertible Securities (as hereinafter defined) then outstanding, would exceed (ii) the total number of shares of Common Stock then authorized by the Company's Articles of Incorporation (all such issued and issuable Common Stock being called the "Potentially Outstanding Common Stock"). In the event any stock or securities of the Company other than Common Stock are issuable upon the exercise hereof, the Company will take or refrain from taking any action referred to in clauses (a) through (e) of this paragraph 2 as though such clauses apply, equally, to such other stock or securities then issuable upon the exercise hereof. 3. Warrant Purchase Price. The provisions set forth in paragraphs 1 and 2 above are, however, subject to the following: 3.1 Adjustment of Warrant Purchase Price; Resulting Adjustment of Number of Purchasable Shares. The initial Warrant Purchase Price of One Dollar Twenty Cents ($1.20) per share of Common Stock shall be subject to adjustment from time to time as hereinafter provided (such price or such price as last adjusted pursuant to the terms 2 hereof, as the case may be, is herein called the "Warrant Purchase Price"). Upon each adjustment of the Warrant Purchase Price, the holder of this Warrant shall thereafter be entitled to purchase, at the Warrant Purchase Price resulting from such adjustment, the number of shares of Common Stock obtained by multiplying the Warrant Purchase Price in effect immediately prior to such adjustment by the number of shares of Common Stock purchasable pursuant hereto immediately prior to such adjustment and dividing the product thereof by the Warrant Purchase Price resulting from such adjustment. 3.2 Adjustment of Warrant Purchase Price Upon Issuance of Stock. If and whenever after the date hereof the Company shall issue or sell any shares of its Common Stock for a consideration per share less than the Warrant Purchase Price in effect immediately prior to the time of such issue or sale (except if such issue or sale shall be made pursuant to the exercise of Options or Convertible Securities, as defined below, outstanding on the date hereof), then, forthwith upon such issue or sale, the Warrant Purchase Price shall be reduced to the price, calculated to the nearest cent, determined by dividing (a) the sum of (I) the number of shares of Common Stock outstanding immediately prior to such issue or sale multiplied by the then existing Warrant Purchase Price and (ii) the consideration, if any, received by the Company upon such issue or sale, by (b) the total number of shares of Common Stock outstanding immediately after such issue or sale. No adjustment of the Warrant Purchase Price, however, shall be made in an amount less than $0.01 per share, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which together with all adjustments so carried forward shall amount to $0.01 per share or more. For purposes of this paragraph 3.2, the following paragraphs 3.3 to 3.15, inclusive, subject to the exception set forth above, shall also be applicable: 3.3 Issuance of Rights or Options. In case at any time the Company shall in any manner grant (whether directly or by assumption in a merger or otherwise) any rights to subscribe for or to purchase, or any options for the purchase of, Common Stock or any stock or securities convertible into or exchangeable for Common Stock (such rights or options being herein called "Options" and such convertible or exchangeable stock or securities being herein called "Convertible Securities"), whether or not such Options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such Options or upon conversion or exchange of such Convertible Securities (determined as provided in the following sentence) shall be less than the Warrant Purchase Price in effect immediately prior to the time of granting of such Options, then the maximum number of shares of Common Stock issuable upon the exercise of all such Option or upon conversion or exchange of the total maximum amount of such Convertible Securities shall be deemed to have been issued for such price per share as of the date of the granting of such Options and thereafter shall be deemed to be outstanding. The price per share for which Common Stock is issuable, as referred to in the preceding sentence, shall be determined by dividing (a) the sum of (I) the total amount, if any, received or receivable by the Company as consideration for the granting of such Options, plus (ii) the minimum aggregate amount of 3 additional consideration payable to the Company upon the exercise of all such Options, plus (iii) in the case of all such Options that relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue or sale of all such Convertible Securities (to the extent not counted under the immediately preceding clause (ii) and upon the conversion or exchange of all such Convertible Securities into Common Stock, by (b) the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon the conversion or exchange of all such Convertible Securities. The consideration received or receivable by the Company shall in each case be determined in accordance with paragraph 3.7 below. Except a otherwise provided in paragraph 3.5 below, no adjustment of the Warrant Purchase Price shall be made upon the actual issue of such Common Stock or of such Convertible Securities upon exercise of such Options or upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities. 3.4 Issuance of Convertible Securities. In case the Company shall in any manner issue (whether directly or by assumption in a merger or otherwise) or sell any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange (determined as provided in the following sentence) shall be less than the Warrant Purchase Price in effect immediately prior to the time of such issue or sale, then the total maximum number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall be deemed to have been issued for such price per share as of the date of the issue or sale of such Convertible Securities and thereafter shall be deemed to be outstanding, provided that (a) except as otherwise provided in paragraph 3.5 below, no adjustment of the Warrant Purchase Price shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities, and (b) if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustments of the Warrant Purchase Price have been or are to be made pursuant to other provisions of this paragraph 3, no further adjustment of the Warrant Purchase Price shall be made by reason of such issue or sale. The price per share for which Common Stock is issuable, as referred to in the preceding sentence, shall be determined by dividing (I) the sum of (A) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus (B) the minimum aggregate amount of additional consideration, if any, payable upon the conversion or exchange of such Convertible Securities into Common Stock, by (ii) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of such Convertible Securities. The consideration received or receivable by the Company shall in each case be determined in accordance with paragraph 3.7 below. 3.5 Change in Option Price or Conversion Rate. Upon the happening of any of the following events, namely, if the purchase price provided for in any Option referred to in paragraph 3.3 above and still outstanding, the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities referred to in paragraph 3.3 or 3.4 above and still outstanding, or the rate at which any such Convertible Securities 4 are convertible into or exchangeable for Common Stock shall change at any time (other than under or by reason of provisions designed to protect against dilution), the Warrant Purchase Price in effect at the time of such event shall forthwith be readjusted to the Warrant Purchase Price which would have been in effect at such time had such Options or Convertible Securities provided for such changed purchase price, additional consideration, or conversion rate, as the case may be, at the time initially granted, issued, or sold. On the expiration of any Option referred to in paragraph 3.3 above prior to the exercise thereof or the termination of any right to convert or exchange any Convertible Securities referred to in paragraph 3.3 or 3.4 above prior to the exercise of such right, the Warrant Purchase Price then in effect hereunder shall forthwith be increased to the Warrant Purchase Price which would have been in effect at the time of such expiration or termination had such Option or Convertible Securities, to the extent outstanding immediately prior to such expiration or termination, never been issued, and the Common Stock issuable thereunder shall no longer be deemed to be outstanding for the purposes of any calculation under paragraph 3.3 or 3.4 above. 3.6 Determination of Consideration Upon Dividend or Other Distribution. In case the Company shall declare a dividend or make any other distribution upon any stock of the Company payable in Common Stock, Options or Convertible Securities, any Common Stock, Options or Convertible Securities, as the case may be, issuable in payment of such dividend or distribution shall be deemed to have been issued or sold without consideration. 3.7 Consideration for Stock. In case any shares of Common Stock, Options or Convertible Securities shall be issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the Company therefor, without deduction therefrom of any expenses incurred or any reasonable underwriting commissions or concessions paid or allowed by the Company (or deducted from amounts received by the Company) in connection therewith. In case any shares of Common Stock, Options or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company shall be deemed to be the fair value of such consideration as determined reasonably and in good faith by the Board of Directors of the Company, without deduction of any expenses incurred or any reasonable underwriting commissions or concessions paid or allowed by the Company (or deducted from amounts received by the Company) in connection therewith. The amount of consideration deemed to be received by the Company pursuant to issuance and/or sale, pursuant to an established compensation plan of the Company, to directors, officers or employees of the Company or any subsidiary of the Company in connection with their employment of shares of Common stock, Options or Convertible Securities, shall be increased by the amount of any tax benefit realized by the Company as a result of such issuance and/or sale, the amount of such tax benefit being the amount by which the federal and/or state income or other tax liability of the Company shall be reduced by reason of any deduction or credit in respect of such issuance and/or sale. In case any Common Stock, Options or Convertible Securities shall be issued in connection with any merger or consolidation in which the Company is the surviving corporation (other than any 5 consolidation or merger in which the previously outstanding shares of Common Stock of the Company shall be changed into or exchanged for the stock or other securities of another corporation), the amount of consideration received therefor shall be deemed to be the fair value as determined reasonably and in good faith by the Board of Directors of the Company of such portion of the assets and business of the non-surviving corporation as such Board may determined to be attributable to such shares of Common Stock, Options or Convertible Securities, as the case may be. In the event of any consolidation or merger of the Company in which the Company is not the surviving corporation or in which the previously outstanding shares of Common Stock of the Company shall be changed into or exchanged for the stock or other securities of another corporation, or in the event of any sale of all or substantially all of the assets of the Company for stock or other securities of any corporation, the Company shall be deemed to have issued a number of shares of its Common Stock computed on the basis of the actual exchange ratio on which the transaction was predicated and for a consideration equal to the fair market value on the date of such transaction of all such stock or securities of the other corporation, and if such calculation results in adjustment of the Warrant Purchase Price, the determination of the number of shares of Common Stock issuable upon exercise of the Warrants immediately prior to such merger, consolidation or sale, for purposes of paragraph 3.13 below, shall be made after giving effect to such adjustment of the Warrant Purchase Price. In case any shares of Common Stock shall be issued (or issuable) pursuant to any Options for the purchase of the same, the consideration deemed to be received (or receivable) therefor shall be deemed to be the total amount, if any, received (or total minimum amount receivable) by the Company as consideration for the granting of such Options, plus the aggregate amount of additional consideration paid (or minimum amount payable) to the Company upon the exercise of such Options. In case any shares of Common Stock shall be issued (or issuable) upon the conversion or exchange of any Convertible Securities, the consideration deemed to be received (or receivable) therefor shall be deemed to be the total amount received (or total minimum amount receivable) by the Company as consideration for the granting of any Options to subscribe to or purchase such Convertible Securities, plus the total amount of additional consideration paid (or minimum amount payable) to the Company as consideration for the issue or sale of such Convertible Securities, plus the total amount of additional consideration, if any, paid (or minimum amount payable) to the Company upon the conversion or exchange thereof. 3.8 Record Date. In case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution payable in Common Stock, Options or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution. 3.9 Treasury Shares. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common stock for the purposes of this paragraph 3. 6 3.10 Liquidating Dividends. The Company will not declare a dividend upon Common Stock payable otherwise than out of consolidated earnings or consolidated earned surplus, determined in accordance with generally accepted accounting principles, including the making of appropriate deductions for minority interests, if any, in subsidiaries, and otherwise than in Common Stock, unless the holder of this Warrant shall have consented to such dividend in writing. 3.11 Subdivision or Combination of Stock. In case at any time the Company shall in any manner subdivide its outstanding shares of Common stock into a greater number of shares or combine such shares of Common Stock into a smaller number of shares, then the Warrant Purchase Price in effect immediately subsequent to such subdivision or combination shall be equal tot he product of (a) the Warrant Purchase Price in effect immediately prior to such subdivision or combination multiplied by (b) a fraction the numerator of which is the number of shares of Common Stock outstanding immediately prior to such subdivision or combination and the denominator of which is the number of shares of Common Stock outstanding immediately thereafter. 3.12 Reorganization, Reclassification, Consolidation, Merger or Sale. If any reorganization or reclassification of the capital stock of the Company, or any consolidation or merger of the Company with another corporation, or the sale of all or substantially all of the Company's assets to another corporation shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provisions shall be made whereby the holder hereof shall thereafter have the right to purchase and receive, upon the basis and upon the terms and conditions specified in this Warrant and in lieu of the shares of Common Stock of the Company immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, such shares of stock, securities, or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of such stock equal to the number of shares of such stock immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby had such reorganization, reclassification, consolidation, merger or sale not taken place, and in any such case appropriate provision shall be made with respect to the rights and interests of the holder of this Warrant to the end that the provisions hereof (including, without limitation, provisions for adjustment of the Warrant Purchase Price and of the number of shares purchasable and receivable upon the exercise of this Warrant) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise of the rights represented hereby (including an immediate adjustment, by reason of such consolidation or merger, of the Warrant Purchase Price to the value for the Common Stock reflected by the terms of such consolidation or merger if the value so reflected is less than the Warrant Purchase Price in effect immediately prior to such consolidation or merger). In the event of a merger or consolidation of the Company with or into another corporation as a result of which the number of shares of common stock of the surviving corporation greater or lesser than the number of shares of Common Stock of the Company outstanding 7 immediately prior to such merger or consolidation are issuable to holders of Common Stock of the Company, then the Warrant Purchase Price in effect immediately prior to such merger or consolidation shall be adjusted in the same manner as though there were a subdivision or combination of the outstanding shares of Common Stock of the Company. The Company shall not effect any such consolidation, merger, or sale, unless prior to the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation or merger of the corporation into or for the securities of which the previously outstanding stock of the Company shall be exchanged in connection with such consolidation or merger, or the corporation purchasing such assets, as the case may be, shall assume, by written instrument executed and mailed or delivered to the holder hereof at the last address of such holder appearing on the books of the Company, the obligation to deliver to such holder such shares of stock, securities, or assets as, in accordance with the foregoing provisions, such holder may be entitled to purchase. If a purchase, tender, or exchange offer is made to and accepted by the holders of more than 50% of the outstanding shares of Common Stock of the Company, the Company shall not effect any consolidation, merger, or sale with the Person having made such offer or with any Affiliate of such Person unless, prior to the consummation of such consolidation, merger, or sale, the holder of this Warrant shall have been given a reasonable opportunity to then elect to receive either the stock, securities, or assets then issuable upon the exercise of this Warrant. As used herein, the term "Person" shall mean and include an individual, a partnership, a corporation, a trust, a joint venture, an unincorporated organization, and a government or any department or agency thereof, and an "Affiliate" of any controlling, controlled by, or under direct or indirect common control with, such other Person. A Person shall be deemed to control a corporation if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such corporation, whether through the ownership of voting securities, by contract, or otherwise. The provisions of this paragraph 3.3 governing the substitution of another corporation for the Company shall similarly apply to successive instances in which the corporation then deemed to be the Company hereunder shall either sell all or substantially all of its properties and assets to any other corporation, shall consolidate with or merge into any other corporation, or shall be the surviving corporation of the merger into it of any other corporation as a result of which the holders of any of its stock or other securities shall be deemed to have become the holders of, or shall become entitled to, the stock or other securities of any corporation other than the corporation at the time deemed to be the Company hereunder. 3.13 Duty to Make Fair Adjustments in Certain Cases. If any event occurs as to which, in the opinion of the Board of Directors of the Company, the other provisions of this paragraph 3 are not strictly applicable or, if strictly applicable, would not fairly protect the purchase rights of this Warrant in accordance with the essential intent and principles hereof, the Board of Directors shall make such adjustments in the Warrant Purchase Price as it deems necessary to protect such purchase rights as aforesaid, but in no event shall any such adjustment have the effect of increasing the Warrant Purchase Price as otherwise determined pursuant to this paragraph 3. 8 3.14 Notice of Adjustment. The Company shall give to the holder of this Warrant prompt written notice of every adjustment of the Warrant Purchase Price, by first class mail, postage prepaid, addressed to the address of such holder as shown on the books of the Company, which notice shall state the Warrant Purchase Price resulting from such adjustment and the increase or decrease, if any, in the number of shares purchasable at such price upon the exercise of this Warrant, and shall set forth in reasonable detail the method of calculation and the facts upon which such calculation was based. 3.15 Other Notices. In case at any time: (a) the Company shall declare any cash dividend upon its Common Stock payable at a rate in excess of the rate of the last cash dividend theretofore paid; (b) the Company shall declare any dividend upon its Common Stock payable in stock or make any special dividend or other distribution (other than regular cash dividends) to the holders of its Common Stock; (c) the Company shall offer for subscription to the holders of any of its Common Stock any additional shares of stock of any class or other rights; (d) there shall be any capital reorganization of the Company or any reclassification of its capital stock or any consolidation or merger of the Company with, or sale of all or substantially all of its assets to, another corporation; or (e) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of such cases, the Company shall give, by first class mail, postage prepaid, addressed to the holder of this Warrant at the address of such holder as shown on the books of the Company, (i) at least 20 days' prior written notice of the date on which the books of the Company shall close or a record shall be taken for such dividend, distribution or subscription rights or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, and (ii) in the case of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, at least 20 days prior written notice of the date when the same shall take place. Any notice required by clause (i) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of Common Stock shall be entitled thereto, and any notice required by clause (ii) shall also specify the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be. 9 4. Issue Tax. The issuance of certificates for shares of Common Stock upon the exercise of this Warrant shall be made without charge to the holder of this Warrant for any issuance tax in respect thereof. 5. Closing of Books. The Company will at no time close its transfer books against the transfer of this Warrant or of any shares of Common Stock issued or issuable upon the exercise of this Warrant in any manner which interferes with the timely exercise of this Warrant. 6. No Voting Rights. This Warrant shall not entitle the holder hereof to any voting rights or other rights as a stockholder of the Company. 7. Warrants Transferable. Subject to the restrictions referred to in the legend set forth on the face of this Warrant, this Warrant and all rights hereunder are transferable to any person, in whole or in part, without charge to the holder hereof, at the office of the Company referred to in paragraph 1 above, by the holder hereof in person or by duly authorized attorney, upon surrender of this Warrant properly endorsed. Each taker and holder of this Warrant, by taking or holding the same, consents and agrees that this Warrant, when endorsed in blank, shall be deemed negotiable, and that the holder hereof, when this Warrant shall have been so endorsed, may be treated by the Company and all other persons dealing with this Warrant as the absolute owner hereof for any purpose and as the person entitled to exercise the rights represented by this Warrant, or to the transfer hereof on the books of the Company, any notice to the contrary notwithstanding. Until such transfer on such books, however, the Company may treat the registered holder hereof as the owner for all purposes. 8. Warrant Exchangeable for Different Denominations. This Warrant is exchangeable, upon its surrender by the holder hereof at the office of the Company referred to in paragraph 1 above, for new Warrants of like tenor representing in the aggregate the right to subscribe for and purchase the number of Shares which may be subscribed for and purchased hereunder, each of such new Warrants to represent the right to subscribe for and purchase such number of shares as shall be designated by said holder hereof at the time of such surrender. 9. Descriptive Headings and Governing Law. The descriptive headings of the several paragraphs of this Warrant are inserted for convenience of reference only and do not constitute a part of this Warrant. This Warrant is being delivered and is intended to be performed in the State of Illinois and shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of such State. 10. Certain Covenants of the Company. So long as this Warrant remains outstanding, in whole or in part, the Company will, unless the holder of this Warrant otherwise consents in writing: (a) within 60 days after the end of each of the first three quarterly fiscal periods in each fiscal year of the Company, deliver to the holder of this Warrant (i) a consolidated balance sheet of the Company and its subsidiaries, if any, as at the end of such period, and (ii) consolidated statements of income and of surplus of the Company and its subsidiaries, if any, for such period and (in the case of the second and third such 10 quarterly periods) for the period from the beginning of the current fiscal year to the end of such quarterly period, setting forth in each case in comparative form the consolidated figures for the corresponding periods of the previous fiscal year, all in reasonable detail and certified as prepared in accordance with generally accepted accounting principles consistently applied, subject to exchanges resulting from year-end audit adjustments, by the principal financial officer of the Company; and (b) within 90 days after the end of each fiscal year of the Company, deliver to the holder of this Warrant (i) a consolidated balance sheet of the Company and its subsidiaries, if any, as at the end of such year, and (ii) consolidated statements of income and of surplus of the Company and its subsidiaries, if any, for such year, setting forth in each case in comparative form the consolidated figures for the previous fiscal year, all in reasonable detail and accompanied by an opinion thereon of independent public accountants, which opinion shall state that such financial statements have been prepared in accordance with generally accepted accounting principles consistently applied and that the audit by such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards; and (c) as soon as practicable, notify the holder of this Warrant in writing of any potentially material adverse development concerning the Company; and permit such holder of his representative to examine the books and records of the company at any time during regular business hours and make copies of any portions thereof desired to be copied by such holder or his representative. IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officers under its corporate seal and this Warrant to be dated this ______ day of ____________, 1997. CTI INDUSTRIES CORPORATION By:_____________________________________ President (CORPORATE SEAL) Attest: _____________________________________ Secretary 11 SUBSCRIPTION AGREEMENT Dated: ______________, 199__ To: CTI Industries Corporation 22160 N. Pepper Road Barrington, Illinois The undersigned, pursuant to the provisions set forth in the within Warrant, hereby agrees to subscribe for and purchase shares of the Common Stock covered by such Warrant, and makes payment herewith in full therefor at the price per share provided by such Warrant. Signature___________________________ Address_____________________________ ____________________________________ 12 ASSIGNMENT FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers all of the rights of the undersigned under the within Warrant, with respect to the number of shares of Common stock set forth below, unto: Name of Assignee Address Number of Shares Dated: __________________, 199__ Signature___________________________ Witness_____________________________ 13 EX-10 15 EMPLOYMENT AGREEMENT EXHIBIT 10.9 E M P L O Y M E N T A G R E E M E N T THIS AGREEMENT is made and entered into this 30th day of June, 1997 effective for the term provided herein, by and between CTI Industries Corporation., an Illinois corporation (the "Company") and Howard W. Schwan (hereinafter referred to as the "Executive"). WHEREAS, the Executive is presently, and for some time has been, employed as an executive officer of the Company and has been instrumental in the operation and management of the Company; WHEREAS, the Company desires to be assured of the continued association and services of Executive and Executive desires to continue in the employment of the Company on the terms provided herein. NOW, THEREFORE, in consideration of the premises and of the terms, covenants and conditions hereinafter contained, the parties hereto agree as follows: 1. Employment, Duties and Authority. 1.1 The Company hereby employs Executive and Executive hereby accepts employment by the Company on the terms, covenants and conditions herein contained. 1.2 The Executive is hereby employed by the Company as President. The Executive shall have such duties, responsibilities and authority as the by-laws of the Company shall from time to time provide and as the Board of Directors of the Company shall from time to time prescribe in writing. 1.3 During the term of Executive's employment hereunder, and subject to the other provisions hereof, Executive shall devote his full energies, interest, abilities and productive time to the performance of his duties and responsibilities hereunder and will perform such duties and responsibilities faithfully and with reasonable care for the welfare of the Company. During the term of his employment hereunder, Executive shall not perform any services for compensation for any person, firm, partnership, company or corporation other than the Company without the express written consent of the Board of Directors of the Company. 2. Compensation and Benefits. 2.1 Basic Salary. 2.1.1 The Company shall pay to Executive during the initial term of employment hereunder and each renewal term a basic salary at an annual rate to be 1 determined by the Board of Directors of the Company but not less than the amount of $135,000. Such basic salary shall be paid by the Company to Executive each month, less amounts which the Company may be required to withhold from such payments by applicable federal, state or local laws or regulations. 2.1.2 If the Executive shall be absent from work on account of personal injuries or sickness, he shall continue to receive the payments provided for in paragraph 2.1.1 hereof; provided, however, that any such payment may, at the Company's option, be reduced by the amount which the Executive may receive, for the period covered by any such payments, in disability payments (i) pursuant to any disability insurance which the Company, in its sole discretion, may maintain, or (ii) under any governmental program for disability compensation. 2.1.3 The Company agrees that the rate of the basic salary of the Executive hereunder shall be reviewed annually by the Board of Directors or such committee of the Board of Directors designated by it to review such matters and that the rate of the basic salary shall be determined and adjusted for each year during the term of Executive's employment hereunder by the Board of Directors or such committee commensurate with (i) the performance of Executive, (ii) the net income of the Company during the preceding fiscal year and as projected for the fiscal year for which the basic salary determination is made, (iii) comparable rates of compensation for executives and (iv) such other factors as the Board of Directors or such committee may deem relevant to the determination. 2.2 Benefits; Expense Reimbursement. 2.2.1 The Executive shall be entitled to, and shall receive, all other benefits of employment available to other executives of the Company generally, including, without limitation, participation in any hospital, surgical, medical or other group health plans or accident benefits, life insurance benefits, pension or profit-sharing plans, bonus plans or vacation plans as shall be instituted by the Company, in its sole discretion. 2.2.2 During the term hereof, the Company shall reimburse Executive for all reasonable and necessary expenses incurred by Executive in the performance of his duties hereunder, including without limitation, travel, meals, lodging, office supplies or equipment subject to such reasonable limitations, restrictions and reporting standards as the Board of Directors of the Company may from time to time establish. Executive shall provide to the Company promptly after incurring any such expenses a detailed report thereof and such information relating thereto as the Company shall from time to time require. Such information shall be sufficient to support the deductibility of all such expenses by the Company for federal income tax purposes. 2 2.2.3 The Company shall provide to Executive the use of an automobile. 3. Term. The employment of Executive hereunder shall be for a term commencing on January 1, 1997 and expiring on June 30, 2002. Upon the expiration of the initial term or any renewal term of Executive's employment hereunder, the term of such employment automatically shall be renewed for an additional term of one year commencing on July 1 and expiring on the succeeding June 30 unless Executive or the Company shall give notice of the termination of Executive's employment and this Agreement by written notice to the other more than 120 days prior to the date of expiration of the initial or any renewal term. In the event that such notice of termination shall be given timely, this Agreement shall terminate on the date of expiration of such initial or renewal term. 4. Termination. 4.1 The Company shall be entitled to terminate this Agreement prior to the expiration of its term or any renewal term on the occurrence of either: 4.1.1 an event of default with respect to Executive as provided herein, or 4.1.2 the permanent mental or physical disability of Executive as provided herein occurring during the term or any renewal term of Executive's employment hereunder. 4.2 For purposes of this Agreement, an event of default with respect to Executive shall include: 4.2.1 Any failure by Executive to perform his duties, responsibilities or obligations hereunder in a faithful and diligent manner or with reasonable care and (if such failure can be cured) the failure by Executive to cure such failure within 10 days after written notice thereof shall have been given to Executive by the Company; or 4.2.2 Commission by Executive of any material act of dishonesty as an employee of the Company or of disloyalty to the Company, or any wrongful or unauthorized appropriation, taking or misuse of funds, property or business opportunities of the Company. 4.3 Permanent mental or physical disability of Executive shall be deemed to have occurred hereunder when Executive shall have failed or been unable to perform his duties hereunder on a full-time basis for an aggregate of 180 days in any one period of 210 consecutive days and with a certification from a licensed physician in the State of Missouri that Executive is permanently disabled from performing his duties hereunder. 3 4.4 Executive shall be entitled to terminate his employment with the Company under this Agreement prior to the expiration of its term upon the occurrence of an event of default with respect to the Company. 4.5 For purposes of this Agreement an event of default with respect to the Company shall include: 4.5.1 Any failure by the Company to perform its obligations to Executive under this Agreement and (if such failure can be cured) the failure by the Company to cure such failure within 10 days after written notice thereof shall have been given to the Company by Executive; 4.5.2 The Company shall: (a) admit in writing its inability to pay its debts generally as they become due, (b) file a petition for relief under any chapter of Title 11 of the United States Code or a petition to take advantage of any insolvency under the laws of the United States of America or any state thereof, (c) make an assignment for the benefit of its creditors, (d) consent to the appointment of a receiver of itself or of the whole or any substantial part of its property, (e) suffer the entry of an order for relief under any chapter of Title 11 of the United Sates Code, or (f) file a petition or answer seeking reorganization under the Federal Bankruptcy Laws or any other applicable law or statute of the United States of America or any state thereof. 4.6 In the event of termination of this Agreement and Executive's employment hereunder by the Company pursuant to paragraph 4.1 hereof, all rights and obligations of the Company and Executive hereunder shall terminate on the date of such termination, subject to the following: 4.6.1 Executive shall be entitled to receive (subject to any rights of set off or counterclaim by the Company) all salary, additional compensation and benefits, which shall have accrued prior to the date of such termination and the obligation of the Company for the payment of salary, additional compensation or benefits shall terminate as at the date of such termination; 4 4.6.2 All rights of the Company or Executive which shall have accrued hereunder prior to the date of such termination, and all provisions of this Agreement provided herein to survive termination of employment of Executive hereunder, shall survive such termination and the Company and Executive shall continue to be bound by such provisions in accordance with the terms thereof; 4.7 In the event of termination of the Agreement by Executive in accordance with paragraph 4.4 hereof, all rights and obligations of the Company and Executive hereunder shall terminate on the date of such termination, subject to the following: 4.7.1 Executive shall be entitled to receive all salary, additional compensation and benefits which shall have accrued prior to the date of such termination and the Company's obligation for the payment of salary, additional compensation and benefits shall terminate as of the date of such termination; 4.7.2 All rights of the Company or Executive which shall have accrued hereunder prior to the date of such termination and the obligations of Executive pursuant to paragraphs 5, 6 and 7 provided herein to survive termination of employment of Executive hereunder shall survive such termination and the Executive shall continue to be bound by such provisions in accordance with their terms. 4.8 This Agreement and all rights and obligations of the parties hereunder shall terminate immediately upon the death of Executive except that the Company shall pay to the heirs, legatees or personal representative of Executive (i) all compensation or benefits hereunder accrued but not paid to the date of Executive's death and (ii) an amount equal to the total compensation which would have been payable to Executive hereunder, but for his death, for a period of six months from the date of his death. 5. Confidential Information. 5.1 "Confidential Information" means information disclosed by the Company to Executive, or developed or obtained by Executive during his employment by the Company, either before the date or during the term of this Agreement, or during the Consultation Period, provided that such information is not generally known in the business and industry in which the Company is or may subsequently become engaged, relating to or concerning the business, projects, products, processes, formulas, know-how, techniques, designs or methods of the Company, whether relating to research, development, manufacture, purchasing, accounting, engineering, marketing, merchandising, selling or otherwise. Without limitation, Confidential Information shall include all know-how, technical information, inventions, ideas, concepts, processes and designs relating to products of the Company, whether now existing or hereafter developed, and all prices, customer or distributor names, customer or distributor lists, marketing and other relationships, whether contractual or not, between the Company, its 5 suppliers, customers, distributors, employees, agents, consultants and independent contractors but shall exclude the names of customers or distributors known to Executive prior to the effective date hereof. 5.2 Executive agrees that, during the term hereof or while Executive shall receive compensation hereunder and after termination of his employment with the Company for so long as the Confidential Information shall not be generally known or generally disclosed (except by Executive or by means of wrongful use or disclosure), Executive shall not use any Confidential Information, except on behalf of the Company, or disclose any Confidential Information to any person, firm, partnership, company, corporation or other entity, except as authorized by the President or the Board of Directors of the Company. 6. Inventions. 6.1 "Inventions" shall mean discoveries, concepts, ideas, designs, methods, formulas, know-how, techniques or any improvements thereon, whether patentable or not, made, conceived or developed, in whole or in part, by Executive. 6.2 Executive covenants and agrees to communicate and fully disclose to the Board of Directors of the Company any and all Inventions made or conceived by him during the term hereof or while receiving any compensation or payment from the Company and further agrees that any and all such Inventions which he may conceive or make, during the term hereof or while receiving any compensation or payments from the Company, shall be at all times and for all purposes regarded as acquired and held by him in a fiduciary capacity and solely for the benefit of the Company and shall be the sole and exclusive property of the Company. The provisions of this subparagraph shall not apply to an invention for which no equipment, supplies, facilities or trade secret information of the Company was used and which was developed entirely on the Executive's own time, unless (a) the invention relates (i) to the business of the Company, or (ii) to the Company's actual or demonstrably anticipated research or development, or (b) the invention relates from any work performed by Executive for the Company. 6.3 Executive also covenants and agrees that he will assist the Company in every proper way upon request to obtain for its benefit patents for any and all inventions referred to in paragraph 6.2 hereof in any and all countries. All such patents and patent applications are to be, and remain, the exclusive property of the Company for the full term thereof and to that end, the Executive covenants and agrees that he will, whenever so requested by the Company or its duly authorized agent, make, execute and deliver to the Company, its successors, assigns or nominees, without charge to the Company, any all applications, applications for divisions, renewals, reissues, specifications, oaths, assignments and all other instruments which the Company shall deem necessary or appropriate in order to apply for and obtain patents of the United States or foreign countries for any and all Inventions referred to in paragraph 6.2 hereof or in order to 6 assign and convey to the Company, its successors, assigns or nominees, the sole and exclusive right, title and interest in and to such Inventions, applications or patents. Executive likewise covenants and agrees that his obligations to execute any such instruments or papers shall continue after the expiration or termination of this Agreement with respect to any and all such Inventions, and such obligations shall be binding upon his heirs, executors, assigns, administrators or other legal representatives. 7. Writings and Working Papers. Executive covenants and agrees that any and all books, textbooks, letters, pamphlets, drafts, memoranda or other writings of any kind written by him for or on behalf of the Company or in the performance of Executive's duties hereunder, Confidential Information referred to in paragraph 7.1 hereof and all notes, records and drawings made or kept by him of work performed in connection with his employment by the Company shall be and are the sole and exclusive property of the Company and the Company shall be entitled to any and all copyrights thereon or other rights relating thereto. Executive agrees to execute any and all documents or papers of any nature which the Company or its successors, assigns or nominees deem necessary or appropriate to acquire, enhance, protect, perfect, assign, sell or transfer its rights under this paragraph. Executive also agrees that upon request he will place all such notes, records and drawings in the Company's possession and will not take with him without the written consent of a duly authorized officer of the Company any notes, records, drawings, blueprints or other reproductions relating or pertaining to or connected with his employment of the business, books, textbooks, pamphlets, documents work or investigations of the Company. The obligations of this paragraph shall survive the term of employment hereunder or the termination or expiration of the term or any renewal term hereof or the term or termination of the Consultation Period. 8. Covenant Not to Compete. 8.1 For purposes of this paragraph: 8.1.1 "Conflicting Organization" means any person, firm, company, partnership, business, corporation or other entity engaged in, or intending to engage in, research, development, production, marketing or selling a Conflicting Product. 8.1.2 "Conflicting Product" means any product, process, service or design which competes with, or is reasonably interchangeable as a substitute for, any product, process, service or design developed, planned, under development, produced marketed or sold by the Company or any Affiliate during the term of the covenant in this paragraph 8. Without limitation, Conflicting Product includes any balloon product, including without limitation, latex or mylar balloon product and any printed or laminated film product. 7 8.1.3 "Territory" means the geographic area within which the Company or any Affiliate or any distributor or representative of the Company or any Affiliate is actively engaged in the sale of, or efforts to sell, the products of the Company or any Affiliate at any time during the term of this Agreement. 8.1.4 "Affiliate" shall mean any corporation of which the Company, or any Affiliate, shall own majority of the capital stock. 8.2 Executive acknowledges and agrees as follows: 8.2.1 That the Company and its Affiliates have developed, and are developing and establishing, a valuable and extensive trade in its services and products, including without limitation, latex and mylar balloons and printed and laminated films and that they have developed, and are developing, operations and distributors to sell such products and services throughout the United States and in foreign countries. 8.2.2 That the Company and its Affiliates have developed, and are developing, at great expense, technical information concerning their products and methods of marketing and sale which are kept and protected as Confidential Information and trade secrets and are of great value to the Company and its Affiliates. 8.2.3 That, during the course of his employment with the Company or an Affiliate and during the term of this Agreement, Executive has participated, and will participate, in such matters and has acquired and will acquire, possession of Confidential Information, and that Executive has had significant responsibility for the development activities of the Company and the development of unique products, methods and techniques of the Company and its Affiliates. 8.2.4 That, for Executive to utilize Confidential Information of the Company and its Affiliates, or unique skills, techniques or information developed by him while an employee of the Company or its Affiliates or during the term of this Agreement for a Conflicting Organization within the area or time provided herein would result in material and irreparable injury to the Company. 8.2.5 That the area and conduct covered by the restrictive covenant in this paragraph includes only a percentage of the total number of organizations and individuals who are customers or distributors or potential customer or distributors for products, processes or services with respect to which Executive has knowledge or expertise, that Executive would be able to utilize his knowledge, experience and expertise for an employer while fully complying with the terms of this paragraph and that the terms and conditions of this paragraph are reasonable and necessary for the protection of the Company's business and assets. 8 8.3 Executive agrees that, during the term of this Agreement, during the term of the Consultation Period, for so long as Executive shall be receiving compensation hereunder, and for a period of 36 months from and after the date of termination of this Agreement (other than by Executive pursuant to paragraph 4.4 hereof), he will not, anywhere within the Territory, directly or indirectly, whether as an employee, agent, officer, consultant, partner, owner, shareholder or otherwise: 8.3.1 solicit for the sale of, or participate with, provide services to, or be employed by any person, company, partnership, business or corporation which shall solicit for the sale of, any Conflicting Product by a Conflicting Organization; 8.3.2 engage or participate in, purchase or own any stock or other equity interest in, be employed by, or provide services or assistance to, any Conflicting Organization; 9. Specific Enforcement. Executive is obligated under this Agreement to render service of a special, unique, unusual, extraordinary and intellectual character, thereby giving this Agreement peculiar value so that the loss of such service or violation by Executive of this Agreement could not reasonably or adequately be compensated in damages in an action at law. Therefore, in addition to other remedies provided by law, the Company shall have the right during the term or any renewal term of this Agreement (or thereafter with respect o obligations continuing after the expiration or termination of this Agreement) to compel specific performance hereof by Executive or to obtain injunctive relief against violations hereof by Executive, and if the Company prevails in any proceeding therefor, it will also be entitled to recover all costs and expenses incurred by the Company in connection therewith, including attorneys' fees. 10. Assignment. The rights and duties of a party hereunder shall not be assignable by that party, except that the Company may assign this Agreement and all rights and obligations hereunder to, and may require the assumption thereof by, any corporation or any other business entity which succeeds to all or substantially all the business of the Company through merger, consolidation or corporate reorganization or by acquisition of all or substantially all of the assets of the Company. 11. Binding Effect. This Agreement shall be binding upon the parties hereto and their respective successors in interest, heirs and personal representatives and, to the extent permitted herein, the assigns of the Company. 9 12. Severability. If any provision of this Agreement or any part hereof or application hereof to any person or circumstance shall be finally determined by a court of competent jurisdiction to be invalid or unenforceable to any extent, the remainder of this Agreement, or the remainder of such provision or the application of such provision to persons or circumstances other than those as to which it has been held invalid or unenforceable, shall not be affected thereby and each provision of this Agreement shall remain in full force and effect to the fullest extent permitted by law. The parties also agree that, if any portion of this Agreement, or any part hereof or application hereof, to any person or circumstance shall be finally determined by a court of competent jurisdiction to be invalid or unenforceable to any extent, any court may so modify the objectionable provision so as to make it valid, reasonable and enforceable. 13. Notices. All notices, or other communications required or permitted to be given hereunder shall be in writing and shall be delivered personally or mailed, certified mail, return receipt requested, postage prepaid, to the parties as follows: If to the Company: Stephen M. Merrick CTI Industries Corporation 22160 N. Pepper Road Barrington, Illinois 60010 If to Executive: Howard W. Schwan ---------------------- ---------------------- Any notice mailed in accordance with the terms hereof shall be deemed received on the third day following the date of mailing. Either party may change the address to which notices to such party may be given hereunder by serving a proper notice of such change of address to the other party. 14. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior written or oral negotiations, representations, agreements, commitments, contracts or understandings with respect thereto and no modification, alteration or amendment to this Agreement may be made unless the same shall be in writing and signed by both of the parties hereto. 10 15. Waivers. No failure by either party to exercise any of such party's rights hereunder or to insist upon strict compliance with respect to any obligation hereunder, and no custom or practice of the parties at variance with the terms hereof, shall constitute a waiver by either party to demand exact compliance with the terms hereof. Waiver by either party of any particular default by the other party shall not affect or impair such party's rights in respect to any subsequent default of the same or a different nature, nor shall any delay or omission of either party to exercise any rights arising from any default by the other party affect or impair such party's rights as to such default or any subsequent default. 16. Governing Law; Jurisdiction. 16.1 For purposes of construction, interpretation and enforcement, this Agreement shall be deemed to have been entered into under the laws of the State of Missouri and its validity, effect, performance, interpretation, construction and enforcement shall be governed by and subject to the laws of the State of Illinois. 16.2 Any and all suits for any and every breach of this Agreement may be instituted and maintained in any court of competent jurisdiction in the State of Illinois and the parties hereto consent to the jurisdiction and venue in such court and the service of process by certified mail to the addresses for the parties provided for notices herein. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. CTI INDUSTRIES CORPORATION By:/s/ Stephen M. Merrick --------------------- Authorized Officer Attest: - ------------------------------ Secretary EXECUTIVE: /s/ Howard W. Schwan ------------------ Howard W. Schwan 11 EX-10 16 JOINT VENTURE AGREEMENT EXHIBIT 10.10 MEMORANDUM OF AGREEMENT FOR JOINT VENTURE AMONG PULIDOS ET TERMINADOS FINOS AND CTI INDUSTRIES CORPORATION THIS MEMORANDUM OF AGREEMENT is made and entered into this 16th day of September, 1996 by and among Pulidos et Terminados Finos, a corporation organized and existing under the laws of Mexico ("P&TF") and CTI Industries Corporation, a corporation organized and existing under the laws of the State of Delaware, U.S.A. ("CTI"). WHEREAS, P&TF is engaged in Guadalajara, Mexico in the manufacture and sale of latex balloons and manufactures latex balloons under a long term agreement for sale to CTI; WHEREAS, CTI is engaged in the manufacture of metallized balloons and other products and in the sale and distribution of metallized and latex balloons and other products in the United States and throughout the world; WHEREAS, the parties desire to enter into an agreement for the formation and operation, as a joint venture, of a corporation under laws of Mexico. NOW, THEREFORE, in consideration of the premises and of the terms, covenants and conditions hereinafter contained, the parties hereto agree as follows: 1. Organization of Entity. Promptly upon execution of this Agreement, the parties shall cause a Sociedad Anonima de Capital Variable ("Joint Venture") to be organized and established under the laws of Mexico, pursuant to the following terms: 1.1 The parties shall cause the Joint Venture to be properly organized and registered promptly after execution of this Agreement; 1.2 The Joint Venture shall be authorized to issue capital stock of up to 50,000 shares at the price per share of One Peso (N$1.00) 1.3 Each of P&TF and CTI do hereby subscribe for and agree to purchase 25,000 shares of capital stock of the Joint Venture at the price of One Peso (N$1.00) per share. Promptly after organization of the Joint Venture, the parties shall make full payment to the Joint Venture for such shares and the Joint Venture shall issue and deliver to each of them certificates representing the shares. 1.4 The Joint Venture shall be managed by a Board of Directors of six persons to be elected by the shareholders. The parties agree that, for the full term of this 1 Agreement, they shall vote all shares of capital stock of the Joint Venture for the election as Directors three persons designated by each of PT&F and CTI. 1.5 The Board of Directors shall designate a General Manager who shall manage the day to day operations of the Joint Venture and such other officers and personel as they shall determine from time to time. The vote of a majority of all of the members of the Board of Directors shall be required for any action on the part of the Board of Directors. The Board of Directors shall hold at least six meetings each year. A director may participate in a meeting of the Board of Directors by telephone. Written minutes of all meetings of the Board of Directors shall be maintained. The Board of Directors may act by unanimous written consent in lieu of a meeting. The General Manager shall have such authority and duties as shall be prescribed by the Board of Directors from time to time. 1.6 A certificate of organization and by-laws or similar governing documents of the Joint Venture shall be adopted and shall not be inconsistent with the provisions of this Agreement. 1.7 Sale or transfer of the shares of capital stock of the Joint Venture shall be restricted in accordance with the following provisions: 1.7.1 All shares of capital stock of the Joint Venture which either of the parties hereto shall own, whether now or hereafter acquired, shall be subject to the restrictions on transfer provided herein; 1.7.2 No party shall be authorized or permitted to sell or transfer any shares of capital stock of the Joint Venture owned by such party, or any interest therein, including without limitation to sell or pledge as security, except strictly in accordance with the provisions hereof. Any attempted sale or transfer in violation of the provisions hereof shall be void and without effect. All shares of capital stock of the Joint Venture issued to the parties shall bear an appropriate legend stating that transfer of the shares are restricted under this Agreement. 1.7.3 In the event that a party shall desire to sell all, but not less than all of the shares of capital stock of the Joint Venture owned by it and shall have received a bona fide written offer therefor setting forth the price and all terms of such offer, such party shall first offer to sell all of such shares to the other party, by written notice the other party, including a true copy of the bona fide offer to purchase received. The other party shall have 30 days after the date of such notice to accept such offer to sell all of the party's shares. If such other party shall fail to accept such offer by written notice to the party offering the shares within 30 days after the date of such offer, the party offering the shares shall be entitled to sell all, but not less than all, of the shares but only to the third party submitting the bona 2 fide offer on the terms specified in the offer; provided, further, that in connection with any sale to a third party, such third party shall execute and deliver an agreement accepting all of the terms of this Agreement. 1.7.4 In the event that a party hereto shall become insolvent, shall cease to conduct business, shall file a petition for relief under any bankruptcy laws, shall suffer or permit any determination of insolvency or bankrutcy under any bankruptcy laws or shall sell all or substantially all of its assets, the other party shall have the option and right for a period of 90 days from and after receiving notice of any such event to purchase all of such party's shares of capital stock of the Joint Venture at the price paid therefore by such party. Such right and option shall be exercised by written notice to the party from whom the shares are to be purchased and the tender of the purchase price for the shares against delivery of the certificates therefore, duly endorsed for transfer. 1.8 The Joint Venture shall obtain and maintain all permits and licenses necessary or appropriate to the conduct of its business as provided herein. 2. Office and Facilities. 2.1 The initial office and facility of the Joint Venture shall be at _________________, Zapopan, Jalisco, Mexico, which is a leased facility of approximately ____________ square feet. 2.2 The Joint Venture shall enter into a lease agreement for the lease of the Initial Facility on such terms as the Board of Directors shall agree. 2.3 The Joint Venture shall acquire, lease, own and operate such other and additional facilities and equipment as the Board of Directors of the Joint Venture shall from time to time authorize and approve. 3. Business and Operations. 3.1 The Joint Venture shall be authorized to engage in any and all lawful business activites under the laws of Mexico and shall engage from time to time in such business ventures and activities as the Board of Directors of the Joint Venture shall authorize. 3.2 It is contemplated that the Joint Venture shall provide a variety of services, initially, and may provide products, to P&TF and CTI, as well as to third parties. The charges or prices for services or products to be provided by the Joint Venture to a party shall be determined by the Board of Directors of the Joint Venture. The parties agree that such charges and prices shall be fair and reasonable and consistent with rates, prices and 3 charges in the industry. In the event that the Board of Directors is unable to agree on a charge or price for any service or product which, under this Agreement, the Joint Venture is to provide to a party, such charge or price shall be determined by arbitration in the manner provided herein. 3.2 The parties contemplate and agree that the business activities in which the Joint Venture initially shall engage shall include the following: 3.2.1 The Joint Venture shall provide the service of printing of latex balloons utilizing printing equipment supplied by P&TF and CTI and leased to the Joint Venture. P&TF agree that, for the term, they shall retain the Joint Venture exclusively for the printing of all latex balloons which either shall manufacture or sell. Latex balloons owned by P&TF or CTI shall be delivered to the Joint Venture for printing and P&TF or CTI, as the case may be, shall pay to the Joint Venture a service charge for such printing services. 3.2.2 The Joint Venture shall provide packaging services to P&TF and CTI in which packaging for latex and mylar balloons is provided and balloons are placed in packages for retail display and sale. 3.2.3 It is contemplated that the Joint Venture shall provide services to CTI in converting (producing balloons from printed film) and packaging mylar balloons on equipment supplied by CTI and leased to the Joint Venture utilizing printed film supplied by CTI. 3.3 With respect to all materials and products provided by P&TF or CTI as to which the Joint Venture shall provide services, (i) at all times the party providing such materials or products shall be and remain the sole owner of such materials and products, (ii) the Joint Venture shall not have or obtain any right, title or interest in or to such materials or products, (iii) the Joint Venture shall not, and shall not have any authority or right to, sell, transfer, deliver, pledge or grant any right or interest in or to any of such materials or products, and (iv) the Joint Venture shall hold, handle, process, package and deliver such materials and products strictly in accordance with the directions of the party providing and owning such materials and products. 3.4 The parties shall deliver and lease to the Joint Venture equipment as follows: 3.4.1 The terms of the lease of equipment owned by a party and leased to the Joint Venture shall be on such terms as the Board of Directors of the Joint Venture. Such terms shall be fair and reasonable and shall be consistent with standards in the industry. In the event that the Board of Directors is unable to agree on lease terms for an item of equipment provided herein to be leased to the 4 Joint Venture by a party, the terms of such lease shall be determined by arbitration in accordance with the provisions hereof. 3.4.2 P&TF agrees to lease to the Joint Venture the following equipment: 3.4.3 CTI agrees to lease to the Joint Venture the following equipment: 3.4.3 With respect to all equipment leased by a party to the Joint Venture, (i) the Joint Venture shall have all risk of loss with respect to the equipment, (ii) the Joint Venture shall have the obligation to maintain such equipment in good working order and condition and, at the termination of the lease, to return the equipment to the owner in the same condition as at the time of the lease, ordinary wear and tear excepted, and (iii) the Joint Venture shall have the obligation to obtain and maintain insurance covering such equipment in such amounts and for such risks as the party owning the equipment reasonably shall require. 4. Certain Operational Matters. 4.1 The Joint Venture shall maintain proper and complete books of account, files and records of its business and operations in accordance with law and as the Board of Directors of the Joint Venture or any party shall reasonably request. All books of account, files and records shall at all times be open to inspection and copying by any member of the Board of Directors or any authorized representative of a party. 4.2 The Joint Venture shall prepare, have prepared and maintain financial statements in proper form on a monthly and annual basis, such statements to include a statement of the results of operation, balance sheet and cash flows, prepared in accordance with generally accepted accounting principles. The General Manager shall provide financial statments of the Joint Venture to each member of the Board of Directors, for each month within thirty days after the last day of such month and for each year within 90 days after the last day of the fiscal year. 4.3 The Joint Venture shall make such distributions to the its shareholders as the Board of Directors shall determine from time to time and in accordance with law. All distributions to shareholders of the Joint Venture shall be proportionate among them in accordance with their interests as shareholders. 4.4 The Joint Venture shall not enter into or perform any contract, agreement, or transaction of any kind or nature with (including without limitation any purchase or sale of goods or services, lease, expense provision or reimbursement), or make any payment of any kind to, any party hereto or any officer, director or shareholder of any party hereto unless the same shall have been fully disclosed to, and authorized by, the Board of Directors of the Joint Venture. 5 5. Arbitration. 5.1 Any dispute, controversy or claim arising out of or in relation to this Agreement including but not limited to its existence, breach, termination or legal validity, shall be finally and exclusively settled by binding arbitration in accordance with the UNCITRAL arbitration rules as are then in force by a single arbitrator appointed by the Arbitration Center most proximate to Chicago, Illinois who will be requested to provide the appropriate administrative services. 6.2 The place of the arbitration shall be Chicago, Illinois, U.S.A. and the English language shall be used throughout the arbitration proceedings. 6.3 The parties expressly agree to confer upon the arbitrator the powers to fill gaps, cure contractual omissions and to perform all other activities which he may deem necessary or appropriate. 6.4 The award of the arbitrator shall be the sole and exclusive remedy between the parties regarding any claims and counter-claims presented to the arbitrator and shall be final and binding on the parties. The parties undertake to fully and punctually abide by the award rendered by the arbitrator. Failing such voluntary compliance, judgment upon the award or any other appropriate procedures may be entered or sought in any court having jurisdiction thereof to secure enforcement of said award. 6.5 The final award of the arbitrator shall be payable in United States currency without deduction or offset and costs, fees or taxes incidental to the enforcement of the arbitration award shall be charged in accordance with the decision of the arbitrator against a party resisting enforcement. Payment of the award including interest from the date of breach and violation shall be made in accordance with the relevant provisions of this Agreement. 6.6 Nothing herein contained shall prevent any party hereto from instituting an action at law against the other party requesting temporary restraining orders, preliminary injunctions or other procedures in a court of competent jurisdiction to obtain interim relief when deemed necessary by such court to preserve the status quo or prevent irreparable injury pending formal settlement of such dispute by arbitration. Each of the parties does hereby consent to the jurisdiction of the courts situated in the State of Illinois, U.S.A. for such purposes and does hereby consent to service of process for any action in such courts by notice delivered in accordance with the notice provisions of this Agreement. 6 7. Notices. 7.1 Any notice, demand, consent, service or other communication required or permitted to be given under this Agreement shall be in writing and addressed to the party at its address stated below: If to CTI Howard W. Schwan Executive Vice President CTI Industries Corporation 22132 Pepper Road Barrington, Illinois 60010, U.S.A. If to P&TF Enrique Mora Velasco Pulidos & Terminados Finos Hugo Vazquez Reyes No. 33 Zapopan, Jalisco, Mexico Any party may change the address to which notices to it shall be sent hereunder by giving a proper notice of such change of address to the other party hereunder. 7.2 Notices may be delivered by hand, registered mail, or fax and shall be deemed to have been received as follows: 7.2.1 If delivered by hand, at the time of delivery to a responsible person at the address for the party; 7.2.2 If sent by fax, at the time of confirmation of transmission provided a confirmation copy is sent by airmail or registered mail within twenty-four hours after the transmission; or, 7.2.3 If sent by registered mail, at the time of delivery or at the time of attempted delivery in the case delivery cannot be completed due to no fault of the sender. If the time of such deemed receipt as provided above is not during the customary business hours of the party, the notice shall be deemed to have been received at 10:00 a.m. at the place of delivery on the first customary day of business thereafter. 7.3 All such notices, demands, service or other communications shall be in the English language. 8. Force Majeure. A party hereto shall not be in default hereunder or be liable for any loss or damage for any delay in the performance of its obligations hereunder due to causes beyond its control such as acts of God, acts of the other party, acts of military authority, 7 priorities, fires, strikes, floods, epidemics, quarantine restrictions, war, riots, delays in transportation, or inability due to causes beyond its reasonable control to obtain necessary labor, material or manufacturing facilities. 9. Binding Effect. This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors in interest and, to the extent permitted herein, their assigns. 10. Assignment. This Agreement, and the rights and obligations of a party, may not be assigned without the express written consent of the other party; provided, however, that the rights and obligations of a party hereunder may be assigned to a third party in connection with a transaction in which substantially all of the assets, properties and business of the party are acquired by a third party in a merger or purchase of all or substantially all of the assets of the party and such third party executes an instrument by which it agrees to assume and be bound by all of the obligations of the party in this Agreement. 11. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law. If any paragraph of this Agreement shall be unenforceable or invalid under applicable law, such provision shall be ineffective only to the extent and duration of such unenforceability or invalidity and the remaining substance of such provision and the remaining paragraphs of this Agreement shall in such event continue to be binding and in full force and effect. 12. Waivers. Nor failure by a party to exercise any of such party's rights hereunder or to insist upon strict compliance with respect to any obligation hereunder, and no custom or practice of the parties at variance with the terms hereof, shall constitute a waiver by any party to demand exact compliance with the terms hereof. Waiver by any party of any particular default by any other party shall not affect or impair such party's rights in respect to any subsequent default of the same or of a different nature, nor shall any delay or omission of any party to exercise any right arising from any default by any other party affect or impair such party's rights as to such default or any subsequent default. 13. Entire Agreement. This Agreement constitutes the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes all prior written or oral negotiations, representations, inducements, understandings, commitments, contracts or agreements. This Agreement may not be amended or modified except by a written instrument signed by the parties hereto. 14. Governing Law. This Agreement shall be governed by, and shall be construed and enforced in all respects in accordance with, the laws of the State of Illinois, U.S.A. 8 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. CTI INDUSTRIES CORPORATION BY /s/ Howard W. Schwan ---------------------- Howard W. Schwan Executive Vice President WITNESS: /s/ Eric B. Flower -------------------------- -------------------------- PULIDOS & TERMINADOS FINOS s.a. de c.v. BY /s/ Enrique Mora Velasco ------------------------ Enrique Mora Velasco Director - Apodegrado WITNESS: - ------------------------------- - ------------------------------- 9 EX-10 17 AGREEMENT EXHIBIT 10.11 AGREEMENT THIS AGREEMENT is made and entered into this 8th day of September, 1995 by and among CTI Industries Corporation, a corporation organized and existing under the laws of the State of Delaware, U.S.A. ("CTI") and Pulidos & Terminados Finos s.a. de c.v., a corporation organized and existing under the laws of Mexico and having its principal place of business in Zapopan, State of Jalisco, Mexico ("P&TF). WHEREAS, CTI presently owns and operates in the State of Illinois, U.S.A. two dipping machines used in the manufacture of latex balloons, such machines being more particularly described in Exhibit A hereto; WHEREAS, CTI is engaged in the business of manufacturing and selling, among other things, latex balloons; WHEREAS, P&TF is engaged in Mexico in the business of manufacturing and selling latex balloons; NOW, THEREFORE, in consideration of the premises and of the terms, covenants and conditions hereinafter contained, the parties hereto agree as follows: 1. Definition of Terms. The terms set forth in this paragraph shall, for purposes of this Agreement, have the meanings set forth herein: 1.1 "Balloons" shall mean latex balloons. 1.2 "CTI Balloons" shall mean Balloons manufactured and produced on the Machines when delivered and operating at P&TF's facility. 1.3 "Machines" means the two dipping machines owned by CTI and used in the manufacture of latex balloons as more particularly described and including all of the items set forth on Exhibit A hereto. "Machine" shall mean one of the Machines. 1.4 "Specifications" shall mean (i) with respect to CTI Balloons, CTI's present specifications for latex balloons which it manufactures utilizing the Machines, which specifications are in writing and shall be transmitted to P&TF promptly after the execution of this Agreement by the parties, (ii) with respect to Balloons other than CTI Balloons produced by P&TF and sold to CTI hereunder, the specifications therefor developed and agreed upon by the parties pursuant to paragraph 3.6 hereof. 1 2. Sale and Delivery of Machines. 2.1 CTI does hereby agree to sell and deliver to P&TF, and P&TF agrees to purchase, acquire, own, install and operate, the Machines on the terms and conditions set forth herein. The Machines shall include the machinery and components described on Exhibit A hereto, together with (i) copies of all blueprints and schematics for the equipment in CTI's possession and (ii) all auxiliary and associated equipment such as tanks, mixers and dryers. CTI shall be entitled to retain any and all plans, blueprints, schematics or other technical information concerning the Machines and all rights to use, sell, license or dispose of such items and information (including without limitation the right to manufacture, assemble, use or sell the equipment) and nothing herein shall be deemed a sale or transfer of any technical or proprietary rights in the Machines or any components thereof, whether patentable or not. 2.2 The purchase price for the Machines shall be $400,000, which the parties agree is the fair value therefor. The purchase price shall be allocated among the two Machines as the parties shall agree. The purchase price herein shall be exclusive of any and all sales, use, excise, transfer or other similar taxes or charges, or any customs, duty or other levy arising from the sale and delivery of the Machines which may be imposed by any governmental authority in the United States or Mexico. P&TF shall pay any and all such taxes, duties, charges or levies, or shall reimburse CTI therefor if paid or advanced by CTI promptly upon receipt of an invoice therefor. Payment of the purchase price for the Machines shall be made by P&TF in accordance with the provisions of paragraph 5.9 hereof. In the event that either party hereto shall terminate this Agreement pursuant to paragraph 9 hereof prior to the time that the purchase price for the Machines shall have been paid in full, the balance of the purchase price shall become immediately due and payable at such time. 2.3 Promptly upon execution of this Agreement and within 30 days thereafter, CTI shall, at CTI's expense, disassemble, crate and ship to P&TF one of the Machines. Promptly upon receipt of the Machine shipped and, in any event within 60 days after receipt thereof, P&TF shall reassemble the Machines and shall commence manufacture of latex balloons utilizing the Machine. Within 30 days after CTI shall confirm that the first Machine shall be fully operational and shall be in production of CTI Balloons meeting the Specifications, CTI shall disassemble, crate and ship to P&TF the second balloon machine. Promptly upon receipt thereof, and in any event within 60 days after receipt thereof, P&TF shall reassemble such second Machine and begin manufacture of latex balloons on such machine. Except as otherwise provided herein with respect to the services of a 2 CTI engineer, P&TF shall bear all of the expenses of assembly, installation and operation of the Machines at its plant. 2.4 CTI shall be responsible for the cost of freight charges in connection with shipping the machines to the Mexico border and P&TF shall be responsible for freight charges from the Mexican border to its plant. Title and risk of loss shall pass to P&TF at the time of delivery of the Machines to the carrier. 2.5 CTI shall make available to P&TF the services of one engineer employed by CTI who is knowledgeable concerning the Machines for a period of 90 days from the date that each Machine shall be received by P&TF for the purpose of assisting P&TF in the assembly, installation and operation of the Machines and the training of P&TF personnel in Jalisco. For both such 90 day periods, CTI will be responsible for the wages of such engineer and P&TF shall be responsible for, and shall pay, all of the travel, lodging, meal and other related and reasonable expenses of such engineer in connection with the provision of such services. In the event that P&TF shall request services of such engineer after either of such 90 day periods, CTI shall provide reasonable additional assistance of such person and P&TF shall be responsible for, and shall pay to CTI, a per diem charge which for such services which shall cover the full cost to CTI of compensation and related expense for such person as well as all travel, lodging and meal expenses incurred in the provision of such services. 2.6 Until the date of disassembly of a Machine, CTI shall be entitled to continue to operate the Machine for the production of latex balloons, at the sole cost, and for the sole benefit of CTI. 2.7 CTI warrants only that the Machines are presently in good working order and condition, subject to reasonable wear and tear from operation, and include all of the parts and components necessary for operation. EXCEPT AS EXPRESSLY PROVIDED IN THE FOREGOING SENTENCE, CTI EXPRESSLY DISCLAIMS ALL WARRANTIES WITH RESPECT TO THE MACHINERY, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. P&TF acknowledges and agrees that (i) it has knowledge and expertise with respect to machinery and equipment for the manufacture of latex balloons, has made a full inspection of the Machinery and has found the Machinery to be in good working order and condition, (i) the Machines are, and have been in use, that components of the Machinery may fail by reason of wear and tear in ordinary use and operation and that no warranty is made as to the continued operation or condition of any part or component of the Machines and (iii) P&TF, based on its inspection and observation of the Machines, 3 has determined the method of function, capability and capacity of the Machines and that no warranty, promise or assurance is made by CTI with respect thereto. CTI shall be responsible for the repair or replacement of any loss or damage to the Machines arising from the disassembly and crating of the Machines; P&TF shall be responsible for any loss or damage arising from the assembly and installation of the Machines at its plant. CTI's sole liability for breach of the limited express warranty provided herein with respect to the Machines, and P&TF's exclusive remedy on any claim arising out of any failure of the Machines or any component thereof constituting a breach of the limited express warranty herein, shall be limited to the repair or replacement of any part or component shown to have been defective and not in good operating condition at the time of disassembly by CTI, and in no event shall CTI be liable to P&TF for any incidental or consequential damages. 3. Manufacture and Sale of Latex Balloons. 3.1 Subject to and on the terms and conditions provided in this Agreement, P&TF agrees to manufacture, sell and deliver latex balloons to CTI and CTI agrees to purchase and pay for latex balloons manufactured by P&TF. 3.2 The Balloons which P&TF agrees to manufacture, sell and deliver to CTI hereunder are 11" CTI Balloons, Standards, Crystals, Metallics and Pearls and the present standard line of latex balloons manufactured by P&TF including 12", 9" and 5" Standards and Crystals. P&TF agrees to manufacture and sell to CTI any and all other latex balloons which it shall determine, in its sole discretion, to manufacture during the term hereof. 3.3 P&TF agrees that, during the term provided herein, it will not sell any CTI Balloons or any of its 5", 9" or 12" Balloons to any customer situated in the United States orCanada or to any customer who shall resell such balloons to a customer or customers in the United States, other than CTI, Imperial Toy and Hedstrom. P&TF shall make reasonable inquiry of each of its customers to determine the place of resale of Balloons by such customer and shall require each customer for such balloons other than CTI, Imperial Toy and Hedstrom to certify in writing that such balloons will not be offered for sale or sold in the United States or Canada. P&TF agrees that, during the term designated herein, it will not sell any Balloons to any person found to have violated such certification. P&TF agrees that it will give priority to CTI orders over orders for Balloons from Imperial Toy and Hedstrom. 3.4 Subject to and on the terms and conditions provided herein and for the term provided herein, CTI agrees that it will purchase all of its requirements for 5", 9" , 11" and 12" Balloons from P&TF. 4 3.5 Promptly after the execution of this Agreement, CTI shall, by written notice to P&TF, provide to P&TF written specifications for Balloons. Unless P&TF shall, by written notice to CTI given within 15 days after such notice from CTI, reasonably object to any provision of such specifications, such specifications provided by CTI shall become the Specifications for Balloons produced and sold hereunder (other than CTI Balloons). If P&TF shall reasonably object to any portion of the specifications provided by CTI, the parties shall negotiate in good faith to develop agreed terms of the Specifications. 4. Ordering and Supply. 4.1 CTI shall submit to P&TF orders for Balloons from time to time during the term hereof. All such orders shall be in writing and shall specify the quantity and the type of the Balloons ordered. Orders may be transmitted to P&TF by mail or by facsimile transmission. 4.2 Balloons may be ordered by CTI, and P&TF will supply Balloons as ordered, bulk packed, in gross bags and in 36-count bags. The parties agree to negotiate, in good faith, terms under which P&TF will supply Balloons in single packages. 4.3 P&TF agrees to utilize its best efforts to delivery Balloons ordered by CTI to the carrier for shipment within 30 days after the date of receipt of the order and, in any event shall deliver Balloons ordered by CTI to the carrier for shipment within ___ days after the receipt of the order. The obligation of P&TF to deliver CTI Balloons shall commence at the time of the completion of assembly and installation of the first Machine as provided in paragraph 3 hereof. 4.4 P&TF shall select the carrier for shipment to CTI of Balloons sold hereunder, subject to the reasonable approval of CTI. Title and risk of loss with respect to Balloons shall transfer to CTI at the time of delivery of the goods to CTI at its plant. 5 5. Price. 5.1 The initial prices per gross for Balloons sold and delivered to CTI hereunder shall be: CTI Balloons ------------ 11" Standards $3.50 per gross/packed in Hytex Bags 11" Crystals $3.50 per gross/packed in Hytex Bags 11" Metallics $4.00 per gross/packed in Hytex Bags 11" Pearls $4.00 per gross/packed in Hytex Bags P&TF Balloons 12" Standards $2.90 per gross/packed in Pivoli Bags 12" Crystals $2.90 per gross/packed in Pivoli Bags 9" Standards $1.39 per gross/packed in Pivoli Bags 9" Crystals $1.39 per gross/packed in Pivoli Bags 5" Standards $0.62 per gross/packed in Pivoli Bags 5" Crystals $0.62 per gross/packed in Pivoli Bags 5.2 With respect to any Balloons other than designated in paragraph 5.1 hereof which P&TF may manufacture during the term hereof, or packaging other than that specified in paragraph 4.2 or 5.1 hereof, the parties shall negotiate in good faith a price for such Balloons if ordered by CTI, such prices to be consistent with the prices for the Balloons designated in paragraph 5.1 hereof in termsof manufacturing cost. 5.3 P&TF shall be entitled during the term hereof, upon 60 days prior written notice, to increase the price for any Balloon hereunder solely to the extent of any demonstrable increase in the cost of raw materials. 5.4 Atthe time of shipment of Balloons ordered, manufactured and sold hereunder, P&TF shall prepare and deliver to CTI an invoice for such Balloons. Delivery of the invoice may be by mail or facsimile transmission. 5.5 For a period of one year from the date of this Agreement, payment for Balloons manufactured, sold and delivered hereunder shall be due at the time of shipment of the Balloons. From and after one year from the date of this Agreement, payment for Balloons manufactured, sold and delivered hereunder shall be due 30 days after the date of shipment. Payment shall be made by CTI for Balloons purchased hereunder by check or by wire transfer, at the discretion of CTI. 6 5.6 All prices and amounts herein shall be expressed and paid in United States currency. 5.7 All prices herein are FOB CTI's plant Barrington, Illinois. 5.8 All prices herein are exclusive of any applicable sales, use or excise taxes imposed by any governmental authority which may be due with respect to the transaction. CTI shall be responsible for the payment of any and all such taxes. P&TF may, if required to do so, make payment for any of such taxes and shall include on its invoice to CTI the amount thereof. 5.9 Notwithstanding the other provisions of this paragraph, with respect to invoices issued for CTI Balloons more than 60 days after CTI's first order for CTI Balloons hereunder, the amount due for CTI Balloons designated and sold in the invoice shall be reduced by 40% of the amount shown to be due on the invoice (being the price therefor as set forth in paragraph 5.1 hereof) until the aggregate amount of the reduction in price for CTI Balloons, by reason of the reduction in the amount due provided for in this paragraph, shall be $400,000; provided that the foregoing reduction shall be applicable with respect to the first $1 million of purchases made within 12 months after CTI's first order for CTI Balloons hereunder. The amount of such reductions shall be credited against and deemed as payments for, the purchase price of the Machines purchased pursuant to paragraph 2 hereof. 6. Warranty. 6.1 P&TF warrants to CTI the Balloons manufactured and sold by it to CTI hereunder shall conform with the Specifications and shall be free of defects in workmanship and materials. 6.2 CTI shall not be obligated to inspect any of the Balloons at any time, it being understood that the Balloons shall be received in packaged form and may be resold in such form, and the rights of CTI hereunder with respect to any breach of warranty shall not be affected by the fact that CTI shall, or shall not, have conducted an inspection of any lot or shipment of Balloons manufactured and sold to it hereunder. 7 7. Indemnification. P&TF shall indemnify CTI, and its successors and assigns, officers, directors, employees and agents, and save and hold each of them harmless from and against any liabilities, claims, causes of actions, suits, damages and expenses (including reasonable attorney's fees and expenses) which CTI or any of such other persons indemnified herein is or becomes liable for, or may incur, or may be called upon to pay, or may pay, by reason of: 7.1 Any personal injury suffered by any third party as a result of the use of any Balloon sold hereunder; 7.2 Any injury, loss or damage suffered, or claimed to be suffered, by any third party by reason of, or arising out of, the violation by P&TF of any of its obligations in this Agreement or of any warranty respecting the Balloons sold pursuant to this Agreement. 8. Term. The term of this Agreement for the purposes set forth herein shall be a period of three years from the date hereof. 9. Termination. Either party hereto may terminate this Agreement as to executory covenants or obligations of the party herein in the event of a violation by the other party of any of its obligations hereunder and the failure by such other party to cure such violation within 30 days after written notice of the violation shall have been given. 10. Arbitration. 10.1 Any dispute, controversy or claim arising out of or in relation to this Agreement including but not limited to its existence, breach, termination or legal validity shall be finally and exclusively settled by binding arbitration in accordance with the UNCITRAL arbitration rules as are then in force by a single arbitrator appointed by the Arbitration Center most proximate to Chicago, Illinois who will be requested to provide the appropriate administrative services. 10.2 The place of the arbitration shall be Chicago, Illinois, U.S.A. and the English language shall be used throughout the arbitration proceedings. 10.3 The parties expressly agree to confer upon the arbitrator the powers to fill gaps, cure contractual omissions and to perform all other activities which he may deem necessary or appropriate. 10.4 The award of the arbitrator shall be the sole and exclusive remedy between the parties regarding any claims and counter-claims presented to the arbitrator and shall be final and binding on the parties. The parties undertake to fully and punctually abide by the award rendered by the arbitrator. Failing such voluntary compliance, judgment upon the award or any other appropriate 8 procedures may be entered or sought in any court having jurisdiction thereof to secure enforcement of said award. 10.5 The final award of the arbitrator shall be payable in United States currency without deduction or offset and costs, fees or taxes incidental to the enforcement of the arbitration award shall be charged in accordance with the decision of the arbitrator against a party resisting enforcement. Payment of the award including interest from the date of breach and violation shall be made in accordance with the relevant provisions of this Agreement. 10.6 Nothing herein contained shall prevent any party hereto from instituting an action at law against the other party requesting temporary restraining orders, preliminary injunctions or other procedures in a court of competent jurisdiction to obtain interim relief when deemed necessary by such court to preserve the status quo or prevent irreparable injury pending formal settlement of such dispute by arbitration. Each of the parties does hereby consent to the jurisdiction of the courts situated in the State of Illinois, U.S.A. for such purposes and does hereby consent to service of process for any action in such courts by notice delivered in accordance with notice provisions of this Agreement. 11. Notices. 11.1 Any notice, demand, consent, service or other communication required or permitted to be given under this Agreement shall be in writing and addressed to the party at its address stated below: If to CTI John C. Davis CTI Industries Corporation 22132 Pepper Road Barrington, Illinois 60010, U.S.A. If to P&TF Enrique Mora Velasco Pulidos & Terminados Finos Hugo Vasquez Reyes No. 33 Zapopan, Jalisco, Mexico Any party may change the address to which notices to it shall be sent hereunder by giving a proper notice of such change of address to the other party hereunder. 11.2 Notices may be delivered by hand, registered mail, or fax and shall be deemed to have been received as follows: 9 11.2.1 If delivered by hand, at the time of delivery to a responsible person at the address for the party; 11.2.2 If sent by fax, at the time of confirmation of transmission provided a confirmation copy is sent by airmail or registered mail within twenty-four hours after the transmission; or 11.2.3 If sent by registered mail, at the time of delivery or at the time attempted delivery in the case delivery cannot be completed due to no fault of the sender. If the time of such deemed receipt as provided above is not during the customary business hours of the party, the notice shall be deemed to have been received at 10:00 a.m. at the place of delivery on the first customary day of business thereafter. 11.3 All such notices, demands, service or other communications shall be in the English language. 12. Force Majeure. A party hereto shall not be in default hereunder or be liable for any loss or damage for any delay in the performance of its obligations hereunder due to causes beyond its control such as acts of God, acts of the other party, acts of military authority, priorities, fires, strikes, floods, epidemics, quarantine restrictions, war, riots, delays in transportation, or inability due to causes beyond its reasonable control to obtain necessary labor, material or manufacturing facilities. 13. Binding Effect. This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors in interest and, to the extent permitted herein, their assigns. 14. Assignment. This Agreement, and the rights and obligations of a party, may not be assigned without the express written consent of the other party; provided, however, that the rights and obligations of a party hereunder may be assigned to a third party in connection with a transaction in which substantially all of the assets, properties and business of the party are acquired by a third party in a merger or purchase of all or substantially all of the assets of the party and such third party executes an instrument by which it agrees to assume and be bound by all of the obligations of the party in this Agreement. 15. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law. If any paragraph of this Agreement shall be unenforceable or invalid under applicable law, such 10 provision shall be ineffective only to the extent and duration of such unenforceability or invalidity and the remaining substance of such provision and the remaining paragraphs of this Agreement shall in such event continue to be binding and in full force and effect. 16. Waivers. No failure by a party to exercise any of such party's rights hereunder or to insist upon strict compliance with respect to any obligation hereunder, and no custom or practice of the parties at variance with the terms hereof, shall constitute a wavier by any party to demand exact compliance with the terms hereof. Waiver by any party of any particular default by any other party shall not affect or impair such party's rights in respect to any subsequent default of the same or of a different nature, nor shall any delay or omission of any party to exercise any right arising from any default by any other party affect or impair such party's rights as to such default or any subsequent default. 17. Entire Agreement. This Agreement constitutes the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes all prior written or oral negotiations, representations, inducements, understandings, commitments, contracts or agreements. This Agreement may be amended or modified except by a written instrument signed by the parties hereto. 18. Governing Law. This Agreement shall be governed by, and shall be construed and enforced in all respects in accordance with, the laws of the State of Illinois, U.S.A. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. CTI INDUSTRIES CORPORATION By:/s/ John C. Davis ---------------------------- John C. Davis Chief Executive Officer WITNESS: - ----------------------------- - ----------------------------- PULIDOS & TERMINADOS FINOS s.a. de c.v. By: /s/ Enrique Mora Velasco -------------------------- Enrique Mora Velasco Director - Apodegrado WITNESS: - ----------------------------- EX-10 18 AMENDMENT TO AGREEMENT EXHIBIT 10.12 AMENDMENT TO AGREEMENT THIS AMENDMENT TO AGREEMENT is made and entered into this 24th day of May, 1996 by and among CTI Industries Corporation ("CTI") and Pulidos et Terminados Finos s.a. de c.v. (P&TF). WHEREAS, CTI and P&TF have entered into that certain Agreement dated September 8, 1995 ("Agreement"); WHEREAS, the parties desire to amend the Agreement as provided herein. NOW, THEREFORE, in consideration of the premises and of the terms herein provided, the parties hereto agree as follows: 1. Paragraph 8 of the Agreement is amended to provide that the term of the Agreement shall be for a period of ten years from the date of the Agreement. 2. With regard to paragraph 5.9 of the Agreement relating to payment for the Machines: 2.1 With respect to any invoice as to which a reduction in payment would be provided for, P&TF shall have the option, for a period of four years from the date of this Agreement, to defer the reduction by so notifying CTI and CTI shall then pay the full amount of the invoice, provided that from and after one year from the date of this Agreement, CTI may deduct amounts from invoices during any year equal to 20% of the total purchase price of the Machines; 2.2 The period of time within which deductions from invoices to CTI shall be made to apply against the purchase price of the Machines shall be extended and continue to the earlier of the date upon which full payment of the purchase price shall have been made or four years from the date hereof; 2.2 Any remaining balance of the purchase price for the Machines shall be due and payable four years from the date of this Agreement; provided that CTI and PT&F, jointly, may further extend such payment date. 2. As amended hereby, the parties reaffirm the Agreement and the Agreement shall remain in full force and effect for its term. IN WITNESS WHEREOF, the parties hereto have executed this Amendment to 1 Agreement as of the day and year first above written. PULIDOS & TERMINADOS FINOS s.a. de c.v. By/s/ Enrique Mora Valasco ------------------------ Enrique Mora Valasco Director WITNESS: - -------------------------- CTI INDUSTRIES CORPORATION By/s/ Stephen M. Merrick ------------------------ Stephen M. Merrick President WITNESS: /s/ Suzanne Trapani 2 EX-10 19 AGREEMENT DATED JULY 14, 1997 EXHIBIT 10.13 AGREEMENT AGREEMENT MADE AND ENTERED IN AS OF July 14, 1997 by and among CTI INDUSTRIES CORPORATION, a corporation incorporated under the laws of Delaware, U.S.A. ("CTI") and PULIDOS & TERMINADOS FINOS S.A. de C.V., a corporation organized under the laws of Mexico (the "Company") and Alpes Promotora Inmobiliaria S.A. de C. V., Juan Manuel Carrillo Coronado, Pablo Gortazar de Oyarzabal, Francisco Hernandez Herrera, Jose Antonio Hernandez Amaya, Enrique Mora Velasco, Rosa Maria Velasco de Mora, Enrique Mora Hernandez, Manuel Mora Velasco, Ricardo Mora Velasco, Roberto Mora Velasco, Rosana Mora Velasco, Veronica Mora Velasco, Alejandra Mora Velasco, Claudia Mora Velasco, Maria Guadalupe Mora Velasco (collectively the "Stockholders"). DECLARATIONS I. Whereas the Company is engaged in manufacture and sale of latex balloons; II. Whereas the Company has issued 1,928,364 shares, no par value, which represent 100% of the capital stock; III. Whereas the actual shareholders who enter into this Agreement haved 1,060,600 no par value shares subscribed and fully paid. Those shares represent actually the 55% of the whole capital stock of the Company. These shares are the only A shares authorized up to this moment to exercise patrimonial and corporate rights of the Company. IV. The Company has B shares in treasury which were previously issued but not paid. They were not paid but authorized by virtue of the increase of the capital stock by means of the shareholders' general meeting which took place on May 2, 1997 (attached hereto is documentary proof thereof). The increase of capital stock is represented by 867,764 no par value shares ("B shares"). These shares will represent the 45% of the remaining capital stock as soon as they are paid. V. CTI wishes to subcribe and pay for a secured promissory note in the amount of U.S. $1,200,000, to be secured by 477,270 shares of A shares, and an option to purchase the 867,764 B shares by exchanging the principal amount of such promissory note for such B shares; THEREFORE, in consideration of the foregoing premises and mutual covenants and agreements contained in this Agreement, the parties hereto agree as follows: 1 ARTICLE ONE Subscription of Secured Note and Option 1.1 Sale and Issuance of Note and Option. Subject to the terms and conditions of this Agreement, at the closing, CTI shall purchase a Secured Promissory Note (in the form attached hereto as Exhibit A) in the principle amount of US $1,200,000 and an Option (in the form attached hereto as Exhibit B) to purchase 867,764 shares of Capital Stock of the Company, the B Shares, for an aggregate purchase price of US$1,200,000, exercisable on or after February 1, 1998, and in consideration therefor shall: (a) pay or cause to be paid to the Company the amount of U.S. $1,200,000; such payment shall consist of and include (1) the outstanding amount of the loan to the Company by CTI pursuant to paragraph 1.2 hereof, (2) the principal amount of U.S. $400,000 which the Company currently owes to CTI for the purchase of certain balloon manufacturing equipment and which debt the Company hereby acknowledges and (3) U.S.$400,000 to be paid at closing; and, (b) loan or provide for a loan to the Company in the amount of U.S. $800,000 on terms no less favorable than (1) a five year term, (2) an interest rate of 2% over the "prime" rate published by The Wall Street Journal, adjusted quarterly and (3) with principal payable in equal quarterly installments over the term, together with interest thereon. The loan shall be secured by an industrial mortgage on the Company's business and assets. The Secured Promissory Note shall be secured by the pledge to CTI by the Stockholders of shares of Capital Stock of the Company owned by them representing 45% of the presently outstanding Capital Stock of the Company. The Stockholders shall execute a pledge agreement ("Pledge Agreement") in form and substance satisfactory to CTI and shall deliver to CTI certificates, duly endorsed in blank, representing such shares of Capital Stock to be held by CTI as security for the payment and performance of the Secured Promissory Note. In the event that the Company shall default on the Secured Promissory Note, CTI shall be entitled to take, in payment of the Secured Promissory Note, all of the shares pledged to it under the Pledge Agreement and such shares shall be deemed B shares under the Shareholders Agreement. 1.2 Current Advances (a) CTI agrees that prior to the Closing, it shall make loans to the Company in an aggregate amount not to exceed U.S. $400,000. Advances with respect to such loan shall be made within 10 days of a written request by the Company; provided that the Company shall have the right to request advances of no more than U.S. $100,000 in any consecutive 20 day period. 2 (b) The loan provided for in this paragraph 1.2 shall be evidenced by a Promissory Note of the Company payable to CTI in the principal amount of U.S. $400,000 due on December 31, 1998. The Promissory Note shall not bear interest prior to November 30, 1997. In the event that the Promissory Note shall not have been paid or satisfied on or before November 30, 1997 by application to the purchase price for the Secured Promissory Notes and Options as provided in paragraph 1.1(a) hereof or as provided in paragraph 1.2(d) hereof, (i) the principal amount of the Promissory Note outstanding from time to time thereafter shall bear interest at the rate of 18% per annum from and after November 30, 1997, and (ii) the Company shall be entitled to make payment with respect to principal and interest due under the Promissory Note in the amount of the purchase price of goods sold and delivered to CTI, as they may be ordered from time to time by CTI. The Promissory Note shall have no right of prepayment without the express written consent of CTI prior to November 30, 1997. (c) As security for the Promissory Note, each of the Stockholders agree to pledge to CTI that number of shares which represents 45% of the shares of stock of the Company owned by them and, at the time of execution of this Agreement, shall deliver to CTI (1) certificates representing such shares duly endorsed in blank and such other documents as may be necessary or appropriate to effect transfer of the shares in accordance with the provisions hereof and (2) an executed Pledge Agreement. (d) In the event that, on or before September 30, 1997, if all conditions to the Closing for the benefit of CTI shall have occurred or been performed, or on or before November 30, 1997, if any of such conditions shall not have been performed or occurred on or before such date, CTI shall have tendered to the Company all of the items provided for in paragraphs 1.4(b) and (c) (that is, the payments provided for in paragraph 1.1(a) and the loan provided for in paragraph 1.1(b)) and the Company shall fail to complete the Closing and deliver to CTI all of the items to be provided to CTI pursuant to paragraph 1.4 hereof, CTI shall have the right, at its election to be exercised by written notice to the Company, to transfer all of the shares pledged to it by the Stockholders as provided herein. In the event that CTI shall so transfer the shares of Stock pledged to it by the Stockholders, such shares shall be and become B Shares under the Shareholders Agreement among CTI, the Company and the Stockholders. (e) The Company and the Stockholders covenant and agree that they shall, concurrently with the execution of this Agreement, or as soon thereafter as practicable: (1) Execute and deliver the Shareholders Agreement; (2) From and after the date hereof and pending the purchase of the B Shares by CTI upon the exercise of the Option, or the election of CTI to transfer the pledged shares to CTI pursuant to paragraph 1.2(d), operate and perform pursuant to the terms of this Agreement and the Shareholders Agreement as if the Closing shall 3 have taken place and the Option exercised for the purchase of the B Shares or as if the pledged shares shall have been transferred to CTI; provided, however, that, if the Closing shall not occur on or before November 30, 1997 by reason of the non-performance or non-occurrence of any condition of this Agreement for the benefit of CTI and CTI shall not elect to have transferred to it the shares pledged to CTI by the Stockholders pursuant to this paragraph, then the Shareholders Agreement shall be terminated and canceled and shall be of no further force or effect and the Company and Stockholders shall not be bound by the provisions of this paragraph 1.2(e). 1.3 Closing Date. The parties agree that the Closing shall take place on September 30, 1997, provided that if CTI's closing conditions as set forth in Article 5 have not occurred or been satisfied as of such date, the Closing shall be extended until such conditions have been satisfied. Notwithstanding the above, if the conditions have not been satisfied or waived by November 30, 1997, CTI shall have the right not to proceed with the Closing and to require payment of the Promissory Note in accordance with its terms and the terms provided herein. 1.4 Closing Deliveries. At the Closing, the certificates, documents and other contracts described herein, as specified below, will be delivered: (a) The Company will deliver to CTI a Secured Promissory Note in the form attached hereto as Exhibit A in the aggregate principal amount of $1,200,000 and an Option in the form attached hereto as Exhibit B for the purchase of 867,764 B Shares for an aggregate purchase price of $1,200,000, such Option to be exercisable at any time after February 1, 1998. (b) CTI will deliver to the Company the amount provided in Section 1.1(a) in immediately available funds other than obligations applied to payment. (c) CTI will provide the loans as provided in Section 1.1(b); (d) The Company and Stockholders will execute all necessary loan documents; (e) CTI will return to the Stockholders certificates representing the pledged shares as provided in Section 1.3; and (f) CTI, the Company and the Stockholders will execute and deliver each of the other documents and instruments required to be delivered under the terms of this Agreement. 1.6 Further Assurances. At or after the Closing, and without further consideration, the Stockholders and the Company shall execute and deliver to CTI such further instruments of conveyance and transfer and such other documents as CTI may reasonably request to more 4 effectively convey and transfer to CTI the Secured Promissory Note, the Option and the B Shares of capital stock upon exercise thereof.. ARTICLE TWO Representations and Warranties of the Company and the Stockholders The Company and each of the Stockholders, jointly and severally, hereby represent and warrant to CTI as follows: 2.1 Organization. The Company is a corporation duly organized, validly existing, and in good standing under the laws of Mexico and has full corporate power to own its properties and to conduct its business as presently conducted. The Company is duly, authorized, qualified or licensed to do business in Mexico or abroad or other jurisdiction in which its assets are located or in which its business or operations as presently conducted make such qualification necessary. 2.2 Authority. The Company has granted all requisite power and authority to execute, deliver and perform this Agreement and all other documents and instruments contemplated by this Agreement to its representatives Juan Manuel Carrillo Coronado and Enrique Mora Velasco. The Stockholders have all requisite power and authority to execute, deliver, and perform this Agreement and all other documents and instruments contemplated by this Agreement. The execution, delivery and performance of this Agreement and related documents by the Company and the Stockholders have been authorized by all necessary action, corporate or otherwise. The obligations undertaken hereunder by the Company and the Stockholders are legal, valid and binding obligations. 2.3 Corporate Records. The Company and the Stockholders have delivered to CTI true, correct and complete copies of the certificate of incorporation, bylaws, minutes books and stock record books of the Company. The minute books of the Company contain complete and accurate minutes or consents reflecting all actions taken by the directors (including any committees) and security holders of the Company. 2.4 Capitalization. The Company currently has an authorized capital stock of 1,928,364 shares of which 1,060,600 are A shares and 867,764 are B shares. There are no outstanding options, warrants, convertible securities or other rights, agreements, arrangements, or commitments obligating the Company, any Stockholder or any other Person (as defined below) to issue or sell any securities or ownership interests in the Company. There are no stockholders' agreements, voting agreements, voting trusts, or similar agreements binding on any Stockholder or applicable to any of the Shares. The "B" Shares when issued to CTI upon conversion of the Option shall represent 45% of the then outstanding shares of capital stock of the Company. 2.5 Title to the Shares. The Shares are duly issued treasury shares in accordance with Article 216 of the General Law of Business Organizations ("Ley General de Socladades Mercantiles") and Article of the bylaws of the Company. The B Shares are free and clear of any lien, pledge, security interest, liability, charge or other encumbrance or claim of any Person (a "Lien"). Upon 5 exercise of the Option, CTI will acquire the entire legal and beneficial interest, in all of the B Shares, free and clear of any Liens. 2.6 No Violation. Neither the execution or the delivery of this Agreement and its attachments nor the consummation of the transactions contemplated by this Agreement including without limitation the subscription of the Shares by CTI will conflict with or result in the breach of any term or provision of, or violate, or constitute a default under, or result in the creation of any Lien on the Company's assets pursuant to, or relieve any third party of any obligation to the Company, give any third party the right to terminate or accelerate any obligation under or increase the rights of any person under or increase the liabilities or obligation of the Company under, any charter provision, bylaws, Material Agreement (as defined in Section 2.18), Permit (as defined in 2.13), order, law or regulation to which the Company or any of the Stockholders is a party or by which the Company, any of the Stockholders, or any of their respective assets is in any way bound or obligated, except for violations or beaches that would not have a material adverse effect on the Company or its assets. For purposes of this Agreement, the term "Material Adverse Effect" shall mean such effect as would (I) cause the Company not to be able to operate immediately after Closing in the business, currently conducted, or contemplated by CTI, absent any expenditure that is not specifically provided for herein, or (ii) preclude the consummation of any transaction contemplated herein. 2.7 Financial Statements. Attached as Schedule 2.7 is a true and complete copy of the unaudited balance sheet, statement of income, and cash flows of the Company ( the "Financial Statements") for the five months ending and as of May 30, 1997 (the Balance Sheet Date"). The Financial Statements present fairly the financial condition of the Company at the dates specified and the results of its operations for the periods specified and have been prepared in accordance with Mexican Generally Accepted Accounting Principles ("MGAAP") consistently applied, subject in the case of the unaudited statements to changes resulting from normal period-end adjustments for recurring accruals (which will not have a material adverse effect on the financial condition of the Company) and to the absence of footnote disclosure and other presentation items. The Financial Statements do not contain any items of a special or nonrecurring nature, except as expressly stated in the Financial Statements. The Financial Statements have been prepared from the books and records of the Company, which accurately and fairly reflect all the transactions of acquisitions and dispositions of assets by, and incurrence of liabilities by the Company. 2.8 Absence of Undisclosed Liabilities. The Company will have no direct or indirect debts, obligations or liabilities of any nature, whether absolute or contingent, accrued or unaccrued, asserted or unasserted, known or unknown, or otherwise and whether due or to become due, (collectively "Liabilities"), except for (I) liabilities specifically identified in the Financial Statements as "current liabilities" in accordance with MGAAP and that are not related to indebtedness for borrowed money, (ii) obligations to be performed in the ordinary course of business since the Balance Sheet Date, and (iii) obligations set forth in Schedule 2.8. 2.9 Absence of Material Adverse Change. Since the Balance Sheet Date, except as specifically contemplated by this Agreement, there has not been: (a) any material adverse change in 6 the condition (financial or otherwise), results of operations, business, prospects, assets, or Liabilities of the Company or with respect to the manner in which the Company conducts its business or operations; (b) any payment or transfer of assets (including without limitation any dividend, stock repurchase, or other distribution or any repayment of indebtedness ) to any of the Stockholders or their respective affiliates; (c) any breach or default (or event that with notice or lapse of time would constitute a breach or default), termination, or threatened termination under any Material Agreement; (d) any material theft, damage, destruction, casualty loss, condemnation, or eminent domain proceeding affecting the Company's assets, whether or not covered by insurance; (e) any sale, assignment, or transfer of any of the assets of the Company, except in the ordinary course of business and consistent with past practices; (f) any waiver by the Company of any rights related to the Company's business, operations, or assets, except in the ordinary course of business; (g) any other transaction, agreement, or commitment entered into by the Company or any of the Stockholders affecting the Company's business, operations or assets, except in the ordinary course of business and consistent with past practices; or (h) any agreement or understanding to do or resulting in any of the foregoing. 2.10 Taxes. Except as set forth in Schedule 2.10, all required federal, state, local, and other tax returns, notices, and reports (including without limitation income, property, sales, use, franchise, withholding, social security tax returns) relating to or involving transactions with the Company have been accurately prepared and duly and timely filed, and all taxes required to be paid with respect to the periods covered by any such returns have been timely paid. No tax deficiency has been proposed or assessed against the Company, and the Company has not executed any waiver of any statute of limitations on the assessment or collection of any tax. No tax audit, action, suit, proceeding, investigation, or claim is now pending or, to the knowledge of the Company or any of the Stockholders, threatened against the Company, and no issue or question has been raised (and is currently pending ) by any taxing authority in connection with the Company's tax returns or reports. The Company has withheld or collected from each payment to its employees the full amount of all taxes required to be withheld or collected therefrom and has paid all such taxes to the proper tax receiving officers or authorized depositories. Neither the Stockholders nor the Company has given or been requested to give waivers or extensions (or is or would be subject to a waiver or extension given by any other Person) of any statute of limitations relating to the payment of taxes of the Company or for which the Company may be liable. 2.11 Litigation. Except as described in Schedule 2.11 hereto, there are no pending, or to the knowledge of the Company or the Stockholders, threatened lawsuits, administrative proceedings, or reviews, or formal or informal complaints or investigations by any individual, corporation, partnership, Governmental Body, or other entity ( a "Person") against or relating to the Company or any of its directors, employees, or agents (in their capacities as such) or to which any assets of the Company are subject. Neither the Stockholders nor the Company is not subject to or bound by any currently existing judgment, order, writ, injunction, or decree. 2.12 Compliance with Laws. The Company is currently complying with, and has at all times complied with, and the use, operation, and maintenance of its assets comply with and have at 7 all times complied with, and neither the Company nor its assets nor the use, operation, or maintenance of its assets is in violation or contravention of, any applicable statute, law, ordinance, decree, order, rule, or regulation of any Governmental Body, except for violations that would not have a material adverse effect on the Company or its assets. 2.13 Permits. The Company owns and possesses for each appropriate Governmental Body all right, title, and interest in all permits, licenses, authorizations, approvals, quality certifications, franchises, all rights (individually, "Permit", collectively "Permits") issued by an Governmental Body necessary to conduct its business, except where the failure to obtain a Permit would not have a material adverse effect on the Company or its assets. Each of such Permits is described in Schedule 2.13 hereto. No loss or expiration of any such Permit is pending, or to the knowledge of the Company or the Stockholders, threatened or enforceable, other than expiration in accordance with the terms of Permits that may be renewed in the ordinary course of business without lapsing. 2.14 Environmental Matters. The Company is not in violation of any environmental law that could have a material adverse effect on the Company, its assets or its business. 2.15 Employee Matters. The consummation of the transactions contemplated by this Agreement and attachments hereto will not accelerate the time of payment or vesting or increase the amount of compensation due to any director, officer or employee (present or former) of the Company. The Company has never experienced, and neither the Company nor the Stockholders know or have reasonable grounds to know of any basis for, any strike, labor trouble, work stoppage, slowdown or other interference with or impairment of the business of the Company. 2.16 Title to Assets. Set forth in Schedule 2.16 hereto is a complete list (including the street address, where applicable) of (i) all real property currently owned by the Company; (ii) all real property currently leased or otherwise used by the Company, (iii) all real property formerly owned leased or otherwise used by the Company, indicating the nature of any facilities or operations of the Company on such property and the date and manner of disposition; (iv) each vehicle owned or leased by the Company, and (v) each asset owned or leased by the Company with a book value or fair market value greater than U.S. $5,000. The Company has good and marketable title to all of its assets, including without limitation, the assets listed on Schedule 2.16 (other than those described in (iii) above), the assets reflected on the Financial Statements and all assets used by the Company in the conduct of its business (except for assets disposed of since the Balance Sheet Date in the ordinary course of business for fair value to Persons that are not affiliates of the Company or any of the Stockholders and consistent with past practices and except for assets held under leases or licenses disclosed pursuant to Section 2.18); and all such assets are owned free and clear of any Liens, except for (A) minor imperfections of title and encumbrances that do not materially detract from or interfere with the use or value of such properties; and (B) liens securing liabilities of the Company reflected on the Financial Statements. 2.17 Condition of Properties. Except as set forth in Schedule 2.17, all facilities, machinery, equipment, fixture, vehicles, and other tangible property owned, leased or used by the 8 Company are in good operating condition and repair, normal wear and tear excepted, are reasonably fit and usable for the purposes for which they are being used, will not likely require major overhaul or repair in the foreseeable future, are adequate and sufficient for the Company's business, and conform with all applicable laws, rules and regulations, except as would not have a material adverse effect on the Company or its assets. The Company maintains policies of insurance issued by insurers of recognized responsibility insuring the Company and its assets and business against such losses and risks, and in such amounts, as are customary in the case of corporations of established reputation engaged in the same or similar businesses and similarly situated. 2.18 Material Agreements. (I) Schedule 2.18 lists each agreement (whether written or oral and including all amendments) to which a Company is a party or a beneficiary or by which the Company or any of its assets is bound (collectively the "Material Agreements"), including without limitation (A) any real estate leases; (B) any agreement that is material to the business, operations or prospects of the Company; (C) any agreement evidencing, securing, or otherwise relating to any indebtedness for which the Company is liable; (D) any capital or operating leases or conditional sales agreements relating to vehicles, equipment or other assets of the Company; (E) any supply or manufacturing agreements or arrangements pursuant to which the Company is entitled or obligated to require any assets from a third party; (F) any insurance policies; (G) any employment, consulting, non-competition, separation, collective bargaining, union or labor agreements or arrangements; (H) any agreement with or for the benefit of any of the Stockholders, any director, officer or employee of the Company or any affiliate or family member of such Person, and (I) any other agreement or arrangement pursuant to which the Company could be required to make or entitle to receive aggregate payments in excess of U.S. $5,000. (ii) The Stockholders and the Company have delivered to CTI a copy of each Material Agreement. Except as described in Schedule 2.18 (A) each Material Agreement is valid, binding, and in full force in effect and enforceable in accordance with its terms; (B) the Company has performed all its obligations under each Material Agreement, and there exists no breach or default (or event that with notice of lapse of the time would constitute a breach or default) under any Material Agreement; (C) there has been no termination or notice of default or any threatened termination under any Material Agreement and (D) no consent of any Person is required in connection with the transactions contemplated by this Agreement in order to preserve the rights of the Company under or to prevent any disadvantage to the Company in respect of any Material Agreement. 2.19 Intellectual Property Rights. Except as set forth in Schedule 2.19 there are not other registered patents, trademarks, service marks, trade names, and copyrights, and applications for, and licenses (to or from the Company) with respect to, any of the foregoing (collectively "Registered Intellectual Property"), owned by the Company or with respect to which the Company has any rights. 9 2.20 Subsidiaries and Investments. Except as set forth in Schedule in 2.20 the Company does not own any direct or indirect equity or debt interest in any other Person, including, without limitation, any interest in a partnership or joint venture (other than with CTF International), and the Company is not obligated or committed to acquire any such interest. 2.21 Competing Interests. None of the Company, Stockholders, nor any director, officer, relatives, or affiliate of any of such Persons owns, directly or indirectly, an interest in any Person that is a competitor for the same business, customer, or supplier of the Company or that otherwise has business dealings with the Company other than Comercializadora Hecht SA de CV and CTF International SA de CV. 2.22 Illegal or Unauthorized Payments; Political Contributions. Neither the Company, nor any of its officers, directors, employees, agents, or other representatives or, to the knowledge of the Company or the Stockholders, any other Person with which the Company is or has been affiliated or associated, has directly or indirectly, made or authorized any payment, contribution, or gift of money, property, or services, whether or not in contravention of applicable law, (a) as a kickback or bribe to any Person or (b) to any political organization, or the holder of or any aspirant to any elective or appointive public office, except for person political contributions not involving the direct or indirect use of funds of the Company. The Company has not violated any federal or state antitrust statutes, rules or regulations, including without limitation those relating to unfair competition, price fixing, bid rigging, or collusion. 2.23 Governmental Consents. Schedule 2.23 sets forth all consents, approvals, orders or authorizations of, or registrations, qualifications, designations, declarations, or filing with Governmental Body that is required on the part of the Company or any of the Stockholders in connection with the transactions contemplated by this Agreement or attachments hereto. 2.24 No Misrepresentations; Adverse Information. The Company and the Stockholders have disclosed to CTI all facts and information known to them that would be material to a purchase of the Convertible Notes. Neither the Company nor the Stockholders have received any appraisal, report, or other similar information relating to the value or condition of the Company or any of its assets. The representations, warranties and statements made by the Company and the Stockholders in or pursuant to this Agreement (including the Schedules to this Agreement) are true, complete, and correct in all material respects and do not contain any untrue statement of a material fact or omit to state any material fact necessary to make any such representation, warranty, or statement, under the circumstances in which it is made, not misleading. Neither the Company nor the Stockholders have any information or knowledge of any change contemplated in any applicable law, ordinances or restrictions, or any judicial or administrative action, which would have a material adverse effect upon the business or assets of the Company, or its value. 10 ARTICLE THREE Representations and Warranties of CTI CTI represents and warrants to the Company as follows: 3.1 Organization. CTI is a corporation duly organized, validly existing, and in good standing under the laws of Delaware, U.S.A. 3.2 Authority. CTI has all requisite power and authority to execute, deliver, and perform under this Agreement. The execution, delivery, and performance of this Agreement by CTI has been duly authorized by all necessary action, corporate or otherwise, on the part of CTI. This Agreement has been duly executed and delivered by CTI and is a legal, valid, and binding agreement of CTI enforceable against CTI in accordance with its terms. 3.3 No Violation. The execution, delivery, and performance of this Agreement by CTI will not conflict with or result in the breach of any term or provision of, or violate or constitute a default under, any charter provision or bylaw or under any material agreement, instrument, order, law, or regulation which CTI is a party or by which CTI is any way bound or obligated ARTICLE FOUR Covenants and Agreements 4.1 Release of the Stockholders. Each of the Stockholders, for themselves and their respective heirs, executors, administrators, successors, and assigns, hereby fully and unconditionally release and forever discharge and hold harmless each of the Company, CTI and their respective employees, officers, directors, successors, and assigns from any and all claims, demands losses, costs, expenses (including reasonable attorneys' fees and expenses), obligations, liabilities, and damages of every kind and nature whatsoever, whether or not now existing or known, relating in any way, directly or indirectly, to the Company, that such Stockholder may now have or may hereafter claim to have against the Company, CTI or any of such employees, officers, directors, successors, or assigns; provided that the foregoing release will not affect any obligations of CTI to the Stockholders under this Agreement or the attachments thereto nor will it affect any current obligation of the Company to the Stockholders as show on the Financial Statements. 4.2 Publicity. CTI and the Company will cooperate with each other in the development and distribution of all news releases and other public disclosures relating to the transactions contemplated by this Agreement. Neither CTI on the one hand, nor the Stockholders or the Company, on the other hand, will issue or make, or allow to have issued or made, any press release or public announcement concerning the transactions contemplated by this Agreement without the advance approval in writing of the form and substance thereof by the other parties, unless otherwise required by applicable legal or stock exchange requirements. 4.3 Transaction Costs. The Company will pay all attorneys', accountants', finders', brokers', investment banking and other fees, costs, and expenses incurred by the Company or the Stockholders prior to the Closing, or by the Stockholders after the Closing in connection with the 11 preparation, negotiation, execution, and performance of this Agreement and attachments hereto or any of the transactions contemplated by this Agreement and attachments hereto. CTI will pay all attorneys', accountants', finders', brokers', investment banking and other fees, costs and expenses that it incurs in connection with the preparation, negotiation, execution and performance of this Agreement or any of the transactions contemplated by this Agreement. 4.4 Nondisclosure. Each of the Stockholders acknowledges and agrees that all customer, prospects, and marketing lists, sales data, intellectual property, proprietary information, and trade secrets of the Company (collectively, "Confidential Information") are valuable, special, and unique assets and are and will be owned exclusively by the Company. Each of the Stockholders agrees to treat the Confidential Information as confidential and not disclose any Confidential Information to any Person or make use of any Confidential Information for such Stockholder's own purposes or for the benefit of any other Person (other than the Company). 4.5 Charter Amendments. Upon exercise of the Option, the Company and the Stocholders will take such action as is necessary and appropriate to cause the Charter of the Company to be amended consistent with the terms of the Shareholders' Agreement. ARTICLE FIVE Closing Conditions 5.1 Conditions to Obligations of CTI. The obligations of CTI under this Agreement are subject to the satisfaction at or prior to the Closing of the following conditions, but compliance with any such condition may be waived by CTI in writing: (a) An order shall have been entered terminating the pending suspension of payments proceedings involving the Company. (b) The obligations of the Company to BanCrecer (in the present principal amount of approximately US $1.1 million shall have been satisfied or paid in full or shall have been renegotiated on other terms satisfactory to CTI. (c) CTI shall have completed a public offering of its securities in an aggregate amount of not less than U.S. $6,000,000. (d) All representations and warranties of the Company and the Stockholders contained in this Agreement and the attachments thereto must be true and correct in all material respects at and as of the Closing with the same effect as though such representations and warranties were made at and as of the Closing. 12 (e) The Company and the Stockholders must have performed and complied with all the covenants and the agreements and satisfied the conditions required by this Agreement to be performed, complied with or satisfied by them at or prior to the Closing, including without limitation, the delivery of all items required to be delivered by them pursuant to Section 1.4. (f) There must be no pending or threatened litigation in any court or any proceeding before or by an Governmental Body against any of the Stockholders, the Company or CTI to restrain or prohibit or obtain damages or other relief with respect to this Agreement or the attachments hereto or the consummation of the transactions contemplated by this Agreement or the attachments thereto. (g) All necessary contractual and governmental consents will be obtained to comply with the applicable laws and regulations. (h) Execution of a Stockholders Agreement by and between the Stockholders and CTI in form reasonably satisfactory to CTI. (I) The satisfactory completion of due diligence audit by counsel of CTI. (j) The Stockholders must have delivered to CTI a legal opinion of their counsel dated on or before the date of Closing in the form of Exhibit C and addressing such other matters as CTI reasonably requests. (k) All documents and proceedings related to the Closing and a subscription of the Shares must be satisfactory in form and substance to CTI. 5.2 Conditions to Obligations of Stockholders and the Company. The obligation of the Stockholders and the Company under this Agreement are subject to the satisfaction at or prior to Closing of the following conditions, but compliance with any such conditions may be waived by the Stockholders and the Company in writing: (a) All representations and warranties of CTI contained in this Agreement must be true and correct in all material respects at and as of the Closing with the same effect as though such representations and warranties were made at and as of the Closing. (b) CTI must have performed and complied with the covenants and agreements and satisfied the conditions required by this Agreement to be performed, complied with, or satisfied by it or prior to the Closing, including without limitation, the delivery of all items required to be delivered by CTI pursuant to Section 1.4 (c) All necessary governmental consents, approvals, orders, and authorizations must have been obtained and all necessary governmental notices have been given with respect 13 to this Agreement and attachments thereto and the transactions contemplated by this Agreement and its attachments. ARTICLE SIX Indemnification 6.1 Indemnification of CTI. The Company and the Stockholders jointly and severally, will indemnify and hold CTI, its subsidiaries, and their respective affiliates, directors, officers, employees, and agents ("the CTI Parties") harmless from any and all liabilities, obligations, claims, contingencies, damages, costs, diminution in value of the B Shares, and expenses, including all court costs and reasonable attorneys' fees (the "Claims"), that any CTI Party may suffer or incur as a result of or relating to: (a) the breach or inaccuracy, or any alleged breach or inaccuracy, of any of the representations, warranties, covenants, or agreements made by the Company or the Stockholders in this Agreement or any attachment or pursuant to this Agreement or any attachment; and (b) any lawsuit, claim, or proceeding of any nature existing at or prior to the Closing, or arising out of any act or transaction of the Stockholders or the Company occurring prior to the Closing, or arising out of facts or circumstances that existed at or prior to the Closing that is related to the Company, its assets or the operation of its business. 6.2 Defense of Claims. Except as set forth below, if any lawsuit or enforcement action is filed against any CTI Party entitled to the benefit of indemnity hereunder, written notice thereof describing such lawsuit or enforcement action in reasonable detail and indicating the estimated amount of the reasonably foreseeable Claims (which estimate shall in no way limit the amount of indemnification the CTI Party is entitled to receive hereunder), shall be given to the Stockholders as promptly as practicable (and in any event within three days, after the service of the citation or summons); provided that the failure of any CTI Party to give timely notice shall not affect is rights to indemnification hereunder except to the extent that the Stockholders demonstrate that the CTI Party's failure to so notify the Stockholders with such ten (10) day period increased the Claims with respect to which the CTI Party is otherwise entitled to indemnification. Upon receipt of such notice, the Stockholders shall have the right, but not the obligation, to undertake the defense of or, with the consent of the CTI Party (which consent may not be unreasonably withheld), to settle or compromise such claim. If the Stockholders elect to defend any such asserted liability and to assume all obligations contained in Section 6.1 to indemnify the CTI Party, then the Stockholders shall so notice the CTI Party and shall be entitled if they so elect, to take control of the defense and investigation of such lawsuit or action and to employ and engage attorneys of their own choice to handle and defend the same, at the Stockholders' sole cost, risk and expense, and such CTI Party shall cooperate in all reasonable respects, at the Stockholders' sole cost, risk and expense, with the Stockholders and such attorneys in the investigation trial, and defense of such lawsuit or action and any appeal arising 14 therefrom; provided however, that the CTI Party may, at its own cost and expense, participate in such investigation, trial and the defense of such lawsuit or action and any appeal arising therefrom. If the Stockholders promptly notify the CTI Party that they intend to defend the claim and to assume all obligations contained in Section 6.1 to indemnify the CTI Party, the CTI Party shall not pay, settle or compromise such claim without the Stockholders' consent (which consent shall not be unreasonably withheld). If the Stockholders elect not to defend the Claim of the CTI Party, The CTI Party may, but shall not be obligated to, undertake the defense of or, with the consent of Stockholder (which consent may not be unreasonably withheld), settle or compromise such claim, on behalf, for the account, and at the risk, of the Stockholders. 6.3 Survival. All representations and warranties made in or pursuant to this Agreement will survive the execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement, and will be unaffected by any notice, investigation, or knowledge to the contrary. All statements contained in any Schedule, certificate, attachments hereto, or other writing delivered in connection with this Agreement or the transactions contemplated by this Agreement will constitute representations and warranties under this Agreement. Each party agrees that no other party to this Agreement will be under any duty, express or implied, to make any investigation of any representation or warranty made by any other party to this Agreement, and that no failure to so investigate will be considered negligent or unreasonable. All Statements contained in any schedule, certificate, or other writing delivered in connection with this Agreement or the transactions contemplated by this Agreement will constitute representations and warranties under this Agreement. ARTICLE SEVEN Noncompetition Agreement 7.1 Noncompetition. Each of the Stockholders hereby agree to refrain for a period of two years after the Closing (the "Non-Compete Period"), directly or indirectly, as an employee, consultant, advisor, referring source, agent of, or investor in, any Person from: (a) engaging in the manufacture, sale, or distribution of latex balloons (the "Business") within 200 kilometers of any city in which the Company, its subsidiaries, or their respective successors and assigns engage in the Business at such time (the "Territory"); (b) directly or indirectly influencing or attempting to influence any customer or potential customer of the Company, its subsidiaries, or their respective successors and assigns to purchase products related to the Business from any person other than Company, its subsidiaries, or their respective successors and assigns. (c) employing or attempting to employ or solicit for any employment competitive with the Company, its subsidiaries, or their respective successors and assigns any individuals who are employees of the Company, its subsidiaries, or their respective successors and assigns 15 at any time at which any Stockholders employs or attempts to employ or solicit such individuals (or were employees of the Company, its subsidiaries, or their respective successors and assigns within one year prior to such time) or influence or seek to influence any such employees to leave the Company's its subsidiaries', or there respective successors' or assigns' employment; provided that all provisions of (a) above will not apply to (I) any investment in publicly traded securities constituting less than 2% of the outstanding securities in such class, or (ii) to the ownership of an interest in, or the provision of services to Hecht. Each of the Stockholders acknowledges that such Stockholder's obligations under this Article Seven are a material inducement and condition to CTI entering into this Agreement and performing the transactions contemplated by this Agreement. Each of the Stockholders acknowledges that this Section 7.1 is necessary to protect the interest of CTI and its affiliates and that the restrictions and remedies contained in this Agreement are reasonable in light of the consideration and other value the Stockholders have accepted pursuant to this Agreement. If any provision of this Section 7.1 should be found by any court of competent jurisdiction to be unenforceable by reason of its being too broad as to the period of time, territory, and/or scope, then and in that even, such provision will nevertheless remain valid and fully effective, but will be considered to be amended so that the period of time, territory, and/or scope set forth will be changed to be the maximum period of time, the largest territory, and/or the broadest scope, as the case may be, that would be found enforceable by such court. Should any Person violate this Section 7.1 the period of time of the Non-Compete Period will automatically be extended for a period of time equal to the period of time such person began such violation until such violation permanently ceases. 7.2 Liquidated Damages. In the event of a violation of this Article Seven, will be entitled to liquidated damages from the Stockholders in the amount of U.S. $1,000.00 per day for each day the violation continues. ARTICLE EIGHT Miscellaneous 8.1 Notices. All notices that are required or may be given pursuant to this Agreement must be in writing and delivered personally, by a recognized courier service or by facsimile, to the parties at the following address (or to the attention of such other person or such other address as any party may provide to the other parties by notice in accordance with this Section 8.1): If to CTI: Howard W. Schwan President CTI Industries Corporation 22166 N. Pepper Road Barrington, IL 60010, U.S.A. 16 If to the Company: Enrique Mora V. Hugo Vazquez Reyes #33 Zapopan, Jalisco, Mexico With a copy to: Juan Manuel Carrillo Coronado At his address as shown herein If to the Shareholders: To the address set forth next to their signatures Any such notice or other communication will be deemed to have been given and received when actually received. 8.2 Attorneys' Fees and Costs. If attorneys' fees or other costs are incurred to secure performance of any obligations under this Agreement, or to establish damages for the breach of this Agreement or to obtain any other appropriate relief, whether by way of prosecution or defense, the prevailing party will be entitled to recover reasonable attorneys' fees and costs incurred in connection therewith. 8.3 No Brokers. Each party to this Agreement represents to the other party that it has not incurred and will not incur any liability for brokerage fees or agents' commissions in connection with this Agreement or the transactions contemplated by this Agreement, and agrees that it will indemnify and hold harmless the other parties against any claim for brokerage and finders' fees or agents' commissions in connection with the negotiation or consummation of the transactions contemplated by this Agreement. 8.4 Counterparts. This Agreement may be executed in counterparts for the convenience of the parties to this Agreement, all of which together will constitute one and the same instrument. 8.5 Assignment Neither this Agreement nor any of the rights, interests, or obligations under this Agreement will be assigned or delegated by the Company, the Stockholders or CTI without the prior written consent of the other parties; except that CTI may assign its rights and obligations under this Agreement to any direct or indirect subsidiary of CTI. This Agreement is not intended to confer any rights or benefits to any person (including, without limitation, any employees of the Company) other than the parties to this Agreement. 8.6 Entire Agreement. This Agreement and the related documents contained as Exhibits and Schedules to this Agreement or expressly contemplated by this Agreement contain the entire understanding of the parties relating to the subject matter of this Agreement and supersede all prior written or oral and all contemporaneous oral agreements and understandings relating to the subject matter of this Agreement and supersede all prior written or oral and all contemporaneous oral agreements and understandings relating to the subject matter of this Agreement. This Agreement cannot be modified or amended except in writing signed by the party against whom enforcement is 17 sought. The Exhibits and Schedules to this Agreement are by this Agreement incorporated by reference into and made a part of this Agreement for all purposes. 8.7 Governing Law. This Agreement will be governed by and construed and interpreted in accordance with the substantive laws of Mexico, without giving effect to any conflicts-of-law rule or any other principle that might require the application of the laws of another jurisdiction. 8.9 Arbitration. Except as otherwise specifically set forth herein, the parties agree to submit any and all disputes relating to this Agreement to final and binding arbitration. Any such disputes will be resolved by arbitration in accordance with the Commercial Arbitration Rules of the Commercial Code of the United Mexican States ("Commercial Code"), which arbitration proceedings must be conducted in Mexico D.F. All arbitration proceedings will be conducted in both English and Spanish. Unless the parties agree otherwise, within thirty (30) days after initiation of an arbitration hereunder the Company and the Stockholders, on the one hand, and CTI on the other hand, will designate an arbitrator pursuant to the Commercial Code rules. The two appointed arbitrators will then appoint a neutral arbitrator in the matter prescribed in the Commercial Code rules. The parties also agree that judgment of a court of competent jurisdiction may be entered upon any award made pursuant to arbitration hereunder. IN WITNESS WHEREOF, the parties to this Agreement have executed this Agreement as of the date first above written. CTI INDUSTRIES CORPORATION By: /s/ Howard W. Schwan -------------------------- Howard W. Schwan, President PULIDOS & TERMINADOS FINOS S.A. de C.V. By: /s/ Juan Manuel Carrillo Coronado --------------------------------- Authorized Officer /s/ Enrique Mora Velasco ------------------------ 18 STOCKHOLDERS: /s/ Juan Manuel Carrillo Coronado ____________________________ Juan Manuel Carrillo Coronado, Pablo Gortazar de Oyarzabal 31,819 shares 90,150 shares ============================== ============================== Address Address - ------------------------------ ------------------------------ Francisco Hernandez Herrera, Jose Antonio Hernandez Amaya 30,771 shares 30,771 shares ============================== ============================== Address Address /s/ Enrique Mora Velasco ______________________________ Enrique Mora Velasco 92,313 Shares Rosa Maria Valasco de Mora 15,986 Shares ============================== ============================== Address Address - ------------------------------ ------------------------------ Enrique Mora Hernandez, 58,297 Shares Manuel Mora Velasco, 5,289 Shares ============================== ============================== Address Address - ------------------------------ ------------------------------ Ricardo Mora Velasco 5,289 Shares Roberto Mora Velasco, 5,289 Shares ============================== ============================== Address Address - ------------------------------ ------------------------------ 19 Rosana Mora Velasco, 5,289 Shares Veronica Mora Velasco, 5,289 Shares ============================== ============================== Address Address - ------------------------------ ------------------------------ Alejandra Mora Velasco, 5,289 Shares Claudia Mora Velasco, 5,289 Shares ============================== ============================== Address Address Alpes Promotora Inmobiliria SA de CV ______________________________ 668,182 shares Maria Guadalupe Mora Velasco 5,289 shares By___________________________ ============================== Address 20 EX-10 20 CONSULTING AGREEMENT EXHIBIT 10.14 AGREEMENT THIS AGREEMENT is made and entered into this __ day of March, 1996 by and among CTI Industries Corporation, a Delaware corporation ("CTI") and Michael M. Miller, an individual residing at 2218 N. Burling Street, Chicago, Illinois ("Miller") WHEREAS, Miller has been an employee of CTI since September, 1984 and was employed by CTI as Senior Vice President: WHEREAS, CTI and Miller entered into a deferred compensation agreement dated January 15, 1987, a copy of which is attached hereto as Exhibit A (Deferred Compensation Agreement); WHEREAS, CTI and Miller entered into a Subscription Agreement dated August 14, 1987, attached hereto as Exhibit B ("Subscription Agreement"), pursuant to which Miller purchased 45,000 shares of Common Stock of the Corporation (subsequently split to three for one to 135,000 shares) (such shares hereinafter sometimes referred to as the "Stock"); WHEREAS, pursuant to the Stock Purchase Agreement, Miller executed and delivered to CTI that certain Promissory Note dated October 30, 1987, attached hereto as Exhibit C ("Promissory Note") and an associated Security Agreement; WHEREAS, on or about October 30, 1987, Miller entered into a Buy-Sell Agreement with the Company and John C. Davis; WHEREAS, on or about December 15, 1988, John C. Davis, Stephen M. Merrick and Russell W. Steger, as voting trustees and Miller and several other persons as shareholders entered into that certain Amended and Restated Voting Trust Agreement ("Voting Trust Agreement") pursuant to which the Stock and shares of Common Stock of certain other shareholders of the Company were transferred to the voting trustees; WHEREAS, the parties desire to enter into an agreement respecting the termination of Miller's full time employment with CTI, a consulting arrangement among Miller and CTI, the Deferred Compensation Agreement, the Stock Purchase Agreement and Promissory Note. NOW, THEREFORE, in consideration of the premises and of the terms, covenants and conditions hereinafter contained, the parties hereto agree as follows: 1. Termination of Employment. The parties agree that Miller's full time employment with CTI was terminated on December 15, 1995 and that Miller continued to receive compensation as an employee through January 31, 1996. 1 2. Consulting Services. 2.1 CTI hereby retains Miller effective February 1, 1996, and Miller accepts such retention, as a consultant to CTI to provide such advice and consulting services to CTI for the term provided herein as CTI shall request from time to time consistent with the provisions hereof. During the Initial Term, Miller shall provide services up to 40 hours per week as requested. Miller shall not be obligated to provide more than 10 hours of service during any month during the Second Term provided herein. It is agreed that, during both terms, Miller may be employed by, or provide services to, other persons or entities and Miller shall not be obligated to provide services hereunder which would conflict with any obligations of Miller with respect to such other persons or entities. 2.2 In consideration of Miller's agreement to provide consulting services hereunder, the Company shall pay to Miller the sum of $3,000 on or before the 15th day of each month during the Initial Term and $1,000 per month for the Second Term, provided herein for such services. Further, the Company shall continue coverage of Miller under its health insurance coverage for employees for the Initial Term of the consulting agreement herein. 2.3 The Initial Term of the consulting agreement herein shall be for a period of fifteen months commencing on February 1, 1996 and the Second Term shall be for a period commencing on May 1, 1997 and expiring on the earlier of Miller's death or January 31, 2016. 2.4 Miller shall provide consulting services hereunder as an independent contractor, not as an employee. Miller shall not be obligated to provide services at the offices of the Company or at any particular time or location. Miller shall not be an agent for the Company and shall not have any authority to bind the Company with respect to any matter. 2.5 In connection with the provision of services by Miller hereunder which the Company shall have requested, the Company shall reimburse Miller for the reasonable and necessary expenses incurred by Miller, provided that any expense in excess of $100 shall have been approved by the Company in advance of the time it is incurred. 2.6 During the Initial Term of the consulting agreement herein, Miller shall not be employed by or provide services to any person who is engaged anywhere in the United States in the business of manufacturing, distributing or selling (other than at retail) metallized or latex balloons as a material part of the business of such person and where Miller shall have any responsibility or authority in connection with the marketing or sale of metallized or latex balloons. 2 2.7 Miller agrees that, during the term of the consulting agreement, and after expiration thereof for so long as the Confidential Information shall not be generally known or generally disclosed, Miller shall not use any Confidential Information except on behalf of the Company during the term of the consulting agreement, or disclose any Confidential Information to any person, firm, partnership, company, corporation or other entity, except as may be authorized in writing by the Company. For purposes of this paragraph, "Confidential Information" shall mean and include information disclosed to Miller by the Company, or developed or obtained by Miller during the term of his employment by the Company or during the term of this consulting agreement, provided that such information is not generally known in the business or industry in which the Company is engaged relating to or concerning the business, financial condition, projects, products, processes, formulas, know-how, techniques, designs or methods of the Company, whether relating to research, development, manufacture, purchasing, accounting, engineering, marketing, merchandising, selling or otherwise. Without limitation, Confidential Information shall include all know-how, technical information, financial information, inventions, ideas, concepts, processes or designs relating to metallized balloons, latex balloons, printing or laminations and all prices, written customer lists or written lists of its suppliers, employees, agents, consultants or independent contractors. 2.8 Miller agrees that, promptly after request by the Company, Miller shall deliver to the Company all documents in his possession or control which contain any Confidential Information. 2.9 Miller acknowledges and agrees that any violation by him of the terms of paragraphs 2.6, 2.7 or 2.8 hereof could not reasonably or adequately be compensated in damages in an action at law and, accordingly, in addition to any other remedies provided by law with respect to any such violation, the Company shall have the right to compel specific performance of such provisions by Miller or to obtain injunctive relief against violations thereof by Miller, and if the Company prevails in any such proceeding, it will be entitled to recover all reasonable costs and expenses incurred by it in connection therewith, including a reasonable sum for its attorneys fees. 3. CTI Stock. 3.1 The Subscription Agreement is hereby amended to provide that the purchase price per share for the Stock is $1.22 per share ($.407 per share, post split). The Company acknowledges that Miller has paid to the Company the entire amount of the purchase price for the Stock and that all shares of the Stock are duly authorized, validly issued, fully paid and non-assessable. 3 3.2 The Promissory Note is hereby terminated and canceled and is of no further force or effect. The Company agrees forthwith to deliver the original of the Promissory Note to Miller or to destroy the same. 3.3 The Pledge Agreement is hereby terminated and canceled and is of no further force or effect. 3.4 The Buy-Sell Agreement is hereby terminated and canceled and shall be of no further force or effect. 3.5 On March 6, 1996, the Voting Trust Agreement was terminated by instrument executed by all of the voting trustees thereof. 3.6 Promptly after execution of this Agreement, the Company shall deliver to Miller a certificate or certificates evidencing all shares of the Stock. 4. Deferred Compensation. The Deferred Compensation Agreement is hereby canceled and terminated as of the date hereof. 5. Life and Disability Policies. 5.1 The Company has maintained a life insurance policy on Miller with a face amount of $500,000 ("Policy One"), a life insurance policy on Miller in the face amount of $300,000 in connection with the Deferred Compensation Agreement ("Policy Two"), a disability policy on Miller providing for disability benefits to him of $3,200 per month ("Policy Three"), a disability policy on Miller providing for disability benefits to him of $2,800 per month ("Policy Four") and, the parties believe, pursuant to the health insurance program of the Company, a life insurance policy in the face amount of $160,000 ("Policy Five") 5.2 With respect to Policy One, (i) the Company acknowledges that Miller is the owner thereof and has all rights to the cash surrender value of the policy, (ii) the Company has paid all premiums due on the policy for the period expiring on November 1, 1996, (iii) the Company shall have no obligation to pay any additional premiums with respect to Policy One. 5.3 With respect to Policy Two, (i) the Company is the sole owner of the policy and any and all cash surrender value of such policy, (ii) the Company has paid all premiums due on the policy through November 15, 1996, (iii) the Company shall have no obligation to pay any additional premiums with respect to such policy. 5.4 With respect to Policies Three and Four, (i) the Company has paid the premiums with respect to such policies for the period through October, 1996 and (ii) the 4 Company will have no obligation to pay future premiums with respect to such policies hereafter and shall have no obligation to maintain any disability coverage with respect to Miller hereafter. 5.5 The parties are informed, and to the best of their knowledge believe, that upon termination of Miller's benefits under the Company's health insurance program, Miller will have the right to convert and maintain Policy Five as an ordinary life insurance policy. However, no assurance is made by the Company that Policy Five will be in effect at the time of such termination, in the face amount of $160,000, or any other amount, or that Miller will be able to convert and maintain Policy Five after such termination on terms acceptable to Miller or the Company, if at all. The parties agree with respect to Policy Five as follows: 5.5.1 Miller and the Company shall use their best efforts to effect a conversion and transfer of Policy Five as an ordinary life policy at the time of the termination of Miller's coverage under the Company's health insurance program; 5.5.2 The Company shall pay all premiums with respect to such policy during the term of the consulting agreement herein; such premium amounts may be paid directly to Miller who, in such event, shall use such funds solely for the purpose of paying the premiums on such policy; 5.5.3 At all times, Miller shall borrow the maximum amount allowed under such policy and apply the amount of such borrowing to payment of premiums on the policy. In the event that Miller shall inform the Company on or before May 30, 1997, that he is unable to obtain to obtain the conversion and transfer of Policy Five as an ordinary life policy, the obligation of the Company to pay premiums with respect to such a policy shall terminate and (1) the amount of the consulting fee payable each month during the Second Term shall be increased by $1,000 and (2) the Second Term shall expire on the earlier of the death of Miller or September 30, 2006. 6. Release. 6.1 The Company does hereby absolutely and forever remise, release and discharge Miller from any and all causes of action in law or in equity, claims, suits, demands, or other obligations or liability of any nature whatsoever, whether known or unknown, that the Company ever had, now has, or may hereafter have, by reason of any matter, cause or thing whatsoever existing prior to or as of the date of the execution hereof, except the obligations of Miller provided herein or in any document referred to herein. 5 6.2 Miller does hereby absolutely and forever remise, release and discharge the Company and each of its officers, directors, shareholders, employees, agents and representatives from any and all causes of action in law or in equity, claims, suits, demands, or other obligations or liability of any nature whatsoever, whether known or unknown, that Miller ever had, now has, or may in the future have, by reason of any matter, cause or thing whatsoever existing prior to or as of the date of execution hereof, except the obligations of the Company provided herein or in any document referred to herein. 7. Severability. If any provision of this Agreement or any part hereof or application hereof to any person or circumstance shall be finally determined by a court of competent jurisdiction to be invalid or unenforceable to any extent, the remainder of this Agreement, or the remainder of such provision or the application of such provision to persons or circumstances other than those as to which it has been held invalid or unenforceable, shall not be affected thereby and each provision of this Agreement shall remain in full force and effect to the fullest extent permitted by law. The parties also agree that, if any portion of this Agreement, or any part hereof or application hereof to any person or circumstance, shall be finally determined by a court of competent jurisdiction to be invalid or unenforceable to any extent, any court may modify the objectionable provision so as to make it valid, reasonable and enforceable. 8. Notices. All notices or other communications required or permitted to be given hereunder shall be in writing and shall be delivered personally or mailed, certified mail, return receipt requested, postage prepaid, to the parties, as follows: If to CTI: Mr. Stephen M. Merrick CTI Industries Corporation 22160 N. Pepper Road Barrington, IL 60010 If to Miller: Mr. Michael M. Miller 2218 Burling Street Chicago, IL 60614 Any notice mailed in accordance with the terms hereof shall be deemed received on the third day following the date of mailing. Either party may change the address to which notices to such party may be given hereunder by serving a proper notice of such change of address to the other party. 9. Waivers. No failure or delay by any party to exercise any of such party's rights hereunder or to insist upon strict compliance with respect to any obligation hereunder, and no custom or practice of the parties at variance with the terms hereof, shall constitute a waiver by any party to demand exact compliance with the terms hereof. Waiver by any party of any particular default by any other party shall not affect or impair such party's rights in respect to any subsequent default of the same or of a different nature, nor shall any delay or omission of any party to exercise any right arising from any default by any other party affect or impair such party's rights as to such default or any subsequent default. 6 10. Benefit and Assignment. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, personal representatives and successors in interest. No party may assign any of such party's rights or duties hereunder to any other person. 11. Entire Agreement. This Agreement constitutes the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes all prior written or oral negotiations, representations, understandings, commitments, contracts or agreements with respect to the subject matter hereof. 12. Rights to Specific Performance. Each of the parties acknowledges that, in the event of a violation of the provisions of this Agreement, the remedies of the parties hereto at law may be inadequate and either party may, as a result of such violation, suffer irreparable harm and, accordingly, the parties hereto shall have the right to obtain specific performance, or to enjoin violations hereof, in a court of competent jurisdiction, and the prevailing party in any action in which injunctive relief or specific performance shall be granted shall be entitled to recover all reasonable costs and expenses of such party in such action including a reasonable sum for attorneys' fees. 13. Governing Law. This Agreement shall be governed by, and shall be construed and enforced in all respects, in accordance with the laws of the State of Illinois. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. CTI INDUSTRIES CORPORATION /s/ Michael R. Miller By /s/ Stephen M. Merrick - --------------------- --------------------- MICHAEL M. MILLER Authorized Officer 7 EX-10 21 LOAN AND SECURITY AGREEMENT EXHIBIT 10.15 LOAN AND SECURITY AGREEMENT THIS AGREEMENT is made as of August 22, 1996, by and between CTI Industries Corporation, a Delaware corporation (the "Borrower"), and First American Bank, an Illinois banking corpo ration (the "Bank"). In consideration of the mutual covenants, conditions, and agreements herein contained, the parties hereto agree as follows: Section 1. THE BANK'S AGREEMENT TO LEND. 1.1. Loan Amount. Subject to and upon the terms and conditions set forth in this Agreement, the Bank agrees to lend to the Borrower, from time to time, such sums as may be requested by the Borrower and which the Bank in its discretion agrees to lend from time to time, the total of which shall not exceed, in the aggregate, $6,300,000.00, subject to the further limits hereinafter set forth (the "Loan") pursuant to the First Term Loan, the Second Term Loan, and the Revolving Loan hereinafter provided. 1.1.1. First Term Loan. The Bank agrees to lend to the Borrower, subject to and upon the terms and conditions herein set forth, the sum of One Million One Hundred Thousand and No/100 Dollars ($1,100,000.00) (herein referred to as the "First Term Loan"). The First Term Loan shall be evidenced by and be repayable with interest in accordance with the terms of this Agreement and a promissory note payable to the order of the Bank in the original principal amount of $1,100,000.00, which shall be dated on or before the initial disbursement of the First Term Loan and shall be duly executed and delivered by the Borrower (the "First Term Note"). 1.1.2. Second Term Loan. The Bank agrees to lend to the Borrower, subject to and upon the terms and conditions herein set forth, the sum of Two Million Two Hundred Thousand and No/100 Dollars ($2,200,000.00)(herein referred to as the "Second Term Loan"). The Second Term Loan shall be evidenced by and be repayable with interest in accordance with the terms of this Agreement and a promissory note payable to the order of the Bank in the original principal amount of $2,200,000.00, which shall be dated on or before the initial disbursement of the Second Term Loan and shall be duly executed and delivered by the Borrower (the "Second Term Note"). 1.1.3. Revolving Loan. The Bank agrees to lend to the Borrower, subject to and upon the terms and conditions set forth herein, at any time or from time to time on or after the date hereof and on or before September 1, 1997, such amounts (each such loan and all such loans, collectively, as the context requires being herein referred to as the "Revolving Loan") as may be requested by the Borrower and which the Bank in its discretion agrees to lend from time to time, subject to the limitations hereinafter set forth. Within the limits and subject to and upon the terms and conditions herein set forth, amounts under the Revolving Loan may be borrowed and repaid and reborrowed from time to time. Except as otherwise permitted by the Bank, the aggregate unpaid principal amount of the Revolving Loan outstanding at any time shall not exceed the lesser of Three Million and No/100 Dollars ($3,000,000.00) or 1 the Advance Limit (as hereinafter defined). The Revolving Loan shall be evidenced by and be repayable with interest in accordance with the terms of this Agreement and a promissory note payable to the order of the Bank in the original principal amount of $3,000,000.00 which shall be dated on or before the initial disbursement of the Revolving Loan and shall be duly executed and delivered by the Borrower (the "Revolving Note"). For purposes of this Agreement, the Advance Limit shall be equal to the sum of: (i) 80% of the Eligible Accounts (as hereinafter defined) or $3,000,000.00, whichever is less; and (ii) 25% of Eligible Inventory (as hereinafter defined) or $1,000,000.00, whichever is less. For purposes of this Agreement the Eligible Accounts shall mean all Accounts Receivable (as defined in Section 4.1(a) hereof) created by the Borrower in the ordinary course of business arising out of the sale or lease of goods or the rendition of services by the Borrower and which are and at all times shall continue to be (to the effect that any Eligible Account that at any subsequent time fails to meet the requirements to be an Eligible Account shall cease to be an Eligible Account) acceptable to the Bank in all respects as the Bank shall from time to time determine in its discretion, but excluding in all events: (a) any Accounts Receivable unpaid for more than 90 days from the date of invoice; (b) any Accounts Receivable against the payment of which the account debtor claims to have, may have, or has a defense, set-off, or counterclaim; (c) any Accounts Receivable as to which the account debtor is located outside the United States, unless supported by a letter of credit or other security deemed to be acceptable by the Bank; (d) any Accounts Receivable as to which the account debtor is a parent, subsidiary, or affiliate of the Borrower; (e) any Accounts Receivable with respect to which goods are placed on consignment, guaranteed sale, or other terms which are conditions precedent to payment by the account debtor; (f) any Accounts Receivable as to which an account debtor is the United States of America or any department, agency, or instrumentality of the United States of America, unless appropriate assignment of claims forms are executed in advance; (g) any Accounts Receivable not arising out of the Borrower's ordinary course of trade or business; (h) any Accounts Receivable not evidenced by an invoice; (i) any Accounts Receivable arising out of a contract or order that, by its terms, forbids or makes void or unenforceable the assignment by the Borrower to the Bank of the Accounts Receivable arising with respect thereto; and 2 (j) any Accounts Receivable that the Bank elects to exclude from eligibility due to any actual or potential liens, claims, or risks, including unsatisfactory financial responsibility, payment record, or reputation of the account debtor. For purposes of this Agreement, the Eligible Inventory shall mean the lower of cost or market value (as determined in accordance with generally accepted accounting principles consistently applied) of the Inventory (as defined in Section 4.1(b) hereof) of the Borrower and which is and at all times shall continue to be (to the effect that any Inventory that at any subsequent time fails to meet the requirements to be Eligible Inventory shall cease to be Eligible Inventory) acceptable to the Bank in all respects as the Bank shall from time to time determine in its discretion, but excluding in all events: (a) any Inventory that is subject to any prior assignment, claim, lien, security interest, or encumbrance, other than the security interest in favor of the Bank; (b) any Inventory that is not new and unused, except as the Bank may otherwise consent in writing; (c) any Inventory that is stored with a bailee, warehouseman, or similar party, unless such bailee, ware houseman, or similar party shall issue and deliver to the Bank, in form and substance acceptable to the Bank, an agreement or other instrument acknowledging the Bank's prior security interest therein; and (d) any Inventory that the Bank elects to exclude from eligibility due to any actual or potential liens, claims, or risks, including age, type, category, and/or quantity of the Inventory. 1.2. Loan Disbursements. 1.2.1. First Term Loan Disbursements. The First Term Loan shall be disbursed, as the Borrower shall direct, upon the satisfaction of the conditions set forth in Sections 2 and 3 hereof. 1.2.2. Second Term Loan Disbursements. The Second Term Loan shall be disbursed, as the Borrower shall direct, upon the satisfaction of the conditions set forth in Sections 2 and 3 hereof. 1.2.3. Revolving Loan Disbursements. The Revolving Loan shall be disbursed, as the Borrower shall direct, upon the submission of such evidence as the Bank shall request to verify the Advance Limit and the satisfaction of the conditions set forth in Sections 2 and 3 hereof. Whenever the Borrower desires to make a borrowing of the Revolving Loan, the Borrower shall give the Bank written or telephonic notice thereof not later than 1:00 p.m. Chicago time on the borrowing date. Each notice of borrowing required under this section shall specify the amount of the proposed borrowing and the proposed borrowing date. 3 1.3. Interest and Penalties. 1.3.1. First Term Loan Interest and Penalties The First Term Loan shall bear interest on its principal amount outstanding from time to time at a rate per annum equal to one percent (1%) per annum over the Prime Rate announced from time to time by the Bank (the "Bank's Prime Rate," which may not be the Bank's lowest rate of interest) which shall be adjusted daily when and as the Bank's Prime Rate changes. Upon and after the occurrence of an Event of Default, the First Term Loan shall bear interest on its principal amount outstanding from time to time at a rate per annum (the "First Term Loan Default Rate") equal to four percent (4%) per annum over the Bank's Prime Rate, which shall be adjusted daily when and as the Bank's Prime Rate changes. Interest accruing prior to maturity of the First Term Loan (whether by lapse of time, acceleration, or otherwise) shall be due and payable on the first day of each calendar month, commencing with the month following the date on which the first disbursement of the First Term Loan is made. After maturity of the First Term Loan (whether by lapse of time, acceleration, or otherwise) accrued interest shall be due and payable upon demand. The Borrower shall pay a late charge of five percent (5%) of the amount of any sum payable to the Bank under this Agreement or any of the Notes that is received by the Bank more than 10 days after the date on which it is due. Such late charges shall be due and payable on the due date of the next installment of principal or interest, together with the regular installment then due. 1.3.2. Second Term Loan Interest and Penalties The Second Term Loan shall bear interest on its principal amount outstanding from time to time at a rate per annum equal to eight and three-quarters percent (8.75%) per annum. Upon and after the occurrence of an Event of Default, the Second Term Loan shall bear interest on its principal amount outstanding from time to time at a rate per annum (the "Second Term Loan Default Rate") equal to eleven and three-quarters percent (11.75%) per annum. Interest accruing prior to maturity of the Second Term Loan (whether by lapse of time, acceleration, or otherwise) shall be due and payable on the first day of each calendar month, commencing with the month following the date on which the first disbursement of the Second Term Loan is made. After maturity of the Second Term Loan (whether by lapse of time, acceleration, or otherwise) accrued interest shall be due and payable upon demand. 1.3.3. Revolving Loan Interest and Penalties The Revolving Loan shall bear interest on its principal amount outstanding from time to time at a rate per annum equal to one percent (1%) per annum over the Prime Rate announced from time to time by the Bank (the "Bank's Prime Rate," which may not be the Bank's lowest rate of interest) which shall be adjusted daily when and as the Bank's Prime Rate changes. Upon and after the occurrence of an Event of Default, the Revolving Loan shall bear interest on its principal amount outstanding from time to time at a rate per annum (the "Revolving Loan Default Rate") equal to four percent (4%) per annum over the Bank's Prime Rate, which shall be adjusted daily when and as the Bank's Prime Rate changes. Interest accruing prior to maturity of the Revolving Loan (whether by lapse of time, acceleration, or otherwise) shall be due and payable on the first day of each calendar month, commencing with the month following the date on which the first disbursement of the Revolving Loan is made. After maturity of the Revolving Loan (whether by lapse of time, acceleration, or otherwise) accrued interest shall be due and payable upon demand. 4 1.3.4 Adjustment in the Interest Rate. Providing no Event of Default has occurred and is continuing, the rate of interest on the First Term Loan and the Revolving Loan shall be reduced under the following terms and conditions: a) if on the last day of any calender month (as evidenced by a financial statement delivered to the Bank pursuant to Section 5.1(a) hereof), the Borrower achieves a ratio of total debt to tangible net worth of no more than 2 to 1, then the rate of interest accruing on the outstanding principal balance for the following month shall be reduced to one-half of one percent (.5%) per annum over the Prime Rate announced from time to time by the Bank; and b) if on the last day of any calender month (as evidenced by a financial statement delivered to the Bank pursuant to Section 5.1 (a) hereof) the Borrower achieves a ratio of total debt to tangible net worth of no more than 1 to 1, then the rate of interest accruing on the outstanding principal balance for the following month shall be reduced to the Bank's Prime Rate announced from time to time by the Bank. For purposes of this Section total debt shall mean all items that, in accordance with generally accepted accounting principles, would be included in determining total liabilities as shown on the liabilities side of a balance sheet as of the date the amount of total liabilities is to be determined and, in any event, shall include (without duplication) capitalized lease obligations, letters of credit, and all obligations relating thereto, any liabilities secured by any mortgage, pledge, lien, or security interest on property owned or acquired, whether or not such liabilities shall have been assumed and guaranties and endorsements (other than for collection in the ordinary course of business) and other contingent obligations. Tangible net worth shall mean the total of all assets appearing on a balance sheet prepared in accordance with generally accepted accounting principles consistently applied, less total liabilities, as determined in accordance with generally accepted accounting principles consistently applied, less the amount of any intangible assets as determined by the Bank in its discretion. 1.4. Maturity of the Loan. 1.4.1. First Term Loan Maturity. The First Term Loan shall be due and payable in monthly installments of $18,333.33 of principal, commencing on October 1, 1996, and a like sum on the first day of each calendar month thereafter until the principal of and accrued and unpaid interest on the First Term Loan is paid in full, provided that the outstanding principal of and accrued and unpaid interest on the First Term Loan, if not sooner paid in full, shall be due and payable in full on September 1, 2001 (or earlier as provided in this Agreement or the First Term Note). 1.4.2. Second Term Loan Maturity. The Second Term Loan shall be due and payable in equal monthly installments of $19,617.26 of principal and interest, commencing on October 1, 1996, and a like sum on the first day of each calendar month thereafter until the principal of and accrued and unpaid interest on the Second Term Loan is paid in full, provided that the out standing principal of and accrued and unpaid interest on the Second Term Loan, if not sooner paid in full, shall be due and payable in full on September 1, 2001 (or earlier as provided in this Agreement or the Second Term Note). 5 1.4.3. Revolving Loan Maturity. The Revolving Loan shall be prepayable as provided in this Agreement and, if not sooner paid in full, shall be due and payable on September 1, 1997 (or earlier as provided in this Agreement or the Revolving Note). 1.5. Mandatory and Optional Prepayments. The Borrower shall prepay the Revolving Loan if and to the extent that the outstanding principal amount of the Revolving Loan shall from time to time exceed the limits therefor. In addition, the Revolving Loan may be prepaid at any time at the option of the Borrower without premium or penalty. All prepayments required or permitted hereunder shall be applied first to prepayment of accrued and unpaid interest on the Revolving Loan and then to the prepayment of the outstanding principal of the Revolving Loan in the inverse order of maturity thereof. 1.6 Second Term Loan Prepayment Fee. The Second Term Note may be prepaid at any time and from time to time prior to maturity, without premium, penalty, or discount, but only to the extent that the source of such prepayment is not derived, directly or indirectly, from money borrowed by the Borrower, any Guarantor, or any Affiliate (as hereinafter defined) of the Borrower or any Guarantor. The Borrower agrees to pay the Bank, on demand, in addition to the payment of all other obligations of the Borrower to the Bank that are then due and payable, a fee (the "Second Term Loan Prepayment Fee") determined as hereinafter provided if the Second Term Note is prepaid in whole or in part at any time or from time to time prior to maturity, but only to the extent that the source of such prepayment is derived, directly or indirectly, from money borrowed by the Borrower, any Guarantor, or any Affiliate of the Borrower or any Guarantor. The Second Term Loan Prepayment Fee shall be equal to the applicable Loan Prepayment Percentage provided below, multiplied by the outstanding principal amount of the Second Term Note so prepaid. For any year in which a prepayment of the Second Term Note occurs, the applicable Second Term Loan Prepayment Percentage shall be the percentage set forth opposite such year in the following schedule: Second Term Loan Year Prepayment Percentage ---- -------------------- August 22, 1996 to September 1, 1997 5% September 2, 1997 to September 1, 1998 4% September 2, 1998 to September 1, 1999 3% September 2, 1999 to September 1, 2000 2% September 2, 2000 to September 1, 2001 1% All payments shall be applied first to accrued and unpaid interest on the Second Term Note then, at the Bank's election, to any Second Term Loan Prepayment Fee due by reason of any prepayment, and then to the outstanding principal of the Second Term Note in the inverse order of maturity thereof. For purposes of this Section the term "Affiliate" shall mean: any director, officer, or stockholder of the Borrower. 6 Section 2. CONDITIONS PRECEDENT TO THE BANK'S OBLIGATION TO MAKE THE INITIAL LOAN DISBURSEMENT. Prior to the initial disbursement by the Bank of any monies pursuant to this Agreement the following conditions must be satisfied: 2.1. Delivery of Loan Documents. The Borrower shall execute and deliver or cause to be executed and delivered to the Bank, as evidence of and as security for all obligations under this Agreement, the following documents (the "Loan Documents"), all to be in form and content as specified by the Bank: (a) the First Term Note, the Second Term Note and the Revolving Note (collectively, the "Notes"); (b) a first mortgage (the "Mortgage") on the real estate commonly known as 22160 N. Pepper Rd., Barrington, IL 60010 (the "Premises") owned by American National Bank and Trust Company of Chicago, not personally, but solely as Trustee under Trust Agreement dated September 19, 1984 and known as Trust No. 61978 (the "Trust") to secure the obligations of the Borrower under this Agreement and the Second Term Note; (c) a collateral assignment of beneficial interest in the Trust; (d) the filing with the Secretary of State of the State of Illinois and the recording with the Recorder's Office of Lake County, Illinois duly executed U.C.C. Financing Statements showing the Bank as secured party; and (e) guaranties of the obligations of the Borrower under this Agreement and the Notes, executed and delivered by Stephen M. Merrick, Howard W. Schwan and John H. Schwan (together with any other persons obligated at any time with respect to all or any part of the Borrower's obligations to the Bank, the "Guarantors"). 2.2. Liens on Property. The Bank shall have received evidence satisfactory to the Bank that all real and personal property, fixtures and equipment in which the Bank is taking a security interest will be free and clear of all liens and encumbrances of every nature and description other than: the security interest in favor of the Bank; the Permitted Exceptions (as defined in Section 2.3); security interests disclosed in the search, conducted on behalf of the Bank in July, 1996, for financing statements on file with the Illinois Secretary of State naming the Borrower as debtor for XLI Datacomp, Inc., Suburban National Bank of Palatine, Fathom Technologies, AT & T Credit Corporation, and Xerox Corporation; and security interests and liens permitted under this Agreement or to which the Bank shall have otherwise consented in writing (collectively, the "Permitted Liens"). 7 2.3. Title Insurance. The Borrower shall have furnished the Bank with an ALTA Mortgage Loan Policy issued by Real Estate Index Inc. (the "Title Company") (such policy being referred to herein as the "Title Policy"), in the aggregate amount of $2,200,000.00. The Title Policy shall insure the Mortgage (for its full amount) as a first lien on the Premises. The Title Policy shall be subject only to the exceptions approved by the Bank (the "Permitted Exceptions") and shall contain no exceptions for mechanic's or materialmen's liens. The Title Policy shall contain affirmative endorsements as required by the Bank and otherwise shall be in all respects in form and content satisfactory to the Bank. 2.4. Insurance. The Borrower shall have delivered to the Bank insurance policies with premiums prepaid, with issuing companies, coverages and amounts satisfactory to the Bank, insuring the Premises and other properties of the Borrower against loss or damage by fire and such other hazards as may be required by the Bank, including, but not limited to, extended coverage, vandalism, malicious mischief, and comprehensive public liability insurance as required by the Bank. Each policy shall contain standard mortgage clauses satisfactory to the Bank and loss payable clauses satisfactory to the Bank with respect to such other insurance and shall provide that the policy may not be canceled by any party for any reason whatsoever without first giving the Bank at least thirty (30) days' prior written notice of any proposed cancellation. The Borrower shall provide the Bank with fully paid valid policies each year as long as any sums are owed the Bank. All policies shall name the Bank as mortgagee, additional insured and loss payee with endorsements acceptable to the Bank. 2.5. Survey. The Borrower shall have delivered to the Bank a surveyor's current plat of survey of the Premises prepared by a registered surveyor, which shall locate the improvements on the Property with respect to lot lines, streets, alleys, driveways, known easements, and encroachments and contain the legal description as provided by the Title Policy, certified to the Bank and the Title Company as having been made in accordance with ALTA Land Survey Standards. 2.6. Opinion of Counsel. The Borrower shall have furnished the Bank the favorable written opinion of the Borrower's legal counsel dated the date of the initial advance hereunder, addressed to the Bank and in form and substance satisfactory to the Bank. 2.7. Authority. The Borrower shall have furnished to the Bank such documents, in form and content satisfactory to the Bank, as the Bank may request as evidence of the due organization and good standing of the Borrower and the due authorization and execution of the Loan Documents by the Borrower. Section 3. ADDITIONAL CONDITIONS PRECEDENT TO THE BANK'S OBLIGATIONS TO MAKE DISBURSEMENTS OF THE LOAN. Prior to and as a condition to each disbursement of the Loan by the Bank: 3.1. Accuracy of Representations and Warranties. The representations and warranties of the Borrower made herein shall be true and correct as though made on and as of the date of such disbursement. 8 3.2. No Material Adverse Change. There shall have been no material adverse change in the financial condition of the Borrower from the financial condition reflected on the financial statements of the Borrower last furnished to the Bank. 3.3. No Default. There shall exist no Event of Default and no event or condition which, with the giving of notice or lapse of time, or both, would constitute an Event of Default. Section 4. SECURITY INTEREST. 4.1. Grant of Security Interest. In order to secure the timely and full performance of the obligations of the Borrower to the Bank under this Agreement and the Notes and any and all interest accruing thereon, and any and all extensions, renewals, or refinancings thereof, and all other present and future obligations of the Borrower to the Bank, the Borrower hereby grants to the Bank a security interest in the following property (collectively, the "Collateral"): (a) all present and future accounts, accounts receivable, other receivables and claims for money due, instruments, documents, chattel paper, contract rights, and general intangibles (the "Accounts Receivable"); (b) all raw materials, supplies, work-in-process, finished goods, and all other inventory of whatsoever kind or nature, wherever located, whether now owned or hereafter acquired (the "Inventory"); (c) all machinery, equipment, vehicles, furniture, tools, and trade fixtures and all substitutions and replacements thereof wherever located, and all attach ments, accessions, parts, and additions thereto, whether now owned or hereafter acquired; (d) all of the Borrower's deposit accounts (whether checking, savings, or otherwise) with the Bank or any other depositary institution, whether now or hereafter existing and including accounts held jointly with others; (e) all monies, securities, drafts, notes, and other property of the Borrower and the proceeds thereof, now or hereafter held or received by or on behalf of the Bank from or for the Borrower, whether for custody, pledge, transmission or otherwise; (f) all books, records, and general intangibles evidencing or relating to any of the foregoing; and (g) any and all proceeds and products of the foregoing. 4.2. Filing and Recording; Perfection. The Borrower shall execute and deliver to the Bank financing statements and take whatever other actions are requested by the Bank to perfect and continue the Bank's security interest in the Collateral. Upon the request of the Bank, the Borrower will 9 deliver to the Bank any and all of the documents and instruments evidencing or constituting the Collateral or any part thereof, together with an appropriate endorsement or assignment thereof satisfactory to the Bank, and the Borrower will note the Bank's security interest upon any and all chattel paper included in the Collateral. The Borrower irrevocably appoints the Bank as the agent and attorney-in-fact of the Borrower to execute such documents and take such actions as the Bank deems necessary to preserve and perfect the Bank's security interest in the Collateral. 4.3. Collections of Accounts. The Borrower hereby authorizes the Bank, now and at any time or times hereafter, to (a) notify any or all account debtors that the Accounts Receivable have been assigned to the Bank and that the Bank has a security interest therein and (b) direct such account debtors to make all payments due from them to the Borrower upon the Accounts Receivable directly to the Bank or to a lockbox designated by the Bank. Until such time as the Bank shall exercise such rights, the Borrower shall collect and enforce all of its Accounts Receivable. The costs of collection and enforcement of the Accounts Receivable shall be borne by the Borrower, whether such costs are incurred by the Borrower or the Bank. All collections and proceeds of the Accounts Receivable and other Collateral shall be held in trust for the Bank, separate and apart from other funds and properties of the Borrower, and shall be promptly delivered by the Borrower to the Bank in the form in which they are received by the Borrower (except for any necessary endorsement in favor of the Bank) by mailing or delivering the same to the Bank not later than the business day following receipt thereof by the Borrower. The Bank will, within two (2) business days after receipt of checks and one business day after receipt of cash and cash equivalents, apply the whole or any part of such collections against the Borrower's liabilities to the Bank. All checks, drafts, instruments, and other items of payment or proceeds of Collateral shall be endorsed by the Borrower to the order of the Bank. The Borrower irrevocably constitutes and appoints the Bank and all persons designated by the Bank as the true and lawful agent and attorney-in-fact to endorse the Borrower's name to any payment or proceeds of Collateral. Section 5. GENERAL COVENANTS. The Borrower agrees that so long as any of the Notes shall be outstanding, unless waived in writing by the Bank: 5.1. Financial Information, Reports. The Borrower will maintain a standard and modern system of accounting in accordance with generally accepted practice and will furnish to the Bank and its duly authorized representatives such information with respect to the business, affairs, operations, and financial condition of the Borrower as may be reasonably requested from time to time. The Borrower shall furnish to the Bank: (a) as soon as available, and in any event within 30 days after the close of each monthly fiscal period of the Borrower, a copy of the balance sheet and profit and loss statement for the Borrower prepared by the Borrower and signed by a principal officer of the Borrower for such monthly period and the period from the beginning of the current fiscal year to the end of such monthly period; 10 (b) as soon as practicable and in any event within 120 days after the end of each fiscal year of the Borrower, a profit and loss statement and a reconciliation of surplus accounts of the Borrower for such year, and a balance sheet of the Borrower as of the end of such year, setting forth in each case in comparative form corresponding figures from the preceding fiscal year, all in reasonable detail and satisfactory to the Bank and audited by an independent certified public accounting firm of recognized standing selected by the Borrower, with a certificate of such independent certified public accounting firm satisfac tory to the Bank in scope and substance; (c) within 15 days after the close of each monthly fiscal period of the Borrower, and otherwise from time to time as the Bank may request, a schedule of the Eligible Accounts and Eligible Inventory and an aging of the Accounts Receivable and accounts payable, and a report of Inventory in form acceptable to the Bank, signed by a principal officer of the Borrower, together with copies of invoices, if requested by the Bank pertaining to the Eligible Accounts arising since the previous such report to the Bank; (d) promptly upon receipt thereof, copies of any detailed reports submitted to the Borrower by independent accountants in connection with each annual audit or any annual or interim review of the books and records of the Borrower made by such accountants; and (e) with reasonable promptness, such other financial information, including annual financial statements of the Guarantors, as the Bank may reasonably request. All financial statements of the Borrower specified in the preceding clauses (a) and (b) shall be furnished in consolidated and consolidating form for the Borrower and all subsidiaries that the Borrower may at any time have. Together with each delivery of financial statements required by the preceding clauses (a) and (b), the Borrower will deliver to the Bank a certificate of a principal officer of the Borrower stating that there exists no Event of Default or any event or condition that, with notice or lapse of time, or both, would constitute an Event of Default, or, if any such Event of Default or event or condition exists, specifying the nature thereof, the period of existence thereof, and what action the Borrower proposes to take with respect thereto. The Borrower will permit any person designated by the Bank to visit and inspect any of the properties, corporate books, and financial records of the Borrower, and to discuss the affairs, finances, and accounts of the Borrower, all at such reasonable times and as often as the Bank may reasonably request. 5.2. Taxes. The Borrower shall cause to be paid on a timely basis all taxes and assessments, special or otherwise, and any other such charges which are due and payable. In the event the Borrower fails to pay taxes as required herein, the Bank reserves the right to require the Borrower to make monthly deposits into an escrow account established for the payment of taxes in an amount satisfactory to the Bank. The Borrower may contest in good faith and 11 through appropriate proceedings any tax or assessment or other charge due and payable provided that the Borrower shall have deposited with the Bank a cash sum sufficient to discharge such tax assessment or charge. 5.3. Insurance. The Borrower will maintain insurance coverage by reputable insurance companies in such forms and amounts, and against such hazards, as are ordinarily carried by other companies similarly situated in operating like businesses and properties. Without limiting the generality of the foregoing, property and casualty insurance shall be in amounts and forms insuring the full replacement cost of fixed assets of the Borrower. 5.4. Liens and Encumbrances. The Borrower shall not create, assume, or suffer to exist any mortgage, deed of trust, pledge, encumbrance, lien, or charge of any kind (including the charge upon the property purchased under conditional sales or other title retention agreements) upon any of the property or assets of the Borrower, whether now owned or hereafter acquired, except: (a) liens for taxes not yet due or which are being contested in good faith by appropriate proceedings; (b) other liens, charges, and encumbrances incidental to the conduct of the Borrower's business or the ownership of its property and assets which are not incurred in connection with the borrowing of money or the obtaining of advances of credit and which do not in the aggregate materially impair the use of such property or assets in the operation of the Borrower's business; (c) Permitted Liens; and (d) purchase money mortgages and other purchase money liens or security interests (including finance leases) upon any fixed or capital assets hereafter acquired by the Borrower, provided that no such mortgage, lien, or security interest shall extend to or cover any other property of the Borrower, and further provided that the principal amount of the aggregate of all such indebted ness secured by all such mortgages, liens, and security interests shall not exceed $50,000.00. 5.5. Maintenance of Properties. The Borrower will maintain, keep, and preserve all of its properties (tangible and intangible) necessary or useful in the proper conduct of its business in good working order and condition, ordinary wear and tear excepted. The Borrower shall from time to time make or cause to be made all necessary and proper repairs, renewals, replacements, additions, and improvements to its properties so that the business carried on by the Borrower may be properly and advantageously conducted at all times in accordance with prudent business management. 5.6. Compliance With Laws. The Borrower shall comply in all material respects with all laws, ordinances, regulations, and orders of all governmental authorities applicable to its business or the use of its properties. The Borrower may contest, in good faith, any such law, ordinance, regulation, or order and withhold compliance during any proceeding, including appropriate appeals, so long as the Bank's security interest in the Collateral or lien in the Premises, in the opinion of the Bank, is not jeopardized. 5.7. Location of Collateral. All Collateral now owned by the Borrower is and will be, and all Collateral hereafter acquired by the Borrower will be, and to the extent the Collateral consists of intangible property such as accounts, the records concerning the Collateral will be, kept at the Borrower's facilities at either 22160 North Pepper Road, Barrington, IL 60010 12 or 675 Industrial Drive, Cary, Illinois or , ______________________England. Except in the ordinary course of its business, the Borrower shall not remove the Collateral from its existing locations. To the extent the Collateral consists of vehicles or other property, the ownership of which is evidenced by a certifi cate of title, the Borrower shall not take or permit any action that would require registration of such Collateral outside the State of Illinois. 5.8. Mergers, Sales of Assets. The Borrower shall not merge or consolidate with any other corporation or sell, lease, transfer, or otherwise dispose of all or any substantial part of the assets of the Borrower or enter into any sale and leaseback transaction or arrangement with respect to any properties of the Borrower, change the name of the Borrower, or wind up, liquidate, or dissolve, or agree to do any of the foregoing, except that the Borrower may sell in the ordinary course of business assets or properties no longer necessary for the proper conduct of the business of the Borrower having a value amounting, in any single transaction, to not more than $50,000.00. 5.9. Bank Account. The Borrower shall maintain its principal deposit relationship, including its corporate operating checking account and money market deposit account, with the Bank. 5.10. Tangible Net Worth. The Borrower shall at all times maintain a Tangible Net Worth in an amount greater than $1,200,000.00. For purposes of this Agreement, Tangible Net Worth shall mean the total of all assets appearing on a balance sheet of the Borrower prepared in accordance with generally accepted accounting principles consistently applied, less the total liabilities of the Borrower, as determined in accordance with generally accepted accounting principles consistently applied, less the amount of any intangible assets as determined by the Bank in its discretion. 5.11. Permitted Debt. The Borrower shall not create, incur, assume, or suffer to exist any funded or current debt, or guarantee, endorse or otherwise be or become contingently liable in connection with the obligations, stock, or dividends of any person, except: (a) debt represented by the Notes; (b) funded or current debt secured by mortgages and other liens and retentions permitted under Section 5.4 hereof; (c) contingent liabilities arising out of the endorsement in the ordinary course of business of negotiable instruments in the course of collection thereof; and (d) current liabilities arising in the ordinary course of business of the Borrower and which are not incurred for money borrowed. 5.12. Leases and Purchases. The Borrower shall not incur or have outstanding any obligations for the payment for purchases of property or for rentals on account of the use or possession of real or personal property (whether or not any express or implied arrangement is made for the acquisition by the Borrower of title thereto at any time) if after giving effect thereto the maximum aggregate amount of rentals for which the Borrower is obligated in any fiscal year on all leases having a term in excess of three years would exceed $50,000.00. 5.13. Investments. The Borrower shall not make or permit to remain outstanding any loan or advance to, or own, purchase, or acquire any stock or securities of, any person, excepting loans to employees not exceeding, at any time, in the aggregate, $50,000.00 outstanding. 13 5.14. Restricted Payments. The Borrower shall not pay or declare any dividend on any shares of any class of its capital stock or make any other distribution on account of any shares of any class of its stock, or redeem, purchase, or otherwise acquire, directly or indirectly, any shares of any class of its capital stock in excess of $250,000.00 in any year. 5.15. Transactions with Affiliates. The Borrower shall not, directly or indirectly, purchase, acquire, or lease any material property or service from, or sell, transfer, or lease any material property or service to, any Affiliate (as hereinafter defined) except in the usual, regular, and ordinary course of business of the Borrower and upon fair and reasonable terms no less favorable to the Borrower than would result from arm's-length bargaining with an unaffiliated person. For purposes of this Agreement, "Affiliate" shall mean: any person or entity, directly or indirectly, through one or more intermediaries, controlling, controlled by, or under common control with the Borrower; or any director, officer, trustee, or shareholder of the Borrower or any entity, directly or indirectly, through one or more intermediaries, controlling, controlled by, or under common control with the Borrower. Section 6. DEFAULT AND REMEDIES. 6.1. Events of Default. Each of the following shall constitute an "Event of Default" under this Agreement: (a) The Borrower fails to pay, within ten (10) days after the date on which payment thereof is due, any installment of principal or interest on any of the Notes or any other sum due and payable under this Agreement, any of the Notes, or the Mortgage; or (b) the Borrower fails to keep or perform any agreement, undertaking, obligation, covenant or condition set forth in Section 5.2, 5.3 or 5.4 of this Agreement; or (c) the Borrower fails to keep or perform any other agreement, undertaking, obligation, covenant, or condition set forth in this Agreement or any of the Loan Documents or any other agreement between the Borrower and the Bank within thirty (30) days after notice that such performance is due and such performance remains uncured within that period; or (d) if default shall occur in the payment of any principal, interest, or premium with respect to any indebt edness of the Borrower or any Guarantor for borrowed money and such default shall continue for more than the period of grace, if any, therein specified and shall not have been effectively waived, or if any such indebtedness shall be declared due and payable prior to the stated maturity thereof; or 14 (e) (i) any representation, warranty or certification, made or given in or pursuant to this Agree ment by the Borrower or otherwise made by the Borrower in writing in connection with this Agreement, proves to be untrue in any respect when such representation, warranty or certification is made or given hereunder; or (ii) any representation, warranty or certification, made or given in or pursuant to this Agreement by the Borrower or otherwise made by the Borrower in writing in connection with this Agreement, although true in all respects when such represen tation, warranty or certification was made or given, proves to be untrue in any material respect at any subsequent time when such representation, warranty or certification is operative or applicable and such representation, warranty or certification continues to be untrue ten (10) days after written notice from the Bank to the Borrower; or (f) the Collateral or the Premises, or any material part thereof, is damaged or destroyed by fire or other casualty and the cost to rebuild or reconstruct exceeds the face amount of insurance actually collected or in the process of collection through diligent efforts of the Borrower, and if the Borrower fails to deposit or to cause to be deposited with the Bank the deficiency within ten (10) days after the Bank's written request therefor, unless such deficiency is less than $50,000.00; or (g) an order of condemnation by eminent domain proceedings is entered with respect to the Premises or any part thereof and is not dismissed or stayed; or (h) any petition is filed or proceeding is commenced for any attachment, levy, or seizure of any property of the Borrower subject to a lien in favor of the Bank; or any judgment or judgments, writ or writs, warrant or warrants of attachment, or any similar process or pro cesses in an aggregate amount in excess of $50,000.00 shall be entered or filed against the Borrower or against any property or assets of the Borrower and remains unvacated, unbonded or unstayed for a period of sixty (60) days; or (i) if the Borrower or any Guarantor: shall be unable to pay its debts as they become due; files a petition to take advantage of any insolvency act; makes an assignment for the benefit of its creditors; commences a proceeding for or consents to the appointment of a receiver, trustee, liquidator, or conservator of itself or of the whole or any substantial part of its property; files a petition to a petition under any chapter of the Bankruptcy Reform Act of 1994, as amended, or files a petition or seeks relief under or takes advantage of any other reorganization, arrangement or readjustment of debt, insolvency, or receivership law or statute of the United States of America or any state thereof; or if there is commenced against the Borrower or any Guarantor any proceeding for any of the foregoing relief which is not dismissed or withdrawn within 90 days after the filing thereof; or if the Borrower or any Guarantor by any act indicates its consent to, or approval or authorization of, any such proceeding or petition; or 15 (j) if Stephen M. Merrick shall cease to own of record and beneficially at least 406,401 shares of common stock representing 14.34% of 2,833,188 shares of common stock, if Stephen M. Merrick, John H. Schwan and Howard W. Schwan shall cease to have beneficial interest in shares of preferred stock as follows: 571,429, 857,143 and 428,571. Preferred stock is held in a limited liability company (CTI Investors) with one other investor having a beneficial interest in 714,286 shares. CTI Investors owns 2,571,969 shares of preferred stock out of a total outstanding of 2,857,143. The preferred stock has the right to elect four of five directors of the Borrower and Stephen M. Merrick, John H. Schwan and Howard W. Schwan control CTI Investors. Common and preferred stock are both voting. There are a total of 5,690,331 shares of common and preferred outstanding of which Stephen M. Merrick owns 17.18%, John H. Schwan 15.06% and Howard W. Schwan 7.53%; or (k) if either Stephen M. Merrick, John H. Schwan or Howard W. Schwan ceases to be actively employed in their respective offices and positions held as of the date hereof; or (l) if any Guarantor shall die or be declared incompetent; or (m) if, in the reasonable opinion of the Bank, there shall be any material adverse change in the financial condition of the Borrower or any Guarantor. 6.2. Remedies. After the occurrence of any Event of Default, the Bank shall have the right in addition to all the remedies conferred upon the Bank by law or equity or the terms of any of the Loan Documents, to do any or all of the following, concurrently or successively, without notice to the Borrower: (a) Declare the Notes to be, and the Notes shall thereupon become, immediately due and payable, provided that if an Event of Default described in Section 6.1(i) shall occur or exist, the Notes shall automatically become immediately due and payable, in each case without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived, anything contained herein or in the Loan Documents to the contrary notwithstanding; (b) terminate the Bank's obligations under this Agreement to extend credit of any kind or to make any disbursement, whereupon the commitment and obligations of the Bank to extend credit or to make disbursements hereunder shall terminate; and (c) exercise all rights and remedies of a secured party under the Uniform Commercial Code and otherwise, including, without limitation, the right to foreclose the security interest granted herein by any available judicial or other procedure and/or to take possession of any or all of the Collateral and the books and records relating thereto with or without judicial process, for which purpose the Bank may enter on any or all of the premises where any of 16 the Collateral or books or records may be situated and take possession and remove the same therefrom; proceed to protect and enforce its rights or remedies either by suit in equity or by action at law, or both; require the Borrower to assemble any or all of the Collateral and any or all certif icates of title and other documents relating to the Collat eral at a place designated by the Bank; charge or set off all sums owing to the Bank by the Borrower against any and all of the Borrower's accounts (including accounts held jointly with others) and credit balances at the Bank, regardless of the stated maturity thereof; and exercise in the Borrower's name all rights with respect to the Collateral, including the right to collect any and all money due or to become due, endorse checks, notes, drafts, instru ments, or other evidences of payment, receive and open mail addressed to the Borrower, and settle, adjust, or compromise any dispute with respect to any item of Collateral. 6.3. Rights and Remedies Cumulative. All of the Bank's rights and remedies, whether evidenced by this Agreement or by any other writing, shall be cumulative and may be exercised singularly or concurrently. Election by the Bank to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of the Borrower under this Agreement, after the failure of the Borrower to perform, shall not affect the Bank's right to declare a default and to exercise its remedies. Section 7. REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants to the Bank as follows: 7.1. Power and Authority. The Borrower is a corporation duly organized and validly existing and in good standing under the laws of its state of incorporation. The Borrower has the requisite authority to execute, deliver and carry out the terms and provisions of this Agreement, and the Loan Documents and other documents to be executed and delivered by it in connection with this Agreement. This Agreement constitutes, and the Loan Documents and other documents to be executed and delivered in connection with this Agreement, when executed and delivered pursuant hereto will constitute, the duly authorized obligations of the party or parties (other than the Bank) executing the same and will be enforceable in accordance with their respective terms. 7.2. No Violation of Agreements, Etc. The Borrower is not in default under any agreement to which it is a party, the effect of which will materially adversely affect performance by the Borrower of its obligations pursuant to and as contemplated by the terms and provisions of this Agreement or any of the Loan Documents. Neither the execution and delivery of this Agreement, the Loan Documents or other documents to be executed and delivered by the Borrower, or the performance of its obligations under this Agreement (a) violate any presently existing provisions of law or any presently existing applicable order, writ, injunction or decree of any court or government department, commission, board, bureau, agency or instrumentality, or (b) conflict or are inconsistent with or result in any breach of any of the terms, covenants, conditions or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, instrument, document, agreement or contract of any kind which creates, represents, evidences or provides for any lien, charge or encumbrance upon any of the assets of the Borrower, or any other indenture, mortgage, deed of trust, instrument, document, agreement or contract of any kind to which the Borrower is a party or by which the Borrower may be bound. 17 7.3. Financial Statements, Financial Condition. The Borrower has furnished the Bank with financial statements of the Borrower as of and for the fiscal year ended October 31 in each of the years 1993, 1994, and 1995 and a balance sheet as of May 31, 1996 and statement of operations for the seven month period then ended. Such financial statements are true and correct, subject, as to the interim statements, to changes resulting from year-end reviews and adjustments, and have been prepared in accordance with generally accepted accounting principles consis tently followed throughout the periods involved. The balance sheets included therein fairly present the condition of the Borrower as at the dates thereof, and the profit and loss and surplus statements included therein fairly present the results of operations of the Borrower for the periods indicated. There has been no material adverse change in the condition, financial or otherwise, of the Borrower since May 31, 1996. 7.4. No Litigation. Except for an action filed by NRS for services performed by NRS in the aggregate of approximately $105,000.00, there are no actions, suits or proceedings pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower before any court or any governmental, administrative, regulatory, adjudicatory or arbitrational body or agency of any kind which will materially adversely affect performance by any of such parties of its obligations pursuant to and as contemplated by the terms and provisions of this Agreement or the Loan Documents. 7.5. Taxes. The Borrower has filed all state and federal income tax returns that are required to be filed, and has paid all taxes shown to be due on such returns and such assessments received by the Borrower to the extent that the same had become due. 7.6. Title to Property. The Borrower holds and will hold all right, title, and interest in and to its properties, including the Collateral, free and clear of all liens, claims and encumbrances, except as permitted under this Agreement. The Trust holds and will hold all right, title, and interest in and to its properties, including the Premises, free and clear of all liens, claims and encumbrances, except as permitted under this Agreement. The Borrower has no subsidiaries. 7.7. Accounts Receivable. With respect to the Accounts Receivable, the Borrower represents and warrants that, unless otherwise indicated in writing by the Borrower: (a) all Accounts Receivable are genuine, are in all respects what they purport to be, are not evidenced by a judgment and are evidenced by only one, if any, executed original instrument, agreement, contract, or document; 18 (b) all Accounts Receivable represent undisputed bona fide transactions completed in accordance with the terms and provisions contained in any documents or agreements related thereto; (c) the face amount shown on any schedule of Accounts Receivable heretofore or hereafter provided to the Bank and all invoices and statements delivered to the Bank with respect to any Accounts Receivable are or will be actually and absolutely owing to the Borrower and are not contingent for any reason; (d) to the best of the Borrower's knowledge, there are no set-offs, counterclaims, or disputes existing or asserted with respect to the Accounts Receivable, and the Borrower has not made any agreement with any account debtor for any deduction therefrom, except for discounts and allowances allowed by the Borrower in the ordinary course of its business for prompt payment, all of which discounts or allowances are reflected in the calculation of the face amount of the invoices to which such discounts or allowances relate; (e) to the best of the Borrower's knowledge, there are no facts, events, or conditions which in any way impair the validity or enforcement of the Accounts Receiv able or tend to reduce the amount payable thereunder from the invoice face amount shown on any schedule of Accounts Receivable delivered to the Bank; (f) the Borrower has no knowledge of any fact or circumstance that would impair the validity or collectibility of the Accounts Receivable; and (g) the Accounts Receivable that the Borrower shall, expressly or by implication, request the Bank to treat as Eligible Accounts will, as of the time such request is made, conform in all requests to the conditions to be treated as Eligible Accounts. 7.8. Inventory. With respect to the Inventory, the Borrower represents and warrants that, unless otherwise indicated in writing by the Borrower: (a) all inventory is located at the location set forth in Section 5.7 hereof or is Inventory that is in transit; (b) no Inventory is, or shall at any time or times hereafter be, stored with a bailee, warehouseman, or similar party without the prior written consent of the Bank; (c) no Inventory is under consignment to or from any person; (d) all Inventory is currently usable and salable in the normal course of the Borrower's business; and 19 (e) the Inventory that the Borrower shall, expressly or by implication, request the Bank to treat as Eligible Inventory will, as of the time such request is made, conform in all respects to the conditions to be treated as Eligible Inventory. 7.9. Compliance with Environmental Laws. Except as disclosed in writing to the Bank on or before the date hereof, the Premises and its present use complies, and at all times shall comply, with all applicable laws and governmental regulations including, without limitation, all applicable federal, state and local laws pertaining to air and water quality, hazardous waste, waste disposal, air emissions and other environmental matters, all zoning and other land use matters, and utility availability. Except as disclosed in writing to the Bank on or before the date hereof, neither the Borrower nor, to the best of the Borrower's knowledge, any previous owner or occupier of the Premises, used, generated, stored or disposed of, on, under or about the Premises any Hazardous Materials. For purposes of this Agreement, Hazardous Materials shall mean and include any hazardous substance or any pollutant or contaminant defined as such in (or for purposes of) the Comprehensive Environmental Response, Compensation, and Liability Act, any so-called applicable "Superfund" or "Superlien" or "Non-priority Lien" law, the Toxic Substances Control Act, or the Resource Conservation and Recovery Act, all as amended from time to time. Further, to the best of the Borrower's knowledge, except as disclosed in writing to the Bank on or before the date hereof, the Premises does not contain any underground tanks and does not contain and has not in the past contained any asbestos-containing material in friable form. 7.10. Material Facts. Neither this Agreement nor any document, financial statement, credit information, certificate or statement furnished to the Bank by the Borrower contains, or will contain, any untrue statement of a material fact or omits, or will omit, to state a material fact necessary to make the statements made not misleading. 7.11. Representations and Warranties to be Continuing. All of the foregoing representations and warranties will be true at the date of the initial disbursement and at the dates of all subsequent disbursements of the Loan. All representations, warranties, covenants, and agreements made herein or in any certificate or other document delivered to the Bank by or on behalf of the Borrower shall be deemed to have been relied upon by the Bank notwithstanding any investigation heretofore or hereafter made by the Bank or on its behalf, and shall survive the making of any or all of the disbursements contemplated hereby and shall continue in full force and effect as long as there remains unperformed any obligation to the Bank hereunder or under any of the Loan Documents. Section 8. MISCELLANEOUS PROVISIONS. 8.1. Notices. Any communications, requests or notices required or appropriate to be given under this Agreement shall be in writing and deemed given when delivered in person or when mailed by certified mail, return receipt requested, deposited in the United States mail postage pre-paid, addressed to the party for whom the notice is intended as follows: 20 BORROWER: CTI Industries Corporation 22160 North Pepper Road Barrington, IL 60010 Attention: Stephen M. Merrick President BANK: First American Bank 975 Busse Road Elk Grove Village, Illinois 60007 Attention: Martin J. Carmody Exec. Vice President These addresses may be changed by notice as provided herein. 8.2. No Waiver. No failure by the Bank to exercise, or delay by the Bank in exercising, any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof, or the exercise of any other right, power or privilege. The rights and remedies provided in this Agreement are cumulative and not exclusive of any right or remedy provided by law. No notice to or demand on the Borrower in any case shall, in itself, entitle the Borrower to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Bank to any other or further action in any circumstances without notice or demand. 8.3. Binding Effect. This Agreement and the Loan Documents shall be binding upon and inure to the benefit of the respective parties hereto and their respective successors and assigns. This Agreement is made for the sole benefit of the Borrower and the Bank and no other person or persons shall have any benefits, rights or remedies under or by reason of this Agreement. 8.4. Further Assurances. The Borrower agrees that, at any time or from time to time, upon the written request of the Bank, it will execute and deliver all such further documents and do all such other acts and things as the Bank may reasonably request to give effect to this Agreement and the Loan Documents. 8.5. Time of the Essence. Time is of the essence of this Agreement and of every part hereof. The obligations of the Bank hereunder shall be of no further force or effect if the initial disbursement of the Loan does not occur on or before September 30, 1996. 8.6. Fees and Expenses. The Borrower shall promptly pay or reimburse the Bank for all reasonable expenses, regardless of whether the Loan is disbursed in whole or in part, incurred in connection with the issuance of the Bank's commitment letter and the making of the Loan, including, but not limited to, examina tion and insurance of title by the Title Company, preparation and review of all Loan Documents by the Bank's outside counsel, taxes of any kind, appraisal, surveys, recording costs, escrow disbursement costs, inspection costs and attorney's fees. The Borrower shall also pay promptly to the Bank on demand the customary fees and out-of-pocket expenses 21 of the Bank in connection with the Bank's periodic examinations of the Collateral and inspections of books and records of the Borrower. The Borrower shall pay promptly to the Bank on demand reasonable attorneys' fees and all costs and other expenses paid or incurred by the Bank in duly enforcing or exercising its rights or reme dies created by, connected with or provided in this Agreement, the Notes, the Mortgage or the other Loan Documents or as a result of any litigation or threatened litigation or the preparation therefor in which the Bank is a party or threatened to be made a party and which in any way whatsoever relates to this Agreement. 8.7. Indemnity Agreement. The Borrower agrees to indemnify, defend, and hold the Bank harmless from and against any and all losses, damages, liabilities, and expenses (including reasonable attorneys' fees) the Bank may sustain as a consequence of the occurrence of any Event of Default or the breach or inaccuracy of any representation and warranty made by the Borrower in this Agreement or any document, financial statement, credit information, certificate, or statement furnished to the Bank. The Borrower agrees to indemnify, defend, and hold the Bank harmless from and against any and all losses, damages, liabilities, and expenses (including reasonable attorneys' fees) that at any time or from time to time may be paid, incurred, or suffered by, or asserted against, the Bank for, with respect to, or as a direct or indirect result of the presence on or under, or the escape, seepage, leakage, spillage, discharge, emission, or release from, the Premises or any part thereof, into or upon any land, the atmosphere, or any water course, body of water, or wet lands, of any Hazardous Material occurring during or prior to the period of ownership of the Premises or any part thereof by the Borrower or as a result of conditions existing during such period (including, without limitation, any losses, liabilities, damages, or expenses asserted or arising under any applicable law or regulation). The provisions of and undertakings and indemni fications set forth in this Section shall survive the payment of the Notes and the other obligations of the Borrower to the Bank and shall not be affected by the Bank's acquisition of any interest in the Premises, whether by foreclosure or otherwise. 8.8. Security for Disbursements and Payments. Any and all disbursements, payments and amounts expended by the Bank pursuant to this Agreement, and all other expenses reimbursable by the Borrower, shall, as and when advanced or incurred, be and become evidenced and secured by this Agreement and the Loan Documents and shall bear interest from the date of advance or expenditure at the rate provided in this Agreement or, if no such rate is provided, then at the highest applicable interest rate provided in the Notes. Any Event of Default which may occur under this Agreement shall constitute a default under the Loan Documents. 8.9. Entire Agreement. This Agreement and the Loan Documents constitute the entire agreement between the parties hereto and may not be modified or amended in any manner other than by supplemental written agreement executed by the parties hereto. This Agreement supersedes any other agreement made by the Bank with or for the benefit of the Borrower. 22 8.10. Governing Law. This Agreement shall be a contract governed by and construed in accordance with the laws of the State of Illinois. IN WITNESS WHEREOF, the parties hereto caused this Agreement to be executed as of the day and year first written above. BORROWER: CTI Industries Corporation BY:/s/ Stephen M. Merrick -------------------- Stephen M. Merrick President ATTEST: BY:______________________ Name: Title: Secretary BANK: First American Bank BY:/s/ Martin J. Carmody -------------------- Martin J. Carmody Exec. Vice President 23 EX-10 22 THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT EXHIBIT 10.16 THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT This Agreement is made as of July 1, 1997 among CTI Industries Corporation, a Delaware corporation (the "Borrower"), and First American Bank, an Illinois banking corporation (the "Bank"), and Stephen M. Merrick, John H. Schwan, and Howard W. Schwan (the "Guarantors"). Whereas, the Borrower and the Bank are parties to a Loan and Security Agreement dated as of August 22, 1996, as it has been amended from time to time (the "Loan Agreement"), and the Borrower is the maker of the Revolving Note dated August 22, 1996 payable to the order of the Bank in the original principal amount of $3,000,000.00 (the "Revolving Note"), and the Borrower is the maker of the First Term Note dated August 22, 1996 payable to the order of the Bank in the original principal amount of $1,100,000.00 (the "First Term Note"), and the Borrower is the maker of the Second Term Note dated August 22, 1996 payable to the order of the Bank in the original principal amount of $2,200,000.00 (the "Second Term Note") each delivered by the Borrower to the Bank; and Whereas, the obligations of the Borrower are secured by, among other things: a security interest in all of Borrower's assets; a first mortgage made by American National Bank and Trust Company of Chicago, not personally, but solely as Trustee under Trust Agreement dated September 19, 1984 and known as Trust No. 61978 (the "Trust") to secure the obligations of the Borrower under the Loan Agreement and the Second Term Note; and a Collateral Assignment of Beneficial Interest in the Trust (the "ABI")and Whereas, the Guarantors have guaranteed the obligations of the Borrower to the Bank pursuant to a Guaranty dated August 22, 1996 (hereinafter referred to as the "Guaranty"); and Whereas, on November 21, 1996 the Borrower and the Bank executed a First Amendment to Loan and Security Agreement whereby the Bank temporarily increased the rate of the advance limit on eligible inventory; and Whereas, on March 21, 1997 the Borrower and the Bank executed a Second Amendment to Loan and Security Agreement whereby the Bank temporarily increased the rate of the advance limit on eligible inventory; and Whereas, the Borrower and the Bank desire to enter into this Agreement in order to extend additional indebtedness to the Borrower in the form of a third and fourth term loans, extend the maturity of the Revolving Note, and otherwise confirm the obligations of the Borrower under the Loan Agreement, the Note (as hereinafter defined), the Guaranty, the Mortgage, the ABI, and all other documents and instruments at any time evidencing, creating, or securing the obligations of the Borrower to the Bank (collectively, the "Loan Documents"). Now, therefore, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1 1. Defined Terms. Capitalized words used in this Agreement as defined terms are used herein with the same meanings as in the Loan Agreement, unless otherwise defined herein. 2. Amendment to Loan Agreement. Section 1.1 of the Loan Agreement shall be amended and restated and, as amended in its entirety, reads as follows: 1.1 Loan Amount. Subject to and upon the terms and conditions set forth in this Agreement, the Bank agrees to lend to the Borrower, from time to time, such sums as may be requested by the Borrower and which the Bank in its discretion agrees to lend from time to time, the total of which shall not exceed, in the aggregate, $6,553,513.67, subject to the further limits hereinafter set forth (the "Loan") pursuant to the First Term Loan, the Second Term Loan, the Third Term Loan, the Fourth Term Loan and the Revolving Loan hereinafter provided. 3. Amendment to Loan Agreement. The first paragraph in Section 1.1.3 of the Loan Agreement shall be amended and restated in its entirety and, as amended, reads as follows: 1.1.3 Revolving Loan. The Bank agrees to lend to the Borrower, subject to and upon the terms and conditions set forth herein, at any time or from time to time on or after the date hereof and on or before July 1, 1998, such amounts (each such loan and all such loans, collectively, as the context requires being herein referred to as the "Revolving Loan") as may be requested by the Borrower and which the Bank in its discretion agrees to lend from time to time, subject to the limitations hereinafter set forth. Within the limits and subject to and upon the terms and conditions herein set forth, amounts under the Revolving Loan may be borrowed and repaid and reborrowed from time to time. Except as otherwise permitted by the Bank, the aggregate unpaid principal amount of the Revolving Loan outstanding at any time shall not exceed the lesser of Three Million and No/100 Dollars ($3,000,000.00) or the Advance Limit (as hereinafter defined). The Revolving Loan shall be evidenced by and be repayable with interest in accordance with the terms of this Agreement and a promissory note payable to the order of the Bank in the original principal amount of $3,000,000.00 which shall be dated on or before the initial disbursement of the Revolving Loan and shall be duly executed and delivered by the Borrower (the "Revolving Note"). For purposes of this Agreement, the Advance Limit shall be equal to the sum of: (i) 80% of the Eligible Accounts (as defined in the Loan Agreement) or $3,000,000.00, whichever is less; and (ii) 25% of Eligible Inventory (as defined in the Loan Agreement) or $1,000,000.00, whichever is less, except for the period from June 19, 1997 through October 17, 1997 when the advance on Eligible Inventory shall be increased to 35% or $1,300,000.00, whichever is less. 4. Amendment to Loan Agreement. Section 1 of the Loan Agreement shall be amended and restated in its entirety to add the following sub-sections: 2 1.1.4 Third Term Loan. The Bank agrees to lend to the Borrower, subject to and upon the terms and conditions herein set forth, the sum of Two Hundred Seventy Five Thousand and No/100 Dollars ($275,000.00) (herein referred to as the "Third Term Loan"). The Third Term Loan shall be evidenced by and be repayable with interest in accordance with the terms of this Agreement and a promissory note payable to the order of the Bank in the original principal amount of $275,000.00, which shall be dated on or before the initial disbursement of the Third Term Loan and shall be duly executed and delivered by the Borrower (the "Third Term Note"). 1.1.5 Fourth Term Loan. The Bank agrees to lend to the Borrower, subject to and upon the terms and conditions herein set forth, the sum of Two Hundred Thousand and No/100 Dollars ($200,000.00)(herein referred to as the "Fourth Term Loan"). The Fourth Term Loan shall be evidenced by and be repayable with interest in accordance with the terms of this Agreement and a promissory note payable to the order of the Bank in the original principal amount of $200,000.00, which shall be dated on or before the initial disbursement of the Fourth Term Loan and shall be duly executed and delivered by the Borrower (the "Fourth Term Note"). 5. Amendment to Loan Agreement. Section 1.2 of the Loan Agreement shall be amended and restated in its entirety to add the following sub-sections: 2.1.4 Third Term Loan Disbursements. The Third Term Loan shall be disbursed, as the Borrower shall direct, upon the satisfaction of the conditions set forth in Sections 2 and 3 of the Loan Agreement. 2.1.5 Fourth Term Loan Disbursements. The Fourth Term Loan shall be disbursed, as the Borrower shall direct, upon the satisfaction of the conditions set forth in Sections 2 and 3 of the Loan Agreement. 6. Amendment to Loan Agreement. Section 1.3 of the Loan Agreement shall be amended and restated in its entirety to add the following sub-sections: 1.3.4 Third Term Loan Interest and Penalties The Third Term Loan shall bear interest on its principal amount outstanding from time to time at a rate per annum equal to one percent (1%) per annum over the Bank's Prime Rate, which shall be adjusted daily when and as the Bank's Prime Rate changes. Upon and after the occurrence of an Event of Default, the Third Term Loan shall bear interest on its principal amount outstanding from time to time at a rate per annum (the "Third Term Loan Default Rate") equal to four percent (4%) per annum over the Bank's Prime Rate, which shall be adjusted daily when and as the Bank's Prime Rate changes. Interest accruing prior to maturity of the Third Term Loan (whether by lapse of time, acceleration, or other wise) shall be due and payable on the first day of each calendar month, commencing with the month following the date on which the first disbursement of the Third Term Loan is made. After maturity of the Third Term Loan (whether by lapse of time, acceleration, or otherwise) accrued interest shall be due and payable upon demand. The Borrower shall pay a late charge of five percent (5%) of the amount of any sum payable to the Bank under this Agreement or any of the Notes that is received by the Bank more than 10 days after the date on which it is due. Such late charges shall be due and payable on the due date of the next installment of principal or interest, together with the regular installment then due. 3 1.3.5 Fourth Term Loan Interest and Penalties The Fourth Term Loan shall bear interest on its principal amount outstanding from time to time at a rate per annum equal to one percent (1%) per annum over the Bank's Prime Rate, which shall be adjusted daily when and as the Bank's Prime Rate changes. Upon and after the occurrence of an Event of Default, the Fourth Term Loan shall bear interest on its principal amount outstanding from time to time at a rate per annum (the "Fourth Term Loan Default Rate") equal to four percent (4%) per annum over the Bank's Prime Rate, which shall be adjusted daily when and as the Bank's Prime Rate changes. Interest accruing prior to maturity of the Fourth Term Loan (whether by lapse of time, acceleration, or other wise) shall be due and payable on the first day of each calendar month, commencing with the month following the date on which the first disbursement of the Fourth Term Loan is made. After maturity of the Fourth Term Loan (whether by lapse of time, acceleration, or otherwise) accrued interest shall be due and payable upon demand. The Borrower shall pay a late charge of five percent (5%) of the amount of any sum payable to the Bank under this Agreement or any of the Notes that is received by the Bank more than 10 days after the date on which it is due. Such late charges shall be due and payable on the due date of the next installment of principal or interest, together with the regular installment then due. 7. Amendment to Loan Agreement. Section 1.4 of the Loan Agreement shall be amended and restated in its entirety to add the following sub-sections: 1.4.4 Third Term Loan Maturity. The Third Term Loan shall be due and payable in monthly installments of $7,738.89 of principal, commencing on November 1, 1997, and a like sum on the first day of each calendar month thereafter until the principal of and accrued and unpaid interest on the Third Term Loan is paid in full, provided that the outstanding principal of and accrued and unpaid interest on the Third Term Loan, if not sooner paid in full, shall be due and payable in full on October 1, 2000 (or earlier as provided in this Agreement or the Third Term Note). 1.4.5 Fourth Term Loan Maturity. The Fourth Term Loan shall be due and payable in monthly installments of $16,666.67 of principal, commencing on August 1, 1997, and a like sum on the first day of each calendar month thereafter until the principal of and accrued and unpaid interest on the Fourth Term Loan is paid in full, provided that the out standing principal of and accrued and unpaid interest on the Fourth Term Loan, if not sooner paid in full, shall be due and payable in full on July 1, 1998 (or earlier as provided in this Agreement or the Fourth Term Note). 8. Amendment to Loan Agreement. Section 2.1(a) of the Loan Agreement shall be amended and restated in its entirety and, as amended, reads as follows: 4 (a) the First Term Note, the Second Term Note, the Third Term Note, the Fourth Term Note, and the Revolving Note (collectively, the "Note"); 9. Delivery of Loan Documents The Borrower shall execute and deliver to the Bank: (a) a First Amendment to Revolving Note in the form attached as Appendix A hereto providing that the Revolving Note shall be due and payable in full on July 1, 1998 (or earlier as provided in the First Amendment to Revolving Note, or the Loan Agreement; (b) a Third Term Note dated July 1, 1997 in the original principal amount of $275,000.00; (c) a Fourth Term Note dated July 1, 1997 in the original principal amount of $200,000.00; (d) a Guaranty dated July 1, 1997 executed by the Guarantors; and (e) an Officer's Certificate dated July 1, 1997. 10. Validity of Agreements. Except as specifically provided in this Agreement, all of the terms, provisions, and covenants of the Borrower in the Loan Agreement, the Note, and the other Loan Documents are now and shall remain in full force and effect and have not been and shall not be modified in any way and are hereby affirmed, confirmed, and ratified in all respects. The Borrower and the Guarantors hereby acknowledge that they have no claims or offsets against, or defenses or counterclaims to, the enforcement by the Bank of the Loan Agreement, the Note and the Amendment, or any of the other Loan Documents. After the date hereof, all references to "Agreement", "hereof", "herein", or the like appearing in the Loan Agreement shall be deemed to be references to the Loan Agreement as herein amended or modified; all references to the "First Term Note," the "Second Term Note," the "Third Term Note," the "Fourth Term Note," and the "Revolving Note" in the Loan Agreement, the Note, or any other Loan Documents shall be deemed to refer to the Note as amended by the Third Amendment to Loan and Security Agreement and any extension, renewal, refinancing, modification, amendment, or restructuring thereof. 11. Miscellaneous Provisions. a. This Agreement shall be governed by the internal laws of the State of Illinois. b. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which, when taken together, shall constitute one and the same instrument. c. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. 5 d. This Agreement represents the complete agreement of the parties with respect to the subject matter hereof and supersedes all prior negotiations and Agreements with respect to the subject matter hereof. In Witness hereof, the parties have executed this Agreement on the date first written above. BORROWER: CTI Industries Corporation Attest: By:/s/Stephen M. Merrick, --------------------- Stephen M. Merrick, By:/s/Howard W. Schwan President ------------------ Howard W. Schwan, Secretary BANK: First American Bank By:/s/ Martin J. Carmody --------------------- Martin J. Carmody, Executive Vice President GUARANTORS: /s/ Stephen M. Merrick --------------------- Stephen M. Merrick,ndividually /s/ John H. Schwan --------------------- John H. Schwan, Individually /s/ Howard W. Schwan --------------------- Howard W. Schwan, Individually EX-10 23 FIRST TERM NOTE Exhibit 10.17 FIRST TERM NOTE $1,100,000.00 Elk Grove Village, Illinois August 22, 1996 Loan No. 600804665-55 FOR VALUE RECEIVED, the undersigned, CTI Industries Corporation, a Delaware corporation (the "Borrower"), hereby promises to pay to the order of First American Bank, an Illinois banking corporation (the "Bank"), the principal sum of One Million One Hundred Thousand and No/100 Dollars ($1,100,000.00) on September 1, 2001 (or earlier as hereinafter provided), or so much thereof as may be advanced by the Bank and evidenced by this Note under the Loan and Security Agreement dated August 22, 1996 between the Borrower and the Bank (the "Loan Agreement"), together with interest to maturity (whether by lapse of time, accel eration, or otherwise) on the balance of principal remaining from time to time outstanding at a fluctuating rate (or such lower interest rate as determined by Section 1.3.4 of the Loan Agreement) per annum equal to one percent (1%) per annum over the Prime Rate announced from time to time by the Bank (which may not be the Bank's lowest rate of interest) which shall be adjusted daily when and as the Bank's Prime Rate changes. Interest shall be calculated on the basis of a 360-day year and actual days. Unless accelerated as hereinafter provided or as otherwise provided in the Loan Agreement, the principal sum outstanding shall be payable in installments of $18,333.33 of principal per month payable on the first day of each calendar month commencing with the month of October, 1996 and on the first day of each succeeding month until this Note is fully paid except that the final payment of principal, if not sooner paid, shall be due on September 1, 2001. Accrued interest shall be paid on the first day of the month following the month in which the first disbursement evidenced by this Note is made under the Loan Agreement and thereafter on the first day of each succeeding month until this Note is fully paid, except that the final payment of interest, if not sooner paid, shall be due on September 1, 2001. If an Event of Default (as defined in the Loan Agreement) shall occur, the outstanding principal of and accrued and unpaid interest on this Note shall become immediately due and payable as provided in the Loan Agreement without notice. All payments on account of the indebtedness evidenced by this Note (other than required prepayments which shall be applied as provided in the Loan Agreement and optional prepayments which shall be applied as provided in this Note) shall be applied first to accrued and unpaid interest and the remainder to principal. Payments on this Note shall be made at the offices of the Bank or at such other office as the legal holder of this Note may, from time to time, designate in writing. Notwithstanding anything to the contrary contained herein, the undersigned agrees to pay a late charge of five percent (5%) of the amount of any monthly installment received more than 10 days after the installment is due. Late charges shall be due and payable on the due date of the next installment of principal or interest, together with the regular installment then due. Upon and after the occurrence of an Event of Default, the undersigned shall pay interest at the rate (the "Default Rate") of four percent (4%) per annum over the Bank's Prime Rate then in effect, which shall be adjusted daily when and as the Bank's Prime Rate changes. -1- First Term Note Page Two Except as otherwise provided in the Loan Agreement, this Note may be prepaid in whole or in part without premium or penalty at any time at the option of the undersigned in accordance with the Loan Agreement. Any partial prepayment made at the option of the undersigned shall be applied against the principal amount outstanding and shall not postpone the due date of any subsequent monthly installment or change the amount of such installment unless the Bank shall otherwise agree in writing. This Note is secured by the Loan Agreement and other documents, agreements, and instruments executed by the Borrower. This Note is made and delivered pursuant to the Loan Agreement and is subject to the further terms and conditions thereof, including the right of the holder to accelerate payment of the principal of and accrued and unpaid interest on this Note and other remedies upon the occurrence of an Event of Default, all of which are hereby incorporated and made a part of this Note by reference. Any waiver of any payment due hereunder or the acceptance by the Bank of partial payments hereunder shall not, at any other time, be taken to be a waiver of the terms of this Note or the Loan Agreement or any other agreement between the Borrower and the Bank. The makers, sureties, guarantors, and endorsers of this Note, if any, jointly and severally hereby waive notice of and consent to any and all extensions of this Note or any part thereof without notice, and each hereby waives demand, presentment for payment, notice of nonpayment, and protest and any and all notice of whatever kind or nature and the exhaustion of legal remedies herein, or any release of liability or any other indulgences or forbearances whatsoever, without releasing or in any way affecting the personal liability of any other party hereunder. This Note shall be the joint and several obligation of all makers, sureties, guarantors, and endorsers and shall be binding upon them, their heirs, personal representatives, and assigns. In the event the holder of this Note shall refer this Note to an attorney for collection, the undersigned agrees to pay, in addition to unpaid principal and interest, all of the costs and expenses incurred in attempting or effecting collection, including reasonable attorneys' fees, whether or not suit is instituted. IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above. Attest: CTI Industries Corporation _________________________ BY: /s/Stephen M. Merrick - ------------------------- ------------------------- Name: ___________________ Stephen M. Merrick Title:___________________ President EX-10 24 SECOND TERM NOTE EXHIBIT 10.18 Second Term Note $2,200,000.00 Elk Grove Village, IL August 19, 1996 Loan No. 600804665-57 FOR VALUE RECEIVED, the undersigned, CTI Industries Corporation, a Delaware corporation (the "Borrower"), hereby promises to pay to the order of First American Bank, an Illinois banking corporation (the "Bank"), the principal sum of Two Million Two Hundred Thousand and No/100 Dollars ($2,200,000.00) on September 1, 2001 (or earlier as hereinafter provided), or so much thereof as may be advanced by the Bank and evidenced by this Note under the Loan and Security Agreement of even date between the Borrower and the Bank (the "Loan Agreement"), together with interest to maturity (whether by lapse of time, acceleration, or otherwise) on the balance of principal remaining from time to time outstanding at a rate per annum equal to eight and three-quarters percent (8.75%). Interest shall be calculated on the basis of a 360-day year and actual days. Unless accelerated as hereinafter provided or as otherwise provided in the Loan Agreement, the principal sum outstanding shall be payable in equal installments of $19,617.26 of principal and interest per month payable on the first day of each calendar month commencing with the month of October 1, 1996 and on the first day of each succeeding month until this Note is fully paid, except that the final payment of principal and interest, if not sooner paid, shall be due on September 1, 2001. If an Event of Default (as defined in the Loan Agreement) shall occur, the outstanding principal of and accrued and unpaid interest on this Note shall become immediately due and payable as provided in the Loan Agreement without notice. All payments on account of the indebtedness evidenced by this Note (other than required prepayments which shall be applied as provided in the Loan Agreement and optional prepayments which shall be applied as provided in this Note) shall be applied first to accrued and unpaid interest and the remainder to principal. Payments on this Note shall be made at the offices of the Bank or at such other office as the legal holder of this Note may, from time to time, designate in writing. Notwithstanding anything to the contrary contained herein, the undersigned agrees to pay a late charge of five percent (5%) of the amount of any monthly installment received more than 10 days after the installment is due. Late charges shall be due and payable on the due date of the next installment of principal or interest, together with the regular installment then due. Second Term Note Page Two Upon and after the occurrence of an Event of Default, the undersigned shall pay interest at the rate (the "Default Rate") of eleven and three-quarters percent (11.75%) per annum. Except as otherwise provided in Section 1.6 of the Loan Agreement, this Note may be prepaid in whole or in part without premium or penalty at any time at the option of the undersigned in accordance with the Loan Agreement. Any partial prepayment made at the option of the undersigned shall be applied against the principal amount outstanding and shall not postpone the due date of any subsequent monthly installment or change the amount of such installment unless the Bank shall otherwise agree in writing. This Note is secured by the Loan Agreement, the Mortgage and other documents, agreements, and instruments executed by the Borrower. This Note is made and delivered pursuant to the Loan Agreement and is subject to the further terms and conditions thereof, including the right of the holder to accelerate payment of the principal of and accrued and unpaid interest on this Note and other remedies upon the occurrence of an Event of Default, all of which are hereby incorporated and made a part of this Note by reference. Any waiver of any payment due hereunder or the acceptance by the Bank of partial payments hereunder shall not, at any other time, be taken to be a waiver of the terms of this Note or the Loan Agreement or any other agreement between the Borrower and the Bank. The makers, sureties, guarantors, and endorsers of this Note, if any, jointly and severally hereby waive notice of and consent to any and all extensions of this Note or any part thereof without notice, and each hereby waives demand, presentment for payment, notice of nonpayment, and protest and any and all notice of whatever kind or nature and the exhaustion of legal remedies herein, or any release of liability or any other indulgences or forbearances whatsoever, without releasing or in any way affecting the personal liability of any other party hereunder. This Note shall be the joint and several obligation of all makers, sureties, guarantors, and endorsers and shall be binding upon them, their heirs, personal representatives, and assigns. In the event the holder of this Note shall refer this Note to an attorney for collection, the undersigned agrees to pay, in addition to unpaid principal and interest, all of the costs and expenses incurred in attempting or effecting collection, including reasonable attorneys' fees, whether or not suit is instituted. IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above. Attest: CTI Industries Corporation /s/ Howard W. Schwan BY: /s/ John H. Scwan - -------------------- --------------------- Howard W. Schwan John H. Schwan Vice President Chief Executive Officer EX-10 25 REVOLVING NOTE EXHIBIT 10.19 REVOLVING NOTE $3,000,000.00 Elk Grove Village, Illinois August 22, 1996 Loan No. 600804665-55 FOR VALUE RECEIVED, the undersigned, CTI Industries Corporation, a Delaware corporation (the "Borrower"), hereby promises to pay to the order of First American Bank, an Illinois banking corporation (the "Bank"), the principal sum of Three Million and No/100 Dollars ($3,000,000.00), or so much thereof as may be advanced by the Bank and evidenced by this Note under the Loan and Security Agreement dated August 19, 1996 between the Borrower and the Bank (the "Loan Agreement"), on September 1, 1997 (or earlier as hereinafter provided), together with interest to maturity (whether by lapse of time, acceleration, or other wise) on the balance of principal remaining from time to time outstanding at a fluctuating rate per annum equal to one percent (1%) per annum over the Prime Rate announced from time to time by the Bank (which may not be the Bank's lowest rate of interest) which shall be adjusted daily when and as the Bank's Prime Rate changes. Interest shall be calculated on the basis of a 360-day year and actual days. Unless accelerated or prepayable as hereinafter provided or as otherwise provided in the Loan Agreement, the principal sum outstanding shall be payable on September 1, 1997. Accrued interest shall be paid on the first day of the month following the month in which the first disbursement evidenced by this Note is made under the Loan Agreement and thereafter on the first day of each succeeding month until this Note is fully paid, except that the final payment of interest, if not sooner paid, shall be due on September 1, 1997. If an Event of Default (as defined in the Loan Agreement) shall occur, the outstanding principal of and accrued and unpaid interest on this Note shall become immediately due and payable as provided in the Loan Agreement without notice. All payments on account of the indebtedness evidenced by this Note (other than required prepayments which shall be applied as provided in the Loan Agreement) shall be applied first to accrued and unpaid interest and the remainder to principal. Payments on this Note shall be made at the offices of the Bank or at such other office as the legal holder of this Note may, from time to time, designate in writing. Notwithstanding anything to the contrary contained herein, the undersigned agrees to pay a late charge of five percent (5%) of the amount of any monthly installment received more than 10 days after the installment is due. Late charges shall be due and payable on the due date of the next installment of interest, together with the regular installment then due. Revolving Note Page Two Upon and after the occurrence of an Event of Default, the undersigned shall pay interest at the rate (the "Default Rate") of four percent (4%) per annum over the Bank's Prime Rate then in effect, which shall be adjusted daily when and as the Bank's Prime Rate changes. Except as otherwise provided in the Loan Agreement, this Note may be prepaid in whole or in part without premium or penalty at any time at the option of the undersigned in accordance with the Loan Agreement. This Note is secured by the Loan Agreement and other documents, agreements, and instruments executed by the Borrower. This Note is made and delivered pursuant to the Loan Agreement and is subject to the further terms and conditions thereof, including the right of the holder to accelerate payment of the principal of and accrued and unpaid interest on this Note and other remedies upon the occurrence of an Event of Default and the required prepayment of the principal of this Note upon certain other events or conditions, all of which are hereby incorporated and made a part of this Note by reference. Any waiver of any payment due hereunder or the acceptance by the Bank of partial payments hereunder shall not, at any other time, be taken to be a waiver of the terms of this Note or the Loan Agreement or any other agreement between the Borrower and the Bank. The makers, sureties, guarantors, and endorsers of this Note, if any, jointly and severally hereby waive notice of and consent to any and all extensions of this Note or any part thereof without notice, and each hereby waives demand, presentment for payment, notice of nonpayment, and protest and any and all notice of whatever kind or nature and the exhaustion of legal remedies herein, or any release of liability or any other indulgences or forbearances whatsoever, without releasing or in any way affecting the personal liability of any other party hereunder. This Note shall be the joint and several obligation of all makers, sureties, guarantors, and endorsers and shall be binding upon them, their heirs, personal representatives, and assigns. In the event the holder of this Note shall refer this Note to an attorney for collection, the undersigned agrees to pay, in addition to unpaid principal and interest, all of the costs and expenses incurred in attempting or effecting collection, including reasonable attorneys' fees, whether or not suit is instituted. IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above. CTI Industries Corporation BY:/s/ John H. Schwan --------------------- John H. Schwan Chief Executive Officer ATTEST /s/ Howard W. Schwan - -------------------- Howard W. Schwan Vice President EX-10 26 MORTGAGE - FIRST AMERICAN BANK EXHIBIT 10.20 THIS INSTRUMENT WAS ) PREPARED BY AND AFTER ) RECORDING RETURN TO: ) Maria F. Cardone ) First American Bank ) 975 Busse Road ) Elk Grove Village, ) Illinois 60007 ) ) PERMANENT INDEX #: ) 13-21-400-014 ) ) STREET ADDRESS: ) 22160 North Pepper Road ) Barrington, IL 60010 ) MORTGAGE THIS MORTGAGE, made August 22, 1996, by and between CTI Industries Corporation, a Delaware corporation (hereinafter referred to as "Mortgagor"), and First American Bank, an Illinois banking corporation (hereinafter referred to as "Mortgagee"); WITNESSETH: WHEREAS, Mortgagor is justly indebted to Mortgagee in the principal sum of Two Million Two Hundred Thousand and No/100 Dollars ($2,200,000.00), evidenced by the certain Second Term Note of even date herewith (the "Note"), made by Mortgagor pursuant to the Loan and Security Agreement, dated August 19, 1996 between Mortgagor and Mortgagee (the "Loan Agreement"), and made payable to the order of and delivered to Mortgagee, in and by which Note the Mortgagor promised to pay the principal sum and interest as set forth in the Note in installments as provided in the Note, with a final maturity date occurring on September 1, 2001 (or earlier as so provided in the Note). NOW, THEREFORE, Mortgagor, to secure the payment of the principal sum of money and the interest and other charges and sums due in accordance with the terms, provisions and limitations of this Mortgage, the Note (and all extensions, renewals, refinancings, modifications, amendments, and replacements thereof), and the Loan Agreement and the performance of the cove nants and agreements herein contained by Mortgagor to be performed, and the performance of the covenants and agreements contained in the Loan Agreement to be performed by the Mortgagor, and also in consideration of the sum of One Dollar ($1.00) in hand paid, the receipt of which is hereby acknowledged, does by these presents MORTGAGE and CONVEY unto Mortgagee, its successors and assigns, the real estate described on Exhibit A attached hereto and all of its estate, right, title and interest therein, situated, lying and being in the City of Barrington, County of Lake, and State of Illinois, which, with the property hereinafter described, is referred to herein as the "Premises"; 1 TOGETHER with all improvements, tenements, easements, fixtures, and appurtenances thereto belonging, and all rents, issues, profits and monies for so long and during all such times as Mortgagor may be entitled thereto (which are pledged primarily and on a parity with the real estate and not secondarily), including, without limiting the foregoing, if and to the extent owned by Mortgagor: (a) all fixtures, fittings, furnishings, appliances, apparatus, equipment and machinery including, without limitation, all gas and electric fixtures, radiators, heaters, engines and machinery, boilers, ranges, ovens, elevators and motors, bathtubs, sinks, water closets, basins, pipes, faucets and other air-conditioning, plumbing and heating fixtures, mirrors, mantles, refrigerating plants, refrigerators, iceboxes, dishwashers, carpeting, furniture, laundry equipment, cooking apparatus and appurtenances, and all building material, supplies and equipment now or hereafter delivered to the Premises and intended to be installed therein; all other fixtures and personal property of whatever kind and nature at present contained in or hereafter placed in any building standing on the Premises; such other goods, equipment, chattels and personal property as are usually furnished by landlords in letting other premises of the character of the Premises; and all renewals or replacements thereof or articles in substitution thereof; and all proceeds and profits thereof and all of the estate, right, title and interest of the Mortgagor in and to all property of any nature whatsoever, now or hereafter situated on the Premises or intended to be used in connection with the operation thereof; (b) all of the right, title and interest of the Mortgagor in and to any fixtures or personal property subject to a lease agreement, conditional sale agreement, chattel mortgage, or security agreement, and all deposits made thereon or therefor, together with the benefit of any payments now or hereafter made thereon; (c) all leases and use agreements of machinery, equipment and other personal property of Mortgagor in the categories hereinabove set forth, under which Mortgagor is the lessee of, or entitled to use, such items; (d) all rents, income, profits, revenues, receipts, leases, tenancies, licenses or other use agreements or arrangements now existing or hereafter created of the Premises or any part thereof including any business conducted thereon) with the right to receive and apply the same to indebtedness due Mortgagee and Mortgagee may demand, sue for and recover such payments but shall not be required to do so; (e) all judgments, awards of damages and settlements hereafter made as a result of or in lieu of any taking of the Premises of any part thereof or interest therein under the power of eminent domain, or for any damage (whether caused by such taking or otherwise) to the Premises or the improvements thereon or any part thereof or interest therein, including any award for change of grade of streets; (f) all proceeds of the conversion, voluntary or involuntary of any of the foregoing into cash or liquidated claims; (g) any monies on deposit for the payment of real estate taxes or special assessments against the Premises or for the payment of premiums on policies of fire and other hazard insurance covering the collateral described hereunder or the Premises, and all proceeds paid for damage done to the collateral described hereunder or the Premises; and (h) all substitutions, replacements, additions and proceeds, including insurance and condemnation award proceeds, of any of the foregoing property; it being understood that the enumeration of any specific articles of property shall in no way exclude or be held to exclude any items of property not specifically mentioned. All of the land, estate and property hereinabove described, real, 2 personal and mixed, whether affixed or annexed or not (except where otherwise hereinabove specified) and all rights hereby conveyed and mortgaged are intended so to be as a unit and are hereby understood, agreed and declared to form a part and parcel of the real estate and to be appropriated to the use of the real estate, and shall be for the purposes of this Mortgage deemed to be real estate and conveyed and mortgaged hereby. As to any of the property aforesaid which (notwithstanding the aforesaid declaration and agreement) does not so form a part and parcel of the real estate, this Mortgage is hereby deemed tobe, as well, a security agreement under the Uniform Commercial Code in effect in the jurisdiction in which the Premises are located (hereinafter referred to as the "UCC") for the purpose of creating a security interest in such property, which Mortgagor hereby grants to Mortgagee as Secured Party (as defined in the UCC), securing the indebtedness and obligations of Mortgagor, and Mortgagee shall have in addition to its rights and remedies hereunder all rights and remedies of a Secured Party under the UCC. As to the above personal property which the UCC classifies as fixtures, this instrument shall constitute a fixture filing and financing statement under the UCC. Mortgagor covenants (a) that it is lawfully seized of the Premises, (b) that the same are subject only to (i) the liens, encumbrances, conditions, restrictions, easements, leases, and other matters, rights or interests disclosed in Schedule B (or an equivalent section or portion) of the mortgage loan title insurance policy delivered to Mortgagee, and (ii) matters disclosed in writing by Mortgagor to Mortgagee, and (c) that it has good right, full power and lawful authority to convey and mortgage the same and that it will forever defend the Premises and the quiet and peaceful possession of the same against the lawful claims of all persons whomsoever. TO HAVE AND TO HOLD the Premises unto the Mortgagee, its successors and assigns, forever, for the purposes and uses herein set forth. IT IS FURTHER UNDERSTOOD AND AGREED THAT: 1. Maintenance, Repair and Restoration of Im provements, Payment of Prior Liens. Mortgagor shall (a) promptly repair, restore or rebuild any buildings or improvements now or hereafter on the Premises which may become damaged or be destroyed; (b) keep the Premises in good condition and repair, without waste, and free from mechanics' liens or other liens or claims for lien not expressly subordinated to the lien hereof (except for mechanics' liens being contested in good faith and as to which adequate reserves have been set aside in conformity with generally accepted accounting principles consistently maintained by Mortgagor); (c) pay when due any indebtedness which may be secured by a lien or charge on the Premises superior to the lien hereof, and upon request exhibit satisfactory evidence of the discharge of such prior lien to Mortgagee; (d) complete within a reasonable time all public improvements and any building or buildings now or at any time in process of construction upon the Premises; (e) comply with all requirements of law, municipal ordinances, or restrictions of record with respect to the Premises and the use thereof; (f) make alterations in the Premises only in accordance with plans and specifications duly approved by Mortgagee; (g) suffer or permit no change in the general nature of the occupancy of the Premises, without Mortgagee's written consent; (h) initiate or acquiesce in no zoning variation or reclassification, without Mortgagee's written consent; (i) pay the indebtedness secured hereby when due according to the terms hereof or of the Loan Agreement and the Note. 3 2. Payment of Taxes. Mortgagor shall pay, before any penalty attaches (except to the extent diligently contested in good faith by appropriate proceedings and provided proper reserves are established on the books of Mortgagor), all general taxes, and shall pay special taxes, special assessments, water charges, sewer service charges, and other charges against the Premises when due, and shall furnish to Mortgagee paid tax receipts within sixty (60) days after the final due date of such taxes. Mortgagee reserves the right to require Mortgagor to make monthly deposits into an escrow account established and controlled by Mortgagee for the payment of taxes under terms and in an amount satisfactory to Mortgagee. 3. Insurance. Mortgagor shall cause all buildings and improvements now or hereafter situated on the Premises to be insured against loss or damage by fire and such other hazards as may be requested from time to time by Mortgagee, including, but not limited to, hazards ordinarily insured against by other companies similarly situated in operating like businesses and properties, and including comprehensive public liability insurance as required by Mortgagee and flood insurance if the Premises lie within an area designated by any government agency as a flood risk area. All policies of insurance to be furnished hereunder shall be in forms, companies and amounts satisfactory to Mortgagee, with mortgagee clauses attached to all policies in favor of and in form satisfactory to Mortgagee, including a provision requiring that the coverage evidenced thereby shall not be terminated or materially modified without thirty (30) days' prior written notice to Mortgagee. Without limiting the generality of the foregoing, property and casualty insurance shall be in amounts and forms insuring the full replacement cost of fixed assets of Mortgagor. All policies shall name Mortgagee as an additional insured and as loss payee. Mortgagor shall deliver all policies, including additional and renewal policies, to Mortgagee, and, in the case of insurance about to expire, shall deliver renewal policies not less than ten (10) days prior to their respective dates of expiration. Mortgagor shall not take out separate insurance concurrent in form or contributing in the event of loss with that required to be maintained hereunder unless Mortgagee is included thereon under a standard mortgagee clause acceptable to Mortgagee. Mortgagor shall immediately notify Mortgagee whenever any such separate insurance is taken out and shall promptly deliver to Mortgagee the policy or policies of such insurance. 4. Adjustment of Losses With Insurer and Application of Proceeds of Insurance. In case of loss or damage by fire or other casualty, Mortgagee is authorized to (a) settle and adjust any claim under insurance policies which insure against such risks, or (b) allow Mortgagor to agree with the insurance company or companies on the amount to be paid in regard to such loss. In either case, Mortgagee is authorized to collect and issue a receipt for any such insurance money. At the option of Mortgagee, such insurance proceeds may be applied in reduction of the indebtedness secured hereby, whether due or not, or may be held by Mortgagee and used to reimburse Mortgagor for the cost of the rebuilding or restoration of buildings or improvements on the Premises. Irrespective of whether such insurance proceeds are used to reimburse Mortgagor for the cost of rebuilding or restoration or not, and irrespective of whether such insurance proceeds are or are not adequate for such purpose, the buildings and improvements shall be so restored 4 or rebuilt so as to be of at least equal value and substantially the same character as prior to such damage or destruction. If the cost of rebuilding, repairing or restoring the building and improvements can reasonably exceed the sum of TWENTY-FIVE THOUSAND AND 00/100 DOLLARS ($25,000.00), then Mortgagor shall obtain Mortgagee's approval of plans and specifications for such work before such work shall be commenced. In any case, where the insurance proceeds are made available for rebuilding and restoration, such proceeds shall be disbursed in the manner and under the conditions that Mortgagee may require and upon Mortgagee being furnished with satisfactory evidence of the estimated cost of completion thereof and with architect's certificates, waivers of lien, contractor's and subcontractors' sworn statements and other evidence of cost and payments so that Mortgagee can verify that the amounts disbursed from time to time are represented by completed and in place work and that the work is free and clear of mechanics' lien claims. If the estimated cost of completion exceeds the amount of the insurance proceeds available, Mortgagor immediately shall, on written demand of Mortgagee, deposit with Mortgagee in cash the amount of such estimated excess cost. No payment made prior to the final completion of the work shall exceed ninety percent (90%) of the value of the work performed from time to time, and at all times the undisbursed balance of the proceeds remaining in the hands of the disbursing party shall be at least sufficient to pay for the cost of completion of the work free and clear of liens. Any surplus which may remain out of the insurance proceeds after payment of the cost of building or restoration shall, at the option of Mortgagee, be applied on account of the indebtedness secured hereby or be paid to any party entitled thereto, without interest. 5. Condemnation. Mortgagor hereby assigns, transfers and sets over unto Mortgagee the entire proceeds of any award or any claim for damages for any of the Premises taken or damaged under the power of eminent domain or by condemnation. Mortgagee may elect to apply the proceeds of the award upon or in reduction of the indebtedness secured hereby, whether due or not, or make the proceeds available for restoration or rebuilding of the Premises. Irrespective of whether such proceeds are made available for restoration or rebuilding, and irrespective of whether such proceeds are adequate for such purpose, the buildings and improvements shall be restored or rebuilt in accordance with plans and specifications to be submitted to and approved by Mortgagee. In the event said proceeds are made available for rebuilding or restoration, the proceeds of the award shall be disbursed in the manner and under the conditions that Mortgagee may require and paid out in the same manner as provided in Section 4 hereof for the payment of insurance proceeds toward the cost of rebuilding or restoration. In such event, if the estimated cost to complete rebuilding or restoration exceeds the proceeds of the condemnation awards, Mortgagor immediately shall, on written demand of Mortgagee, deposit with Mortgagee in cash the amount of such excess cost. Any surplus which may remain out of any such award after payment of such cost of building or restoration shall, at the option of Mortgagee, be applied on account of the indebtedness secured hereby or be paid to any party entitled thereto, without interest. 6. Effect of Extensions of Time. If the payment of the indebtedness secured hereby or any part thereof is extended or varied or if any part of any security for the payment of the indebtedness secured hereby is released or additional security is taken, all persons now or at any time hereafter liable therefor, or interested in the Premises, shall be held to assent to such extension, variation, or taking of additional security or release, and their liability and the lien and all provisions of this Mortgage shall continue in full force, the right of recourse against all such persons being expressly reserved by Mortgagee, notwithstanding such extension, variation, taking of additional security or release. 5 7. Effect of Changes in Laws Regarding Taxation. In the event of the enactment after this date of any law of the state in which the Premises is located deducting from the value of the land for the purpose of taxation any lien thereon, or imposing upon Mortgagee the payment of the whole or any part of the taxes or assessments or charges or liens herein required to be paid by Mortgagor, or changing in any way the laws relating to the taxation of mortgages or debts secured by mortgages or Mortgagee's interest in the Premises, or the manner of collection of taxes, so as to affect this Mortgage or the indebtedness secured hereby or the holders thereof, then, and in any event, Mortgagor, upon demand by Mortgagee, shall pay such taxes or assessments, or reimburse Mortgagee therefor, provided, however, that if in the opinion of counsel for Mortgagee (a) it might be unlawful to require Mortgagor to make such payment or (b) the making of such payment might result in the imposition of interest beyond the maximum amount permitted by law, then and in such event, Mortgagee may elect, by notice in writing given to Mortgagor, to declare all of the indebtedness secured hereby to be and become due and payable sixty (60) days after the giving of such notice. 8. Mortgage as Security. The proceeds of the loan secured hereby are to be disbursed by Mortgagee to Mortgagor in accordance with the provisions contained in the Loan Agreement. All advances and indebtedness arising and accruing under the Loan Agreement from time to time, whether or not the total amount thereof may exceed the face amount of the Note, shall be secured hereby to the same extent as though the Loan Agreement were fully incorporated in this Mortgage. In the event of any inconsistencies or conflicts between this Mortgage and the Loan Agreement, the terms of the Loan Agreement shall govern and control. 9. Mortgagee's Performance of Defaulted Acts. In case of default herein, Mortgagee may, but need not, make any payment or perform any act herein required of Mortgagor in any form and manner deemed expedient, and may, but need not, make full or partial payments of principal or interest on prior encumbrances, if any, and purchase, discharge, compromise or settle any tax lien or other prior lien or title or claim thereof, or redeem from any tax sale or forfeiture affecting the Premises or consent to any tax or assessment or cure any default of the landlord in any lease of the Premises. All monies paid for any of the purposes herein authorized and all expenses paid or incurred in connection therewith, including attorneys' fees, and any other monies advanced by Mortgagee in regard to any tax or any leases of the Premises or to protect the Premises and the lien of this Mortgage, shall be so much additional indebtedness secured hereby, and shall become immediately due and payable on demand and with interest thereon at the rate per annum applicable under the Note upon and after an Event of Default under the Loan Agreement. Inaction of Mortgagee shall never be considered as a waiver of any right accruing to it on account of any default on the part of Mortgagor. 10. Mortgagee's Reliance on Tax Bills. Mortgagee in making any payment hereby authorized: (a) relating to taxes and assessments, may do so according to any bill, statement or estimate procured from the appropriate public office without inquiry into the accuracy of such bill, statement or estimate or into the validity of any tax, assessment, sale, forfeiture, tax lien or title or claim thereof; or (b) for the purchase, discharge, compromise or settlement of any other prior lien, may do so without inquiry as to the validity or amount of any claim for lien which may be asserted. 6 11. Acceleration of Indebtedness in Case of Default. If (a) default is made in the due and punctual payment of the principal (or any part(s) thereof) of the Note, or the Mortgagor fails to pay, within (10) days after the date on which payment thereof is due, any installment of interest on the Note or any other sum due and payable under the Loan Agreement, the Note, or this Mortgage; or (b) default shall be made in the due observance or performance of any other of the covenants, agreements or conditions herein contained, required to be kept or performed or observed by Mortgagor; or (c) default shall be made in the due observance or performance of any of the covenants, agreements or conditions contained, required to be kept or observed by Mortgagor in any other instrument given at any time to secure the payment of the Note; or (d) an Event of Default shall occur under the Loan Agreement; or (e) Mortgagor or any guarantor of the indebtedness secured hereby becomes insolvent or bankrupt or admits in writing its inability to pay its debts as they mature, or makes an assignment for the benefit of creditors, or applies for or consents to the appointment of a trustee or receiver for a major portion of its property or business; or (f) any petition is filed or proceeding is commenced for any attachment, levy, or seizure of any property of Mortgagor or any guarantor of the indebtedness subject to a lien in favor of Mortgagee; or any judgment or judgments, writ or writs, warrant or warrants of attachment, or any similar process or processes in an aggregate amount in excess of $25,000.00 shall be entered or filed against Mortgagor or any guarantor of the indebtedness or against any property or assets of Mortgagor or any guarantor of the indebtedness and remains unvacated, unbonded or unstayed for a period of sixty (60) days; or (g) bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings or other proceedings for relief under any bankruptcy law or similar law for the relief of debtors is instituted by or against Mortgagor or any guarantor of the indebtedness and, if instituted against Mortgagor or any guarantor of the indebtedness, are allowed against Mortgagor or any guarantor of the indebtedness or are consented to or are not dismissed within sixty (60) days after such institution, then and in every such case if default shall be continuing the whole of the indebtedness secured hereby shall, at once, at the option of Mortgagee, become immediately due and payable without notice to Mortgagor. 12. Due on Sale -- Due on Encumbrance. Mortgagee may at its option accelerate the maturity date of the indebtedness evidenced by the Note, whereupon the whole of the indebtedness secured hereby shall at once become immediately due and payable (without any cure or grace period), if Mortgagor shall (whether voluntarily or by operation of law), without the prior written consent of Mortgagee, sell, mortgage, encumber, hypothecate or otherwise transfer the Premises or any part thereof, or otherwise cease to own the Premises. 13. Application of Funds. If while any insurance proceeds or condemnation awards are being held by Mortgagee to reimburse Mortgagor for the cost of rebuilding or restoration of buildings or improvements on the Premises, as set forth in Sections 4 or 5 hereof, or while Mortgagor is holding deposits for the payment of taxes, Mortgagee shall be or become entitled to, and shall accelerate the indebtedness secured hereby, then and in such event, Mortgagee shall be entitled to apply all such insurance proceeds and condemnation awards and deposits then held by it in reduction of the indebtedness secured hereby, and any excess held by it over the amount of indebtedness then due shall be returned to Mortgagor or any party entitled thereto, without interest. 7 14. Foreclosure; Expense of Litigation. When the indebtedness hereby secured, or any part thereof, shall become due, whether by acceleration or otherwise, Mortgagee shall have the right to foreclose the lien of this Mortgage for such indebtedness or part thereof. In any civil action to foreclose the lien of this Mortgage, there shall be allowed and included as additional indebtedness in the order or judgment for sale all expenditures and expenses which may be paid or incurred by or on behalf of Mortgagee for attorneys' fees, appraiser's fees, outlays for documentary and expert evidence, stenographers' charges, publication costs, and costs (which may be estimated as to items to be expended after entry of the order or judgment) of procuring all such abstracts of title, title searches and examinations, title insurance policies, Torrens certificates, and similar data and assurances with respect to title as Mortgagee may deem reasonably necessary either to prosecute such civil actions or to evidence to bidders at any sale which may be had pursuant to such order or judgment the true condition of the title to or the value of the Premises. All expenditures and expenses of the nature mentioned in this Section, and such expenses and fees as may be incurred in the protection of the Premises and maintenance of the lien of this Mortgage, including the fees of any attorney employed by Mortgagee in any litigation or proceeding affecting this Mortgage, the Note or the Premises, including probate, bankruptcy and appellate proceedings, or in preparations for the commencement or defense of any proceeding or threatened civil actions or proceeding shall be immediately due and payable by Mortgagor, with interest thereon at the rate of interest applicable under the Note upon the occurrence of an Event of Default under the Loan Agreement, and shall be secured by this Mortgage. 15. Application of Proceeds of Foreclosure Sale. The proceeds of any foreclosure sale of the Premises shall be distributed and applied in the following order of priority: first, on account of all costs and expenses incident to the foreclosure proceedings, including all such items as are mentioned in Section 14 hereof; second, all other items which may under the terms hereof or the Loan Agreement constitute secured indebtedness additional to that evidenced by the Note, with interest thereon as provided herein or in the Loan Agreement; third, all principal and interest remaining unpaid on the Note; and fourth, any overplus to Mortgagor, its successors or assigns, as their rights may appear. 16. Appointment of Receiver. Upon, or at any time after the filing of a complaint to foreclose this Mortgage, the court in which such complaint is filed may appoint a receiver of the Premises. Such appointment may be made either before or after sale, without notice, without regard to the solvency or insolvency of Mortgagor at the time of application for such receiver and without regard to the then value of the Premises or whether the same shall be then occupied as a homestead, and Mortgagee or any holder of the Note may be appointed as such receiver. Such receiver shall have power to collect the rents, issues and profits of the Premises during the pendency of such foreclosure suit 8 and during the full statutory period of redemption, whether there be redemption or not, as well as during any further times when Mortgagor, except for the intervention of such receiver, would be entitled to collect such rents, issues and profits, and all other powers which may be necessary or are usual in such cases for the protection, possession, control, management and operation of the Premises during the whole of such period. The court from time to time may authorize the receiver to apply the net income in his hands to the payment in whole or in part of: (a) the indebtedness secured hereby, or by any judgment or order foreclosing this Mortgage, or any tax, special assessment or other lien which may be or become superior to the lien hereof or of such decree, provided such application is made prior to foreclosure sale; and (b) the deficiency in case of a sale and deficiency. 17. Mortgagee's Right of Possession in Case of Default. In any case in which under the provisions of this Mortgage, Mortgagee has a right to institute foreclosure proceedings, whether before or after the whole indebtedness secured hereby is declared to be immediately due, or whether before or after the institution of legal proceedings to foreclose the lien hereof or before or after sale thereunder, forthwith, upon demand of Mortgagee, Mortgagor shall surrender to Mortgagee and Mortgagee shall be entitled to take actual possession of the Premises or any part thereof personally, or by its agent or attorneys. In such event Mortgagee in its discretion may, in accordance with law, enter upon and take and maintain possession of all or any part of the Premises, together with all documents, books, records, papers and accounts of Mortgagor or the then owner of the Premises relating thereto, and may exclude Mortgagor, its agents or servants, wholly therefrom and may as attorney in fact or agent of Mortgagor, or in its own name as Mortgagee and under the powers herein granted, hold, operate, manage and control the Premises and conduct the business, if any, thereof, either personally or by its agents, and with full power to use such measures, legal or equitable, as in its discretion or in the discretion of its successors or assigns may be deemed proper or necessary to enforce the payment or security of the avails, rents, issues, and profits of the Premises, including actions for the recovery of rent, actions in forcible detainer and actions in distress for rent, and with full power to: (a) cancel or terminate any lease or sublease for any cause or on any ground which would entitle Mortgagor to cancel the same; (b) elect to disaffirm any lease or sublease which is then subordinate to the lien hereof; (c) extend or modify any then existing leases and to make new leases, which extensions, modifications and new leases may provide for terms to expire, or for options to lessees to extend or renew terms to expire, beyond the maturity date of the indebtedness hereunder and beyond the date of the issuance of a deed or deeds to a purchaser or purchasers at a foreclosure sale, it being understood and agreed that any such leases, and the options or other such provisions to be contained therein, shall be binding upon Mortgagor and all persons whose interests in the Premises are subject to the lien of this Mortgage and upon the purchaser or purchasers at any foreclosure sale, notwithstanding any redemption from a foreclosure of this Mortgage, discharge of the indebtedness secured hereby, satisfaction of any foreclosure decree, or issuance of any certificate of sale or deed to any purchaser; (d) make all necessary or proper repairs, decorating, renewals, replacements, alterations, additions, betterments and improvements to the Premises as to it may seem judicious; (e) insure and reinsure the same and all risks incidental to Mortgagee's possession, operation and management thereof; and (f) receive all of such avails, rents, 9 issues and profits, hereby granting full power and authority to exercise each and every of the rights, privileges and powers herein granted at any and all times hereafter, without prior notice to Mortgagor provided that Mortgagor shall give subsequent notice thereof. Mortgagee shall not be obligated to perform or discharge, nor does it hereby undertake to perform or discharge, any obligation, duty or liability under any leases. Mortgagor shall and does hereby agree to indemnify and hold Mortgagee harmless of and from any and all liability, loss, damage, or expense (including reasonable attorneys' fees) which Mortgagee may or might incur under said leases or under or by reason of the assignment thereof and of and from any and all claims and demands whatsoever which may be asserted against it by reason of any alleged obligations or undertakings on its part to perform or discharge any of the terms, covenants or agreements contained in said leases. Should Mortgagee incur any such liability, loss or damage, under said leases or under or by reason of the assignment thereof, or in the defense of any claims or demands, the amount thereof, including costs, expenses and reasonable attorneys' fees, shall be secured hereby, and Mortgagor shall reimburse Mortgagee therefor immediately upon demand. 18. Application of Income Received by Mortgagee. Mortgagee, in the exercise of the rights and powers conferred herein, shall have full power to use and apply the avails, rents, issues and profits of the Premises to the payment of or on account of the following, in such order as Mortgagee may determine: (a) to the payment of the operating expenses of the Premises, including cost of management, established claims for damages, if any, and premiums on insurance hereinabove authorized; (b) to the payment of taxes and special assess ments now due or which may hereafter become due on the Premises; (c) to the payment of all repairs, replacements, alterations, additions, betterments, and improvements of the Premises and of placing the Premises in such condition as will, in the judgment of Mortgagee, make it readily marketable; (d) to the payment of any indebtedness secured hereby or any deficiency which may result from any foreclosure sale. 19. Rights Cumulative. Each right, power and remedy herein conferred upon Mortgagee is cumulative and in addition to every other right, power or remedy, express or implied, given now or hereafter existing, at law or in equity, and each and every right, power and remedy herein set forth or otherwise so existing may be exercised from time to time as often and in such order as may be deemed expedient by Mortgagee, and the exercise or the beginning of the exercise of one right, power or remedy shall not be a waiver of the right to exercise at the same time or thereafter any other right, power or remedy, and no delay or omission of Mortgagee in the exercise of any right, power or remedy accruing hereunder or arising otherwise shall impair any such right, power or remedy, or be construed to be a waiver of any default or acquiescence therein. 10 20. Compliance With Illinois Mortgage Foreclosure Law. In the event that any provision in this Mortgage shall be inconsistent with any provision of the Illinois Mortgage Foreclosure Law (Sections 735 ILCS 5/15-1101 et seq., Illinois Compiled Statutes) (herein called the "Act"), the provisions of the Act shall take precedence over the provisions of this Mortgage, but shall not invalidate or render unenforceable any other provision of this Mortgage that can be construed in a manner consistent with the Act. If any provision of this Mortgage shall grant to Mortgagee any rights or remedies upon default of Mortgagor which are more limited than the rights that would otherwise be vested in Mortgagee under the Act in the absence of said provision, Mortgagee shall be vested with the rights granted in the Act to the full extent permitted by law. Without limiting the generality of the foregoing, all expenses incurred by Mortgagee to the extent reimbursable under Sections 735 ILCS 5/15-1510 and 15-1512 of the Act, whether incurred before or after any decree or judgment of foreclosure, and whether enumerated in Section 14 of this Mortgage, shall be added to the indebtedness secured by this Mortgage or by the judgment of foreclosure. 21. Waiver of Statutory Rights. Mortgagor shall not apply for or avail itself of any appraisal, valuation, stay, extension or exemption laws, or any so-called "Moratorium Laws," now existing or hereafter enacted, in order to prevent or hinder the enforcement or foreclosure of this Mortgage, but hereby waives the benefit of such laws. Mortgagor, for itself, and all who may claim through or under it, waives any and all right to have the property and estates comprising the Premises marshalled upon any foreclosure of the lien hereof and agrees that any court having jurisdiction to foreclose such lien may order the Premises sold as an entirety. Mortgagor does hereby expressly waive any and all rights of redemption from any order, judgment or decree of foreclosure of this Mortgage on behalf of Mortgagor and each and every person acquiring any interest in or title to the Premises subsequent to the date of this Mortgage. Mortgagor does hereby further expressly waive, to the extent now or hereafter permitted by law, all rights of reinstatement of this Mortgage pursuant to Section 15-1602 of the Act. 22. Waiver of Notice. No action for the enforcement of the of the lien or of any provision hereof shall be subject to any defense which would not be good and available to the party interposing same in an action at law upon the Note. 23. Release upon Payment and Discharge of Mortgagor's Obligations. Mortgagee shall release this Mortgage and the lien thereof by proper instrument upon payment and discharge of all indebtedness secured hereby, in accordance with the terms and conditions in the Note and the Loan Agreement, and including a reasonable fee to Mortgagee for the execution of such release. 24. Filing and Recording Fees. Mortgagor will pay all filing, registration or recording fees, and all expenses incident to the execution and acknowledgement of this Mortgage and all federal, state, county, and municipal taxes, and other taxes, duties, imposts, assessments and charges arising out of or in connection with the execution and delivery of the Note and this Mortgage. 25. Compliance With Laws. Except as disclosed in writing to Mortgagee on or before the date hereof, the Premises and its present use complies, and at all times shall comply, with all applicable laws and governmental regulations including, without limitation, all applicable federal, state and local laws pertaining to air and water quality, hazardous 11 waste, waste disposal, air emissions and other environmental matters, all zoning and other land use matters, and utility availability. Except as disclosed in writing to Mortgagee on or before the date hereof, neither Mortgagor nor, to the best of Mortgagor's knowledge, any previous owner or occupier of the Premises, used, generated, stored or disposed of, on, under or about the Premises any Hazardous Materials. For purposes of this Mortgage, Hazardous Materials shall mean and include any hazardous substance, hazardous material, toxic substance, solid waste, or any pollutant or contaminant now or hereafter defined as such in (or for purposes of) the Comprehensive Environmental Response, Compensation, and Liability Act, any so-called applicable "Superfund" or "Superlien" or "Non-priority lien" law, the Toxic Substances Control Act, or the Resource Conservation and Recovery Act, all as amended from time to time. Further, to the best of Mortgagor's knowledge, except as disclosed in writing to Mortgagee on or before the date hereof, the Premises does not contain any underground tanks and does not contain and has not in the past contained any asbestos-containing material in friable form. Mortgagor shall protect, indemnify and hold harmless Mortgagee, its directors, officers, employees, agents, successors and assigns, from and against any and all loss, damage, cost, expense or liability (including attorneys' fees and costs) directly or indirectly arising out of or attributable to the use, generation, manufacture, production, storage, release, threatened release, discharge, disposal or presence of Hazardous Materials or asbestos on, under or about the Premises including without limitation (a) all foreseeable consequential damages; and (b) the costs of any required or necessary repair, cleanup or detoxification of the Premises and the preparation and implementation of any closure, remedial or other required plans. This indemnity shall survive the payment of the Note and the reconveyance or release of the lien of this Mortgage, or the extinguishment of the lien by foreclosure or action in reconveyance or extinguishment or deed in lieu of foreclosure. This indemnity shall not apply to any claims, losses, liabilities, damages, penalties, and expenses which are incurred by the Mortgagee solely as a direct result of any act or omission of Mortgagee and which are not the result, in whole or in part, of any pre-existing condition or event. In the event that any investigation, site monitoring, containment, clean-up, removal, restoration or other remedial work of any kind or nature (the "Remedial Work") is reasonably necessary or desirable under any applicable local, state or federal law or regulation, any judicial order, or by any governmental entity or person because of, or in connection with, the current or future presence, suspected presence, release or suspected release of any Hazardous Materials in or about the air, soil, ground water, surface water or soil vapor at, on, about, under or within the Premises (or any portion thereof), Mortgagor shall within thirty (30) days after written demand for performance thereof by Mortgagee (or such shorter period of time as may be required under any applicable law, regulation, order or agreement), commence and thereafter diligently prosecute to completion, all the Remedial Work. All Remedial Work shall be performed by contractors approved in advance by Mortgagee, and under the supervision of a consulting engineer approved by Mortgagee. All costs and expenses of Remedial Work shall be paid by Mortgagor including, without limitation, Mortgagee's reasonable attorneys' fees and costs incurred in connection with monitoring or review of the Remedial Work. In the event Mortgagor shall fail to timely prosecute to completion, the Remedial Work, Mortgagee may, but shall not be required to, cause the Remedial Work to be performed and all costs and expenses thereof, or incurred in connection therewith, shall become part of the indebtedness secured hereby. 12 26. Indemnity. Mortgagor agrees to indemnify and hold harmless Mortgagee from and against any and all losses, liabilities, suits, obligations, fines, damages, judgments, penalties, claims, charges, costs and expenses (including attorneys' fees and disbursements) which may be imposed on, incurred or paid by or asserted against Mortgagee by reason or on account of, or in connection with, (a) any willful misconduct of Mortgagor or any default by Mortgagor hereunder or under any other documents executed at any time to secure the payment of the Note, (b) Mortgagee's good faith and commercially reasonable exercise of any of its rights and remedies, or the performance of any of its duties, hereunder or under any other documents executed at any time to secure payment of the Note, (c) the construction, reconstruction or alteration of the Premises, (d) any negligence of Mortgagor, or any negligence or willful misconduct of any lessee of the Premises, or any of their respective agents, contractors, subcontractors, servants, employees, licensees or invitees or (e) any accident, injury, death or damage to any person or property occurring in, on or about the Premises or any street, drive, sidewalk, curb or passageway adjacent thereto, except for the willful misconduct or gross negligence of the indemnified person. Any amount payable to Mortgagee under this Section shall be due and payable within ten (10) days after demand therefor and receipt by Mortgagor of a statement from Mortgagee setting forth in reasonable detail the amount claimed and the basis therefor, and such amounts shall bear interest, from and after the date such amounts are paid by Mortgagee until paid in full by Mortgagor, at the rate of interest applicable under the Note upon the occurrence of an Event of Default under the Loan Agreement. Mortgagor's obligations under this Section shall not be affected by the absence or unavailability of insurance covering the same or by the failure or refusal by any insurance carrier to perform any obligation on its part under any such policy of covering insurance. If any claim, action or proceeding is made or brought against Mortgagor and/or Mortgagee which is subject to the indemnity set forth in this Section, Mortgagor shall resist or defend against the same, if necessary, in the name of Mortgagee, by attorneys for Mortgagor's insurance carrier (if the same is covered by insurance) or otherwise by attorneys approved by Mortgagee. Notwithstanding the foregoing, Mortgagee, in its discretion, may engage its own attorneys to resist or defend, or assist therein, and Mortgagor shall pay, or, on demand, shall reimburse Mortgagee for the payment of, the reasonable fees and disbursements of Mortgagee's attorneys. 27. Giving of Notice. Any notice which either party hereto may desire or be required to give to the other party shall be in writing and shall be given in person or by the mailing thereof by certified mail addressed to Mortgagor at: CTI Industries Corporation, 22160 North Pepper Road, Barrington, IL 60010 or to Mortgagee at: First American Bank, 975 Busse Road, Elk Grove Village, Illinois 60007, or at such other place as any party hereto may by notice in writing designate as a place for service of notice. 28. Miscellaneous. (a) This Mortgage, and all provisions hereof, shall extend to and be binding upon Mortgagor and its successors, grantees and assigns, any subsequent owner or owners of the Premises and all persons claiming under or through Mortgagor, and the word "Mortgagor" when used herein shall include all such persons and all persons liable 13 for the payment of the indebtedness secured hereby or any part thereof, whether or not such persons shall have executed the Note or this Mortgage. The word "Mortgagee" when used herein shall include the successors and assigns of Mortgagee named herein, and the holder or holders, from time to time, of the Note. The word "indebtedness" when used herein shall include the principal sum evidenced by the Note, together with all interest, additional interest, and late charges thereon and other sums due thereunder and all other sums due to Mortgagee under the Loan Agreement or this Mortgage. The word "Note" when used herein shall include all extensions, renewals, refinancings, modifications, amendments, and replacements thereof. (b) In the event one or more of the provisions contained in this Mortgage or the Note or in any other security documents given to secure the payment of the Note shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall, at the option of Mortgagee, not affect any other provision of this Mortgage, and this Mortgage shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein or therein. This Mortgage shall be construed and governed by the laws of the State of Illinois. (c) At all times, regardless of whether any loan proceeds have been disbursed, this Mortgage secures (in addition to any loan proceeds disbursed from time to time) the payment of any and all expenses and advances due to or incurred by Mortgagee in connection with the indebtedness secured hereby, provided, however, notwithstanding anything to the contrary herein, the total aggregate indebtedness secured by this Mortgage shall not exceed an amount equal to two (2) times the face amount of the Note. (d) No offset or claim that Mortgagor now has or may have in the future against Mortgagee shall relieve Mortgagor from paying any amounts due under the Note or from performing any other obligations contained herein or secured hereby. (e) Mortgagor shall not by act or omission permit any building or other improvement on the Premises not subject to the lien of this Mortgage to rely on the Premises or any part thereof or any interest therein to fulfill any municipal or governmental requirement, and Mortgagor hereby assigns to Mortgagee any and all rights to give consent for all or any portion of the Premises or any interest therein to be used. Similarly, no building or other improvement on the Premises shall rely on any premises not subject to the lien of this Mortgage or any interest therein to fulfill any governmental or municipal requirement. Mortgagor shall not by act or omission impair the integrity of the Premises as zoned for its present or intended use. Any act or omission by Mortgagor which would result in a violation of any of the provisions of this Section shall be void. (f) Mortgagee shall have the right to inspect the Premises at all reasonable times and access thereto shall be permitted for that purpose. 14 IN WITNESS WHEREOF, Mortgagor has executed this instrument the day and year first written above. CTI Industries Corporation BY:/s/ John H. Schwan --------------------- John H. Schwann, Chief Executive Officer ATTEST: /s/ Howard W. Schwan - -------------------- Howard W. Schwann, Vice President STATE OF ILLINOIS ) ) SS COUNTY OF _______ ) I, , a Notary Public in and for said County in the State aforesaid, DO HEREBY CERTIFY THAT John H. Schwann and Howard W. Schwann, personally known to me and known by me to be the Chief Executive Officer and Vice President, respectively, of CTI Industries Corporation in whose name the above and foregoing instrument is executed, appeared before me this day in person and acknowledged that they signed and deliv ered the said instrument as their free and voluntary act and as the free and voluntary act of said CTI Industries Corporation, for the uses and purposes therein set forth, and the said John H. Schwann then and there acknowledged that he, as custodian of the corporate seal of said CTI Industries Corporation did affix the said corporate seal to said instrument as his free and voluntary act and as the free and voluntary act of said CTI Industries Corporation, for the uses and purposes therein set forth. GIVEN under my hand and Notarial Seal this______day of_______________ , 19_____. _________________________ Notary Public My Commission Expires: ______________________________ 15 EXHIBIT A ______________ Legal Description _________________________ EX-10 27 GUARANTY EXHIBIT 10.21 GUARANTY FOR VALUE RECEIVED and in consideration of any loan or other financial accommodation heretofore or hereafter at any time made or granted to CTI Industries Corporation, a Delaware corporation (hereinafter called the "Borrower") by First American Bank, an Illinois banking corporation (hereinafter called the "Bank"), the undersigned hereby unconditionally guarantee(s) the full and prompt payment when due, whether by acceleration or otherwise, and at all times thereafter, of all obligations of the Borrower to the Bank, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, or now or hereafter existing, or due or to become due (all such obligations being hereinafter collectively called the "Obligations"), and the undersigned further agree(s) to pay all expenses (including attorneys' fees and legal expenses) paid or incurred by the Bank in endeavoring to collect the Obligations, or any part thereof, and in enforcing this Guaranty. 1. Each of the undersigned agrees that, in the event of the death, incompetency, dissolution or insolvency of the Borrower or such undersigned, or the inability of the Borrower or such undersigned to pay debts as they mature, or an assignment by the Borrower or such undersigned for the benefit of creditors, or the institution of any proceeding by or against the Borrower or such undersigned alleging that the Borrower or such undersigned is insolvent or unable to pay debts as they mature, and if such event shall occur at a time when any of the Obligations may not then be due and payable, such undersigned will pay to the Bank forthwith the full amount that would be payable hereunder by such undersigned if all Obligations were then due and payable. 2. This Guaranty shall in all respects be a continuing, absolute and unconditional guaranty, and shall remain in full force and effect (notwithstanding, without limitation, the death, incompetency or dissolution of any of the undersigned or that at any time or from time to time all Obligations may have been paid in full). 3. The undersigned further agree(s) that, if at any time all or any part of any payment theretofore applied by the Bank to any of the Obligations is or must be rescinded or returned by the Bank for any reason whatsoever (including, without limitation, the insolvency, bankruptcy or reorganization of the Borrower), such Obligations shall, for the purposes of this Guaranty, to the extent that such payment is or must be rescinded or returned be deemed to have continued in existence, notwithstanding such application by the Bank, and this Guaranty shall continue to be effective or be reinstated, as the case may be, as to such Obligations, all as though such application by the Bank had not been made. The undersigned shall indemnify and defend the Bank Guaranty -2- and hold the Bank harmless from and against any and all loss, damage, cost, or expense, (including reasonable attorney's fees) arising out of any claim for rescission or return of all or any part of any payment theretofore applied by the Bank to any of the Obligations. 4. The Bank may, from time to time, at its sole discretion and without notice to the undersigned (or any of them), take any or all of the following actions: (a) retain or obtain a security interest in any property to secure any of the Obligations or any obligation hereunder, (b) retain or obtain the primary or secondary obligation of any obligor or obligors, in addition to the undersigned, with respect to any of the Obligations, (c) extend or renew for one or more periods (whether or not longer than the original period), alter or exchange any of the Obligations, or release or compromise any obligation of any of the undersigned hereunder or any obligation of any nature of any other obligor with respect to any of the Obligations, (d) release its security interest in, or surrender, release, or permit any substitution or exchange for, all or any part of any property securing any of the Obligations or any obligation hereunder, or extend or renew for one or more periods (whether or not longer than the original period) or release, compromise, alter or exchange any obligations of any nature of any obligor with respect to any such property, and (e) resort to the undersigned (or any of them) for payment of any of the Obligations, whether or not the Bank shall have resorted to any property securing any of the Obligations or any obligation hereunder or shall have proceeded against any other of the undersigned or any other obligor primarily or secondarily obligated with respect to any of the Obligations. 5. Any amounts received by the Bank from whatsoever source on account of the Obligations may be applied by it toward the payment of such of the Obligations, and in such order of application, as the Bank may from time to time elect. Notwithstanding any payments made by or for the account of the undersigned pursuant to this Guaranty, the undersigned shall not be subrogated to any rights of the Bank. The undersigned hereby waive all rights of subrogation, indemnity, contribution, exoneration, reimbursement or other claim which the undersigned now or may hereafter have or claim against the Borrower or any other person liable in any way with respect to the Obligations. 6. The undersigned hereby expressly waive(s): (a) notice of the acceptance by the Bank of this Guaranty, (b) notice of the existence or creation or non-payment of all or any of the Obligations, (c) presentment, demand, notice of dishonor, Guaranty -3- protest, and all other notices whatsoever, and (d) all diligence in collection or protection of or realization upon the Obligations or any thereof, any obligation hereunder, or any security for or guaranty of any of the foregoing. 7. The Bank may, from time to time, without notice to the undersigned (or any of them), assign or transfer any or all of the Obligations or any interest therein; and, notwithstanding any such assignment or transfer or any subsequent assignment or transfer thereof, such Obligations shall be and remain Obligations for the purposes of this Guaranty, and each and every immediate and successive assignee or transferee of any of the Obligations or of any interest therein shall, to the extent of the interest of such assignee or transferee in the Obligations, be entitled to the benefits of this Guaranty to the same extent as if such assignee or transferee were the Bank; provided, however, that, unless the Bank shall otherwise consent in writing, the Bank shall have an unimpaired right, prior and superior to that of any such assignee or transferee, to enforce this Guaranty, for the benefit of the Bank, as to those of the Obligations which the Bank has not assigned or transferred. 8. No delay on the part of the Bank in the exercise of any right or remedy shall operate as a waiver thereof, and no single or partial exercise by the Bank of any right or remedy shall preclude other or further exercise thereof or the exercise of any other right or remedy; nor shall any modification or waiver of any of the provisions of this Guaranty be binding upon the Bank except as expressly set forth in a writing duly signed and delivered on behalf of the Bank. No action of the Bank permitted hereunder shall in any way affect or impair the rights of the Bank and the obligation of the undersigned under this Guaranty. For the purposes of this Guaranty, the Obligations shall include all obligations of the Borrower to the Bank, notwithstanding any right or power of the Borrower or anyone else to assert any claim or defense as to the invalidity or unenforceability of any such obligation, and no such claim or defense shall affect or impair the obligations of the undersigned hereunder. 9. This Guaranty shall be binding upon the undersigned, and upon the heirs, legal representatives, successors and assigns of the undersigned; and to the extent that the Borrower or any of the undersigned is either a partnership or a corporation, all references herein to the Borrower and to the undersigned, respectively, shall be deemed to include any successor or successors, whether immediate or remote, to such partnership or corporation. If more than one party shall execute this Guaranty, the term "undersigned" as used herein shall mean all parties executing this Guaranty and each of them, and all such parties shall be jointly and severally obligated hereunder. This Guaranty shall inure to the benefit of the Bank and its successors and assigns, and all references herein to the Bank shall be deemed to include its successors and assigns. 10. This Guaranty has been delivered in the State of Illinois and shall be construed in accordance with and governed by the laws of the State of Illinois. Wherever possible each provision of this Guaranty shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Guaranty shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Guaranty. 11. To secure all obligations of each of the undersigned hereunder, the Bank shall have a lien upon and security interest in (and may, without demand or notice of any kind, at any time and from time to time when any amount shall be due and payable by such undersigned hereunder, appropriate and apply toward the payment of such amount, in such order of application as the Bank may elect) any and all balances, credits, deposits, accounts, or monies of or in the name of such undersigned now or hereafter with the Bank and any and all property of any kind or description of or in the name of such undersigned now or hereafter, for any reason or purpose whatsoever, in the possession or control of, or in transit to, the Bank or any agent or bailee for the Bank. Signed and delivered July 1, 1997. /s/ Stephen M. Merrick ---------------------- Stephen M. Merrick /s/ John H. Schwan ---------------------- John H. Schwan /s/ Howard W. Schwan ---------------------- Howard W. Schwan EX-10 28 THIRD TERM NOTE EXHIBIT 10.22 THIRD TERM NOTE $275,000.00 Elk Grove Village, Illinois July 1, 1997 Loan No. 600804665-59 FOR VALUE RECEIVED, the undersigned, CTI Industries Corporation, a Delaware corporation (the "Borrower"), hereby promises to pay to the order of First American Bank, an Illinois banking corporation (the "Bank"), the principal sum of Two Hundred Seventy Five Thousand and No/100 Dollars ($275,000.00) on October 1, 2000 (or earlier as hereinafter provided), or so much thereof as may be advanced by the Bank and evidenced by this Note under the Loan and Security Agreement dated August 19, 1996, as it has been amended from time to time, between the Borrower and the Bank (the "Loan Agreement"), together with interest to maturity (whether by lapse of time, acceleration, or otherwise) on the balance of principal remaining from time to time out standing at a fluctuating rate per annum equal to one percent (1%) per annum over the Prime Rate announced from time to time by the Bank (which may not be the Bank's lowest rate of interest) which shall be adjusted daily when and as the Bank's Prime Rate changes. Interest shall be calculated on the basis of a 360-day year and actual days. Unless accelerated as hereinafter provided or as otherwise provided in the Loan Agreement, the principal sum outstanding shall be payable in installments of $7,738.89 of principal per month payable on the first day of each calendar month commencing with the month of November, 1997 and on the first day of each succeeding month until this Note is fully paid except that the final payment of principal, if not sooner paid, shall be due on October 1, 2000. Accrued interest shall be paid on the first day of the month following the month in which the first disbursement evidenced by this Note is made under the Loan Agreement and thereafter on the first day of each succeeding month until this Note is fully paid, except that the final payment of interest, if not sooner paid, shall be due on October 1, 2000. If an Event of Default (as defined in the Loan Agreement) shall occur, the outstanding principal of and accrued and unpaid interest on this Note shall become immediately due and payable as provided in the Loan Agreement without notice. All payments on account of the indebtedness evidenced by this Note (other than required prepayments which shall be applied as provided in the Loan Agreement and optional prepayments which shall be applied as provided in this Note) shall be applied first to accrued and unpaid interest and the remainder to principal. Payments on this Note shall be made at the offices of the Bank or at such other office as the legal holder of this Note may, from time to time, designate in writing. Notwithstanding anything to the contrary contained herein, the undersigned agrees to pay a late charge of five percent (5%) of the amount of any monthly installment received more than 10 days after the installment is due. Late charges shall be due and payable on the due date of the next installment of principal or interest, together with the regular installment then due. Upon and after the occurrence of an Event of Default, the undersigned shall pay interest at the rate (the "Default Rate") of four percent (4%) per annum over the Bank's Prime Rate then in effect, which shall be adjusted daily when and as the Bank's Prime Rate changes. Third Term Note Page Two Except as otherwise provided in the Loan Agreement, this Note may be prepaid in whole or in part without premium or penalty at any time at the option of the undersigned in accordance with the Loan Agreement. Any partial prepayment made at the option of the undersigned shall be applied against the principal amount outstanding and shall not postpone the due date of any subsequent monthly installment or change the amount of such installment unless the Bank shall otherwise agree in writing. This Note is secured by the Loan Agreement and other documents, agreements, and instruments executed by the Borrower. This Note is made and delivered pursuant to the Loan Agreement and is subject to the further terms and conditions thereof, including the right of the holder to accelerate payment of the principal of and accrued and unpaid interest on this Note and other remedies upon the occurrence of an Event of Default, all of which are hereby incorporated and made a part of this Note by reference. Any waiver of any payment due hereunder or the acceptance by the Bank of partial payments hereunder shall not, at any other time, be taken to be a waiver of the terms of this Note or the Loan Agreement or any other agreement between the Borrower and the Bank. The makers, sureties, guarantors, and endorsers of this Note, if any, jointly and severally hereby waive notice of and consent to any and all extensions of this Note or any part thereof without notice, and each hereby waives demand, presentment for payment, notice of nonpayment, and protest and any and all notice of whatever kind or nature and the exhaustion of legal remedies herein, or any release of liability or any other indulgences or forbearances whatsoever, without releasing or in any way affecting the personal liability of any other party hereunder. This Note shall be the joint and several obligation of all makers, sureties, guarantors, and endorsers and shall be binding upon them, their heirs, personal representatives, and assigns. In the event the holder of this Note shall refer this Note to an attorney for collection, the undersigned agrees to pay, in addition to unpaid principal and interest, all of the costs and expenses incurred in attempting or effecting collection, including reasonable attorneys' fees, whether or not suit is instituted. IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above. Attest: CTI Industries Corporation /s/ Howard W. Schwan BY:/s/ John H. Schwan - -------------------- -------------------- Howard W. Schwan John H. Schwan Vice President Chief Executive Officer EX-10 29 FOURTH TERM NOTE EXHIBIT 10.23 FOURTH TERM NOTE $200,000.00 Elk Grove Village, Illinois July 1, 1997 Loan No. 600804665-60 FOR VALUE RECEIVED, the undersigned, CTI Industries Corporation, a Delaware corporation (the "Borrower"), hereby promises to pay to the order of First American Bank, an Illinois banking corporation (the "Bank"), the principal sum of Two Hundred Thousand and No/100 Dollars ($200,000.00) on July 1, 1998 (or earlier as hereinafter provided), or so much thereof as may be advanced by the Bank and evidenced by this Note under the Loan and Security Agreement dated August 19, 1996, as it has been amended from time to time, between the Borrower and the Bank (the "Loan Agreement"), together with interest to maturity (whether by lapse of time, acceleration, or otherwise) on the balance of principal remaining from time to time outstanding at a fluctuating rate per annum equal to one percent (1%) per annum over the Prime Rate announced from time to time by the Bank (which may not be the Bank's lowest rate of interest) which shall be adjusted daily when and as the Bank's Prime Rate changes. Interest shall be calculated on the basis of a 360-day year and actual days. Unless accelerated as hereinafter provided or as otherwise provided in the Loan Agreement, the principal sum outstanding shall be payable in installments of $16,666.67 of principal per month payable on the first day of each calendar month commencing with the month of August, 1997 and on the first day of each succeeding month until this Note is fully paid except that the final payment of principal, if not sooner paid, shall be due on July 1, 1998. Accrued interest shall be paid on the first day of the month following the month in which the first dis bursement evidenced by this Note is made under the Loan Agreement and thereafter on the first day of each succeeding month until this Note is fully paid, except that the final payment of interest, if not sooner paid, shall be due on July 1, 1998. If an Event of Default (as defined in the Loan Agreement) shall occur, the outstanding principal of and accrued and unpaid interest on this Note shall become immediately due and payable as provided in the Loan Agreement without notice. All payments on account of the indebtedness evidenced by this Note (other than required prepayments which shall be applied as provided in the Loan Agreement and optional prepayments which shall be applied as provided in this Note) shall be applied first to accrued and unpaid interest and the remainder to principal. Payments on this Note shall be made at the offices of the Bank or at such other office as the legal holder of this Note may, from time to time, designate in writing. Notwithstanding anything to the contrary contained herein, the undersigned agrees to pay a late charge of five percent (5%) of the amount of any monthly installment received more than 10 days after the installment is due. Late charges shall be due and payable on the due date of the next installment of principal or interest, together with the regular installment then due. Upon and after the occurrence of an Event of Default, the undersigned shall pay interest at the rate (the "Default Rate") of four percent (4%) per annum over the Bank's Prime Rate then in effect, which shall be adjusted daily when and as the Bank's Prime Rate changes. Except as otherwise provided in the Loan Agreement, this Note may be prepaid in whole or in part without premium or penalty at any time at the option of the undersigned in accordance with the Loan Agreement. Any partial prepayment made at the option of the undersigned shall be applied against the principal amount outstanding and shall not postpone the due date of any subsequent monthly installment or change the amount of such installment unless the Bank shall otherwise agree in writing. Fourth Term Note Page Two This Note is secured by the Loan Agreement and other documents, agreements, and instruments executed by the Borrower. This Note is made and delivered pursuant to the Loan Agreement and is subject to the further terms and conditions thereof, including the right of the holder to accelerate payment of the principal of and accrued and unpaid interest on this Note and other remedies upon the occurrence of an Event of Default, all of which are hereby incorporated and made a part of this Note by reference. Any waiver of any payment due hereunder or the acceptance by the Bank of partial payments hereunder shall not, at any other time, be taken to be a waiver of the terms of this Note or the Loan Agreement or any other agreement between the Borrower and the Bank. The makers, sureties, guarantors, and endorsers of this Note, if any, jointly and severally hereby waive notice of and consent to any and all extensions of this Note or any part thereof without notice, and each hereby waives demand, presentment for payment, notice of nonpayment, and protest and any and all notice of whatever kind or nature and the exhaustion of legal remedies herein, or any release of liability or any other indulgences or forbearances whatsoever, without releasing or in any way affecting the personal liability of any other party hereunder. This Note shall be the joint and several obligation of all makers, sureties, guarantors, and endorsers and shall be binding upon them, their heirs, personal representatives, and assigns. In the event the holder of this Note shall refer this Note to an attorney for collection, the undersigned agrees to pay, in addition to unpaid principal and interest, all of the costs and expenses incurred in attempting or effecting collection, including reasonable attorneys' fees, whether or not suit is instituted. IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above. Attest: CTI Industries Corporation /s/ Howard W. Schwan BY: /s/ John H. Schwan - -------------------- -------------------- Howard W. Schwan John H. Schwan Vice President Chief Executive Officer EX-10 30 FIRST AMENDMENT TO REVOLVING NOTE EXHIBIT 10.24 FIRST AMENDMENT TO REVOLVING NOTE Loan No. 600804665-57 The undersigned, CTI Industries, Inc., a Delaware corporation (the "Borrower"), hereby agrees with First American Bank, an Illinois banking corporation (the "Bank"), that the Revolving Note dated August 22, 1996, made by the Borrower payable to the order of the Bank in the original principal amount of $3,000,000.00 (the "Note"), shall be and hereby is amended as follows: Notwithstanding any contrary provision of the Note: 1. The principal and accrued interest sum outstanding, if not sooner paid in full and unless accelerated as provided in the Note or prepayable as hereinafter provided, shall be due and payable in full on July 1, 1998. 2. Commencing July 1, 1997, Borrower shall make regular monthly payments of accrued unpaid interest and on the same day of each month thereafter, until July 1, 1998, when the Note shall be paid in full. All references in the Note to this "Note" or the like, shall be deemed to be references to the Note as amended by this Amendment. The Borrower hereby authorizes the Bank to affix this Amendment to the Note. Except as herein amended, the Note is ratified and confirmed and shall remain in full force and effect in accordance with its terms. IN WITNESS WHEREOF, the undersigned has executed this Amendment to the Note this 1st day of July, 1997. BORROWER CTI Industries Corporation Attest: By:/s/ Stephen M. Merrick ----------------------- Stephen M. Merrick, By: /s/ Howard W. Schwan President --------------------- Howard W. Schwan, Secretary Agreed to as of this 1st day of July, 1997. First American Bank By: /s/ Martin J. Carmody ----------------------- Martin J. Carmody, Exec. Vice President EX-10 31 FINANCIAL ADVISORY AND CONSULTING AGREEMENT EXHIBIT 10.25 FINANCIAL ADVISORY AND CONSULTING AGREEMENT This Agreement is made and entered into as of this __ day of ________, 1997, by and between CTI Industries Corporation, a Delaware corporation (the "Company"), and Joseph Stevens & Company, Inc. (the "Consultant"). In consideration of and for the mutual promises and covenants contained herein, and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Purpose. The Company hereby retains the Consultant during the term specified in Section 2 hereof to render consulting advice to the Company as an investment banker relating to financial and similar matters, upon the terms and conditions as set forth herein. 2. Term. Subject to the provisions of Sections 8, 9 and 10 hereof, this Agreement shall be effective for a period of twenty-four (24) months commencing on the date hereof. 3. Duties of Consultant. During the term of this Agreement, the Consultant will provide the Company with such regular and customary consulting advice as is reasonably requested by the Company, provided that the Consultant shall not be required to undertake duties not reasonably within the scope of the consulting advisory service contemplated by this Agreement. In performance of these duties, the Consultant shall provide the Company with the benefits of its best judgment and efforts. It is understood and acknowledged by the parties that the value of the Consultant's advice is not measurable in any quantitative manner, and that the Consultant shall be obligated to render advice, upon the request of the Company, in good faith, but shall not be obligated to spend any specific amount of time in doing so. The Consultant's duties may include, but will not necessarily be limited to: A. Providing sponsorship and exposure in connection with the dissemination of corporate information regarding the Company to the investment community at large under a systematic planned approach. B. Rendering advice and assistance in connection with the preparation of annual and interim reports and press releases. C. Arranging, on behalf of the Company and its representatives, at appropriate times, meetings with securities analysts of major regional investment banking firms. D. Assisting in the Company's financial public relations, including discussions between the Company and the financial community. E. Rendering advice with regard to internal operations, including: (i) advice regarding formation of corporate goals and their implementation; (ii) advice regarding the financial structure of the Company and its divisions or subsidiaries or any programs and projects of such entities; (iii) advice concerning the securing, when necessary and if possible, of additional financing through banks, insurance companies and/or other institutions; and (iv) advice regarding corporate organization and personnel. F. Rendering advice with respect to any acquisition program of the Company. G. Rendering advice regarding a future public or private offering of securities of the Company or of any subsidiary. 4. Relationships with Others. The Company acknowledges that the Consultant and its affiliates are in the business of providing financial services and consulting advice (of all types contemplated by this Agreement) to others. Nothing herein contained shall be construed to limit or restrict the Consultant or its affiliates from rendering such services or advice to others. 5. Consultant's Liability. In the absence of gross negligence or willful misconduct on the part of the Consultant, or the Consultant's breach of this Agreement, the Consultant shall not be liable to the Company, or to any officer, director, employee, shareholder or creditor of the Company, for any act or omission in the course of or in connection with the rendering or providing of advice hereunder. Except in those cases where the gross negligence or willful misconduct of the Consultant or the breach by the Consultant of this Agreement is alleged and proven, the Company agrees to defend, indemnify and hold the Consultant harmless from and against any and all reasonable costs, expenses and liability (including, but not limited to, attorneys' fees paid in the defense of the Consultant) which may in any way result from services rendered by the Consultant pursuant to or in any connection with this Agreement. 6. Expenses. The Company, upon receipt of appropriate supporting documentation, shall reimburse the Consultant for any and all reasonable out-of-pocket expenses incurred by the Consultant in connection with services rendered by the Consultant to Company pursuant to this Agreement, including, but not limited to, hotel, food and associated expenses, all charges for travel and long-distance telephone calls and all other expenses incurred by the Consultant in connection with services rendered by the Consultant to the Company pursuant to this Agreement. Expenses payable under this Section 6 shall not include allocable overhead expenses of the Consultant, including, but not limited to, attorneys' fees, secretarial charges and rent. 2 7. Compensation. As compensation for the services to be rendered by the Consultant to the Company pursuant to Section 3 hereof, the Company shall pay the Consultant a financial consulting fee of two thousand dollars ($2,000) per month for twenty-four (24) months commencing on ______ __ 1997. Forty-Eight Thousand Dollars ($48,000), representing payment in full of all amounts due the Consultant pursuant to this Section 7, shall be paid by the Company on _______ __, 1997. 8. Other Advice. In addition to the duties set out in Section 3 hereof, the Consultant agrees to furnish advice to the Company in connection with the acquisition of and/or merger with other companies, joint ventures with any third parties, license and royalty agreements and any other financing (other than the private or public sale of the Company's securities for cash), including, but not limited to, the sale of the Company itself (or any significant percentage, subsidiaries or affiliates thereof). In the event that any such transactions are directly or indirectly originated by the Consultant for a period of five (5) years from the date hereof, the Company shall pay fees to the Consultant as follows: Legal Consideration Fee ------------------- --- 1. $ -0- - $3,000,000 5% of legal consideration 2. $ 3,000,001 - $4,000,000 Amount calculated pursuant to line 1 of this computation, plus 4% of excess over $3,000,000 3. $ 4,000,001 - 5,000,000 Amount calculated pursuant to lines 1 and 2 of this computation, plus 3% of excess over $4,000,000 4. above $ 5,000,000 Amount calculated pursuant to lines 1, 2 and 3 of this computation, plus 2% of excess over $5,000,000. Legal consideration is defined, for purposes of this Agreement, as the total of stock (valued at market on the day of closing, or if there is no public market, valued as set forth herein for other property), cash and assets and property or other benefits exchanged by the Company or received by the Company or its shareholders (all valued at fair market value as agreed or, if not, by any independent appraiser), irrespective of period of payment or terms. 9. Sales or Distributions of Securities. If the Consultant assists the Company in the sale or distribution of securities to the public or in a private transaction, the Consultant shall receive fees in the amount and form to be arranged separately at the time of such transaction. 3 10. Form of Payment. All fees due to the Consultant pursuant to Section 8 hereof are due and payable to the Consultant, in cash or by certified check, at the closing or closings of a transaction specified in such Section 8 or as otherwise agreed between the parties hereto; provided, however, that in the case of license and royalty agreements specified in Section 8 hereof, the fees due the Consultant in receipt of such license and royalty agreements shall be paid as and when license and/or royalty payments are received by the Company. In the event that this Agreement shall not be renewed for a period of at least twelve (12) months at the end of the five (5) year period referred to in Section 8 hereof or if terminated for any reason prior to the end of such five (5) year period then, notwithstanding any such non-renewal or termination, the Consultant shall be entitled to the full fee for any transaction contemplated under Section 8 hereof which closes within twelve (12) months after such non-renewal or termination. 11. Limitation Upon the Use of Advice and Services. A. No person or entity, other than the Company or any of its subsidiaries, shall be entitled to make use of or rely upon the advice of the Consultant to be given hereunder, and the Company shall not transmit such advice to others, or encourage or facilitate the use of or reliance upon such advice by others, without the prior written consent of the Consultant. B. It is clearly understood that the Consultant, for services rendered under this Agreement, makes no commitment whatsoever as to making a market in the securities of the Company or to recommend or advise its clients to purchase the securities of the Company. Research reports or corporate finance reports that may be prepared by the Consultant will, when and if prepared, be done solely on the merits or judgment of analysts of the Consultant or senior corporate finance personnel of the Consultant. C. The use of the Consultant's name in any annual report or other report of the Company, or any release or similar document prepared by or on behalf of the Company, must have the prior written approval of the Consultant unless the Company is required by law to include the Consultant's name in such annual report, other report or release, in which event the Consultant will be furnished with a copy of such annual report, other report or release using Consultant's name in advance of publication by or on behalf of the Company. D. Should any purchases of securities be requested to be effected through the Consultant by the Company, its officers, directors, employees or other affiliates, or by any person on behalf of any profit sharing, pension or similar plan of the Company, for the account of the Company or the individuals or entities involved, such orders shall be taken by a registered account executive of the Consultant, shall not be subject to the terms of this Agreement, and the normal brokerage commission as charged by the Consultant will apply in conformity with all rules and regulations of the New York Stock Exchange, the National Association of Securities Dealers, Inc. or other regulatory bodies. Where no regulatory body sets the fee, the normal established fee as used by the Consultant shall apply. 4 E. The Consultant shall not disclose confidential information which it learns about the Company as a result of its engagement hereunder, except as such disclosure as may be required for Consultant to perform its duties hereunder. 12. Indemnification. Since the Consultant will be acting on behalf of the Company in connection with its engagement hereunder, the Company and Consultant have entered into a separate indemnification agreement substantially in the form attached hereto as Exhibit A and dated the date hereof, providing for the indemnification of Consultant by the Company. The Consultant has entered into this Agreement in reliance on the indemnities set forth in such indemnification agreement. 13. Severability. Every provision of this Agreement is intended to be severable. If any term or provision hereof is deemed unlawful or invalid for any reason whatsoever, such unlawfulness or invalidity shall not affect the validity of the remainder of this Agreement. 14. Miscellaneous. A. Any notice or other communication between the parties hereto shall be sent by certified or registered mail, postage prepaid, if to the Company, addressed to 22160 North Pepper Road, Barrington, Illinois 60010, Attention: Stephen Merrick, President, with a copy to Fishman & Merrick, P.C., 30 La Salle Street, Suite 3500, Chicago, Illinois, Attention: John M. Klimek, or, if to the Consultant, addressed to it at 33 Maiden Lane, 8th Floor, New York, New York 10038, Attention: Joseph Sorbara, Chief Executive Officer, with a copy to Orrick, Herrington & Sutcliffe, 666 Fifth Avenue, New York, New York 10103, Attention: Rubi Finkelstein, Esq., or to such address as may hereafter be designated in writing by one party to the other. Such notice or other communication shall be deemed to be given on the date of receipt. B. If, during the term hereof, the Consultant shall cease to do business, the provisions hereof relating to the duties of the Consultant and compensation by the Company as it applies to the Consultant shall thereupon cease to be in effect, except for the Company's obligation of payment for services rendered prior thereto. This Agreement shall survive any merger of, acquisition of, or acquisition by the Consultant and, after any such merger or acquisition, shall be binding upon the Company and the corporation surviving such merger or acquisition. C. This Agreement embodies the entire agreement and understanding between the Company and the Consultant and supersedes any and all negotiations, prior discussions and preliminary and prior agreements and understandings related to the central subject matter hereof. D. This Agreement has been duly authorized, executed and delivered by and on behalf of the Company and the Consultant. E. This Agreement shall be construed and interpreted in accordance with laws of the State of New York, without giving effect to conflicts of laws. N 5 F. This Agreement and the rights hereunder may not be assigned by either party (except by operation of law) and shall be binding upon and inure to the benefit of the parties and their respective successors, assigns and legal representatives. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date hereof. CTI INDUSTRIES CORPORATION By:_______________________________ Howard W. Schwan President JOSEPH STEVENS & COMPANY, INC. By:_______________________________ Name: Title: 6 EXHIBIT A _________________, 1997 JOSEPH STEVENS & COMPANY, INC. 33 Maiden Lane 8th Floor New York, New York 10038 Ladies and Gentlemen: In connection with our engagement of JOSEPH STEVENS & COMPANY, INC. (the "Consultant") as our financial advisor and investment banker, we hereby agree to indemnify and hold the Consultant and its affiliates, and the directors, officers, partners, shareholders, agents and employees of the Consultant (collectively the "Indemnified Persons"), harmless from and against any and all claims, actions, suits, proceedings (including those of shareholders), damages, liabilities and expenses incurred by any of them (including, but not limited to, fees and expenses of counsel) which are (A) related to or arise out of (i) any actions taken or omitted to be taken (including any untrue statements made or any statements omitted to be made) by us, or (ii) any actions taken or omitted to be taken by any Indemnified Person in connection with our engagement of the Consultant pursuant to the Financial Advisory and Consulting Agreement, of even date herewith, between the Consultant and us (the "Consulting Agreement"), or (B) otherwise related to or arising out of the Consultant's activities on our behalf pursuant to the Consultant's engagement under the Consulting Agreement, and we shall reimburse any Indemnified Person for all expenses (including, but not limited to, fees and expenses of counsel) incurred by such Indemnified Person in connection with investigating, preparing or defending any such claim, action, suit or proceeding (collectively a "Claim"), whether or not in connection with pending or threatened litigation in which any Indemnified Person is a party. We will not, however, be responsible for any Claim which is finally judicially determined to have resulted exclusively from the gross negligence or willful misconduct of any person seeking indemnification hereunder. We further agree that no Indemnified Person shall have any liability to us for or in connection with the Consultant's engagement under the Consulting Agreement except for any Claim incurred by us solely as a direct result of any Indemnified Person's gross negligence or willful misconduct. We further agree that we will not, without the prior written consent of the Consultant settle, compromise or consent to the entry of any judgment in any pending or threatened Claim in respect of which indemnification may be sought hereunder (whether or not any Indemnified Person is an actual or potential party to such Claim), unless such settlement, compromise or consent includes a legally binding, unconditional, and irrevocable release of each Indemnified Person hereunder from any and all liability arising out of such Claim. Promptly upon receipt by an Indemnified Person of notice of any complaint or the assertion or institution of any Claim with respect to which indemnification is being sought hereunder, such Indemnified Person shall notify us in writing of such complaint or of such assertion or institution, but failure to so notify us shall not relieve us from any obligation we may have hereunder, unless, and only to the extent that, such failure results in the forfeiture by us of substantial rights and defenses, and such failure to so notify us will not in any event relieve us from any other obligation or liability we may have to any Indemnified Person otherwise than under this Agreement. If we so elect or are requested by such Indemnified Person, we will assume the defense of such Claim, including the employment of counsel reasonably satisfactory to such Indemnified Person and the payment of the fees and expenses of such counsel. In the event, however, that such Indemnified Person reasonably determines in its sole judgment that having common counsel would present such counsel with a conflict of interest or such Indemnified Person concludes that there may be legal defenses available to it or other Indemnified Persons different from or in addition to those available to us, then such Indemnified Person may employ its own separate counsel to represent or defend it in any such Claim and we shall pay the reasonable fees and expenses of such counsel. Notwithstanding anything herein to the contrary, if we fail timely or diligently to defend, contest, or otherwise protect against any Claim, the relevant Indemnified Party shall have the right, but not the obligation, to defend, contest, compromise, settle, assert crossclaims or counterclaims, or otherwise protect against the same, and shall be fully indemnified by us therefor, including, but not limited to, for the fees and expenses of its counsel and all amounts paid as a result of such Claim or the compromise or settlement thereof. In any Claim in which we assume the defense, the Indemnified Person shall have the right to participate in such defense and to retain its own counsel therefor at its own expense. We agree that if any indemnity sought by an Indemnified Person hereunder is held by a court to be unavailable for any reason, then (whether or not the Consultant is the Indemnified Person) we and the Consultant shall contribute to the Claim for which such indemnity is held unavailable in such proportion as is appropriate to reflect the relative benefits to us, on the one hand, and the Consultant, on the other, in connection with the Consultant's engagement by us under the Consulting Agreement, subject to the limitation that in no event shall the amount of the Consultant's contribution to such Claim exceed the amount of fees actually received by the Consultant from us pursuant to the Consultant's engagement under the Consulting Agreement. We hereby agree that the relative benefits to us, on the one hand, and the Consultant, on the other hand, with respect to the Consultant's engagement under the Consulting Agreement shall be deemed to be in the same proportion as (a) the total value paid or proposed to be paid or received by us or our stockholders as the case may be, pursuant to the transaction (whether or not consummated) for which the Consultant is engaged to render services bears to (b) the fee paid or proposed to be paid to the Consultant in connection with such engagement. 2 Our indemnity, reimbursement and contribution obligations under this Agreement shall be in addition to, and shall in no way limit or otherwise adversely affect any rights that an Indemnified Part may have at law or at equity. Should the Consultant, or any of its directors, officers, partners, shareholders, agents or employees, be required or be requested by us to provide documentary evidence or testimony in connection with any proceeding arising from or relating to the Consultant's engagement under the Consulting Agreement, we agree to pay all reasonable expenses (including but not limited to fees and expenses of counsel) in complying therewith and one thousand dollars ($1,000) per day for any sworn testimony or preparation therefor, payable in advance. We hereby consent to personal jurisdiction and service of process and venue in any court in which any claim for indemnity is brought by any Indemnified Person. It is understood that, in connection with the Consultant's engagement under the Consulting Agreement, the Consultant may be engaged to act in one or more additional capacities and that the terms of the original engagement or any such additional engagement may be embodied in one or more separate written agreements. The provisions of this Agreement shall apply to the original engagement and any such additional engagement and shall remain in full force and effect following the completion or termination of the Consultant's engagement(s). Very truly yours, CTI INDUSTRIES CORPORATION By: _________________________ Howard W. Schwan President CONFIRMED AND AGREED TO: JOSEPH STEVENS & COMPANY, INC. By:___________________________ Name: Title: 3 EX-11 32 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11.1 CTI Industries Corporation Computation of Earnings (Loss) Per Share And Equivalent Share of Common Stock for the years ended October 31, 1995 and 1996
Year Ended October 31, 1995 Year Ended October 31, 1996 --------------------------- --------------------------- Fully Fully Primary Diluted Primary Diluted ---------- ----------- ---------- ---------- Line ---- AVERAGE SHARES OUTSTANDING 1 Weighted average number of shares of common stock outstanding during the period 1,089,689 1,089,689 1,026,572 1,026,572 2 Net additional shares assuming stock options and warrants exercised and proceeds used to purchase treasury shares 263,695 263,695 263,695 263,695 ---------- ----------- ---------- ---------- 3 Weighted average number of shares and equivalent shares of common stock outstanding during the period 1,353,384 1,353,384 1,290,267 1,290,267 ========== =========== ========== ========== EARNINGS (LOSS) 4 Loss applicable to common shares ($2,893,175) ($2,893,175) ($183,040) ($183,040) 5 Add back dividends applicable to convertible preferred stock - - (74,211) (74,211) ---------- ----------- ---------- ---------- 6 Amount for per share computation ($2,893,175) ($2,893,175) ($257,251) ($257,251) =========== =========== ========== ========== PER SHARE AMOUNTS Loss applicable to common shares (line 6 / line 3) ($2.14) ($2.14) ($0.20) ($0.20) =========== =========== ========== ==========
Earnings (loss) per share is computed by dividing net earnings (loss), less convertible preferred stock dividends, by the weighted average number of shares of common stock and common stock equivalents (common stock warrannts and convertible preferred stock) outstanding during the period. EX-11 33 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11.2 CTI Industries Corporation Computation of Earnings (Loss) Per Share And Equivalent Share of Common Stock for the six months ended April 30, 1996 and 1997
Six Months Ended Six Months Ended April 30, 1996 April 30, 1997 --------------------------- --------------------------- Fully Fully Primary Diluted Primary Diluted ---------- ----------- ---------- ---------- Line ---- AVERAGE SHARES OUTSTANDING 1 Weighted average number of shares of common stock outstanding during the period 1,060,385 1,060,385 987,125 987,125 2 Net additional shares assuming stock options and warrants exercised and proceeds used to purchase treasury shares 263,695 263,695 263,695 263,695 ---------- ----------- ---------- ---------- 3 Weighted average number of shares and equivalent shares of common stock outstanding during the period 1,324,080 1,324,080 1,250,820 1,250,820 ========== =========== ========== ========== EARNINGS (LOSS) 4 Net earnings (loss) $(68,538) $(68,538) $390,691 $390,691 5 Less dividends applicable to convertible preferred stock (10,294) (10,294) ($65,000) ($65,000) ----------- ----------- ---------- ---------- 6 Amount for per share computation ($78,832) ($78,832) $325,691 $325,691 =========== =========== ========== ========== PER SHARE AMOUNTS Loss applicable to common shares (line 8 / line 3) ($.06) ($.06) $.26 $.26 =========== =========== ========== ==========
Earnings (loss) per share is computed by dividing net earnings (loss), less convertible preferred stock dividends, by the weighted average number of shares of common stock and common stock equivalents (common stock warrannts and convertible preferred stock) outstanding during the period. EX-23 34 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in the registration statement on Form SB-2 (File No. __________) of our report dated July 22, 1997, on our audits of the financial statements of CTI Industries Corporation. We also consent to the reference to our firm ounder the caption "Experts." COOPERS & LYBRAND L.L.P. Chicago, Illinois July 22, 1997 EX-27 35 FDS -- FORM SB-2
5 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM SB-2 FOR THE SIX MONTHS ENDED APRIL 30, 1997 AND FOR THE YEAR ENDED OCTOBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM SB-2. 0001042187 CTI Industries Corporation 1,000 dollars 6-mos 12-mos APR-30-1997 OCT-31-1996 NOV-01-1996 NOV-01-1995 APR-30-1997 OCT-31-1996 1.000 1.000 0 131 0 0 2,805 1,795 126 130 4,701 4,583 7,687 6,597 10,266 10,000 6,547 6,416 11,523 10,286 7,197 6,250 0 0 0 0 1,044 1,028 75 74 (117) (620) 11,523 10,286 8,736 13,910 8,736 13,910 5,384 8,558 5,384 8,558 2,658 4,976 0 0 304 553 390 (177) 0 6 390 (183) 0 0 0 0 0 0 390 (183) .26 (.20) .26 (.20)
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