SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
|X| Filed by the Registrant Filed by a Party other than the Registrant |_|
Check the appropriate box:
|X| Preliminary Proxy Statement
|_| Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
|_| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
CTI INDUSTRIES CORPORATION
(Name of Registrant as Specified In Its Charter)
Payment of Filing Fee (check the appropriate box):
|X| No Fee Required
CTI INDUSTRIES CORPORATION
22160 North Pepper Road
Barrington, Illinois 60010
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO
BE HELD ON OCTOBER 1, 2004
To: Shareholders of CTI Industries Corporation
The annual meeting of the shareholders of CTI Industries Corporation will
be held at The Holiday Inn Crystal Lake, 800 South Route 31, Crystal Lake,
Illinois 60014, on Friday, October 1, 2004, at 10:00 a.m., Central Daylight
Savings Time, for the following purposes:
1. To elect 7 directors to hold office during the year following the
annual meeting or until their successors are elected (Item No. 1 on
proxy card);
2. To approve the issuance of 1,400,375 additional shares of the
Corporation's common stock in connection with a Standby Equity
Distribution Agreement between the Corporation and Cornell Capital
Partners, L.P. (Item No. 2 on the proxy card);
3. To ratify the appointment of Eisner, LLP as auditors of the
Corporation for 2004 (Item No. 3 on proxy card); and
4. To transact such other business as may properly come before the
meeting.
The close of business on August 6, 2004, has been fixed as the record date
for determining the shareholders entitled to receive notice of and to vote at
the annual meeting.
BY ORDER OF THE BOARD OF DIRECTORS
August 13, 2004 -----------------------------
Stephen M. Merrick, Secretary
YOUR VOTE IS IMPORTANT
It is important that as many shares as possible be represented at
the annual meeting. Please date, sign, and promptly return the proxy
in the enclosed envelope. Your proxy may be revoked by you at any
time before it has been voted.
CTI INDUSTRIES CORPORATION
22160 North Pepper Road
Barrington, Illinois 60010
PROXY STATEMENT
Information Concerning the Solicitation
This statement is furnished in connection with the solicitation of proxies
to be used at the Annual Shareholders Meeting (the "Annual Meeting") of CTI
Industries Corporation (the "Company"), an Illinois corporation, to be held at
10:00 a.m. Central Daylight Savings Time on Friday, October 1, 2004, at The
Holiday Inn Crystal Lake, 800 South Route 31, Crystal Lake, Illinois 60014. The
proxy materials are being mailed to shareholders of record at the close of
business on August 6, 2004.
The solicitation of proxies in the enclosed form is made on behalf of the
Board of Directors of the Company.
The cost of preparing, assembling and mailing the proxy material and of
reimbursing brokers, nominees and fiduciaries for the out-of-pocket and clerical
expenses of transmitting copies of the proxy material to the beneficial owners
of shares held of record by such persons will be borne by the Company. The
Company does not intend to solicit proxies otherwise than by use of the mail,
but certain officers and regular employees of the Company or its subsidiaries,
without additional compensation, may use their personal efforts, by telephone or
otherwise, to obtain proxies.
Quorum and Voting
Only shareholders of record at the close of business on August 6, 2004 are
entitled to vote at the Annual Meeting. On that day, there were 1,954,100 shares
of Common Stock outstanding. Each share has one vote. A simple majority of the
outstanding shares of Common Stock is required to be present in person or by
proxy at the meeting for there to be a quorum for purposes of proceeding with
the Annual Meeting. The Company's Articles of Incorporation grants the holders
of Common Stock the right to elect up to seven total directors, and seven
directors will be elected by the Company's Common Stockholders at this meeting.
The Common Stock does not possess cumulative voting rights, and the election of
directors will be by the vote of a majority of shares of Common Stock present in
person or by proxy at the Annual Meeting. Approval of the issuance of shares of
the Company's Common Stock under a Standby Equity Distribution Agreement and the
ratification of auditors will require the vote of a simple majority of the
shares of Common Stock present at the Annual Meeting by person or proxy.
Abstentions and withheld votes have the effect of votes against these matters.
Broker non-votes (shares of record held by a broker for which a proxy is not
given) will be counted for purposes of determining shares outstanding for
purposes of a quorum, but will not be counted as present for purposes of
determining the vote on any matter considered at the meeting.
A shareholder signing and returning a proxy on the enclosed form has the
power to revoke it at any time before the shares subject to it are voted by
notifying the Secretary of the Company in writing. If a shareholder specifies
how the proxy is to be voted with respect to any
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of the proposals for which a choice is provided, the proxy will be voted in
accordance with such specifications. If a shareholder fails to so specify with
respect to such proposals, the proxy will be voted "FOR" the nominees for
directors contained in these proxy materials, "FOR" proposal 2, "FOR" proposal 3
and "FOR" proposal 4.
Stock Ownership by Management and Others
The following table provides information concerning the beneficial
ownership of the Company's common stock by each director and nominee for
director, certain executive officers, and by all directors and officers of the
Company as a group as of July 15, 2004. In addition, the table provides
information concerning the beneficial owners known to the Company to hold more
than 5 percent of the outstanding common stock of the Company as of July 15,
2004.
Shares of Common Stock Percent of
Name and Address (1) Beneficially Owned (2) Common Stock
-------------------- ---------------------- ------------
John H. Schwan 642,237(3) 29.8%(4)
Stephen M. Merrick 525,758(5) 25.1%(4)
Howard W. Schwan 178,904(6) 9.0%(4)
Brent Anderson 42,795(7) 2.1%
Samuel Komar 24,879(8) 1.3%
Mark Van Dyke 23,809(9) 1.2%
Timothy Patterson 5,000(10)
Stanley M. Brown
1140 Larkin
Wheeling, IL 60090 11,250(11) *
Bret Tayne
6834 N. Kostner Avenue
Lincolnwood, IL 60712 9,923(12) *
Michael Avramovich
70 W. Madison Street, Suite 1400
Chicago, IL 60602 0 *
John Collins (Director Nominee)
262 Pine Street
Deerfield, IL 60015 0 *
All Current Directors and Executive Officers as a group
(10 persons) 1,464,555 59.4%(4)
----------
* Less than one percent
(1) Except as otherwise indicated, the address of each stockholder listed
above is c/o CTI Industries Corporation, 22160 North Pepper Road,
Barrington, Illinois 60010.
(footnotes continued on next page)
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(2) A person is deemed to be the beneficial owner of securities that can be
acquired within 60 days from the date set forth above through the exercise
of any option, warrant or right. Shares of Common Stock subject to
options, warrants or rights that are currently exercisable or exercisable
within 60 days are deemed outstanding for purposes of computing the
percentage ownership of the person holding such options, warrants or
rights, but are not deemed outstanding for purposes of computing the
percentage ownership of any other person.
(3) Includes warrants to purchase up to 79,364 shares of Common Stock at $1.50
per share, warrants to purchase up to 93,000 shares of Common Stock at
$4.87 per share, options to purchase up to 23,810 shares of Common Stock
at $2.08 per share granted under the Company's 1999 Stock Option Plan and
options to purchase up to 5,952 shares of Common Stock at $2.55 per share
granted under the Company's 2002 Stock Option Plan. Also includes indirect
beneficial ownership of 130,821 shares of Common Stock through shares
owned through CTI Investors, L.L.C. See "Board of Directors Affiliations
and Related Transactions."
(4) Assumes the exercise of all warrants and options owned by the named person
into shares of Common Stock and all shares of Common Stock beneficially
owned by the named person through CTI Investors, L.L.C.
(5) Includes warrants to purchase up to 39,683 shares of Common Stock at $1.50
per share, warrants to purchase up to 70,000 shares of Common Stock at
$4.87 per share, options to purchase up to 23,810 shares of Common Stock
at $2.08 per share granted under the Company's 1999 Stock Option Plan and
options to purchase up to 5,952 shares of Common Stock at $2.55 per share
granted under the Company's 2002 Stock Option Plan. Also includes indirect
beneficial ownership of 87,214 shares of Common Stock through shares owned
through CTI Investors, L.L.C. See "Board of Directors Affiliations and
Related Transactions."
(6) Includes options to purchase up to 15,873 shares of Common Stock at $6.30
per share granted under the Company's 1997 Stock Option Plan, options to
purchase up to 23,810 shares of Common Stock at $1.89 per share granted
under the Company's 1999 Stock Option Plan and options to purchase up to
14,285 shares of Common Stock at $2.31 per share granted under the
Company's 2002 Stock Option Plan. Also includes indirect beneficial
ownership of 65,410 shares of Common Stock through shares owned through
CTI Investors, L.L.C. See "Board of Directors Affiliations and Related
Transactions."
(7) Includes options to purchase up to 4,761 shares of Common Stock at $6.30
per share granted under the Company's 1997 Stock Option Plan, options to
purchase up to 17,857 shares of Common Stock at $1.47 per share, granted
under the Company's 2001 Stock Option Plan and options to purchase up to
8,928 shares of Common Stock at $2.31 per share granted under the
Company's 2002 Stock Option Plan.
(footnotes continued on next page)
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(8) Includes options to purchase up to 4,761 shares of Common Stock at $6.30
per share granted under the Company's 1997 Stock Option Plan, options to
purchase up to 7,976 shares of Common Stock at $1.89 per share granted
under the Company's 1999 Stock Option Plan, options to purchase up to
11,904 shares of Common Stock at $1.47 per share granted under the
Company's 2001 Stock Option Plan, and 238 shares of Common Stock held by
immediate family members.
(9) Includes options to purchase up to 23,809 shares of Common Stock at $1.47
per share granted under the Company's 2001 Stock Option Plan.
(10) Includes options to purchase up to 5,000 shares of Common Stock at $2.26
per share granted under the Company's 2002 Stock Option Plan.
(11) Includes options to purchase up to 1,984 shares of Common Stock at $6.30
per share and options to purchase up to 1,984 shares of Common Stock at
$10.08 per share, both granted under the Company's 1997 Stock Option Plan,
options to purchase up to 3,571 shares of Common Stock at $1.89 per share
granted under the Company's 1999 Stock Option Plan and options to purchase
up to 2,976 shares of Common Stock at $2.31 per share granted under the
Company's 2002 Stock Option Plan.
(12) Includes options to purchase up to 1,984 shares of Common Stock at $6.30
per share granted under the Company's 1997 Stock Option Plan, options to
purchase up to 3,571 shares of Common Stock at $1.89 per share granted
under the Company's 1999 Stock Option Plan and options to purchase up to
2,976 shares of Common Stock at $2.31 per share granted under the
Company's 2002 Stock Option Plan.
PROPOSAL ONE - ELECTION OF DIRECTORS
Seven directors will be elected at the Annual Meeting to serve for
one-year terms expiring on the date of the Annual Meeting in 2005. All directors
will be elected by holders of the Company's Common Stock. Each director elected
will continue in office until a successor has been elected. If a nominee is
unable to serve, which the Board of Directors has no reason to expect, the
persons named in the accompanying proxy intend to vote for the balance of those
named and, if they deem it advisable, for a substitute nominee.
THE BOARD OF DIRECTORS RECOMMENDS THE ELECTION OF ALL OF THE NOMINEES
Information Concerning Nominees
The following is information concerning nominees for election as directors
of the Company as of July 15, 2004. Messrs. John Schwan, Howard Schwan, Merrick,
Brown, Tayne and Avramovich are presently directors of the Company.
JOHN H. SCHWAN, age 59, 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 and affiliated companies
for over the last 15 years. Mr. Schwan has
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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.
HOWARD W. SCHWAN, age 49, President. Mr. Schwan has been associated with
the Company for 21 years, principally in the management of the production and
engineering operations of the Company. Mr. Schwan was appointed as Vice
President of Manufacturing in November, 1990, was appointed as a director in
January, 1996, and was appointed as President in June, 1997.
John Schwan and Howard Schwan are brothers.
STEPHEN M. MERRICK, age 62, Executive Vice President and Secretary. Mr.
Merrick was President of the Company from January, 1996 to June, 1997 when he
became Chief Executive Officer of the Company. In October, 1999, Mr. Merrick
became Executive Vice President. Mr. Merrick is a principal of the law firm of
Merrick & Klimek, P.C. of Chicago, Illinois and has been engaged in the practice
of law for more than 35 years. Mr. Merrick is also Senior Vice President,
Director and a member of the Management Committee of Reliv International, Inc.
(NASDAQ), a manufacturer and direct marketer of nutritional supplements and food
products.
STANLEY M. BROWN, age 57, Director. Mr. Brown was appointed as a director
of the Company in January, 1996. Since March, 1996, Mr. Brown has been President
of Inn-Room Systems, Inc., a manufacturer and lessor of in-room vending systems
for hotels. From 1968 to 1989, Mr. Brown was with the United States Navy as a
naval aviator, achieving the rank of Captain.
BRET TAYNE, age 45, Director. Mr. Tayne was appointed as a director of the
Company in December, 1997. Mr. Tayne has been the President of Everede Tool
Company, a manufacturer of industrial cutting tools, since January, 1992. Prior
to that, Mr. Tayne was Executive Vice President of Unifin, a commercial finance
company, since 1986. Mr. Tayne received a Bachelor of Science degree from Tufts
University and an MBA from Northwestern University.
MICHAEL AVRAMOVICH, age, 52, Director. Mr. Avramovich is a principal of
the law firm of Avramovich & Associates, P.C. of Chicago, Illinois, and has been
engaged in the practice of law for over 6 years. Prior to the practice of law,
Mr. Avramovich was an Associate Professor of Accounting and Finance at
National-Louis University in Chicago, Illinois. Mr. Avramovich has also worked
in various financial accounting positions at Molex International, Inc. of Lisle,
Illinois. Mr. Avramovich received a Bachelor of Arts degree in History and
International Relations from North Park University, a Master of Management,
Accounting and Information Systems, and Finance from Northwestern University, a
Juris Doctorate from the John Marshall Law School and an L.L.M. in International
and Corporate Law from Georgetown University Law Center.
JOHN I. COLLINS, age 44, Director Nominee. Mr. Collins is currently the
Treasurer of the Illinois Credit Union Executives Society, and is a former
member of the Chicago Federal Reserve Bank Advisory Group. Mr. Collins is also
the Chief Administrative Officer and the former Chief Financial Officer of
Mid-States Corporate Federal Credit Union ("MSCFCU"), a
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$4.5 billion wholesale financial institution located in Warrenville, Illinois.
Mr. Collins' responsibilities at MSCFCU have included all accounting, financial
reporting, strategic planning, risk management, lending and data processing
matters, as well as, more recently, working directly with MSCFCU's Chief
Executive Officer in matters concerning MSCFCU's Board of Directors and Board
Committee matters and administration, corporate governance and legal affairs.
Prior to his affiliation with MSCFCU in 2001, Mr. Collins was employed as both a
Controller and Chief Financial Officer by Great Lakes Credit Union ("GLCU"), a
$350 million financial institution located in North Chicago, Illinois. During
Mr. Collins tenure with GLCU from 1991 to 2001, and MSCFCU from 2001 to the
present, Mr. Collins has experience working with audit committees, public
accounting firms and regulatory agencies on an ongoing basis, has supervised
principal accounting officers, and has had the responsibility of preparing
audited financial statements, internal controls and financial reporting. Mr.
Collins received a Bachelor of Arts degree in Economics, History and English
from Ripon College, and a Masters in Business Administration from Emory
University. Mr. Collins has also participated in the Kellogg Management
Institute and the Consumer Marketing Strategy programs at Northwestern
University on a post-graduate basis.
Executive Officers Other Than Nominees
MARK VAN DYKE, age 54, Senior Vice President. Mr. Van Dyke rejoined the
Company in August, 2001. Mr. Van Dyke has over 25 years experience in the
balloon industry and was previously employed by the Company for 12 years. Prior
to rejoining the Company, Mr. Van Dyke was employed by M&D Balloons, Inc. for
eight years and became Executive Director of that Company.
BRENT ANDERSON, age 37, 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. Mr. Anderson was appointed Vice President of Manufacturing in June,
1997.
SAMUEL KOMAR, age 47, Vice President of Sales. Mr. Komar has been employed
by the Company since March of 1998, and was named Vice-President of Sales in
September of 2001. Mr. Komar has worked in sales for 16 years, and prior to his
employment with the Company, Mr. Komar was with Bob Gable & Associates, a
manufacturer of sporting goods. Mr. Komar received a Bachelor of Science Degree
in Sales and Marketing from Indiana University.
TIMOTHY PATTERSON, age 43, Vice President of Finance and Administration.
Mr. Patterson has been employed by the Company as Vice President of Finance and
Administration since September, 2003. Prior to his employment with the Company,
Mr. Patterson was Manager of Controllers for the Thermoforming group at Solo Cup
Company for two years. Prior to that, Mr. Patterson was Manager of Corporate
Accounting for Transilwrap Company for three years. Mr. Patterson received a
Bachelor of Science degree in finance from Northern Illinois University and an
MBA from the University of Illinois at Chicago.
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Committees of the Board of Directors
The Company's Board of Directors has standing Compensation and Audit
Committees.
During 2003, the Compensation Committee was composed of John H. Schwan,
Stanley M. Brown and Bret Tayne. The Compensation Committee reviews and makes
recommendations to the Board of Directors concerning the compensation of
officers and key employees of the Company. The Compensation Committee met one
time during 2003.
The Company does not have a standing nominating committee or committee
performing similar functions. All of the independent directors of the Board of
Directors of the Company participated in the nominating process and voted in
favor of the nomination of the directors nominated for election at the annual
meeting of shareholders to be held on October 1, 2004. The Company's Board of
Directors intends to establish a nominating committee during 2004 in accordance
with rules of the Securities and Exchange Commission and of the NASDAQ Stock
Market.
Audit Committee
Since 2000, the Company has had a standing Audit Committee, which is
presently composed of Mr. Tayne, Mr. Brown and Mr. Avramovich. Mr. Avramovich
has been designated and is the Company's "Audit Committee Financial Expert"
pursuant to paragraph (h)(1)(i)(A) of Item 401 of Regulation S-K of the Exchange
Act. The Audit Committee held five meetings during fiscal year 2003, including
quarterly meetings with management and independent auditors to discuss the
Company's financial statements. Mr. Avramovich and each appointed member of the
Audit Committee satisfies the definition of "independent" as that term is used
in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act. The Company's Board
of Directors has adopted a written charter for the Company's Audit Committee, a
true and correct copy of which has been included as Exhibit A to this report.
The Audit Committee reviews and makes recommendations to the Company about its
financial reporting requirements. Information regarding the functions performed
by the Committee is set forth in the "Report of the Audit Committee," as
follows:
Report of the Audit Committee
The Audit Committee oversees the Company's financial reporting process on
behalf of the Board of Directors. Management has the primary responsibility for
the financial statements and the reporting process including the systems of
internal controls. In fulfilling its oversight responsibilities, the Committee
reviewed the audited financial statements in the Annual Report with management
including a discussion of the quality, not just the acceptability, of the
accounting principles, the reasonableness of significant judgments, and the
clarity of disclosures in the financial statements.
The Committee reviewed with the independent auditors, who are responsible
for expressing an opinion on the conformity of those audited financial
statements with generally accepted accounting principles, their judgments as to
the quality, not just the acceptability, of the Company's accounting principles
and such other matters as are required to be discussed with the Committee under
generally accepted auditing standards, including but not limited to those
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matters required to be discussed by SAS 61 (Codification of Statements on
Auditing Standards, AU ss.380). In addition, the Committee has discussed with
the independent auditors the auditor's independence from management and the
Company including the matters in the written disclosures required by the
Independence Standards Board.
The Committee discussed with the Company's independent auditors the
overall scope and plans for their respective audits. The Committee meets with
the independent auditors, with and without management present, to discuss the
results of their examinations, their evaluations of the Company's internal
controls, and the overall quality of the Company's financial reporting.
In reliance on the reviews and discussions referred to above, the
Committee recommended to the Board of Directors (and the Board has approved)
that the audited financial statements be included in the Annual Report on Form
10-K/A, Amendment No. 1 for the year ended December 31, 2003 for filing with the
Securities and Exchange Commission. The Committee and the Board have also
recommended, subject to future shareholder approval at the Company's 2004 annual
meeting of shareholders, the selection of Eisner, LLP as the Company's
independent auditors.
Bret Tayne, Audit Committee Chair
Stanley M. Brown, III, Audit Committee Member
Michael Avramovich, Audit Committee Member
Executive Compensation
The following table sets forth a summary of the compensation paid or
accrued during the last three fiscal years by the Company to its President,
Chief Executive Officer and any other officer who was an officer of the Company
at December 31, 2003, and who received compensation in excess of $100,000
("Named Executive Officers").
Summary Compensation Table
Annual Compensation Long Term Compensation
All Other
Name and Principal Salary Other Annual Underlying Compensation
Position Year $ Compensation Options ($)
---------------------------------------------------------------------------------------------------
Howard W. Schwan 2003 $162,500 $5,520 -- --
President 2002 $162,500 $8,100 14,285(1) $1,925(5)
2001 $150,000 $5,000 -- $1,765(5)
Mark Van Dyke 2003 $125,000 -- -- --
Senior Vice President 2002 $123,100 -- -- --
2001 $ 45,900 -- 23,809(2) --
Brent Anderson 2003 $ 95,000 -- -- --
Vice President of Manufacturing 2002 $ 95,000 -- 8,928(3) --
2001 $ 86,700 -- 17,857(3) --
Samuel Komar 2003 $104,200 -- -- --
Vice President of Sales 2002 $104,200 -- -- --
2001 $ 94,450 -- 11,904(4) --
(footnotes continued on next page)
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(1) Stock options to purchase up to 14,285 shares of the Company's Common
Stock at $2.31 per share, and stock options to purchase up to 23,809
shares of the Company's Common Stock at $1.89 per share.
(2) Stock options to purchase up to 23,809 shares of the Company's Common
Stock at $1.47 per share.
(3) Stock options to purchase up to 8,928 shares of the Company's Common Stock
at $2.31 per share, and stock options to purchase up to 17,857 shares of
the Company's Common Stock at $1.47 per share.
(4) Stock options to purchase up to 11,904 shares of the Company's Common
Stock at $1.47 per share.
(5) Company contribution to the Company's 401(k) Plan as a pre-tax salary
deferral.
The Company has never granted any stock appreciation rights. During the
period from January 1, 1999 to December 31, 2003, there have been no awards or
payments made for long-term incentive compensation (other than stock option and
warrant grants) and there have been no restricted stock grants to any of the
Named Executive Officers.
Certain Named Executive Officers have received warrants to purchase Common
Stock of the Company in connection with their guarantee of certain bank loans
secured by the Company and in connection with their participation in a private
offering of notes and warrants conducted by the Company. See "Board of Director
Affiliations and Related Transactions" below. The following stock option grants
were made to certain of the Company's executive officers in the fiscal year
ending December 31, 2003:
Option Grants in Last Fiscal Year
Individual Grants
Number of
Securities % of Total
Underlying Options Granted
Options to Employees in Exercise Price
Name Granted Fiscal Year ($/share) Expiration Date
---- ------- ----------- --------- ---------------
Timothy Patterson 5,000 71.4% $2.26 2/3/2013
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Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
Number of Securities
Shares Underlying Unexercised Value of Unexercised In- the-
Acquired on Value Options at Year End (#) Money Options at Fiscal Year End
Name Exercise (#) Realized ($) Exercisable/Unexercisable ($) Exercisable/Unexercisable
---- ------------ ------------ ------------------------- -------------------------
John H. Schwan 0 0 29,762/0 $ 4,286/0(1)
Howard W. Schwan 0 0 53,968/0 $ 8,810/0(1)
Stephen M. Merrick 0 0 29,762/0 $ 4,286/0(1)
Mark Van Dyke 0 0 23,809/0 $ 18,809/0(1)
Brent Anderson 0 0 31,546/0 $ 14,107/0(1)
Samuel Komar 0 0 24,641/0 $ 12,355/0(1)
----------
(1) The value of unexercised in-the-money options is based on the difference
between the exercise price and the fair market value of the Company's
Common Stock on December 31, 2003.
Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors of the Company is
composed of three members of the Board of Directors. The Compensation Committee
is responsible for establishing the standards and philosophy of the Board of
Directors regarding executive compensation, for reviewing and evaluating
executive compensation and compensation programs, and for recommending levels of
salary and other forms of compensation for executives of the Company to the
Board of Directors. The full Board of Directors of the Company is responsible
for setting and administering salaries, bonus payments and other compensation
awards to executives of the Company.
Compensation Philosophy
The philosophy of the Compensation Committee, and of the Board of
Directors of the Company, regarding executive compensation includes the
following principal components:
To attract and retain quality executive talent, which is regarded as
critical to the long and short-term success of the Company, in substantial
part by offering compensation programs which provide attractive rewards
for successful effort.
To provide a reasonable level of base compensation to senior
executives.
To create a mutuality of interest between executive officers of the
Company and shareholders through long-term compensation structures,
particularly stock option programs, so that executive officers share the
risks and rewards of strategic decision making and its effect on
shareholder value.
The Compensation Committee has recommended, and the Board of Directors has
determined, to take appropriate action to comply with the provisions of Section
162(m) of the Internal Revenue Code so that executive compensation will be
deductible as an expense to the fullest extent allowable.
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The Company's executive compensation program consists of two key elements:
(i) an annual component consisting of base salary and (ii) a long-term
component, principally stock options.
Annual Base Compensation
The Compensation Committee recommends annual salary levels for each of the
Named Executives, and for other senior executives of the Company, to the Board
of Directors. The recommendations of the Compensation Committee for base salary
levels for senior executives of the Company are determined annually, in part, by
evaluating the responsibilities of the position and examining market
compensation levels and trends for similar positions in the marketplace.
Additional factors which the Compensation Committee considers in recommending
annual adjustments to base salaries include: results of operation of the
Company, sales, shareholder returns, and the experience, work-performance,
leadership and team building skills of each executive. The Company receives
information from the Chief Executive Officer with regard to these matters. While
each of these factors is considered in relatively equal weight, the Compensation
Committee does not utilize performance matrices or measured weightings in its
review. Each year, the Compensation Committee conducts a structured review of
base compensation of senior executives with input from the Chief Executive
Officer.
Long-Term Component - Stock Options
The long-term component of compensation provided to executives of the
Company has been in the form of stock options. The Compensation Committee has
recommended to the Board of Directors that a significant portion of the total
compensation to executives be in the form of incentive stock options. Stock
options are granted with an exercise price equal to or greater than the fair
market value of the Company's Common Stock on the date of the grant. Stock
options are exercisable between one and ten years from the date granted. Such
stock options provide incentive for the creation of shareholder value over the
long-term since the full benefit of the compensation package for an executive
cannot be realized unless an appreciation in the price of the Company's Common
Stock occurs over a specified number of years.
The magnitude of the stock option awards are determined annually by the
Compensation Committee and the Board of Directors. Generally, the number of
options granted to an executive has been based on the relative salary level of
the executive.
On October 12, 2002, incentive stock options to purchase up to 14,285,
8,928, 5,952 and 5, 952 shares of the Company's Common Stock were granted to
Messrs. Howard Schwan, Brent Anderson, Stephen M. Merrick and John Schwan,
respectively, under the 2002 Stock Option Plan (the "2002 Plan"). In addition,
on October 12, 2002, non-qualified stock options to purchase up to 2,926 shares
of the Company's Common Stock were granted to each of Messrs. Stan Brown and
Bret Tayne respectively, under the 2002 Stock Option Plan, and incentive stock
options to purchase up to 5,000 shares of the Company's Common Stock were
granted to Timothy Patterson under the 2002 Stock Option Plan on December 31,
2003.
There were no other stock options granted to any of the Named Executives
in 2001, 2002 or 2003.
11
CEO Compensation
The Compensation Committee utilizes the same standards and methods for
recommending annual base compensation for the Chief Executive Officer of the
Company as it does for other senior executive officers of the Company.
In 1997, the Company entered into an Employment Agreement with Howard W.
Schwan, President of the Company, providing that Mr. Schwan's base annual
compensation would not be less than $135,000. During 2001, 2002 and 2003, upon
the recommendation of the Compensation Committee, the base salary of Mr. Schwan
was $150,000, $162,500 and $162,500 respectively. In 2001, 2002 and 2003, annual
incentive compensation was paid to Mr. Schwan in the amounts of $5,000, $8,100
and $5,520, respectively.
The Compensation Committee recommended that Mr. Schwan (and other senior
executives of the Company), receive incentive stock options, consistent with
observed market practices, so that a significant portion of his total
compensation will be based upon, and consistent with, returns to shareholders.
In 2002, Mr. Schwan was granted incentive stock options to purchase up to 14,285
shares of the Company's Common Stock.
Compensation Committee:
John H. Schwan,
Bret Tayne,
Stanley M. Brown, III
Compensation Committee Interlocks and Insider Participation
John H. Schwan, a member of the Compensation Committee, is Chairman of the
Company. Mr. Schwan is an officer and owner of Packaging Systems, L.L.C.,
Shamrock Specialty Packaging and affiliated companies. The Company made
purchases of packaging materials from these entities in the aggregate amounts of
$118,011 and $273,910 during each of the years ended December 31, 2002 and
December 31, 2003, respectively. John Schwan and Howard W. Schwan are brothers.
Comparative Stock Price Performance Graph
The following graph compares, for the period January 1, 1999 to December
31, 2003, the cumulative total return (assuming reinvestment of dividends) on
the Company's Common Stock with (i) the NASDAQ Stock Market Index (U.S.) and
(ii) a peer group including S&P 500 Specialty Stores. The graph assumes an
investment of $100 on January 1, 1999, in the Company's Common Stock and each of
the other investment categories.
The historical stock prices of the Company's Common Stock shown on the
graph below are not necessarily indicative of future price performance. Per
share value as of October 31, 1999, 2000, and December 31, 2001, 2002 and 2003
is based on the Common Stock's closing price as of such date.
12
Total Return To Shareholders
(Includes reinvestment of dividends)
ANNUAL RETURN PERCENTAGE
Years Ending
Company / Index Oct00 Dec00 Dec01 Dec02 Dec03
CTI INDUSTRIES CORP -4.76 -46.67 75.00 325.85 -63.90
NASDAQ U.S. INDEX 13.06 -27.05 -20.63 -30.86 49.51
S&P 500 SPECIALTY STORES -4.69 -13.37 61.41 -11.11 34.66
INDEXED RETURNS
Base Years Ending
Period
Company / Index Oct99 Oct00 Dec00 Dec01 Dec02 Dec03
CTI INDUSTRIES CORP 100 95.24 50.79 88.89 378.53 136.66
NASDAQ U.S. INDEX 100 113.06 82.48 65.47 45.26 67.67
S&P 500 SPECIALTY STORES 100 95.31 82.57 133.28 118.47 159.52
Employment Agreements
In June, 1997, the Company entered into an Employment Agreement with
Howard W. Schwan as President, which provides for an annual salary of not less
than $135,000. The term of the Agreement was through June 30, 2002 and is
automatically renewed thereafter for successive one year terms. The Agreement
contains covenants of Mr. Schwan with respect to the use of the Company's
confidential information, establishes the Company's right to inventions created
by Mr. Schwan during the term of his employment, and includes a covenant of Mr.
Schwan not to compete with the Company for a period of three years after the
date of termination of the Agreement.
Director Compensation
John Schwan was compensated in the amount of $76,500 in fiscal 2003 for
his services as Chairman of the Board of Directors. Directors other than members
of management received a fee of $1,000 for each Board meeting attended.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and with the NASDAQ Stock Market. Officers, directors and greater than
ten-percent shareholders are required by SEC regulation to furnish the Company
with copies of all Section 16(a) forms they file.
13
Based solely on a review of such forms furnished to the Company, or
written representations that no Form 5's were required, the Company believes
that during calendar year 2003, all Section 16(a) filing requirements applicable
to the officers, directors and ten-percent beneficial shareholders were complied
with, except that Brent Anderson was late in filing one Form 4 for an aggregate
of 8,750 shares.
Code of Ethics
The Company has adopted a code of ethics that applies to its senior
executive and financial officers. The Company's Code of Ethics seeks to promote
(i) honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between personal and professional relationships,
(ii) full, fair, accurate, timely and understandable disclosure of information
to the Commission, (iii) compliance with applicable governmental laws, rules and
regulations, (iv) prompt internal reporting of violations of the Code to
predesignated persons, and (v) accountability for adherence to the Code. A copy
of the Company's Code of Ethics has been included as Exhibit B to this report.
Board of Directors Affiliations and Related Transactions
Stephen M. Merrick, Executive Vice President and Secretary of the Company,
is a principal of the law firm of Merrick & Klimek, P.C., which serves as
general counsel of the Company. In addition, Mr. Merrick is a principal
stockholder of the Company. Other principals of the firm of Merrick & Klimek,
P.C. own less than 1% of the Company's outstanding Common Stock. Legal fees
incurred from the firm of Merrick & Klimek, P.C. for the fiscal years ended
December 31, 2003, 2002 and 2001 were $106,750, $102,245 and $121,305,
respectively. Mr. Merrick is also an officer and director of Reliv
International, Inc. (NASDAQ-RELV).
John H. Schwan is an officer and owner of Packaging Systems, L.L.C.,
Shamrock Specialty Packaging and affiliated companies. The Company made
purchases of packaging materials from these entities in the aggregate amounts of
$118,011 and $273,910 during each of the years ended December 31, 2002 and
December 31, 2003, respectively.
In June, 1999, notes of the Company to Howard W. Schwan, John Schwan, and
Stephen Merrick in the amount of, respectively, $50,000, $350,000 and $315,000,
came due. On November 9, 1999, new notes in the same principal amounts were
issued to Messrs. H. Schwan, J. Schwan and Merrick, in payment and replacement
of the prior notes with maturity dates for each of November 9, 2001. As of that
date, each payee under the Notes had executed a consent to extend the maturity
of the Notes to March 1, 2004. In November, 1999, the June, 1997 warrants of
Messrs. H. Schwan, J. Schwan and Merrick to purchase up to (respectively) 6,359,
44,515 and 40,063 shares of the Company's Common Stock at an exercise price of
$7.86 per share were cancelled. At that time, new warrants to purchase up to
35,263, 246,840 and 222,157 shares of the Company's Common Stock at an exercise
price of $1.418 per share were issued to Messrs. H. Schwan, J. Schwan and
Merrick, respectively. Each of these warrants were exercised on June 3, 2002.
The respective $50,000, $350,000 and $315,000 notes were cancelled and used as
payment for the warrant shares.
In July, 2001, the Company issued Warrants to purchase up to 79,364 shares
of the Company's Common
14
Stock to John H. Schwan and 39,683 shares of the Company's Common Stock to
Stephen M. Merrick. The warrants were issued in consideration of Mr. Schwan and
Mr. Merrick guaranteeing and securing loans to the Company in the aggregate
amount of approximately $1,600,000. The warrants are exercisable for a period of
five years at a price of $1.50 per share.
On December 12, 2002, Messrs. John Schwan, Howard Schwan and Stephen
Merrick exercised warrants to purchase 24,572, 30,525 and 28,780 shares of the
Company's Common Stock, respectively. In each instance, the warrant holder
tendered shares of the Company's Common Stock on the date of exercise.
During February, 2003, John H. Schwan loaned $930,000 to the Company and
Stephen M. Merrick loaned $700,000 to the Company, in exchange for (i) two year
promissory notes bearing interest at 9% per annum and (ii) five year warrants to
purchase up to an aggregate of 163,000 shares of Common Stock of the Company at
$4.87 per share, the market price of the Common Stock on the date of the
Warrants. The proceeds of these loans were to (i) re-finance the loan of bank
loan of CTI Mexico in the amount of $880,000 and (ii) to provide financing for
CTI Mexico and Flexo Universal.
During 2003, John H. Schwan loaned to the Company an additional aggregate
amount of $795,024 . Such amount is due on demand and bears interest at the rate
of 8% per annum.
During 2003, John H. Schwan loaned to Flexo Universal the aggregate amount
of $225,000 and Stephen M. Merrick loaned to Flexo Universal the sum of $25,000.
These advances are reflected in notes and bear interest at the rate of 8% per
annum. The notes are unsecured.
On November 10, 1999, the Company entered into a Lease Agreement with
Pepper Road, Inc., an Illinois corporation, to lease certain warehouse and
office space located at 22222 North Pepper Road, Barrington, Illinois, the
building and property immediately adjacent to the Company's manufacturing
facilities at 22160 North Pepper Road, Barrington, Illinois. The lease has a 10
year term and provides for monthly rent payments of $15,500 ($186,000 annually),
plus all utility charges associated with the property. John Schwan, Howard
Schwan and Stephen M. Merrick are officers, directors, and the sole shareholders
of Pepper Road, Inc. On July 6, 2004, the Lease Agreement between the Company
and Pepper Road, Inc. terminated.
The Company believes that each of the transactions set forth above were
entered into, and any future related party transactions will be entered into, on
terms as fair as those obtainable from independent third parties. All related
party transactions must be approved by a majority of disinterested directors and
subject to review in the context of the Company's Code of Ethics.
15
THE BOARD OF DIRECTORS RECOMMENDS SHAREHOLDERS VOTE "FOR" THE SEVEN NOMINEES FOR
DIRECTOR NAMED IN PROPOSAL NO. 1.
PROPOSAL TWO - APPROVAL OF THE ISSUANCE OF 1,400,375 ADDITIONAL SHARES OF THE
CORPORATION'S COMMON STOCK IN CONNECTION WITH A STANDBY EQUITY DISTRIBUTION
AGREEMENT BETWEEN THE CORPORATION AND CORNELL CAPITAL PARTNERS, L.P.
Summary
On July 1, 2004, the Company entered into an Standby Equity Distribution
Agreement with Cornell Capital Partners, L.P. (the "SEDA"). Pursuant to the
SEDA, the Company may, at its sole discretion, periodically sell to Cornell
Capital Partners shares of common stock for a total purchase price of up to $5
million. For each share of common stock purchased under the SEDA, Cornell
Capital Partners will pay 100% of the volume weighted average price of the
Company's common stock on the NASDAQ SmallCap Stock Market (or other principal
market on which the Company's common stock is traded) for the five days
immediately following the notice date for the advance. Cornell Capital Partners
is a private limited partnership whose business operations are conducted through
and whose investment decisions are made by its general partner, Yorkville
Advisors, L.L.C. The effectiveness of the sale of the shares under the SEDA is
conditioned upon the Company registering the shares of common stock with the
Securities and Exchange Commission, which registration has yet to occur. The
costs associated with this registration will be borne by the Company. There are
no other significant closing conditions to draws under the equity line.
Standby Equity Line Explained
Pursuant to the SEDA, the Company may periodically sell shares of common
stock to Cornell Capital Partners to raise capital to fund CTI's working capital
needs. The periodic sale of shares is known as an advance. The Company may make
a written request for an advance from Cornell every seven trading days. A
closing will be held six trading days after such written notice at which time
CTI will deliver shares of common stock and Cornell Capital Partners will pay
the advance amount. There are no closing conditions for any of the draws other
than the written notice and associated correspondence. The Company is limited,
however, on its ability to request advances under the SEDA based on the number
of shares it has registered on its registration statement, the number of shares
CTI has authorized and the market price of CTI Industries Corporation's Common
Stock. For example, at an assumed marketing price of $2.50, the Company would
only be able to draw net proceeds of $4,375,000 under the SEDA with all of the
1,750,000 shares CTI is planning to register.
The Company may request advances under the SEDA once the underlying shares
are registered with the Securities and Exchange Commission. Thereafter, CTI may
continue to request advances until Cornell Capital Partners has advanced $5
million or 24 months after the effective date of the registration statement,
whichever occurs first.
The amount of each advance is subject to a maximum amount of $100,000, and
CTI may not submit an advance within seven trading days of a prior advance.
Advances totaling more
16
than $400,000 may not be requested in any 30 day period. The amount available
under the SEDA is not dependent on the price or volume of the Company's common
stock. The Company's ability to request advances is otherwise only conditioned
upon its registering the shares of common stock with the Securities and Exchange
Commission. In addition, the Company may not request advances if the shares to
be issued in connection with such advances would result in Cornell Capital
Partners owning more than 9.9% of CTI's outstanding common stock. Cornell
Capital Partners' beneficial ownership of CTI common stock is presently less
than 1%.
The Company does not have any agreements with Cornell Capital Partners
regarding the distribution of stock it will purchase from the Company under the
SEDA.
The Company cannot predict the actual number of shares of common stock
that will be issued pursuant to the SEDA, in part, because the purchase price of
the shares will fluctuate based on prevailing market conditions and the Company
has not determined the total amount of advances it intends to draw. Nonetheless,
the Company can estimate the number of shares of its common stock that will be
issued using certain assumptions. Assuming the Company issued the number of
shares of common stock it intends to register at a recent price of $2.50 per
share, the Company would issue 1,750,000 shares of its common stock to Cornell
Capital Partners for gross proceeds of $4,375,000. These shares would represent
approximately 47% of CTI's total outstanding common stock upon issuance.
There is an inverse relationship between the Company's stock price and the
number of shares to be issued under the SEDA. That is, as the Company's stock
price declines, it would be required to issue a greater number of shares under
the SEDA for a given advance. This inverse relationship is demonstrated by the
following table, which shows the number of shares to be issued under the SEDA at
a recent price of $3.50 per share and $3.00, $2.50 and $2.25 per share.
Purchase Price $ 3.50 $ 3.00 $ 2.50 $ 2.25
No. of Shares (1) 1,428,571 1,666,666 1,750,000 1,750,000
Total Outstanding (2) 3,402,671 3,640,766 3,724,100 3,724,100
Percent Outstanding(3) 42% 45.8% 47% 47%
Net Cash to CTI: $5,000,000 $5,000,000 $4,375,000 $3,937,500
(1) Represents the number of shares of common stock to be issued to Cornell
Capital Partners, L.P. under the SEDA at the prices set forth in the table
(2) Represents the total number of shares of common stock outstanding after
the issuance of the shares to Cornell Capital Partners, L.P. under the
SEDA and the shares issued to them as a commitment fee.
(3) Represents the shares of common stock to be issued as a percentage of the
total number shares outstanding.
Proceeds used under the SEDA will be used for general corporate purposes.
The Company cannot predict the total amount of proceeds to be raised in this
transaction because it has not determined the total amount of the advances it
intends to or may draw.
17
The Company expects to incur expenses of approximately $55,000 in
connection with the registration of the shares, consisting primarily of
professional fees. In connection with the SEDA, Cornell Capital Partners has
received a commitment fee in the form of Fourteen Thousand One Hundred Sixty-Two
(14,162) shares of CTI common stock on July 1, 2004 and will receive an
additional commitment fee of Fifty Thousand Dollars ($50,000) worth of CTI
common stock (approximately Twenty Thousand (20,000) shares) upon the
registration of the shares under the SEDA (based on a value of $2.50 per share).
Newbridge Securities Corporation, the Company's placement agent for the shares,
received Three Thousand-Five- Hundred (3,500) shares of the Company's Common
Stock. Further, under the SEDA, the Company has agreed to pay Cornell Capital
Partners' legal fees in the transaction of Fifteen Thousand Dollars ($15,000),
which fee has been included in the Company's estimate of expenses above, as well
as a 5% commitment fee for the value of each draw by the Company under the SEDA.
Rule 4350 (i)(1)(D) of the National Association of Securities Dealers
rules of Corporate Governance (a rule to which the Company is subject) provides
that approval of a majority of shareholders voting in person or by proxy is
required in all circumstances where a transaction involving the sale, issuance
or potential issuance of 20% or more of the total number of outstanding shares
of a corporation's voting stock is proposed to take place. Thus, shareholder
approval of the issuance of more than Three Hundred Eighty Seven Thousand, Two
Hundred Eighty-Seven (387,287) shares of the Company's Common Stock under the
SEDA is being sought in this Proposal 2 because the maximum number of shares of
the Company's Common Stock that is potentially issuable thereunder (1,787,662)
exceeds 20% of the total number issued and outstanding shares of Common Stock
(1,936,438) of the Company prior to any transaction or stock issuance made in
connection with the SEDA. The Company's Board of Directors has determined that
the twofold potential increase in the Company's operating capital and
shareholder liquidity that it believes would likely result from advances under
the SEDA would be a benefit that would far outweigh the transactional costs
associated with the SEDA's implementation.
If this Proposal 2 to this Proxy Statement is not approved by a majority
of the Company's shareholders, voting either in person or by proxy, the Company
will not be able to avail itself of advances from the issuance of more than
Three Hundred Forty-Nine Thousand Six Hundred Twenty-Five (349,625) shares of
its Common Stock to Cornell Capital Partners, LP under the SEDA. In the event of
non-approval, neither the Company's initial payment of 14,162 shares of its
Common Stock and $15,000 (in reimbursed legal costs) to Cornell Capital
Partners, LP will be recoverable, nor will the 3,500 shares of Common Stock the
Company has paid to Newbridge Securities Corporation, nor the approximate
additional $40,000 in legal and accounting fees incurred by the Company in
connection with the preparation of a registration statement for the SEDA shares
be recoverable. The Company would also remain obligated to remit the additional
$50,000 of shares of the Company's Common Stock to Cornell Capital Partners, LP
if any of the shares under the SEDA are registered with the Securities and
Exchange Commission. The Company presently intends to register for issuance up
to 387,287 shares of Common Stock under the SEDA even if shareholder approval is
not obtained for this Proposal 2.
A true and correct copy of the Company's SEDA Agreement with Cornell
Capital Partners, LP is attached to this Proxy as Exhibit C.
18
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE RATIFICATION
OF THE ISSUANCE OF 1,400,375 ADDITIONAL SHARES OF THE COMPANY'S COMMON STOCK
UNDER THE SEDA.
PROPOSAL THREE - SELECTION OF AUDITORS
EISNER, LLP
Effective July 22, 2003, CTI Industries Corporation (the "Registrant")
engaged Eisner, LLP as the Registrant's principal accountants to audit the
Registrant's financial statements for the year ending December 31, 2003. Eisner,
LLP replaced McGladrey & Pullen, LLP, which had previously been engaged for the
same purpose, and whose dismissal was effective July 22, 2003. The decision to
change the Registrant's principal accountants was approved by the Registrant's
Board of Directors on July 22, 2003.
The reports of McGladrey & Pullen, LLP, on the Registrant's financial
statements for the fiscal year ended December 31, 2002 did not contain an
adverse opinion or disclaimer of opinion, nor were they qualified or modified as
to uncertainty, audit scope, or accounting principles.
Effective July 24, 2002, the Company engaged McGladrey & Pullen, LLP as
the Registrant's principal accountants to audit the Company's financial
statements for the year ending December 31, 2002. McGladrey & Pullen, LLP
replaced Grant Thornton, LLP, which had previously been engaged for the same
purpose, and whose dismissal was effective July 24, 2002. The decision to change
the Company's principal accountants was approved by the Company's Audit
Committee and Board of Directors on July 24, 2002.
During the Company's fiscal year ended December 31, 2002 and in the
subsequent interim period through March 31, 2003, there were no disagreements
with McGladrey & Pullen, LLP on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of McGladrey & Pullen, LLP
would have caused it to make reference to the subject matter of the
disagreements in connection with its reports on the financial statements for
such periods.
McGladrey & Pullen, LLP has not informed the Company of any reportable
events during the Company's fiscal year ended December 31, 2002 or in the
subsequent interim period ending March 31, 2003.
The reports of Grant Thornton LLP, on the Company's financial statements
for the prior two fiscal years ended December 31, 2000, and December 31, 2001
did not contain an adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope, or accounting principles.
During the Company's fiscal years ended December 31, 2000, and December
31, 2001, and in the subsequent interim periods through July 24, 2002, there
were no disagreements with Grant Thornton, LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of Grant
Thornton, LLP, would have caused it to make reference to the subject
19
matter of the disagreements in connection with its reports on the financial
statements for such periods.
Grant Thornton, LLP has not informed the Company of any reportable events
during the Company's two fiscal years ended December 31, 2000 and 2001 and in
subsequent interim periods through July 24, 2002.
Fees Billed By Independent Public Accountants
The following table sets forth the aggregate amount of audit fees and all
other fees billed or expected to be billed by Eisner, LLP, the Company's
principal auditor, for the year ended December 31, 2003:
Amount
------
Audit fees (1) $ 98,500
Other audit related fees (2) $ 15,000
All other fees(3) $ 15,000
--------
Total fees $128,500
========
(1) Includes the annual financial statement audit and limited quarterly
reviews and expenses.
(2) Includes fees and expenses for other audit related activity provided by
Eisner, LLP.
(3) Primarily represents tax services, which include preparation of tax
returns and other tax consulting services.
Eisner, LLP became the Company's principal auditor in July, 2003,
replacing the Company's principal auditor for the fiscal year ended December 31,
2002, McGladrey & Pullen, LLP. Consequently, Eisner, LLP billed no fees to the
Company in 2002.
The audit-related fees charged to the Company by McGladrey & Pullen, LLP
and RSM McGladrey, Inc. (an affiliate of McGladrey & Pullen, LLP) for the fiscal
year ended December 31, 2002 and in 2003 were as follows:
2002 2003
Amount Amount
------ ------
Audit fees (1) $301,000 $84,200
Other audit related fees (2) $ 8,900 $ 0
All other fees (3) $ 19,100 $ 0
-------- -------
Total fees $329,000 $84,200
======== =======
----------
(footnotes continued on next page)
20
(1) Includes the annual financial statement audit and limited quarterly
reviews and expenses.
(2) Includes fees and expenses for other audit related activity provided by
McGladrey & Pullen, LLP.
(3) Primarily represents tax services provided by RSM McGladrey, Inc. which
include preparation of tax returns and other tax consulting services.
The Board of Directors have selected and approved Eisner, LLP as the
principal independent auditor to audit the financial statements of the Company
for 2004, subject to ratification by the shareholders. It is expected that a
representative of the firm of Eisner, LLP will be present at the annual meeting
and will have an opportunity to make a statement if they so desire and will be
available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS SHAREHOLDERS VOTE "FOR" SUCH RATIFICATION.
Stockholder Proposals for 2005 Proxy Statement
Proposals by shareholders for inclusion in the Company's Proxy Statement
and form of proxy relating to the 2005 Annual Meeting of Stockholders, which is
tentatively scheduled to be held on July 31, 2005 should be addressed to the
Secretary, CTI Industries Corporation, 22160 North Pepper Road, Barrington,
Illinois 60010, and must be received at such address no later than December 31,
2004. Upon receipt of any such proposal, the Company will determine whether or
not to include such proposal in the Proxy Statement and proxy in accordance with
applicable law. It is suggested that such proposal be forwarded by certified
mail, return receipt requested.
Other Matters to Be Acted Upon at the Meeting
The management of the Company knows of no other matters to be presented at
the meeting. Should any other matter requiring a vote of the shareholders arise
at the meeting, the persons named in the proxy will vote the proxies in
accordance with their best judgment.
BY ORDER OF THE
BOARD OF DIRECTORS
Dated: August 13, 2004
--------------------------------------
Stephen M. Merrick, Secretary
21
EXHIBIT A
AUDIT COMMITTEE CHARTER
OF CTI INDUSTRIES CORPORATION
1. Organization
There shall be a committee of the Board of Directors of CTI Industries
Corporation (the "Corporation") to be known as the Audit Committee. This charter
(the "Charter") shall govern the operations of the Audit Committee. The
Committee shall review and reassess the adequacy of this Charter at least
annually, and shall submit any revisions to this Charter to the Board of
Directors for their approval. The Audit Committee shall be composed of at least
three directors who are independent of the management of the Corporation. A
director shall be deemed independent if he is free of any relationship that, in
the opinion of the Board of Directors, would interfere with exercise of
independent judgment as a Committee member. To ensure that an audit committee
member satisfies the definition of "independent" according to both Item 7(d) (3)
(iv) of Schedule 14A under the Securities Exchange Act and NASDAQ's SmallCap
Marketplace Rules, an Audit Committee member may not:
o have been employed by the Corporation or its affiliates in the current or
past three years;
o have accepted any compensation from the Corporation or its affiliates in
excess of $60,000 during the previous fiscal year (except for board
service, retirement plan benefits, or non-discretionary compensation);
o have an immediate family member who is, or has been in the past three
years, employed by the Corporation or its affiliates as an executive
officer;
o have been a partner, controlling shareholder or an executive officer of
any for-profit business to which the Corporation made, or from which it
received, payments (other than those which arise solely from investments
in the Corporation's securities) that exceed five percent of the
organization's consolidated gross revenues for that year, or $200,000,
whichever is more, in any of the past three years; or
o have been employed as an executive of another entity where any of the
Corporation's executives serve on that entity's compensation committee.
In addition, the Corporation shall have one member who is designated and meets
the requirements of an "audit committee financial expert" as that term is
defined in Item 401(h) of Regulation S-K of the Exchange Act. An "audit
committee financial expert" shall possess all of the following five attributes:
o An understanding of generally accepted accounting principles ("GAAP") and
financial statements;
o The ability to assess the general application of such principles in
connection with the accounting for estimates, accruals and reserves;
o Experience preparing, auditing, analyzing or evaluating financial
statements that present a breadth and level of complexity of accounting
issues that are generally comparable to the breadth and complexity of
issues that can reasonably be expected to be raised by the Corporation's
financial statements, or experience actively supervising one or more
persons engaged in such activities;
o An understanding of internal controls and procedures for financial
reporting; and
o An understanding of audit committee functions.
The foregoing attributes must have been acquired by the audit committee
financial expert through one or more of the following means:
(1) Education and experience as a public accountant or a principal
financial officer, controller or principal accounting office of a
company, or experience in one or more positions involving the
performance of similar functions;
(2) Experience actively supervising any of the persons referred to in
(1) above;
(3) Experience in overseeing or assessing the performance of companies
or public accountants with respect to the preparation, auditing or
evaluation of financial statements; or
(4) other relevant experience.
All Audit Committee members shall be able to read and understand fundamental
financial statements, including but not limited to balance sheets, income
statements and cash flow statements.
2. Statement of Policy
The Audit Committee shall provide assistance to the Corporation's
directors in fulfilling their responsibility to the shareholders, potential
shareholders, and investment community relating to corporate accounting and
financial reporting practices of the Corporation, and the quality and integrity
of the financial reports of the Corporation. In so doing, it is the
responsibility of the Audit Committee to maintain free and open means of
communication between the directors, the independent auditors, the internal
auditors, and the financial management of the Corporation. In discharging its
oversight role, the Committee is empowered to investigate any matter brought to
its attention with full access to all books, records, facilities, and counsel or
other experts for this purpose.
3. Responsibilities and Processes
The primary responsibility of the Audit Committee is to oversee the
Corporation's financial reporting process on behalf of the Board and report the
results of their activities to the Board. Management is responsible for
preparing the Corporation's financial statements, and the independent auditors
are responsible for auditing those financial statements. In carrying out its
responsibilities, the Audit Committee believes its policies and procedures
should remain flexible,
2
in order to best react to changing conditions and to ensure to the directors and
shareholders that the corporate accounting and reporting practices of the
Corporation are in accordance with all applicable requirements and are of the
highest quality.
In carrying out these responsibilities, the Audit Committee will:
3.1 Provide an open avenue of communication between the independent
auditor, the internal auditor, management and the Board of Directors. The
Committee shall have a clear understanding with management and the independent
auditors that the independent auditors are ultimately accountable to the Board
and the Audit Committee.
3.2 Meet at least one time per year or more frequently as circumstances
require. The Audit Committee may ask members of management or others to attend
meetings and provide pertinent information as necessary.
3.3 Review and recommend to the Directors the independent auditors to be
selected to audit the financial statements of the corporation, and approve the
compensation of the independent auditors. The Committee shall have the ultimate
authority and responsibility to evaluate and, where appropriate, replace the
independent auditors (or to nominate the independent auditor to be proposed for
shareholder approval in any proxy statement).
3.4 Review and concur in the appointment, replacement, reassignment or
dismissal of the internal auditor.
3.5 Confirm and assure the independence of the independent auditors. The
Audit Committee has the responsibility for ensuring its receipt from the
independent auditors of a formal written statement delineating all relationships
between the auditors and the Corporation. The Audit Committee also has the
responsibility for actively engaging in a dialogue with the independent auditors
with respect to any disclosed relationships or services that may impact the
objectively and independence of the independent auditor and for taking, or
recommending that the full Board take appropriate action to oversee the
independence of the independent auditors.
3.6 Meet with the independent auditors and internal auditors to review the
scope of the proposed audit for the current year and the audit procedures to be
utilized, and at the conclusion thereof review such audit, including any
comments or recommendations of the independent or internal auditors.
3.7 Review with the independent auditors and the internal auditor(s) the
adequacy and effectiveness of the accounting and financial controls of the
Corporation, and elicit any recommendations for the improvement of such internal
control procedures or particular areas where new or more detailed controls or
procedures are desirable. The Audit Committee should also review with the
independent and internal auditors the coordination of audit efforts to assure
3
completeness of coverage, reduction of redundant efforts, and the effective use
of audit resources.
3.8 Inquire of management, the internal auditor(s), and the independent
auditors about significant business risks or exposures and assess the steps
management has taken to minimize such risk to the Corporation.
3.9 Review with management, the independent auditors and the internal
auditor(s) the interim financial report prior to the filing of the quarterly
report on Form 10-Q. The Audit Committee shall discuss the results of the
quarterly review and any other matters required to be communicated to the Audit
Committee by the independent auditors under generally accepted auditing
standards.
3.10 The Audit Committee shall review with management, the independent
auditors and the internal auditor(s) the financial statements to be included in
the Annual Report on Form 10-K, including their judgment about the quality, not
just acceptability, of accounting principles, the reasonableness of significant
judgments, and the clarity of the disclosures in the financial statements. Also,
the Audit Committee shall discuss the results of the annual audit and any other
matters required to be communicated to the Audit Committee by the independent
auditors under generally accepted auditing standards.
3.11 Review with the Board of Directors and the independent auditors at
the completion of the annual examination:
(a) The Corporation's annual financial statements and related
footnotes;
(b) The independent auditor's audit of the financial statements and
his report thereon;
(c) Any significant changes required in the independent auditor's
audit plan;
(d) Any serious difficulties or disputes with management encountered
during the course of the audit; and
(e) Other matters relating to the conduct of the audit which are to
be communicated to the Audit Committee under generally accepted auditor
standards.
3.12 Consider and review with management and the internal auditor(s):
(a) Significant findings during the year and management's responses
thereto;
(b) Any difficulties encountered in the course of their audits,
including any restrictions on the scope of their work or access to
required information;
4
(c) Any changes required in the planned scope of their audit plan;
(d) The internal auditing department budget and staffing; and
(e) Internal auditing's compliance with appropriate accounting
standards.
3.13 Provide sufficient opportunity for the internal and independent
auditors to meet with the members of the Audit Committee with and without
members of management present to discuss results of examinations. Among the
items to be discussed in these meetings are the independent auditors' evaluation
of the corporation's financial, accounting, and auditor personnel, and the
cooperation that the independent auditors received during the course of the
audit.
3.14 Review legal and regulatory matters that may have a material impact
on the financial statements, related company compliance policies, and programs
and reports received from regulators.
3.15 Submit the minutes of all meetings of the Audit Committee to, or
discuss the matters discussed at each committee meeting with, the Board of
Directors.
3.16 Investigate any matter brought to its attention within the scope of
its duties.
3.17 Report Committee actions to the Board of Directors with such
recommendations as the Audit Committee may deem appropriate.
3.18 The duties and responsibilities of a member of the Audit Committee
are in addition to those duties set out for a member of the Board of Directors.
Effective this 8th day of April, 2004, by order of this Corporation's Board of
Directors.
/s/ Stephen M. Merrick
--------------------------------
Stephen M. Merrick, Secretary
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EXHIBIT B
CTI INDUSTRIES CORPORATION
Code of Ethics
for Senior Executive and Financial Officers
I. General
The policy of CTI Industries Corporation (the "Company") is to comply
strictly with all laws governing its operations and to conduct its affairs in
keeping with the highest moral, legal and ethical standards. Senior executive
and financial officers hold an important and elevated role in maintaining a
commitment to (i) honest and ethical conduct, (ii) full, fair, accurate, timely
and understandable disclosure in the Company's public communications, and (iii)
compliance with applicable governmental rules and regulations. Accordingly, the
Company has adopted this Code of Ethics for its Chief Executive Officer, Chief
Financial Officer, Controller and any other senior executive or financial
officers performing similar functions and so designated from time to time by the
Chief Executive Officer (the "Senior Executive and Financial Officers"). This
Code of Ethics shall be approved annually by the Audit Committee of the Board of
Directors (the "Committee") and disbursed to the public by means of one of the
methods described in Item 406 of Regulation S-K promulgated by the Securities
and Exchange Commission (the "SEC").
II. Honest and Ethical Conduct
Senior Executive and Financial Officers are expected to exhibit and
promote the highest standards of honest and ethical conduct, by, among other
things, their adherence to the following policies and procedures:
o Senior Executive and Financial Officers shall engage in only honest
and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between personal and professional
relationships.
o Senior Executive and Financial Officers shall inform the Company's
Corporate Counsel or, in his absence, the Chairman of the Committee
of (a) deviations in practice from policies and procedures governing
honest and ethical behavior or (b) any material transaction or
relationship that could reasonably be expected to create a conflict
of interest.
o Senior Executive and Financial Officers shall demonstrate personal
support for the policies and procedures set forth in this Code of
Ethics through periodic communications reinforcing these principles
and standards throughout the Company.
o Senior Executive and Financial Officers shall respect the
confidentiality of information acquired in performance of one's
responsibilities and shall not use confidential information for
personal advantage.
III. Financial Records and Periodic Reports
The Company is committed to full, fair, accurate, timely and
understandable disclosures in reports and documents that it files with, or
submits to, the SEC and in other public communications made by the Company. In
support of this commitment, the Company has, among other measures, (a) designed
and implemented disclosure controls and procedures (within the meaning of
applicable SEC rules) and (b) required the maintenance of accurate and complete
records, the prohibition of false, misleading or artificial entries on its books
and records, and the full and complete documentation and recording of
transactions in the Company's accounting records. In addition to performing
their duties and responsibilities under these requirements, each of the Senior
Executive and Financial Officers will establish and manage the Company's
reporting systems and procedures with due care and diligence to ensure that:
o Reports filed with or submitted to the SEC and other public
communications contain information that is full, fair, accurate,
timely and understandable and do not misrepresent or omit material
facts.
o Business transactions are properly authorized and completely and
accurately recorded in all material respects on the Company's books
and records in accordance with generally accepted accounting
principles and the Company's established financial policies.
o Retention or disposal of Company records is in accordance with
established Company policies and applicable legal and regulatory
requirements.
IV. Compliance with Applicable Laws, Rules and Regulations
The policy of the Company is to comply strictly with all laws governing
its operations and to conduct its affairs in keeping with the highest moral,
legal and ethical standards. Accordingly, the Senior Executive and Financial
Officers will comply with all applicable governmental laws, rules and
regulations, and will establish and maintain mechanisms to:
o Monitor compliance of the Company's finance organization and other
key employees with all applicable federal, state and local statutes,
rules, regulations and administrative procedures.
o Identify, report and correct any detected deviations from applicable
federal, state and local statutes, rules, regulations and
administrative procedures.
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V. Compliance with Code of Ethics
The Senior Executive and Financial Officers shall acknowledge and certify
their ongoing compliance with this Code of Ethics annually and provide a copy of
such certification to the Committee. This Code of Ethics will be published and
made available to all employees, and any employee should promptly report any
violation of this Code of Ethics to the General Counsel or, in his or her
absence, the Chairman of the Committee. The Board of Directors shall take
appropriate action with respect tot he failure of any Senior Executive or
Financial Officer to comply with this Code of Ethics, which may include
reprimand, demotion or dismissal, depending on the seriousness of the offense.
Adopted: April, 2004
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EXHIBIT C
STANDBY EQUITY DISTRIBUTION AGREEMENT
AGREEMENT dated as of the 1st day of June 2004 (the "Agreement") between
CORNELL CAPITAL PARTNERS, LP, a Delaware limited partnership (the "Investor"),
and CTI INDUSTRIES CORPORATION a corporation organized and existing under the
laws of the State of Illinois (the "Company").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the Investor,
from time to time as provided herein, and the Investor shall purchase from the
Company up to Five Million Dollars ($5,000,000) of the Company's common stock,
no par value per share (the "Common Stock"); and
WHEREAS, such investments will be made in reliance upon the provisions of
Regulation D ("Regulation D") of the Securities Act of 1933, as amended, and the
regulations promulgated thereunder (the "Securities Act"), and or upon such
other exemption from the registration requirements of the Securities Act as may
be available with respect to any or all of the investments to be made hereunder.
WHEREAS, the Company has engaged Newbridge Securities Corp., to act as the
Company's exclusive placement agent in connection with the sale of the Company's
Common Stock to the Investor hereunder pursuant to the Placement Agent Agreement
dated the date hereof by and among the Company, the Placement Agent and the
Investor (the "Placement Agent Agreement").
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I.
Certain Definitions
Section 1.1. "Advance" shall mean the portion of the Commitment Amount
requested by the Company in the Advance Notice.
Section 1.2. "Advance Date" shall mean the date Butler Gonzalez LLP Escrow
Account is in receipt of the funds from the Investor and Butler Gonzalez LLP, as
the Investor's Counsel, is in possession of free trading shares from the Company
and therefore an Advance by the Investor to the Company can be made and Butler
Gonzalez LLP can release the free trading shares to the Investor. The Advance
Date shall be the first (1st) Trading Day after expiration of the applicable
Pricing Period for each Advance.
Section 1.3. "Advance Notice" shall mean a written notice to the Investor
setting forth the Advance amount that the Company requests from the Investor and
the Advance Date.
Section 1.4. "Advance Notice Date" shall mean each date the Company
delivers to the Investor an Advance Notice requiring the Investor to advance
funds to the Company, subject to the terms of this Agreement. No Advance Notice
Date shall be less than seven (7) Trading Days after the prior Advance Notice
Date.
Section 1.5. "Bid Price" shall mean, on any date, the closing bid price
(as reported by Bloomberg L.P.) of the Common Stock on the Principal Market or
if the Common Stock is not traded on a Principal Market, the highest reported
bid price for the Common Stock, as furnished by the National Association of
Securities Dealers, Inc.
Section 1.6. "Closing" shall mean one of the closings of a purchase and
sale of Common Stock pursuant to Section 2.3.
Section 1.7. "Commitment Amount" shall mean the aggregate amount of up to
Five Million Dollars ($5,000,000) which the Investor has agreed to provide to
the Company in order to purchase the Company's Common Stock pursuant to the
terms and conditions of this Agreement.
Section 1.8. "Commitment Period" shall mean the period commencing on the
earlier to occur of (i) the Effective Date, or (ii) such earlier date as the
Company and the Investor may mutually agree in writing, and expiring on the
earliest to occur of (x) the date on which the Investor shall have made payment
of Advances pursuant to this Agreement in the aggregate amount of Five Million
Dollars ($5,000,000), (y) the date this Agreement is terminated pursuant to
Section 2.5, or (z) the date occurring twenty-four (24) months after the
Effective Date.
Section 1.9. "Common Stock" shall mean the Company's common stock, no par
value per share.
Section 1.10. "Condition Satisfaction Date" shall have the meaning set
forth in Section 7.2.
Section 1.11. "Damages" shall mean any loss, claim, damage, liability,
costs and expenses (including, without limitation, reasonable attorney's fees
and disbursements and costs and expenses of expert witnesses and investigation).
Section 1.12. "Effective Date" shall mean the date on which the SEC first
declares effective a Registration Statement registering the resale of the
Registrable Securities as set forth in Section 7.2(a).
Section 1.13. "Escrow Agreement" shall mean the escrow agreement among the
Company, the Investor, and Butler Gonzalez LLP dated the date hereof.
Section 1.14. "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder.
Section 1.15. "Material Adverse Effect" shall mean any condition,
circumstance, or situation that would prohibit or otherwise materially interfere
with the ability of the Company to
2
enter into and perform any of its obligations under this Agreement or the
Registration Rights Agreement in any material respect.
Section 1.16. "Market Price" shall mean the lowest daily VWAP of the
Common Stock during the Pricing Period.
Section 1.17. "Maximum Advance Amount" shall be One Hundred Thousand
Dollars ($100,000) per Advance Notice up to a maximum of Four Hundred Thousand
Dollars ($400,000), in the aggregate, in any thirty-day (30) calendar period.
Section 1.18 "NASD" shall mean the National Association of Securities
Dealers, Inc.
Section 1.19 "Person" shall mean an individual, a corporation, a
partnership, an association, a trust or other entity or organization, including
a government or political subdivision or an agency or instrumentality thereof.
Section 1.20 "Placement Agent" shall mean Newbridge Securities Corporation
a registered broker-dealer.
Section 1.21 "Pricing Period" shall mean the five (5) consecutive Trading
Days after the Advance Notice Date.
Section 1.22 "Principal Market" shall mean the Nasdaq National Market, the
Nasdaq SmallCap Market, the American Stock Exchange, the OTC Bulletin Board or
the New York Stock Exchange, whichever is at the time the principal trading
exchange or market for the Common Stock.
Section 1.23 "Purchase Price" shall be set at one hundred percent (100%)
of the Market Price during the Pricing Period.
Section 1.24 "Registrable Securities" shall mean the shares of Common
Stock to be issued hereunder (i) in respect of which the Registration Statement
has not been declared effective by the SEC, (ii) which have not been sold under
circumstances meeting all of the applicable conditions of Rule 144 (or any
similar provision then in force) under the Securities Act ("Rule 144") or (iii)
which have not been otherwise transferred to a holder who may trade such shares
without restriction under the Securities Act, and the Company has delivered a
new certificate or other evidence of ownership for such securities not bearing a
restrictive legend.
Section 1.25 "Registration Rights Agreement" shall mean the Registration
Rights Agreement dated the date hereof, regarding the filing of the Registration
Statement for the resale of the Registrable Securities, entered into between the
Company and the Investor.
Section 1.26 "Registration Statement" shall mean a registration statement
on Form S-1 or S-3 (if use of such form is then available to the Company
pursuant to the rules of the SEC and, if not, on such other form promulgated by
the SEC for which the Company then qualifies and which counsel for the Company
shall deem appropriate, and which form shall be available for the resale of the
Registrable Securities to be registered there under in accordance with the
provisions of this Agreement and the Registration Rights Agreement, and in
accordance with the
3
intended method of distribution of such securities), for the registration of the
resale by the Investor of the Registrable Securities under the Securities Act.
Section 1.27 "Regulation D" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.28 "SEC" shall mean the Securities and Exchange Commission.
Section 1.29 "Securities Act" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.30 "SEC Documents" shall mean Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and Proxy Statements
of the Company as supplemented to the date hereof, filed by the Company for a
period of at least twelve (12) months immediately preceding the date hereof or
the Advance Date, as the case may be, until such time as the Company no longer
has an obligation to maintain the effectiveness of a Registration Statement as
set forth in the Registration Rights Agreement.
Section 1.31 "Trading Day" shall mean any day during which the New York
Stock Exchange shall be open for business.
Section 1.32 "VWAP" shall mean the volume weighted average price of the
Company's Common Stock as quoted by Bloomberg, LP.
ARTICLE II.
Advances
Section 2.1. Investments.
(a) Advances. Upon the terms and conditions set forth herein
(including, without limitation, the provisions of Article VII hereof), on any
Advance Notice Date the Company may request an Advance by the Investor by the
delivery of an Advance Notice. The number of shares of Common Stock that the
Investor shall receive for each Advance shall be determined by dividing the
amount of the Advance by the Purchase Price. No fractional shares shall be
issued. Fractional shares shall be rounded to the next higher whole number of
shares. The aggregate maximum amount of all Advances that the Investor shall be
obligated to make under this Agreement shall not exceed the Commitment Amount.
Section 2.2. Mechanics.
(a) Advance Notice. At any time during the Commitment Period, the
Company may deliver an Advance Notice to the Investor, subject to the conditions
set forth in Section 7.2; provided, however, the amount for each Advance as
designated by the Company in the applicable Advance Notice, shall not be more
than the Maximum Advance Amount. The aggregate amount of the Advances pursuant
to this Agreement shall not exceed the Commitment Amount. The Company
acknowledges that the Investor may sell shares of the Company's Common Stock
corresponding with a particular Advance Notice on the day the Advance Notice
4
is received by the Investor. There will be a minimum of seven (7) Trading Days
between each Advance Notice Date.
(b) Date of Delivery of Advance Notice. An Advance Notice shall be
deemed delivered on (i) the Trading Day it is received by facsimile or otherwise
by the Investor if such notice is received prior to 12:00 noon Eastern Time, or
(ii) the immediately succeeding Trading Day if it is received by facsimile or
otherwise after 12:00 noon Eastern Time on a Trading Day or at any time on a day
which is not a Trading Day. No Advance Notice may be deemed delivered, on a day
that is not a Trading Day.
(c) Pre-Closing Share Credit. Within two (2) business days after the
Advance Notice Date, the Company shall credit shares of the Company's Common
Stock to the balance account of Butler Gonzalez LLP (the "Escrow Agent" and/or
"Investor's Counsel") with The Depository Trust Company through its Deposit
Withdrawal At Custodian system, in an amount equal to the amount of the
requested Advance divided by the closing Bid Price of the Company's Common Stock
as of the Advance Notice Date multiplied by one point one (1.1). Any adjustments
to the number of shares to be delivered to the Investor at the Closing as a
result of fluctuations in the closing Bid Price of the Company's Common Stock
shall be made as of the date of the Closing. Any excess shares shall be credited
to the next Advance. In no event shall the number of shares issuable to the
Investor pursuant to an Advance cause the Investor to own in excess of nine and
9/10 percent (9.9%) of the then outstanding Common Stock of the Company.
(d) Hardship. In the event the Investor sells the Company's Common
Stock pursuant to subsection (c) above and the Company fails to perform its
obligations as mandated in Section 2.5 and 2.2 (c), and specifically fails to
provide the Investor with the shares of Common Stock for the applicable Advance,
the Company acknowledges that the Investor shall suffer financial hardship and
therefore shall be liable for any and all losses, commissions, fees, or
financial hardship caused to the Investor.
Section 2.3. Closings. On each Advance Date, which shall be the first
(1st) Trading Day after expiration of the applicable Pricing Period for each
Advance, (i) the Company shall deliver to the Investor's Counsel, as defined
pursuant to the Escrow Agreement, shares of the Company's Common Stock,
representing the amount of the Advance by the Investor pursuant to Section 2.1
herein, registered in the name of the Investor which shall be delivered to the
Investor, or otherwise in accordance with the Escrow Agreement, subject to
adjustment for shares previously delivered with respect to such Advance pursuant
to Section 2.2(c) herein and (ii) the Investor shall deliver to the Investor's
Counsel the amount of the Advance specified in the Advance Notice by wire
transfer of immediately available funds which shall be delivered to the Company,
or otherwise in accordance with the Escrow Agreement. In addition, on or prior
to the Advance Date, each of the Company and the Investor shall deliver to the
other through the Investor's Counsel all documents, instruments and writings
required to be delivered by either of them pursuant to this Agreement in order
to implement and effect the transactions contemplated herein. Payment of funds
to the Company and delivery of the Company's Common Stock to the Investor shall
occur in accordance with the conditions set forth above and those contained in
the Escrow Agreement; provided, however, that to the extent the Company has not
paid the fees, expenses, and disbursements of the Investor and the Investor's
counsel in accordance with
5
Section 12.4, the amount of such fees, expenses, and disbursements may be
deducted by the Investor (and shall be paid to the relevant party) from the
amount of the Advance with no reduction in the amount of shares of the Company's
Common Stock to be delivered on such Advance Date.
Section 2.4. Termination of Investment. The obligation of the Investor to
make an Advance to the Company pursuant to this Agreement shall terminate
permanently (including with respect to an Advance Date that has not yet
occurred) in the event that (i) there shall occur any stop order or suspension
of the effectiveness of the Registration Statement for an aggregate of fifty
(50) Trading Days, other than due to the acts of the Investor, during the
Commitment Period, and (ii) the Company shall at any time fail materially to
comply with the requirements of Article VI and such failure is not cured within
thirty (30) days after receipt of written notice from the Investor, provided,
however, that this termination provision shall not apply to any period
commencing upon the filing of a post-effective amendment to such Registration
Statement and ending upon the date on which such post effective amendment is
declared effective by the SEC..
Section 2.5. Agreement to Advance Funds.
(a) The Investor agrees to advance the amount specified in the
Advance Notice to the Company after the completion of each of the following
conditions and the other conditions set forth in this Agreement:
(i) the execution and delivery by the Company, and the
Investor, of this Agreement, and the Exhibits hereto;
(ii) Investor's Counsel shall have received the shares of
Common Stock applicable to the Advance in accordance with Section 2.2(c) hereof;
(iii) the Company's Registration Statement with respect to the
resale of the Registrable Securities in accordance with the terms of the
Registration Rights Agreement shall have been declared effective by the SEC;
(iv) the Company shall have obtained all material permits and
qualifications required by any applicable state for the offer and sale of the
Registrable Securities, or shall have the availability of exemptions therefrom.
The sale and issuance of the Registrable Securities shall be legally permitted
by all laws and regulations to which the Company is subject;
(v) the Company shall have filed with the Commission in a
timely manner all reports, notices and other documents required of a "reporting
company" under the Exchange Act and applicable Commission regulations;
(vi) the fees as set forth in Section 12.4 below shall have
been paid or can be withheld as provided in Section 2.3;
(vii) the conditions set forth in Section 7.2 shall have been
satisfied; and
(viii) The Company's transfer agent shall be DWAC eligible.
6
(b) In the event that the Investor shall fail to advance and pay
funds to the Company as provided in this Agreement, the Company shall provide
the Investor written notice of such failure, of which receipt shall be confirmed
by the sending party by providing a confirmation of successful facsimile
transmission, in the event such failure to perform is not cured within ten (10)
business days from the receipt of such notice from the Company the Investor
shall be liable to the Company for (i) the amount of the Advance it is obligated
to make together with interest thereon at a rate of three percent (3%) in excess
of Prime Rate (as set forth in the Midwest Edition of the Wall Street Journal,
(ii) any and all reasonable losses or damage incurred by the Company as a result
of the Investor to timely advance funds to the Company as provided herein, and
(iii) all reasonable costs and expenses which the Company has incurred in their
effort to collect from the Investor the amount of such Advance and any damages,
including without limitation, a reasonable sum for its attorney's fees.
Section 2.6. Lock Up Period.
During the Commitment Period, the Company shall not, without
thirty (30) calendar days advance written notice to the Investor, of which
receipt shall be confirmed by the sending party by providing a confirmation of
successful facsimile transmission, issue or sell (i) any Common Stock or
Preferred Stock without consideration or for a consideration per share less than
the Bid Price on the date of issuance, except for shares of the Company's Common
Stock which are purchased upon exercise of options or warrants or (ii) issue or
sell any warrant, option, right, contract, call, or other security or instrument
granting the holder thereof the right to acquire Common Stock without
consideration or for a consideration per share less than the Bid Price on the
date of issuance.
ARTICLE III.
Representations and Warranties of Investor
Investor hereby represents and warrants to, and agrees with, the Company
that the following are true and as of the date hereof and as of each Advance
Date:
Section 3.1. Organization and Authorization. The Investor is duly
incorporated or organized and validly existing in the jurisdiction of its
incorporation or organization and has all requisite power and authority to
purchase and hold the securities issuable hereunder. The decision to invest and
the execution and delivery of this Agreement by such Investor, the performance
by such Investor of its obligations hereunder and the consummation by such
Investor of the transactions contemplated hereby have been duly authorized and
requires no other proceedings on the part of the Investor. The undersigned has
the right, power and authority to execute and deliver this Agreement and all
other instruments (including, without limitations, the Registration Rights
Agreement), on behalf of the Investor. This Agreement has been duly executed and
delivered by the Investor and, assuming the execution and delivery hereof and
acceptance thereof by the Company, will constitute the legal, valid and binding
obligations of the Investor, enforceable against the Investor in accordance with
its terms.
Section 3.2. Evaluation of Risks. The Investor has such knowledge and
experience in financial tax and business matters as to be capable of evaluating
the merits and risks of, and bearing the economic risks entailed by, an
investment in the Company and of protecting its
7
interests in connection with this transaction. It recognizes that its investment
in the Company involves a high degree of risk.
Section 3.3. No Legal Advice From the Company. The Investor acknowledges
that it had the opportunity to review this Agreement and the transactions
contemplated by this Agreement with his or its own legal counsel and investment
and tax advisors. The Investor is relying solely on such counsel and advisors
and not on any statements or representations of the Company or any of its
representatives or agents for legal, tax or investment advice with respect to
this investment, the transactions contemplated by this Agreement or the
securities laws of any jurisdiction.
Section 3.4. Investment Purpose. The securities are being purchased by the
Investor for its own account, for investment and without any view to the
distribution, assignment or resale to others or fractionalization in whole or in
part. The Investor agrees not to assign or in any way transfer the Investor's
rights to the securities or any interest therein and acknowledges that the
Company will not recognize any purported assignment or transfer except in
accordance with applicable Federal and state securities laws. No other person
has or will have a direct or indirect beneficial interest in the securities. The
Investor agrees not to sell, hypothecate or otherwise transfer the Investor's
securities unless the securities are registered under Federal and applicable
state securities laws or unless, in the opinion of counsel satisfactory to the
Company, an exemption from such laws is available.
Section 3.5. Accredited Investor. The Investor is an "Accredited Investor"
as that term is defined in Rule 501(a)(3) of Regulation D of the Securities Act.
Section 3.6. Information. The Investor and its advisors (and its counsel),
if any, have been furnished with all materials relating to the business,
finances and operations of the Company and information it deemed material to
making an informed investment decision. The Investor and its advisors, if any,
have been afforded the opportunity to ask questions of the Company and its
management. Neither such inquiries nor any other due diligence investigations
conducted by such Investor or its advisors, if any, or its representatives shall
modify, amend or affect the Investor's right to rely on the Company's
representations and warranties contained in this Agreement. The Investor
understands that its investment involves a high degree of risk. The Investor is
in a position regarding the Company, which, based upon employment, family
relationship or economic bargaining power, enabled and enables such Investor to
obtain information from the Company in order to evaluate the merits and risks of
this investment. The Investor has sought such accounting, legal and tax advice,
as it has considered necessary to make an informed investment decision with
respect to this transaction.
Section 3.7. Receipt of Documents. The Investor and its counsel has
received and read in their entirety: (i) this Agreement and the Exhibits annexed
hereto; (ii) all due diligence and other information necessary to verify the
accuracy and completeness of such representations, warranties and covenants;
(iii) the Company's Form 10-K for the year ended year ended December 31, 2003
and Form 10-Q for the periods ended March 31, 2004; and (iv) answers to all
questions the Investor submitted to the Company regarding an investment in the
Company; and the Investor has relied on the information contained therein and
has not been furnished any other documents, literature, memorandum or
prospectus.
8
Section 3.8. Registration Rights Agreement and Escrow Agreement. The
parties have entered into the Registration Rights Agreement and the Escrow
Agreement, each dated the date hereof.
Section 3.9. No General Solicitation. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has engaged in any
form of general solicitation or general advertising (within the meaning of
Regulation D under the Securities Act) in connection with the offer or sale of
the shares of Common Stock offered hereby.
Section 3.10. Not an Affiliate. The Investor is not an officer, director
or a person that directly, or indirectly through one or more intermediaries,
controls or is controlled by, or is under common control with the Company or any
"Affiliate" of the Company (as that term is defined in Rule 405 of the
Securities Act). Neither the Investor nor its Affiliates has an open short
position in the Common Stock of the Company, and the Investor agrees that it
will not, and that it will cause its Affiliates not to, engage in any short
sales of or hedging transactions with respect to the Common Stock, provided that
the Company acknowledges and agrees that upon receipt of an Advance Notice the
Investor may sell the Shares to be issued to the Investor pursuant to the
Advance Notice, even if the Shares have not been delivered to the Investor.
ARTICLE IV.
Representations and Warranties of the Company
Except as stated below, on the disclosure schedules attached hereto or in
the SEC Documents (as defined herein), the Company hereby represents and
warrants to, and covenants with, the Investor that the following are true and
correct as of the date hereof:
Section 4.1. Organization and Qualification. The Company is duly
incorporated or organized and validly existing in the jurisdiction of its
incorporation or organization and has all requisite power and authority
corporate power to own its properties and to carry on its business as now being
conducted. Each of the Company and its subsidiaries is duly qualified as a
foreign corporation to do business and is in good standing in every jurisdiction
in which the nature of the business conducted by it makes such qualification
necessary, except to the extent that the failure to be so qualified or be in
good standing would not have a Material Adverse Effect on the Company and its
subsidiaries taken as a whole.
Section 4.2. Authorization, Enforcement, Compliance with Other
Instruments. (i) The Company has the requisite corporate power and authority to
enter into and perform this Agreement, the Registration Rights Agreement, the
Escrow Agreement, the Placement Agent Agreement and any related agreements, in
accordance with the terms hereof and thereof, (ii) the execution and delivery of
this Agreement, the Registration Rights Agreement, the Escrow Agreement, the
Placement Agent Agreement and any related agreements by the Company and the
consummation by it of the transactions contemplated hereby and thereby, have
been duly authorized by the Company's Board of Directors and no further consent
or authorization is required by the Company, its Board of Directors or its
stockholders, (iii) this Agreement, the Registration Rights Agreement, the
Escrow Agreement, the Placement Agent Agreement and any related agreements have
been duly executed and delivered by the Company, (iv) this Agreement, the
Registration Rights Agreement, the Escrow Agreement, the Placement Agent
9
Agreement and assuming the execution and delivery thereof and acceptance by the
Investor and any related agreements constitute the valid and binding obligations
of the Company enforceable against the Company in accordance with their terms,
except as such enforceability may be limited by general principles of equity or
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally, the enforcement of creditors'
rights and remedies. The Company acknowledges that the Investor would not enter
into this Agreement without the participation of Stephen Merrick and his ability
to execute the Business Plan and the operational plans of the Company.
Section 4.3. Capitalization. As of the date hereof, the authorized capital
stock of the Company consists of 5,000,000 shares of Common Stock, no par value
per share and 2,000,000 shares of Preferred Stock, no par value per share of
which 1,918,420 shares of Common Stock and no shares of Preferred Stock were
issued and outstanding. All of such outstanding shares have been validly issued
and are fully paid and nonassessable. Except as disclosed in the SEC Documents,
no shares of Common Stock are subject to preemptive rights or any other similar
rights or any liens or encumbrances suffered or permitted by the Company. Except
as disclosed in the SEC Documents, as of the date hereof, (i) there are no
outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, any shares of capital stock of the Company or any of its
subsidiaries, or contracts, commitments, understandings or arrangements by which
the Company or any of its subsidiaries is or may become bound to issue
additional shares of capital stock of the Company or any of its subsidiaries or
options, warrants, scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights convertible into, any
shares of capital stock of the Company or any of its subsidiaries, (ii) there
are no outstanding debt securities (iii) there are no outstanding registration
statements other than on Form S-8 and (iv) there are no agreements or
arrangements under which the Company or any of its subsidiaries is obligated to
register the sale of any of their securities under the Securities Act (except
pursuant to the Registration Rights Agreement). There are no securities or
instruments containing anti-dilution or similar provisions that will be
triggered by this Agreement or any related agreement or the consummation of the
transactions described herein or therein. The Company has furnished to the
Investor true and correct copies of the Company's Certificate of Incorporation,
as amended and as in effect on the date hereof (the "Certificate of
Incorporation"), and the Company's By-laws, as in effect on the date hereof (the
"By-laws"), and the terms of all securities convertible into or exercisable for
Common Stock and the material rights of the holders thereof in respect thereto.
10
Section 4.4. No Conflict. The execution, delivery and performance of this
Agreement by the Company and the consummation by the Company of the transactions
contemplated hereby will not (i) result in a violation of the Certificate of
Incorporation, any certificate of designations of any outstanding series of
preferred stock of the Company or By-laws or (ii) conflict with or constitute a
default (or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture or instrument to which
the Company or any of its subsidiaries is a party, or result in a violation of
any law, rule, regulation, order, judgment or decree (including federal and
state securities laws and regulations and the rules and regulations of the
Principal Market on which the Common Stock is quoted) applicable to the Company
or any of its subsidiaries or by which any material property or asset of the
Company or any of its subsidiaries is bound or affected and which would cause a
Material Adverse Effect. Except as disclosed in the SEC Documents, neither the
Company nor its subsidiaries is in violation of any term of or in default under
its Certificate of Incorporation or By-laws or their organizational charter or
by-laws, respectively, or any material contract, agreement, mortgage,
indebtedness, indenture, instrument, judgment, decree or order or any statute,
rule or regulation applicable to the Company or its subsidiaries. The business
of the Company and its subsidiaries is not being conducted in violation of any
material law, ordinance, regulation of any governmental entity. Except as
specifically contemplated by this Agreement and as required under the Securities
Act and any applicable state securities laws, the Company is not required to
obtain any consent, authorization or order of, or make any filing or
registration with, any court or governmental agency in order for it to execute,
deliver or perform any of its obligations under or contemplated by this
Agreement or the Registration Rights Agreement in accordance with the terms
hereof or thereof. All consents, authorizations, orders, filings and
registrations which the Company is required to obtain pursuant to the preceding
sentence have been obtained or effected on or prior to the date hereof. The
Company and its subsidiaries are unaware of any fact or circumstance which might
give rise to any of the foregoing.
Section 4.5. SEC Documents; Financial Statements. Since March 31, 2004,
the Company has filed all reports, schedules, forms, statements and other
documents required to be filed by it with the SEC under of the Exchange Act. The
Company has delivered to the Investor or its representatives, or made available
through the SEC's website at http://www.sec.gov, true and complete copies of the
SEC Documents. As of their respective dates, the financial statements of the
Company disclosed in the SEC Documents (the "Financial Statements") complied as
to form in all material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto. Such financial
statements have been prepared in accordance with generally accepted accounting
principles, consistently applied, during the periods involved (except (i) as may
be otherwise indicated in such financial statements or the notes thereto, or
(ii) in the case of unaudited interim statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and, fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments). No other information provided by or on behalf of the Company to
the Investor which is not included in the SEC Documents contains any untrue
statement of a material fact or omits to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
11
Section 4.6. 10b-5. The SEC Documents do not include any untrue statements
of material fact, nor do they omit to state any material fact required to be
stated therein necessary to make the statements made, in light of the
circumstances under which they were made, not misleading.
Section 4.7. No Default. Except as disclosed in the SEC Documents, the
Company is not in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any indenture,
mortgage, deed of trust or other material instrument or agreement to which it is
a party or by which it is or its property is bound and neither the execution,
nor the delivery by the Company, nor the performance by the Company of its
obligations under this Agreement or any of the exhibits or attachments hereto
will conflict with or result in the breach or violation of any of the terms or
provisions of, or constitute a default or result in the creation or imposition
of any lien or charge on any assets or properties of the Company under its
Certificate of Incorporation, By-Laws, any material indenture, mortgage, deed of
trust or other material agreement applicable to the Company or instrument to
which the Company is a party or by which it is bound, or any statute, or any
decree, judgment, order, rules or regulation of any court or governmental agency
or body having jurisdiction over the Company or its properties, in each case
which default, lien or charge is likely to cause a Material Adverse Effect on
the Company's business or financial condition.
Section 4.8. Absence of Events of Default. Except for matters described in
the SEC Documents and/or this Agreement, no Event of Default, as defined in the
respective agreement to which the Company is a party, and no event which, with
the giving of notice or the passage of time or both, would become an Event of
Default (as so defined), has occurred and is continuing, which would have a
Material Adverse Effect on the Company's business, properties, prospects,
financial condition or results of operations.
Section 4.9. Intellectual Property Rights. The Company and its
subsidiaries own or possess adequate rights or licenses to use all material
trademarks, trade names, service marks, service mark registrations, service
names, patents, patent rights, copyrights, inventions, licenses, approvals,
governmental authorizations, trade secrets and rights necessary to conduct their
respective businesses as now conducted. The Company and its subsidiaries do not
have any knowledge of any infringement by the Company or its subsidiaries of
trademark, trade name rights, patents, patent rights, copyrights, inventions,
licenses, service names, service marks, service mark registrations, trade secret
or other similar rights of others, and, to the knowledge of the Company, there
is no claim, action or proceeding being made or brought against, or to the
Company's knowledge, being threatened against, the Company or its subsidiaries
regarding trademark, trade name, patents, patent rights, invention, copyright,
license, service names, service marks, service mark registrations, trade secret
or other infringement; and the Company and its subsidiaries are unaware of any
facts or circumstances which might give rise to any of the foregoing.
Section 4.10. Employee Relations. Neither the Company nor any of its
subsidiaries is involved in any labor dispute nor, to the knowledge of the
Company or any of its subsidiaries, is any such dispute threatened. None of the
Company's or its subsidiaries' employees is a member of a union and the Company
and its subsidiaries believe that their relations with their employees are good.
12
Section 4.11. Environmental Laws. The Company and its subsidiaries are (i)
in compliance with any and all applicable material foreign, federal, state and
local laws and regulations relating to the protection of human health and
safety, the environment or hazardous or toxic substances or wastes, pollutants
or contaminants ("Environmental Laws"), (ii) have received all permits, licenses
or other approvals required of them under applicable Environmental Laws to
conduct their respective businesses and (iii) are in compliance with all terms
and conditions of any such permit, license or approval.
Section 4.12. Title. Except as set forth in the SEC Documents, the Company
has good and marketable title to its properties and material assets owned by it,
free and clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest other than such as are not material to the business of the
Company. Any real property and facilities held under lease by the Company and
its subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company and its
subsidiaries.
Section 4.13. Insurance. The Company and each of its subsidiaries are
insured by insurers of recognized financial responsibility against such losses
and risks and in such amounts as management of the Company believes to be
prudent and customary in the businesses in which the Company and its
subsidiaries are engaged. Neither the Company nor any such subsidiary has been
refused any insurance coverage sought or applied for and neither the Company nor
any such subsidiary has any reason to believe that it will not be able to renew
its existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition,
financial or otherwise, or the earnings, business or operations of the Company
and its subsidiaries, taken as a whole.
Section 4.14. Regulatory Permits. The Company and its subsidiaries possess
all material certificates, authorizations and permits issued by the appropriate
federal, state or foreign regulatory authorities necessary to conduct their
respective businesses, and neither the Company nor any such subsidiary has
received any notice of proceedings relating to the revocation or modification of
any such certificate, authorization or permit.
Section 4.15. Internal Accounting Controls. The Company and each of its
subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
accountability, (iii) access to assets is permitted only in accordance with
management's general or specific authorization and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
13
Section 4.16. No Material Adverse Breaches, etc. Except as set forth in
the SEC Documents, neither the Company nor any of its subsidiaries is subject to
any charter, corporate or other legal restriction, or any judgment, decree,
order, rule or regulation which in the judgment of the Company's officers has or
is expected in the future to have a Material Adverse Effect on the business,
properties, operations, financial condition, results of operations or prospects
of the Company or its subsidiaries. Except as set forth in the SEC Documents,
neither the Company nor any of its subsidiaries is in breach of any contract or
agreement which breach, in the judgment of the Company's officers, has or is
expected to have a Material Adverse Effect on the business, properties,
operations, financial condition, results of operations or prospects of the
Company or its subsidiaries.
Section 4.17. Absence of Litigation. Except as set forth in the SEC
Documents, there is no action, suit, proceeding, inquiry or investigation before
or by any court, public board, government agency, self-regulatory organization
or body pending against or affecting the Company, the Common Stock or any of the
Company's subsidiaries, wherein an unfavorable decision, ruling or finding would
(i) have a Material Adverse Effect on the transactions contemplated hereby (ii)
adversely affect the validity or enforceability of, or the authority or ability
of the Company to perform its obligations under, this Agreement or any of the
documents contemplated herein, or (iii) except as expressly disclosed in the SEC
Documents, have a Material Adverse Effect on the business, operations,
properties, financial condition or results of operation of the Company and its
subsidiaries taken as a whole.
Section 4.18. Subsidiaries. Except as disclosed in the SEC Documents, the
Company does not presently own or control, directly or indirectly, any interest
in any other corporation, partnership, association or other business entity.
Section 4.19. Tax Status. The Company and each of its subsidiaries has
made or filed all federal and state income and all other tax returns, reports
and declarations required by any jurisdiction to which it is subject and (unless
and only to the extent that the Company and each of its subsidiaries has set
aside on its books provisions reasonably adequate for the payment of all unpaid
and unreported taxes) has paid all taxes and other governmental assessments and
charges that are material in amount, shown or determined to be due on such
returns, reports and declarations, except those being contested in good faith
and has set aside on its books provision reasonably adequate for the payment of
all taxes for periods subsequent to the periods to which such returns, reports
or declarations apply. There are no unpaid taxes in any material amount claimed
to be due by the taxing authority of any jurisdiction, and the officers of the
Company know of no basis for any such claim.
Section 4.20. Certain Transactions. Except as set forth in the SEC
Documents none of the officers, directors, or employees of the Company is
presently a party to any transaction with the Company (other than for services
as employees, officers and directors), including any contract, agreement or
other arrangement providing for the furnishing of services to or by, providing
for rental of real or personal property to or from, or otherwise requiring
payments to or from any officer, director or such employee or, to the knowledge
of the Company, any corporation, partnership, trust or other entity in which any
officer, director, or any such employee has a substantial interest or is an
officer, director, trustee or partner.
14
Section 4.21. Fees and Rights of First Refusal. Except as set forth in the
SEC Documents, the Company is not obligated to offer the securities offered
hereunder on a right of first refusal basis or otherwise to any third parties
including, but not limited to, current or former shareholders of the Company,
underwriters, brokers, agents or other third parties.
Section 4.22. Use of Proceeds. The Company represents that the net
proceeds from this offering will be used for general corporate purposes as
detailed in Schedule 4.22 attached hereto. However, in no event shall the net
proceeds from this offering be used by the Company for the payment (or loaned to
any such person for the payment) of any judgment, or other liability, incurred
by any executive officer, officer, director or employee of the Company, except
for any liability owed to such person for services rendered, or if any judgment
or other liability is incurred by such person originating from services rendered
to the Company, or the Company has indemnified such person from liability. All
uses of the net proceeds from this offering will shall be approved by Stephen
Merrick prior to disbursement. All capital expenditures shall not be made
without the prior written approval of Stephen Merrick.
Section 4.23. Further Representation and Warranties of the Company. For so
long as any securities issuable hereunder held by the Investor remain
outstanding, the Company acknowledges, represents, warrants and agrees that it
will use commercially reasonable efforts to maintain the listing of its Common
Stock on the Principal Market
Section 4.24. Opinion of Counsel. Investor shall receive an opinion letter
from Merrick & Klimek, counsel to the Company on the date hereof.
Section 4.25. Opinion of Counsel. The Company will obtain for the
Investor, at the Company's expense, any and all opinions of counsel which may be
reasonably required in order to sell the securities issuable hereunder without
restriction.
Section 4.26. Dilution. The Company is aware and acknowledges that
issuance of shares of the Company's Common Stock could cause dilution to
existing shareholders and could significantly increase the outstanding number of
shares of Common Stock.
ARTICLE V.
Indemnification
The Investor and the Company represent to the other the following with
respect to itself:
Section 5.1. Indemnification.
(a) In consideration of the Investor's execution and delivery of
this Agreement, and in addition to all of the Company's other obligations under
this Agreement, the Company shall defend, protect, indemnify and hold harmless
the Investor, and all of its officers, directors, partners, employees and agents
(including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the "Investor
Indemnitees") from and against any and all actions, causes of action, suits,
claims, losses, costs, penalties, fees, liabilities and damages, and expenses in
connection therewith (irrespective of whether any such Investor Indemnitee is a
party to the action for which indemnification hereunder is sought), and
including reasonable attorneys' fees and disbursements (the
15
"Indemnified Liabilities"), incurred by the Investor Indemnitees or any of them
as a result of, or arising out of, or relating to (a) any misrepresentation or
breach of any representation or warranty made by the Company in this Agreement
or the Registration Rights Agreement or any other certificate, instrument or
document contemplated hereby or thereby, (b) any breach of any covenant,
agreement or obligation of the Company contained in this Agreement or the
Registration Rights Agreement or any other certificate, instrument or document
contemplated hereby or thereby, or (c) any cause of action, suit or claim
brought or made against such Investor Indemnitee not arising out of any action
or inaction of an Investor Indemnitee, and arising out of or resulting from the
execution, delivery, performance or enforcement of this Agreement or any other
instrument, document or agreement executed pursuant hereto by any of the
Investor Indemnitees. To the extent that the foregoing undertaking by the
Company may be unenforceable for any reason, the Company shall make the maximum
contribution to the payment and satisfaction of each of the Indemnified
Liabilities, which is permissible under applicable law.
(b) In consideration of the Company's execution and delivery of this
Agreement, and in addition to all of the Investor's other obligations under this
Agreement, the Investor shall defend, protect, indemnify and hold harmless the
Company and all of its officers, directors, shareholders, employees and agents
(including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the "Company
Indemnitees") from and against any and all Indemnified Liabilities incurred by
the Company Indemnitees or any of them as a result of, or arising out of, or
relating to (a) any misrepresentation or breach of any representation or
warranty made by the Investor in this Agreement, the Registration Rights
Agreement, or any instrument or document contemplated hereby or thereby executed
by the Investor, (b) any breach of any covenant, agreement or obligation of the
Investor(s) contained in this Agreement, the Registration Rights Agreement or
any other certificate, instrument or document contemplated hereby or thereby
executed by the Investor, or (c) any cause of action, suit or claim brought or
made against such Company Indemnitee based on misrepresentations or due to a
breach by the Investor and arising out of or resulting from the execution,
delivery, performance or enforcement of this Agreement or any other instrument,
document or agreement executed pursuant hereto by any of the Company
Indemnitees. To the extent that the foregoing undertaking by the Investor may be
unenforceable for any reason, the Investor shall make the maximum contribution
to the payment and satisfaction of each of the Indemnified Liabilities, which is
permissible under applicable law.
ARTICLE VI.
Covenants of the Company
Section 6.1. Registration Rights. The Company shall cause the Registration
Rights Agreement to remain in full force and effect and the Company shall comply
in all material respects with the terms thereof.
Section 6.2. Listing of Common Stock. The Company shall use commercially
reasonable efforts to maintain the Common Stock's authorization for quotation on
the National Association of Securities Dealers Inc's NASDAQ-Small Cap Market.
16
Section 6.3. Exchange Act Registration. The Company will cause its Common
Stock to continue to be registered under Section 12(g) of the Exchange Act, will
file in a timely manner all reports and other documents required of it as a
reporting company under the Exchange Act and will not take any action or file
any document (whether or not permitted by Exchange Act or the rules thereunder
to terminate or suspend such registration or to terminate or suspend its
reporting and filing obligations under said Exchange Act.
Section 6.4. Transfer Agent Instructions. Not later than two (2) business
days after each Advance Notice Date and prior to each Closing and the
effectiveness of the Registration Statement and resale of the Common Stock by
the Investor, the Company will deliver instructions to its transfer agent to
issue shares of Common Stock free of restrictive legends.
Section 6.5. Corporate Existence. The Company will take all steps
necessary to preserve and continue the corporate existence of the Company.
Section 6.6. Notice of Certain Events Affecting Registration; Suspension
of Right to Make an Advance. The Company will immediately notify the Investor
upon its becoming aware of the occurrence of any of the following events in
respect of a registration statement or related prospectus relating to an
offering of Registrable Securities: (i) receipt of any request for additional
information by the SEC or any other Federal or state governmental authority
during the period of effectiveness of the Registration Statement for amendments
or supplements to the registration statement or related prospectus; (ii) the
issuance by the SEC or any other Federal or state governmental authority of any
stop order suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose; (iii) receipt of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction or the initiation or threatening of any proceeding for such
purpose; (iv) the happening of any event that makes any statement made in the
Registration Statement or related prospectus of any document incorporated or
deemed to be incorporated therein by reference untrue in any material respect or
that requires the making of any changes in the Registration Statement, related
prospectus or documents so that, in the case of the Registration Statement, it
will not 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 not misleading, and that in the case of the related prospectus, it will
not 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 the light of the circumstances under which they were made, not
misleading; and (v) the Company's reasonable determination that a post-effective
amendment to the Registration Statement would be appropriate; and the Company
will promptly make available to the Investor any such supplement or amendment to
the related prospectus. The Company shall not deliver to the Investor any
Advance Notice during the continuation of any of the foregoing events.
Section 6.7. Expectations Regarding Advance Notices. Within ten (10) days
after the commencement of each calendar quarter occurring subsequent to the
commencement of the Commitment Period, the Company must notify the Investor, in
writing, as to its reasonable expectations as to the dollar amount it intends to
raise during such calendar quarter, if any, through the issuance of Advance
Notices. Such notification shall constitute only the Company's good faith
estimate and shall in no way obligate the Company to raise such amount, or any
17
amount, or otherwise limit its ability to deliver Advance Notices. The failure
by the Company to comply with this provision can be cured by the Company's
notifying the Investor, in writing, at any time as to its reasonable
expectations with respect to the current calendar quarter.
Section 6.8. Restriction on Sale of Capital Stock. During the Commitment
Period, the Company shall not, without thirty (30) calendar days advance written
notice to the Investor, of which receipt shall be confirmed by the sending party
by providing a confirmation of successful facsimile transmission, issue or sell
(i) any Common Stock or Preferred Stock without consideration or for a
consideration per share less than the bid price of the Common Stock determined
immediately prior to its issuance, except for shares of the Company's Common
Stock which are purchased upon exercise of options or warrants, or (ii) issue or
sell any Preferred Stock warrant, option, right, contract, call, or other
security or instrument granting the holder thereof the right to acquire Common
Stock without consideration or for a consideration per share less than such
Common Stock's Bid Price determined immediately prior to its issuance, or (iii)
file any registration statement on Form S-8.
Section 6.9. Consolidation; Merger. The Company shall not, at any time
after the date hereof, effect any merger or consolidation of the Company with or
into, or a transfer of all or substantially all the assets of the Company to
another entity (a "Consolidation Event") unless the resulting successor or
acquiring entity (if not the Company) assumes by written instrument the
obligation to deliver to the Investor such shares of stock and/or securities as
the Investor is entitled to receive pursuant to this Agreement.
Section 6.10. Issuance of the Company's Common Stock. The sale of the
shares of Common Stock to the Investor herein shall be made in accordance with
the provisions and requirements of Regulation D and any applicable state
securities law.
Section 6.11 Business Plan and Operations. Within twenty (20) calendar
from the date hereof the Company shall deliver to the Investor a business plan
detailing the operations of the Company for a five (5) year period (the
"Business Plan"). The Business Plan shall include but not be limited to (i)
detailed projections including an income statement, cash flow, balance sheet,
and capital expenditures and (ii) a narrative description of (A) the businesses
and product lines in which the Company will engage, (B) a detailed description
of the initiatives to be undertaken by the Company to implement the business
plan and the steps to be taken and (C) a description of the financial controls
employed to manage funds as well as a a summary of all officers, directors, and
employees and a description of their roles and responsibilities including
Stephen Merrick.
ARTICLE VII.
Conditions for Advance and Conditions to Closing
Section 7.1. Conditions Precedent to the Obligations of the Company. The
obligation hereunder of the Company to issue and sell the shares of Common Stock
to the Investor incident to each Closing is subject to the satisfaction, or
waiver by the Company, at or before each such Closing, of each of the conditions
set forth below.
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(a) Accuracy of the Investor's Representations and Warranties. The
representations and warranties of the Investor shall be true and correct in all
material respects.
(b) Performance by the Investor. The Investor shall have performed,
satisfied and complied in all respects with all covenants, agreements and
conditions required by this Agreement and the Registration Rights Agreement to
be performed, satisfied or complied with by the Investor at or prior to such
Closing.
Section 7.2. Conditions Precedent to the Right of the Company to Deliver
an Advance Notice and the Obligation of the Investor to Purchase Shares of
Common Stock. The right of the Company to deliver an Advance Notice and the
obligation of the Investor hereunder to acquire and pay for shares of the
Company's Common Stock incident to a Closing is subject to the fulfillment by
the Company, on (i) the date of delivery of such Advance Notice and (ii) the
applicable Advance Date (each a "Condition Satisfaction Date"), of each of the
following conditions:
(a) Registration of the Common Stock with the SEC. The Company shall
have filed with the SEC a Registration Statement with respect to the resale of
the Registrable Securities in accordance with the terms of the Registration
Rights Agreement. As set forth in the Registration Rights Agreement, the
Registration Statement shall have previously become effective and shall remain
effective on each Condition Satisfaction Date and (i) neither the Company nor
the Investor shall have received notice that the SEC has issued or intends to
issue a stop order with respect to the Registration Statement or that the SEC
otherwise has suspended or withdrawn the effectiveness of the Registration
Statement, either temporarily or permanently, or intends or has threatened to do
so (unless the SEC's concerns have been addressed and the Investor is reasonably
satisfied that the SEC no longer is considering or intends to take such action),
and (ii) no other suspension of the use or withdrawal of the effectiveness of
the Registration Statement or related prospectus shall exist. The Registration
Statement must have been declared effective by the SEC prior to the first
Advance Notice Date.
(b) Authority. The Company shall have obtained all permits and
qualifications required by any applicable state in accordance with the
Registration Rights Agreement for the offer and sale of the shares of Common
Stock, or shall have the availability of exemptions therefrom. The sale and
issuance of the shares of Common Stock shall be legally permitted by all laws
and regulations to which the Company is subject.
(c) Fundamental Changes. There shall not exist any fundamental
changes to the information set forth in the Registration Statement which would
require the Company to file a post-effective amendment to the Registration
Statement.
(d) Performance by the Company. The Company shall have performed,
satisfied and complied in all material respects with all covenants, agreements
and conditions required by this Agreement (including, without limitation, the
conditions specified in Section 2.5 hereof) and the Registration Rights
Agreement to be performed, satisfied or complied with by the Company at or prior
to each Condition Satisfaction Date.
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(e) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction that
prohibits or directly and adversely affects any of the transactions contemplated
by this Agreement, and no proceeding shall have been commenced that may have the
effect of prohibiting or adversely affecting any of the transactions
contemplated by this Agreement.
(f) No Suspension of Trading in or Delisting of Common Stock. The
trading of the Common Stock is not suspended by the SEC or the Principal Market
(if the Common Stock is traded on a Principal Market). The issuance of shares of
Common Stock with respect to the applicable Closing, if any, shall not violate
the shareholder approval requirements of the Principal Market (if the Common
Stock is traded on a Principal Market). The Company shall not have received any
notice threatening the continued listing of the Common Stock on the Principal
Market (if the Common Stock is traded on a Principal Market).
(g) Maximum Advance Amount. The amount of the Advances requested by
the Company in any thirty (30) day period shall not exceed the Maximum Advance
Amount. In addition, in no event shall the number of shares issuable to the
Investor pursuant to an Advance cause the Investor to own in excess of nine and
9/10 percent (9.9%) of the then outstanding Common Stock of the Company.
(h) No Knowledge. The Company has no knowledge of any event which
would be more likely than not to have the effect of causing such Registration
Statement to be suspended or otherwise ineffective.
(i) Prior Approval. The Company shall have obtained all approvals
necessary under the rules and regulations under the Listing Qualifications of
the Market Place Rules established and maintained by the National Association of
Securities Dealers, Inc., for the issuance of the shares of Common Stock to the
Investor pursuant to Advances under this Agreement.
(j) Other. On each Condition Satisfaction Date, the Investor shall
have received the certificate executed by an officer of the Company in the form
of Exhibit A attached hereto.
ARTICLE VIII.
Due Diligence Review; Non-Disclosure of Non-Public Information
Section 8.1. Due Diligence Review. Prior to the filing of the Registration
Statement the Company shall make available for inspection and review by the
Investor, advisors to and representatives of the Investor, any underwriter
participating in any disposition of the Registrable Securities on behalf of the
Investor pursuant to the Registration Statement, any such registration statement
or amendment or supplement thereto or any blue sky, NASD or other filing, all
financial and other records, all SEC Documents and other filings with the SEC,
and all other corporate documents and properties of the Company as may be
reasonably necessary for the purpose of such review, and cause the Company's
officers, directors and employees to supply all such information reasonably
requested by the Investor or any such representative, advisor or
20
underwriter in connection with such Registration Statement (including, without
limitation, in response to all questions and other inquiries reasonably made or
submitted by any of them), prior to and from time to time after the filing and
effectiveness of the Registration Statement for the sole purpose of enabling the
Investor and such representatives, advisors and underwriters and their
respective accountants and attorneys to conduct initial and ongoing due
diligence with respect to the Company and the accuracy of the Registration
Statement.
Section 8.2. Non-Disclosure of Non-Public Information.
(a) The Company shall not disclose non-public information to the
Investor, advisors to or representatives of the Investor unless prior to
disclosure of such information the Company identifies such information as being
non-public information and provides the Investor, such advisors and
representatives with the opportunity to accept or refuse to accept such
non-public information for review. The Company may, as a condition to disclosing
any non-public information hereunder, require the Investor's advisors and
representatives to enter into a confidentiality agreement in form reasonably
satisfactory to the Company and the Investor.
(b) Nothing herein shall require the Company to disclose non-public
information to the Investor or its advisors or representatives, and the Company
represents that it does not disseminate non-public information to any investors
who purchase stock in the Company in a public offering, to money managers or to
securities analysts, provided, however, that notwithstanding anything herein to
the contrary, the Company will, as hereinabove provided, immediately notify the
advisors and representatives of the Investor and, if any, underwriters, of any
event or the existence of any circumstance (without any obligation to disclose
the specific event or circumstance) of which it becomes aware, constituting
non-public information (whether or not requested of the Company specifically or
generally during the course of due diligence by such persons or entities),
which, if not disclosed in the prospectus included in the Registration Statement
would cause such prospectus to include a material misstatement or to omit a
material fact required to be stated therein in order to make the statements,
therein, in light of the circumstances in which they were made, not misleading.
Nothing contained in this Section 8.2 shall be construed to mean that such
persons or entities other than the Investor (without the written consent of the
Investor prior to disclosure of such information) may not obtain non-public
information in the course of conducting due diligence in accordance with the
terms of this Agreement and nothing herein shall prevent any such persons or
entities from notifying the Company of their opinion that based on such due
diligence by such persons or entities, that the Registration Statement contains
an untrue statement of material fact or omits a material fact required to be
stated in the Registration Statement or necessary to make the statements
contained therein, in light of the circumstances in which they were made, not
misleading.
ARTICLE IX.
Choice of Law/Jurisdiction
Section 9.1. Governing Law. This Agreement shall be governed by and
interpreted in accordance with the laws of the State of Illinois without regard
to the principles of conflict of laws. The parties further agree that any action
between them shall be heard in Hudson County, New Jersey, and expressly consent
to the jurisdiction and venue of the Superior Court of New Jersey, sitting in
Hudson County, New Jersey and the United States District Court of New Jersey,
21
sitting in Newark, New Jersey, for the adjudication of any civil action asserted
pursuant to this paragraph.
ARTICLE X.
Assignment; Termination
Section 10.1. Assignment. Neither this Agreement nor any rights of the
Company hereunder may be assigned to any other Person.
Section 10.2. Termination. The obligations of the Investor to make
Advances under Article II hereof shall terminate twenty-four (24) months after
the Effective Date.
ARTICLE XI.
Notices
Section 11.1. Notices. Any notices, consents, waivers, or other
communications required or permitted to be given under the terms of this
Agreement must be in writing and will be deemed to have been delivered (i) upon
receipt, when delivered personally; (ii) upon receipt, when sent by facsimile,
provided a copy is mailed by U.S. certified mail, return receipt requested;
(iii) three (3) days after being sent by U.S. certified mail, return receipt
requested, or (iv) one (1) day after deposit with a nationally recognized
overnight delivery service, in each case properly addressed to the party to
receive the same. The addresses and facsimile numbers for such communications
shall be:
If to the Company, to: CTI Industries Corporation
22160 N. Pepper Road
Barrington, IL 60010
Attention: Stephen M. Merrick
Telephone: (847) 382-1000
Facsimile: (847) 382-1219
With a copy to: Merrick & Klimek
33 N. LaSalle Street
Chicago, IL 60602
Attention: John M. Klimek, Esq.
Telephone: (312) 284-1520
Facsimile: (312) 284-1521
If to the Investor(s): Cornell Capital Partners, LP
101 Hudson Street -Suite 3700
Jersey City, NJ 07302
Attention: Mark Angelo
Portfolio Manager
Telephone: (201) 985-8300
Facsimile: (201) 985-8266
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With a Copy to: Butler Gonzalez LLP
1416 Morris Avenue - Suite 207
Union, NJ 07083
Attention: David Gonzalez, Esq.
Telephone: (908) 810-8588
Facsimile: (908) 810-0973
Each party shall provide five (5) days' prior written notice to the other party
of any change in address or facsimile number.
ARTICLE XII.
Miscellaneous
Section 12.1. Counterparts. This Agreement may be executed in two or more
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party. In the event any signature page is
delivered by facsimile transmission, the party using such means of delivery
shall cause four (4) additional original executed signature pages to be
physically delivered to the other party within five (5) days of the execution
and delivery hereof, though failure to deliver such copies shall not affect the
validity of this Agreement.
Section 12.2. Entire Agreement; Amendments. This Agreement supersedes all
other prior oral or written agreements between the Investor, the Company, their
affiliates and persons acting on their behalf with respect to the matters
discussed herein, and this Agreement and the instruments referenced herein
contain the entire understanding of the parties with respect to the matters
covered herein and therein and, except as specifically set forth herein or
therein, neither the Company nor the Investor makes any representation,
warranty, covenant or undertaking with respect to such matters. No provision of
this Agreement may be waived or amended other than by an instrument in writing
signed by the party to be charged with enforcement.
Section 12.3. Reporting Entity for the Common Stock. The reporting entity
relied upon for the determination of the trading price or trading volume of the
Common Stock on any given Trading Day for the purposes of this Agreement shall
be Bloomberg, L.P. or any successor thereto. The written mutual consent of the
Investor and the Company shall be required to employ any other reporting entity.
Section 12.4. Fees and Expenses. The Company hereby agrees to pay the
following fees:
(a) Legal Fees. Each of the parties shall pay its own fees and
expenses (including the fees of any attorneys, accountants, appraisers or others
engaged by such party) in connection with this Agreement and the transactions
contemplated hereby, except that upon the execution of this Agreement the
Company will pay Fifteen Thousand Dollars ($15,000) to Butler Gonzalez LLP for
legal, administrative, and escrow fees. Subsequently on each advance date, the
Company will pay Butler Gonzalez LLP, the sum of Five Hundred Dollars ($500) for
legal, administrative and escrow fees directly out the proceeds of any Advances
hereunder.
23
(b) Commitment Fees.
(i) On each Advance Date the Company shall pay to the
Investor, directly from the gross proceeds held in escrow, an amount equal to
five percent (5%) of the amount of each Advance. The Company hereby agrees that
if such payment, as is described above, is not made by the Company on the
Advance Date, such payment will be made at the direction of the Investor as
outlined and mandated by Section 2.3 of this Agreement.
(ii) Furthermore upon the execution of the Agreement the
Company shall issue to the Investor fourteen thousand six hundred eighty two
(14,162) shares of the Company's Common Stock (the "First Tranche of Investor's
Shares") and on the Effective Date of the Registration Statement filed pursuant
to the Registration Rights Agreement dated the date hereof the Company shall
issue to the Investor shares of the Company's common Stock in an amount equal to
Fifty Thousand Dollars ($50,000) divided by the closing Bid Price of the
Company's Common Stock on the NASDAQ Small-Cap Market as quoted by Bloomberg, LP
on the ninetieth (90th) Trading Day following the date hereof ("Second Tranche
of Investor's Shares" (collectively referred to as the "Investor's Shares").
(iii) Due Diligence Fee. Upon the submission of the due
diligence package the Company shall pay to the Investor Two Thousand Five
Hundred Dollars ($2,500) in order to defray the costs of due diligence (the "Due
Diligence Fee"). The Due Diligence Fee shall be earned as of the date the due
diligence package is submitted to the Investor.
(iv) Fully Earned. The First Tranche of Investor's Shares
shall be deemed fully earned as of the date hereof and the Second Tranche of
Investor's Shares shall be deemed fully earned on the date the registration
statement filed pursuant to the Registration Rights Agreement dated the date
hereof is declared effective by the SEC.
(iv) Registration Rights. The Investor's Shares will have
"piggy-back" registration rights.
Section 12.5. Brokerage. Each of the parties hereto represents that it has
had no dealings in connection with this transaction with any finder or broker
who will demand payment of any fee or commission from the other party. The
Company on the one hand, and the Investor, on the other hand, agree to indemnify
the other against and hold the other harmless from any and all liabilities to
any person claiming brokerage commissions or finder's fees on account of
services purported to have been rendered on behalf of the indemnifying party in
connection with this Agreement or the transactions contemplated hereby.
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Section 12.6. Confidentiality. If for any reason the transactions
contemplated by this Agreement are not consummated, each of the parties hereto
shall keep confidential any information obtained from any other party (except
information publicly available or in such party's domain prior to the date
hereof, and except as required by court order) and shall promptly return to the
other parties all schedules, documents, instruments, work papers or other
written information without retaining copies thereof, previously furnished by it
as a result of this Agreement or in connection herein.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have caused this Standby Equity
Distribution Agreement to be executed by the undersigned, thereunto duly
authorized, as of the date first set forth above.
COMPANY:
CTI INDUSTRIES CORPORTION
By: /s/ Stephen M. Merrick
----------------------------
Name: Stephen M. Merrick
Title: Executive Vice President
INVESTOR:
CORNELL CAPITAL PARTNERS, LP
By: Yorkville Advisors, LLC
Its: General Partner
By: /s/ Mark Angelo
----------------------------
Name: Mark Angelo
Title: Portfolio Manager
26
EXHIBIT A
ADVANCE NOTICE/COMPLIANCE CERTIFICATE
CTI INDUSTRIES CORPORATION
The undersigned, ____________________ hereby certifies, with respect to
the sale of shares of Common Stock of CTI Industries Corporation (the
"Company"), issuable in connection with this Advance Notice and Compliance
Certificate dated ___________________ (the "Notice"), delivered pursuant to the
Standby Equity Distribution Agreement (the "Agreement"), as follows:
1. The undersigned is the duly elected President of the Company.
2. There are no fundamental changes to the information set forth in the
Registration Statement which would require the Company to file a post effective
amendment to the Registration Statement.
3. The Company has performed in all material respects all covenants and
agreements to be performed by the Company on or prior to the Advance Date
related to the Notice and has complied in all material respects with all
obligations and conditions contained in the Agreement.
4. The Advance requested is _____________________.
The undersigned has executed this Certificate this ____ day of
_________________.
CTI INDUSTRIES CORPORATION
By:
-------------------------------
Name:
Title: