As filed with the Securities and Exchange Commission on July 24, 1997
SEC File No. ______
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
Registration Statement
Under the Securities Act of 1933
CTI INDUSTRIES CORPORATION
(Name of Small Business Issuer in its charter)
Delaware 3970 36-2848943
(State or jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification No.)
organization) Code Number)
22160 North Pepper Road
Barrington, Illinois 60010
(847) 382-1000
(Address and Telephone Number of Principal Executive Offices)
22160 North Pepper Road
Barrington, Illinois 60010
(Address of Principal Place of Business)
Howard W. Schwan, President
22160 North Pepper Road
Barrington, Illinois 60010
(847) 382-1000
(Name, address and telephone number of Agent for Service)
Copies to:
John M. Klimek, Esq. Rubi Finkelstein, Esq.
Fishman Merrick Miller Genelly Orrick, Herrington & Sutcliffe LLP
Springer Klimek & Anderson, P.C. 666 Fifth Avenue
30 North LaSalle, Suite 3500 New York, New York 10103-0001
Chicago, Illinois 60602 (212) 506-5000
(312) 726-1224 (212) 506-5151 (Facsimile)
(312) 726-2649 (Facsimile)
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration
Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box |_|
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
FACING SHEET CONTINUED ON NEXT PAGE
CONTINUATION OF FACING SHEET
CALCULATION OF REGISTRATION FEE
Title of Each Class Proposed Maximum Proposed Maximum Amount of
of Securities To Be Amount To Be Offering Price Aggregate Registration
Registered Registered(1) Per Share (2) Offering Price (2) Fee
- ----------------------------------------------------------------------------------------------------------------------------------
Units, each consisting of one share
of Common Stock, $.065 Par
Value ("Common Stock") and one
Common Stock Purchase Warrant
("Redeemable Warrant") 1,533,332(3) $ 4.50 $ 6,899,994.00 $2,090.91
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock 1,533,332(4) ----- -------- ------
- ----------------------------------------------------------------------------------------------------------------------------------
Redeemable Warrants 1,533,332(5) ----- -------- ------
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock Issuable Upon
Exercise of the Redeemable
Warrants 1,533,332 $ 6.75(6) $10,349,991.00 $3,136.36
- ----------------------------------------------------------------------------------------------------------------------------------
Underwriter's Warrants(7) 133,333 $.0001 $ 13.33 $ 0(8)
- ----------------------------------------------------------------------------------------------------------------------------------
Units issuable upon exercise of
Underwriter's Warrants, each Unit
consisting of one share of
Common Stock and one
Redeemable Warrant 133,333 $ 5.40(9) $ 719,998.20 $ 218.18
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock 133,333 ----- -------- ------
- ----------------------------------------------------------------------------------------------------------------------------------
Redeemable Warrants 133,333 ----- -------- ------
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock Issuable Upon
Exercise of the Redeemable
Warrants Included in the
Underwriter's Warrants 133,333 $ 6.75 $ 899,997.75 $ 272.73
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL $18,869,994.28 $5,718.18
===================================================================================================================================
<FN>
(1)Pursuant to Rule 416, there are also being registered such
indeterminable number of securities which may be issued as a result of the
anti-dilution provisions of the Warrants and the Underwriter's Warrants.
(2)Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(3)Includes 199,999 Units subject to sale upon exercise of
over-allotment option granted to Underwriter which may be offered to cover
over-allotments, if any.
(4)Includes 199,999 shares of Common Stock included in the Units which
may be offered to cover over-allotments, if any.
(5)Includes 199,999 Redeemable Warrants included in the Units which may
be offered to cover over-allotments, if any.
(6)Represents the exercise price of the Redeemable Warrants.
(7)Represents warrants, to be issued to the Underwriter, to purchase
Common Stock and Redeemable Warrants.
(8)No separate registration fee is required pursuant to Rule 457(g).
(9)Represents the exercise price of the Underwriter's Warrants.
</FN>
(ii)
CTI INDUSTRIES CORPORATION
CROSS REFERENCE SHEET
Showing the Location in the Prospectus
of Information Required by Items of Form SB-2
Registration Statement
Item Number and Heading Location in Prospectus
- ----------------------- ----------------------
1. Front of Registration Statement and Outside
Front Cover Page of Prospectus....................................... Outside Front Cover of Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus.................................................. Inside Front and Outside Back Cover Pages of
Prospectus
3. Summary Information and Risk Factors................................. Prospectus Summary; Risk Factors
4. Use of Proceeds...................................................... Use of Proceeds
5. Determination of Offering Price...................................... Outside Front Cover Page; Risk Factors;
Underwriting
6. Dilution............................................................. Dilution
7. Selling Security Holders............................................. N/A
8. Plan of Distribution................................................. Outside Front Cover Page of Prospectus;
Underwriting
9. Legal Proceedings.................................................... Business - Legal Proceedings
10. Directors, Executive Officers, Promoters
and Control Persons.................................................. Management; Principal Stockholders
11. Security Ownership of Certain
Beneficial Owners and Management..................................... Principal Stockholders
12. Description of Securities............................................ Description of Capital Stock; Underwriting
13. Interest of Named Experts and Counsel................................ Experts
14. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities....................................... Management - Limitation of Liability and
Indemnification; Underwriting
15. Organization Within Last Five Years.................................. Not Applicable
16. Description of Business.............................................. Prospectus Summary; Risk Factors;
Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Business; Management; Certain Transactions;
Financial Statements
17. Management's Discussion and Analysis or
Plan of Operation.................................................... Management's Discussion and Analysis of
Financial Condition and Results of Operations
18. Description of Property.............................................. Business - Manufacturing
19. Certain Relationships and
Related Transactions................................................. The Company; Certain Transactions
20. Market for Common Equity and
Related Stockholder Matters.......................................... Risk Factors; Description of Capital Stock
21. Executive Compensation............................................... Management - Executive Compensation
22. Financial Statements................................................. Financial Statements
23. Changes in and Disagreements With
Accountants on Accounting and Financial
Disclosure........................................................... Change in Independent Accountants
(iii)
SUBJECT TO COMPLETION, DATED , 1997
PROSPECTUS
CTI Industries Corporation
1,333,333 UNITS
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK
AND
ONE REDEEMABLE WARRANT
This Prospectus relates to an offering (the "Offering") of 1,333,333
Units (the "Units"), each Unit consisting of one share of common stock, $.065
par value per share ("Common Stock"), and one redeemable common stock purchase
warrant ("Redeemable Warrant") of CTI Industries Corporation, a Delaware
corporation (the "Company"). The shares of Common Stock and Redeemable Warrants
comprising the Units are separately tradeable commencing upon issuance. Each
Redeemable Warrant entitles the registered holder thereof to purchase one share
of Common Stock at an initial exercise price of $__________ [150% of the initial
public offering price per Unit], subject to adjustment, at any time from
issuance until __________, 2002 [60 months after the date of this Prospectus].
The Company shall have the right to redeem all, but not less than all, of the
Redeemable Warrants, commencing __________, 1998 [12 months after the date of
this Prospectus] at a price of $.05 per Redeemable Warrant on 30 days' prior
written notice, provided that the Company shall have obtained the consent of
Joseph Stevens & Company, Inc. (the "Underwriter"), and the average closing bid
price of the Common Stock equals or exceeds 150% of the then exercise price per
share, subject to adjustment, for any 20 trading days within a period of 30
consecutive trading days ending on the fifth trading day prior to the date of
the notice of redemption. See "Description of Securities -- Redeemable
Warrants."
Prior to the Offering, there has been no public market for the Units, the
Common Stock or the Redeemable Warrants, and there can be no assurance that such
a market will develop after the completion of the Offering or, if developed,
that it will be sustained. It is currently anticipated that the initial public
offering price will be $4.50 per Unit. The offering price of the Units and the
exercise price and other terms of the Redeemable Warrants were determined by
negotiation between the Company and the Underwriter and are not necessarily
related to the Company's asset or book values, results of operations or any
other established criteria of value. See "Risk Factors," "Description of
Securities" and "Underwriting." The Company has applied to include the Units,
the Common Stock and the Redeemable Warrants on the Nasdaq SmallCap Market
("Nasdaq") under the symbols "CTINU," "CTIN" and "CTINW," respectively. The
Company and the Underwriter may jointly determine, based upon market conditions,
to delist the Units upon the expiration of the 30-day period commencing on the
date of this Prospectus.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" LOCATED ON PAGE 8, AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
===================================================================================================================
Price to Public Underwriting Discounts(1) Proceeds to Company(2)
- -------------------------------------------------------------------------------------------------------------------
Per Unit........................ $ $ $
- -------------------------------------------------------------------------------------------------------------------
Total(3)........................ $ $ $
===================================================================================================================
<FN>
(1) Does not include additional compensation payable to the Underwriter in the
form of a non-accountable expense allowance. In addition, see "Underwriting"
for information concerning indemnification and contribution arrangements and
other compensation payable to the Underwriter.
(2) Before deducting estimated expenses of $______ payable by the Company,
including the Underwriter's non-accountable expense allowance.
(3) The Company has granted to the Underwriter an option (the "Over-Allotment
Option"), exercisable for a period of 45 days after the date of this
Prospectus, to purchase up to 199,999 additional Units upon the same terms
and conditions set forth above, solely to cover over-allotments, if any. If
the Over-Allotment Option is exercised in full, the total Price to Public,
Underwriting Discounts and Proceeds to Company will be $_____________,
$____________ and $______________, respectively. See "Underwriting."
</FN>
The Units are being offered by the Underwriter, subject to prior sale,
when, as and if delivered to and accepted by the Underwriter, and subject to
approval of certain legal matters by its counsel and subject to certain other
conditions. The Underwriter reserves the right to withdraw, cancel or modify the
Offering and to reject any order in whole or in part. It is expected that
delivery of the Units offered hereby will be made against payment, at the
offices of Joseph Stevens & Company, Inc., New York, New York, on or about
_________, 1997.
JOSEPH STEVENS & COMPANY, INC.
The date of this Prospectus is _______________, 1997.
[PHOTOGRAPHS]
The Company intends to furnish to the registered holders of the Units,
Redeemable Warrants and Common Stock, annual reports containing financial
statements audited by its independent accounting firm and quarterly reports for
the first three quarters of each fiscal year containing unaudited interim
financial information.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
UNITS, COMMON STOCK AND/OR REDEEMABLE WARRANTS, INCLUDING PURCHASES OF THE
UNITS, COMMON STOCK AND/OR REDEEMABLE WARRANTS TO STABILIZE THEIR RESPECTIVE
MARKET PRICES, PURCHASES OF THE UNITS, COMMON STOCK AND/OR REDEEMABLE WARRANTS
MAINTAINED BY THE UNDERWRITER IN THE UNITS, COMMON STOCK AND/OR REDEEMABLE
WARRANTS, RESPECTIVELY, AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
2
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus. In
July, 1997, the Company restated its Certificate of Incorporation to provide for
Common Stock and Class B Common Stock. The shares of Class B Common Stock
contain rights identical to shares of Common Stock, except that shares of Class
B Common Stock, voting separately as a class, have the right to elect four of
the Company's seven directors. Shares of Common Stock and Class B Common Stock,
voting together as a class, vote on all other matters including electing the
remaining directors. Also in July, 1997, the Company effected a 1 for 2.6
reverse stock split of both its Common Stock and Preferred Stock. Upon the
closing of the Offering, the holders of the Company's then outstanding
Convertible Preferred Stock will convert all outstanding shares of such
Convertible Preferred Stock into 1,098,901 shares of Class B Common Stock.
Except as otherwise noted, all information in this Prospectus gives retroactive
effect to the aforementioned recapitalization, the 1 for 2.6 reverse stock split
and conversion of Convertible Preferred Stock, and assumes no exercise of the
Over-Allotment Option or the Underwriter's Warrants. See "Description of Capital
Stock." Investors should carefully consider the information set forth under the
heading "Risk Factors."
The Company
CTI Industries Corporation (the "Company") manufactures and sells mylar
balloons and believes it is the third largest manufacturer of mylar balloons in
the world. The Company also sells latex balloons, novelty and "message" items,
such as mugs and banners, and toy products, such as inflatable masks, punch
balls and water bombs, and produces laminated and specialty films for food
packaging and other commercial uses. The Company's balloons and related products
are sold throughout the United States and in 30 foreign countries through a wide
variety of retail outlets including grocery, general merchandise and drugstore
chains, such as Eckerd Drug Stores and the Safeway and Winn Dixie grocery
chains, card and gift shops, such as Hallmark and Factory Card Outlet stores,
and party goods stores, such as Party City, as well as through florists and
balloon decorators. The Company estimates the worldwide wholesale market for
latex and mylar balloons to be in excess of $570 million. During fiscal 1996,
the Company manufactured and sold over 15 million mylar balloons.
The mylar balloon, actually a balloon made of a nylon based material
with metallized and polyethylene coatings, has become a popular medium of social
expression. Most mylar balloons contain printed characters, designs and
messages. The Company maintains licenses on numerous characters and designs,
including, for example, Peanuts(TM) characters, Garfield(TM), Precious
Moments(TM) and Hallmark.
To meet the needs of the mylar balloon market, the Company has
developed sophisticated film products and techniques which have other
applications. The Company's expertise in multi-color printing, with water-based
ink in particular, has enabled the Company to expand its business to include the
production of film wrappers for consumables. The Company produces, laminates and
prints films for food packaging companies and manufactures custom film products
for other commercial uses.
The Company is a fully integrated designer and manufacturer of its
mylar balloon product line and believes that its facilities are among the most
advanced in the industry. The Company is a party to a long term agreement with a
Mexican manufacturer under which a broad line of latex balloons are manufactured
for the Company. The Company thereby has a competitive source of supply of
quality latex balloon products which it markets with its mylar balloon line. The
Company has also established a joint venture with this Mexican manufacturer for
the packaging of balloon products and printing of latex balloons.
3
The Company's objective is to become a dominant participant in the
worldwide mylar and latex balloon industry. To achieve this objective, the
Company is pursuing a business strategy that includes the following principal
elements:
Strengthen and Expand Marketing Efforts. The Company is
focusing its sales and marketing efforts to strengthen,
develop and expand its relationships with balloon distributors
and believes it can expand the business volume generated
through current distributors of its products. The Company also
intends to seek out relationships with new distributors both
in current markets and in new sales areas and plans to pursue
additional national chain accounts. The Company is developing
relationships with independent sales representatives for the
marketing of its toy-grade latex balloons, inflatable masks
and other toy/novelty products and also is expanding its
marketing efforts for its laminated and specialty film
products.
Increase Production Capability. The Company plans to purchase
additional printing, graphic and laminating equipment which
will allow it to increase its production capabilities and
enable it to produce eight-color mylar balloons and custom
film products.
Secure Supply. The Company plans to secure its low cost, high
quality source of latex balloons by providing capital in the
form of loans to its Mexican supplier of these products. The
Company believes this relationship provides the Company with a
competitive advantage over its competitors.
Expand Balloon Design and Product Development. By continuing
to expand its design and research and development departments,
the Company plans to develop new balloon designs and create or
license additional characters for display on its balloons to
increase the demand for its products. The Company also intends
to expand its toy/novelty product line of toy- grade latex
balloons, inflatable masks, punch balls and water bombs.
Develop Alternative Sales Channels. The Company plans to
develop strategic alliances with greeting card companies and
other members of the social expression industry to more
effectively market its products. The Company will seek to
become the supplier of custom, special order balloon products
to major distributors and suppliers.
The Offering
Securities offered by the
Company.................... 1,333,333 Units, each Unit consisting of one
share of Common Stock and one Redeemable
Warrant. The shares of Common Stock and
Redeemable Warrants comprising the Units will be
detachable and separately tradeable upon
issuance. Each Redeemable Warrant entitles the
registered holder thereof to purchase one share
of Common Stock at an initial exercise price of
$____ per share [150% of the initial public
offering price per Unit], subject to adjustment,
at any time following the date of issuance until
___________, 2002 [sixty months from the date of
this Prospectus]. The Company
4
shall have the right to redeem all, but not less
than all, of the Redeemable Warrants commencing
________, 1998 [twelve months from the date of
this Prospectus] at a price of $.05 per
Redeemable Warrant on 30 days' prior written
notice, provided that (i) the average closing
bid price of the Common Stock equals or exceeds
150% of the then exercise price per share,
subject to adjustment, for any 20 trading days
within a period of 30 consecutive trading days
ending on the fifth trading day prior to the
date of the notice of redemption, and (ii) the
Company shall have obtained the consent of the
Underwriter. See "Description of Capital Stock."
Common Stock outstanding Common Stock Class B Common Stock
before the Offering...... 1,010,202(1) 1,098,901
Common Stock to be
outstanding after
the Offering.............. 2,343,535(1) 1,098,901
Redeemable Warrants
to be outstanding
after the Offering....... 1,333,333(1)
Proposed NASDAQ SmallCap
Market Symbols............ Units: CTINU
Common Stock: CTIN
Redeemable Warrants: CTINW
Use of Proceeds............
The net proceeds of the Offering will be used
(i) to repay bank indebtedness of approximately
$1,250,000, including accrued interest, (ii)
$400,000 for sales and marketing programs, (iii)
$1,100,000 for improvements to plant and
equipment, (iv) $400,000 for loans to Mexican
supplier, (v) $150,000 for investment in Mexican
joint venture, (vi) $400,000 for product
development and character and image licenses and
(vii) the balance ($1,000,000) for working
capital and general corporate purposes.
Risk Factors................. Investment in the Units offered hereby is highly
speculative and involves significant risks and
substantial dilution. See "Risk Factors."
-----------------------
(1)Excludes (i) warrants to purchase an aggregate of 230,769 shares of
Common Stock at an exercise price of $.91 per share, (ii) warrants to purchase
277,244 shares of Common Stock at an exercise price of $3.12 per share and (iii)
300,000 shares of Common Stock issuable pursuant to options which may be granted
under the Company's stock option plan.
5
Summary Financial Information
(in thousands except share and per share data)
The following table sets forth summary financial data of the Company
for the two years ended October 31, 1996 and 1995 (collectively, the "Year-End
Data") and as of April 30, 1997, and for the six month periods ended April 30,
1996 and 1997. The Year-End Data has been derived from the audited financial
statements of the Company appearing elsewhere herein, which have been audited by
Coopers & Lybrand L.L.P. The summary financial data set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and the Financial Statements and notes
thereto and other financial and statistical data appearing elsewhere in this
Prospectus.
Years Ended October 31, Six Months Ended April 30,
-------------------------- --------------------------
1995 1996 1996 1997
----------- ----------- ----------- -----------
Consolidated Statement of
Operations Data:
Net sales ......................... $ 22,784 $ 13,910 $ 7,884 $ 8,736
Cost of sales ..................... $ 15,078 $ 8,558 $ 4,798 $ 5,384
----------- ----------- ----------- -----------
Gross profit ...................... $ 7,706 $ 5,352 $ 3,086 $ 3,352
Operating Expenses:
General and administrative ..... $ 2,900 $ 2,055 $ 1,196 $ 900
Selling ........................ $ 3,770 $ 2,387 $ 1,332 $ 1,364
Advertising and marketing ...... $ 2,356 $ 592 $ 341 $ 468
Plant shut down expense ........ $ 850 -- -- --
----------- ----------- ----------- -----------
Total operating expenses .......... $ 9,876 $ 5,034 $ 2,869 $ 2,732
----------- ----------- ----------- -----------
Operating income (loss) ........... $ (2,170) $ 318 $ 217 $ 620
Other income (expense) ............ $ (1,497) $ (495) $ (285) $ (229)
Income tax benefit(expense) ....... $ 774 $ (6) $ -- $ --
----------- ----------- ----------- -----------
Net income (loss) ................. $ (2,893) $ (183) $ (68) $ 391
Dividends applicable to Convertible
Preferred Stock .................. -- $ (74) $ (11) $ (65)
----------- ----------- ----------- -----------
Net income (loss) applicable to
common shares .................... $ (2,893) $ (257) $ (79) $ 326
=========== =========== =========== ===========
Net income (loss) per common and
common equivalent share .......... $ (2.14) $ (.20) $ (.06) $ .26
=========== =========== =========== ===========
Weighted average number
of common and common equivalent
shares outstanding ................ 1,353,384 1,290,267 1,324,080 1,254,124
=========== =========== =========== ===========
Pro forma per share data
reflecting recapitalization (1):
Net income (loss) per
common share and common
equivalent share .............. $ (.11) $ .17
Weighted average common
shares and common equivalent
shares outstanding ............ 2,301,756 2,265,612
6
April 30, 1997
-----------------------------
Pro Forma
Pro Forma(2) As Adjusted(2)(3)
------------ -----------
Consolidated Balance Sheet Data:
Working capital .................... $ 1,311 $ 4,383
Total assets ....................... $11,522 $14,994
Long-term debt, less current portion $ 3,738 $ 3,738
Total liabilities .................. $10,114 $ 8,864
Stockholders' equity ............... $ 958 $ 5,680
- -------------
(1) Pro forma per share data gives effect to the conversion of all
convertible preferred stock into common shares as if it occurred as of November
1, 1995 using the treasury stock method. The following table presents a
reconciliationof the pro forma weighted average common shares used in the pro
forma per share computations.
Six Months
Year Ended Ended
October 31, 1996 April 30, 1997
---------------- --------------
Weighted average common
shares outstanding ................ 1,026,572 990,428
Conversion of preferred stock ....... 1,011,489 1,011,489
Warrants ............................ 263,695 263,695
---------- ----------
2,301,756 2,265,612
========== ==========
(2) Gives retroactive effect to recapitalization and conversion of
Convertible Preferred Stock to shares of Class B Common Stock and issuance of
$865,000 of notes in June, 1997. See "Certain Transactions."
(3) Adjusted to give effect to the Offering assuming an initial public
offering price of $4.50 per Unit and the initial application of the net proceeds
therefrom.
7
RISK FACTORS
The purchase of Units offered hereby involves substantial risks and
immediate substantial dilution. Prospective investors should carefully consider
the risk factors set forth below in addition to the other information contained
in this Prospectus before purchasing the securities offered hereby.
Operating Results; History of Losses. Although the Company had net
income of $391,000 for the six months ended April 30, 1997, the Company's
revenues and results of operations have fluctuated materially during the last
five fiscal years. For the fiscal year ended October 31, 1995 and 1996, the
Company experienced net losses of $2,893,000 and $183,000, respectively. There
can be no assurance the Company can maintain profitability. See "Selected
Financial Data," Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Financial Statements and notes thereto included
herein.
Additional Capital Requirements; Uncertainty of Additional Funding.
Based on its current operating plan, the Company anticipates that its existing
capital resources together with the proceeds of this Offering will be adequate
to satisfy its requirements for at least 12 months from the date of this
Prospectus. Thereafter, the Company may require additional capital in order to
expand its business. There can be no assurance that the Company will be able to
secure additional debt or equity financing or that such financing will be
available on favorable terms. Historically, the Company has been substantially
dependent upon bank debt financing and debt and equity financing and guarantees
from its affiliates. There can be no assurance that the Company's affiliates
will continue to extend or guarantee such financing. See "Certain Transactions."
Additionally, financing, if any, may be either equity, debt or a combination of
debt and equity. An equity financing could result in dilution in the Company's
net tangible book value per share of Common Stock. The Company has agreed not to
sell or offer for sale any of its securities for a period of 18 months following
the date of this Prospectus without the consent of the Underwriter. If the
Company is unable to obtain additional financing, if needed, the Company's
ability to meet its obligations and to expand its operations will be materially
and adversely affected. See "Business" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Financial Statements
and notes thereto included herein.
Dependence on Limited Product Lines. The business of the Company is
dependent on three principal product lines -- mylar balloons, latex balloons and
specialty and printed films. Competition in each of these product lines is
intense. There can be no assurance that the Company will be able to establish or
maintain sales in all or any of these lines sufficient to achieve or sustain
profitability. If demand for one or more of these product lines is not developed
or maintained, as the case may be, whether due to competition, product
performance, customer assessment of the Company's resources, technological
changes or other factors, the Company's operations will be materially adversely
affected. See "Business--Products."
Dependence on Supplier. The Company is dependent on a supplier located
in Mexico for the manufacture of its latex balloon product line. This supplier
has experienced financial difficulty and has sought protection from its
creditors in a "Suspension of Payments" proceeding similar but not identical to
a reorganization proceeding under U.S. bankruptcy laws. The loss of the source
of supply for the latex balloon product line for any reason would materially
adversely affect the business of the Company. The Company has entered into an
agreement to provide capital in the form of loans to the Mexican supplier, and
has made loans and advances to the supplier to date in the amount of $300,000.
In the event the Mexican supplier is unsuccessful in negotiating a
reorganization with its creditors and is forced into bankruptcy, the collection
of all or any portion of such advances is unlikely. A portion of the proceeds of
this Offering will be used to provide such loans to the Mexican supplier. See
"Use of Proceeds" and "Business-Manufacturing."
8
Dependence On Key Personnel. The Company's success depends to a
significant degree on the continued service of certain key management personnel,
in particular Howard W. Schwan, the Company's President and John C. Davis, the
Company's Executive Vice President of Sales. The loss or interruption of Messrs.
Schwan or Davis' services, for whatever reason, would have a material adverse
effect on the Company. In the event of the loss of services of either Mr. Schwan
or Mr. Davis, no assurance can be given that the Company will be able to obtain
the services of adequate replacement personnel. The Company has entered into a
five year employment agreement with Mr. Schwan and has extended the term of Mr.
Davis' employment agreement through January, 2000. Mr. Schwan's agreement
includes provisions under which Mr. Schwan agrees not to compete with the
Company for a period of three years after termination of his employment with the
Company. See "Management-Executive Compensation-Employment Agreement."
Related Party Transactions; Potential Conflicts of Interest. In June,
1997, the Company issued notes in the principal amount of $865,000, together
with warrants to purchase 277,244 shares of the Company's Common Stock at $3.12
per share. A substantial portion of these notes and warrants were purchased by
an investor group including Howard W. Schwan, John H. Schwan and Stephen M.
Merrick, current members of Company management. The notes will not be repaid out
of the proceeds of the Offering nor will the shares of Common Stock underlying
the warrants be included in the Offering. The Company believes that all of these
arrangements are favorable to the Company and were entered into on terms
reflecting arms' length negotiation; however, since no independent appraisals
evaluating these affiliated business transactions were obtained, there can be no
assurance that such transactions were based on terms no less favorable than
could have been obtained from unaffiliated third parties. Potential conflicts of
interest could arise between the Company and the affiliated parties in
connection with the future enforcement, amendment or termination of these
arrangements. See "Management," "Certain Transactions" and "Principal
Stockholders."
Stephen M. Merrick, Chief Executive Officer and principal shareholder
of the Company is also a member of Fishman Merrick Miller Genelly Springer
Klimek & Anderson, P.C., the law firm which represents the Company in this
Offering and which has passed on the validity of the Units. Other members of
Fishman Merrick Miller Genelly Springer Klimek & Anderson, P.C. also have an
equity ownership interest in the Company. A conflict may arise between the
responsibilities and duties of Fishman Merrick Miller Genelly Springer Klimek &
Anderson, P.C., Mr. Merrick, and/or the other members of the firm, as
shareholders, as officers of the Company, and as counsel to the Company. See
"Certain Transactions" and "Legal Matters."
Possible Control by Insiders; Reduced Probability of Change in Control.
Upon completion of the Offering, the Company's executive officers and directors
will beneficially own 65% of the outstanding Class B Common Stock and will
beneficially own approximately 37% of the outstanding Common Stock (45% if their
shares of Class B Common Stock are converted to shares of Common Stock) and will
be able to elect at least a majority of the Company's directors and thereby
direct the policies of the Company. As a result of the executive officers owning
the majority of the Class B Common Stock and thereby being able to elect a
majority of the Company's directors, it is less likely that an outside party
will seek to obtain control of the Company through the purchase of Common Stock.
See "Principal Stockholders", "Management" and "Description of Capital Stock."
Competition. The markets in which the Company competes are highly
competitive and rapidly changing. A number of companies offer products and
services which are the same or similar to those offered by the Company. The
Company's ability to compete depends upon many factors within and outside its
control. There are a number of well-established competitors in each of the
Company's product lines,
9
several of which possess substantially greater financial, marketing and
technical resources and established, extensive direct and indirect channels of
distribution for their products and services. As a result, such competitors may
be able to respond more quickly to new developments and changes in customer
requirements, or to devote greater resources to the development, promotion and
sale of their products and services than the Company. Competitive pressures
include, among other things, price competition, new designs and product
development and copyright licensing. There can be no assurance that the Company
will be able to compete successfully against current or future competitors, or
that competitive pressures will not have a material adverse effect on the
Company's business, operating results and financial condition.
See "Business - Competition."
Dependence on Licenses. Particularly in connection with its mylar
balloon product line, the Company relies significantly on the use of character
and other copyright licenses to develop, maintain and market its products and to
compete against other companies having licenses for other characters and
copyrights. All of the Company's licenses are for one or two year terms. The
loss of one or more of its present significant licenses or the failure to obtain
new licenses as they become available could have a material adverse effect on
the business of the Company. There is intense competition among the
manufacturers of mylar balloons to obtain and maintain such licenses and there
can be no assurance that the Company will be able to retain or obtain current or
new licenses. See "Business-Competition."
No Dividends. The Company has never paid any dividends on its Common
Stock and does not currently intend to pay dividends on its Common Stock in the
foreseeable future. The Company currently intends to retain all its earnings, if
any, to finance the development and expansion of its business. It is also likely
that the Company will be required to agree to restrictions on the payment of
dividends in connection with future financings. See "Dividend Policy."
Broad Discretion of Management in Use of Proceeds. Approximately 39% of
the estimated net proceeds of the Offering (approximately 47% if the
Over-Allotment Option is exercised in full) is to be used for sales and
marketing activities, character and copyright licensing and working capital and
general corporate purposes. Accordingly, the Company's management will have
broad discretion as to the application of such proceeds. See "Use of Proceeds."
Securities Eligible for Future Sale. Sales of substantial amounts of
Common Stock after the Offering could adversely affect the market price of the
Company's Common Stock. The number of shares of Common Stock available for sale
in the public market is limited by restrictions under the Securities Act of
1933, as amended (the "Securities Act"), and by lock-up agreements pursuant to
which the holders of all of the issued and outstanding shares prior to the
Offering have agreed not to sell or dispose of any of their shares for a period
of 18 months after the date of this Prospectus (the "Lock-up Period") without
the prior written consent of the Underwriter. The Underwriter may, in its sole
discretion and at any time without notice, release all or any portion of the
shares subject to such lock-up agreements. Although the Underwriter does not
currently intend to release all of such shares from the lock-up agreements prior
to their expiration, it may from time to time release all or a portion thereof,
depending on a securityholder's individual circumstances, as market conditions
permit. Of the 2,343,535 shares of Common Stock that will be outstanding after
the Offering, the 1,333,333 shares underlying the Units sold in this Offering
will be freely tradeable without restriction or further registration under the
Securities Act, except that shares owned by "affiliates" of the Company, as that
term is defined in Rule 144 ("Rule 144") under the Securities Act
("Affiliates"), may generally only be sold in compliance with applicable
provisions of Rule 144. The remaining 1,010,202 shares of Common Stock and the
1,098,901 shares of Class B Common Stock (and Common Stock underlying the Class
B Common Stock) will be "restricted securities," as that term is
10
defined in Rule 144, and in certain circumstances may be sold without
registration pursuant to such rule. After the Offering, substantially all of the
restricted shares will be eligible for sale in compliance with Rule 144;
however, all of these shares are subject to lock-up agreements and will be
subject to restrictions on sale until the expiration of the Lock-up Period,
unless released therefrom by the Underwriter. See "Management--Stock Option
Plan," "Description of Capital Stock," "Securities Eligible for Future Sale" and
"Underwriting."
The Redeemable Warrants and the shares of Common Stock underlying such
Redeemable Warrants, upon exercise thereof, will be freely tradeable without
restriction under the Securities Act, except for any Redeemable Warrants or
shares of Common Stock purchased by Affiliates, which will be subject to the
resale limitations of Rule 144.
Absence of Public Market; Arbitrary Determination of Offering Price;
Possible Volatility of Stock Price. Prior to this Offering, there has been no
public market for the Units, the Common Stock or the Redeemable Warrants, and
there can be no assurance that an active public market for any such securities
will develop or be sustained after the Offering. The initial public offering
price of the Units and the terms of the Redeemable Warrants has been determined
by negotiations among the Company and the Underwriter and may not necessarily
bear any relationship to the assets, book value, earnings or net worth of the
Company or any other recognized criteria and should not be considered to be an
indication of the actual value of the Company. Accordingly, the initial public
offering price may bear no relationship to the trading prices of the securities
offered hereby after the consummation of this Offering, and there can be no
assurance that these prices will not decline below the initial public offering
price. See "Underwriting." The trading prices of the Units, the Common Stock and
the Redeemable Warrants could be subject to wide fluctuations in response to
actual or anticipated quarterly operating results of the Company, announcements
of the Company or its competitors and general market conditions, as well as
other events or factors. In addition, the stock markets have experienced extreme
price and volume trading volatility in recent years. This volatility has had a
substantial effect on the market price of many small capitalization companies,
and has often been unrelated to the operating performance of those companies.
This volatility may adversely affect the market price of the Units, Common Stock
and Redeemable Warrants.
Dilution; Disproportionate Risk to Purchasers of Units. Purchasers of
the Units at the initial public offering price will experience immediate and
substantial dilution in the net tangible book value per share of Common Stock of
$2.85 or 63% ($2.73 or 61%, if the Over-Allotment Option is exercised in full).
The existing stockholders of the Company have acquired their respective equity
interests at costs substantially below the offering price in this Offering.
Accordingly, to the extent that the Company incurs losses, the purchasers of the
Units will bear a disproportionate risk with respect to such losses. See
"Dilution."
Underwriter's Potential Influence on the Market. It is anticipated that
a significant portion of the Units offered hereby will be sold to customers of
the Underwriter. Although the Underwriter has advised the Company that it
intends to make a market in the Units, the Common Stock and the Redeemable
Warrants, it will have no legal obligation to do so. The prices and the
liquidity of the Units, the Common Stock and the Redeemable Warrants may be
significantly affected by the degree, if any, of the Underwriter's participation
in the market. No assurance can be given that any market activities of the
Underwriter, if commenced, will be continued. See "Underwriting."
Continued Quotation on the Nasdaq SmallCap Market; Potential Penny
Stock Classification. The Company has applied to have the Units, the Common
Stock and the Redeemable Warrants approved for quotation on the Nasdaq SmallCap
Market and believes it will meet the initial listing requirements upon
11
consummation of this Offering. However, there can be no assurance that a trading
market for these securities will develop, or if developed, that it will be
maintained. In addition, no assurance can be given that the Company will be able
to satisfy the criteria for continued quotation on the Nasdaq SmallCap Market
following this Offering. Failure to meet the maintenance criteria in the future
may result in the Units, the Common Stock and the Redeemable Warrants not being
eligible for quotation.
If the Company were removed from the Nasdaq SmallCap Market, trading,
if any, in the Units, the Common Stock or the Redeemable Warrants would
thereafter have to be conducted in the over-the-counter market in so-called
"pink sheets" or, if then available, Nasdaq's OTC Bulletin Board. As a result,
holders of the Units, the Common Stock and the Redeemable Warrants would find it
more difficult to dispose of, or to obtain accurate quotations as to the market
value of, such securities.
In addition, if the Units, the Common Stock or the Redeemable Warrants
are delisted from trading on Nasdaq and the trading price of the Common Stock is
less than $5.00 per share, trading in the Common Stock would also be subject to
the requirements of Rule 15g-9 promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Under such rule, broker/dealers who
recommend such low-priced securities to persons other than established customers
and accredited investors must satisfy special sales practice requirements,
including a requirement that they make an individualized written suitability
determination for the purchaser and receive the purchaser's written consent
prior to the transaction. The Securities Enforcement Remedies and Penny Stock
Reform Act of 1990 also requires additional disclosure in connection with any
trades involving a stock defined as a penny stock (generally, according to
recent regulations adopted by the Securities Exchange Commission (the
"Commission"), any equity security not traded on an exchange or quoted on Nasdaq
that has a market price of less than $5.00 per share, subject to certain
exceptions), including the delivery, prior to any penny stock transaction, of a
disclosure schedule explaining the penny stock market and the risks associated
therewith. Such requirements could severely limit the market liquidity of the
Units, the Common Stock and the Redeemable Warrants and the ability of
purchasers in the Offering to sell their securities in the secondary market.
There can be no assurance that the Units, Common Stock and Redeemable Warrants
will not be delisted or treated as a penny stock.
Current Prospectus and State Blue Sky Registration Required to Exercise
Redeemable Warrants. The Redeemable Warrants issued in the Offering are not
exercisable unless, at the time of exercise, the Company has distributed a
current prospectus covering the shares of Common Stock issuable upon exercise of
such Redeemable Warrants and such shares have been registered, qualified or
deemed to be exempt under the securities laws of the state of residence of the
holder who wishes to exercise such Redeemable Warrants. In addition, in the
event any Redeemable Warrants are exercised at any time after nine months from
the date of this Prospectus, the Company will be required to file a
post-effective amendment and deliver a current prospectus before the Redeemable
Warrants may be exercised. Although the Company will use its best efforts to
have all such shares so registered or qualified on or before the exercise date
and to maintain a current prospectus relating thereto until the expiration of
such Redeemable Warrants, there is no assurance that it will be able to do so.
Holders of Redeemable Warrants who exercise such Redeemable Warrants at a time
the Company does not have a current prospectus may receive unregistered and,
therefore, restricted shares of Common Stock. Although the Units will not
knowingly be sold to purchasers in jurisdictions in which the Units are not
registered or otherwise qualified for sale, purchasers may buy Redeemable
Warrants in the after market or may move to jurisdictions in which the shares
underlying the Redeemable Warrants are not registered or qualified during the
period that the Redeemable Warrants are exercisable. In this event, the Company
would be unable to issue shares to those persons desiring to exercise their
Redeemable Warrants unless and until the shares and Redeemable Warrants could be
qualified for sale in the jurisdiction
12
in which such purchasers reside, or an exemption from such qualification exists
in such jurisdiction, and holders of Redeemable Warrants would have no choice
but to attempt to sell the Redeemable Warrants in a jurisdiction where such sale
is permissible or allow them to expire unexercised.
Redemption of Redeemable Warrants. Commencing _____________, 1998 [12
months from the date of this Prospectus], the Company shall have the right to
redeem all, but not less than all, of the Redeemable Warrants, at a price of
$.05 per Redeemable Warrant on 30 days' prior written notice, provided that the
Company shall have obtained the consent of the Underwriter, and the average
closing bid price of the Common Stock equals or exceeds 150% of the then
exercise price per share, subject to adjustment, for any 20 trading days within
a period of 30 consecutive trading days ending on the fifth trading day prior to
the date of the notice of redemption. In the event the Company exercises the
right to redeem the Redeemable Warrants, such Redeemable Warrants will be
exercisable until the close of business on the date fixed for redemption in such
notice. If any Redeemable Warrant called for redemption is not exercised by such
time, it will cease to be exercisable and the holder will be entitled only to
the redemption price.
Forward-Looking Information and Associated Risk. This Prospectus
contains various forward- looking statements, including statements regarding,
among other things, (i) the Company's growth strategy, (ii) anticipated trends
in the Company's business, and (iii) the Company's ability to enter into
contracts with licensors, suppliers, distributors and strategic partners. These
statements are based upon management's current beliefs as well as assumptions
made by management based upon information currently available to it. These
statements are subject to various risks and uncertainties, including those
described above, as well as potential changes in economic or regulatory
conditions generally which are largely beyond the Company's control. Should one
or more of these risks materialize or changes occur, or should management's
assumptions prove incorrect, the Company's actual results may vary materially
from those anticipated or projected.
13
THE COMPANY
Background. The Company was incorporated as Container Technologies, Inc.
under the laws of the State of Delaware on October 14, 1983, and changed its
name to CTI Industries Corporation on August 2, 1985. The principal executive
offices of the Company are located at 22160 North Pepper Road, Barrington,
Illinois 60010; the Company's telephone number is (847) 382-1000. See
"Business--Property." A predecessor company, Creative Technology, Inc., was
organized as an Illinois corporation on December 9, 1975 and was merged into the
Company in October, 1983. CTI Balloons Ltd. ("CTI Balloons"), the Company's
wholly-owned subsidiary, was organized as a corporation under the laws of the
United Kingdom on October 2, 1996. On October 24, 1996, the Company entered into
an agreement with CTI Balloons pursuant to which all of the assets and
liabilities of the Company in its branch operation in the United Kingdom were
sold and transferred to CTI Balloons and all of the capital stock of CTI
Balloons was issued and delivered to the Company. Unless otherwise specified,
all references herein to the Company shall refer to the Company, its predecessor
Creative Technology, Inc. and its wholly-owned subsidiary, CTI Balloons.
Change in Control. In March and May of 1996, a group of investors made
an equity investment of $1,000,000 in the Company in return for 1,098,091 shares
of Preferred Stock, $.91 par value. Each share of Preferred Stock was entitled
to an annual cumulative dividend of 13% of the purchase price, and was
convertible into one share of Common Stock. The shares of Preferred Stock,
voting separately as a class, were entitled to elect four of the Company's
directors. Members of such investment group included Howard W. Schwan, John H.
Schwan and Stephen M. Merrick, current members of management. See "Management"
and "Certain Transactions."
Recapitalization. In July, 1997, the Company effected a
recapitalization (the "Recapitalization") without a formal reorganization. As
part of the Recapitalization, the Board of Directors approved the creation of
Class B Common Stock, approved a 1 for 2.6 reverse stock split on both the
Common Stock and Preferred Stock, and negotiated a conversion effective upon the
closing of this Offering of all then outstanding shares of the Company's
Convertible Preferred Stock into an aggregate of 1,098,901 shares of Class B
Common Stock. The shares of Class B Common Stock contain rights identical to
shares of Common Stock, except that shares of Class B Common Stock, voting
separately as a class, have the right to elect four of the Company's seven
directors. Shares of Common Stock and Class B Common Stock, voting together as a
class, vote on all other matters, including the election of the remaining
directors. The recapitalization and related transactions were approved by
written consent of the shareholders. See "Description of Capital Stock."
14
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Units offered by
the Company hereby, after deduction of the underwriting discounts, the
Underwriter's non-accountable expense allowance and other estimated expenses of
the Offering payable by the Company, are expected to aggregate $4,722,000
($5,505,000 if the Over-Allotment Option is exercised in full).
The following table summarizes the Company's estimated use of the net
proceeds:
Approximate Approximate
Application of Proceeds Amount Percentage
- ----------------------- ---------- ----------
Repayment of bank indebtedness(1).................. $ 1,250,000 26.4%
Selling and marketing(2) .......................... $ 400,000 8.5%
Plant and equipment(3)............................. $ 1,100,000 23.3%
Loans to Mexican supplier(4)....................... $ 400,000 8.5%
Investment in Mexican joint venture(4) ............ $ 150,000 3.2%
Character and other licenses....................... $ 400,000 8.5%
Working capital and general corporate purposes..... $ 1,022,000 21.6%
---------- -----
Total........................................ $ 4,722,000 100%
========== =====
- --------------------
(1)Repayment of revolving line of credit. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations-Liquidity and
Capital Resources."
(2)Includes hiring of additional personnel in marketing, product design
and development, and sales, and acquiring product displays for expansion into
additional retail locations. See "Business-Marketing, Sales and Distribution."
(3)Includes purchase of laminating and coating equipment and graphics
equipment, including eight- color graphic printer. See "Business-Manufacturing."
(4)See "Business-Manufacturing" for description of loan to Mexican
supplier and further investment in Mexican joint venture.
In the event the Underwriter exercises the Over-Allotment Option in
full, the Company will utilize the additional net proceeds for general corporate
purposes.
The Company anticipates that the proceeds from the Offering, together
with its current capital resources and projected cash flow from operations, will
be sufficient to satisfy its requirements for at least 12 months from the date
of this Prospectus. Thereafter, the Company may need to raise additional funds
to expand its operations. There can be no assurance that additional financing
will be available or if available will be available on favorable terms. If the
Company is unable to obtain such additional financing, the Company's ability to
maintain its current level of operations will be materially and adversely
affected. See "Risk Factors--Additional Capital Requirements; Uncertainty of
Additional Funding."
15
Pending application of the proceeds of the Offering, the Company
intends to invest the net proceeds in certificates of deposit, money market
accounts, United States government obligations or other short-term interest
bearing obligations of investment grade.
Proceeds of this Offering may also be used, if the Company so elects,
to acquire companies or products that complement its business or operations. In
the ordinary course of its business, the Company from time to time evaluates
companies for acquisition and products for acquisition or license. Except as
otherwise disclosed herein, the Company has no agreement or arrangement with
respect to any such acquisition or license.
DIVIDEND POLICY
The Company has never paid any dividends on its Common Stock and does
not currently intend to pay dividends on its Common Stock in the foreseeable
future. The Company currently intends to retain all its earnings to finance the
development and expansion of its business. It is also likely that the Company
will be required to agree to restrictions on the payment of dividends in
connection with future financings, if any.
See "Risk Factors--No Dividends."
16
CAPITALIZATION
The following table sets forth the proforma capitalization of the
Company as of April 30, 1997, and as adjusted to reflect the sale of the Units
offered hereby at an assumed initial public offering price of $4.50 per Unit and
the initial application of the net proceeds therefrom (after deducting the
underwriting discounts and estimated Offering expenses payable by the Company).
The pro forma column gives retroactive effect to the recapitalization and
conversion of Convertible Preferred Stock to shares of Class B Common Stock upon
the closing of the Offering and the issuance of $865,000 of notes in June, 1997.
See "The Company- Recapitalization" and "Certain Transactions." This table
should be read in conjunction with the Company's financial statements attached
hereto.
April 30,1997
-----------------------
Pro Forma
Pro Forma As Adjusted
(in thousands)
Long-term debt, less current portion ...... $ 3,738 $ 3,738
------- -------
Stockholders' equity
Common Stock, $.065 par value,
11,000,000 shares authorized,
1,010,202 shares outstanding,
pro forma, 2,343,535 shares
pro forma as adjusted(1) .............. $ 75 $ 162
Class B Common Stock, $.91 par value,
1,100,000 shares authorized,
1,098,901 shares outstanding .......... $ 1,000 $ 1,000
Additional paid-in capital .............. $ 248 $ 4,883
Retained earnings ....................... $ 463 $ 463
Treasury stock .......................... $ (371) $ (371)
Redeemable common stock ................. $ (450) $ (450)
Stock Subscription Receivable ........... $ (7) $ (7)
------- -------
Total stockholders' equity ........... $ 958 $ 5,680
------- -------
Total capitalization ............. $ 4,696 $ 9,418
======= =======
- -------------------
(1)Excludes (i) warrants to purchase an aggregate of 230,769 shares of
Common Stock at an exercise price of $.91 per share, (ii) warrants to purchase
277,244 shares of Common Stock at an exercise price of $3.12 per share, and
(iii) 300,000 shares of Common Stock issuable pursuant to options which may be
granted under the Company's stock option plan.
17
DILUTION
"Net tangible book value per share" represents the amount of total
tangible assets of the Company reduced by the amount of total liabilities and
divided by the number of shares of capital stock outstanding. "Dilution"
represents the difference between the price per share to be paid by new
investors for the shares of Common Stock included in the Units offered hereby,
and the pro forma net tangible book value per share as of April 30, 1997, after
giving effect to the Offering. The pro forma net tangible book value per share
at April 30, 1997, also gives retroactive effect to the recapitalization and
conversion of the Company's Preferred Stock into shares of Class B Common Stock
upon the closing of the Offering. See "Certain Transactions." At April 30, 1997,
the pro forma net tangible book value of the capital stock was (including shares
of Class B Common Stock) $958,000 in the aggregate, or $.45 per share. After
giving effect to the sale of the shares of Common Stock included in the Units
offered hereby (at the assumed initial public offering price of $4.50 per Unit,
resulting in estimated net proceeds of $4,722,000, after deducting underwriting
discounts and estimated Offering expenses payable by the Company and assuming no
value is attributed to the Redeemable Warrants included in the Units), the pro
forma net tangible book value of the capital stock (including shares of Class B
Common Stock), as of April 30, 1997, would have been $5,680,000 in the
aggregate, or $1.65 per share. This represents an immediate increase in pro
forma net tangible book value of $1.20 per share to existing stockholders and an
immediate dilution per share of $2.85, or 63%, to new investors in the Offering.
The following table illustrates the dilution per share as described
above:
Initial public offering price per share of Common Stock .... $4.50
Pro forma net tangible book value per share
(including shares of Class B Common Stock)
before Offering ........................................ $.45
Increase attributable to new investors ................... $1.20
-----
Pro forma net tangible book value per share
(including shares of Class B
Common Stock) after the Offering ......................... $1.65
-----
Dilution per share to new investors ........................ $2.85
=====
Based on the foregoing assumptions, the following table sets forth, as
of completion of the Offering, the number of shares purchased from the Company,
the total cash consideration paid to the Company and the average price per share
paid by the existing stockholders and by new investors purchasing shares of
Common Stock included in the Units in the Offering (assuming no value is
attributed to the Redeemable Warrants).
Total
Shares Purchased Consideration
----------------- ------------------- Average Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
Existing Common Stock
holders ................ 1,010,202 29% $ 256,388 3.53% $ .25
Class B Common Stock
holders ................ 1,098,901 32% $1,000,000 13.78% $ .91
New Investors ............ 1,333,333 39% $6,000,000 82.69% $4.50
---------- ---- ----------- ----
Total .................... 3,442,436 100% $7,256,388 100%
========== === =========== ===
18
If the Over-Allotment Option is exercised in full, the pro forma net
tangible book value at April 30, 1997, after giving effect to the Offering
(assuming no value is attributed to the Redeemable Warrants included in the
Units), would be approximately $6,463,000 or $1.77 per share, and the dilution
per share to new investors would be approximately $2.73 or 61%.
The foregoing also assumes no exercise of the Redeemable Warrants, the
Underwriter's Warrants or any outstanding stock options or warrants. As of April
30, 1997, there were outstanding warrants to purchase an aggregate of 230,769
shares of Common Stock at an exercise price of $.91 per share. Subsequent to
April 30, 1997, the Company issued $865,000 of notes, together with warrants to
purchase up to 277,244 shares of Common Stock at a price of $3.12 per share. See
"Certain Transactions." The Company has a total of 300,000 shares of Common
Stock reserved for issuance upon the exercise of stock options which may be
granted from time to time pursuant to its stock option plan. See "Management--
Executive Compensation--Stock Option Plan." To the extent that any options or
warrants are exercised at a price per share less than the initial public
offering price, there will be further dilution to new investors.
19
SELECTED FINANCIAL DATA
(in thousands except share and per share data)
The following table sets forth selected financial data of the Company
for the two years ended October 31, 1996 and 1995 (collectively, the "Year-End
Data"), and for the six months ended April 30, 1997 and 1996. The Year-End Data
has been derived from the audited financial statements of the Company appearing
elsewhere herein, which have been audited by Coopers & Lybrand L.L.P. The
selected financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Financial Statements and notes thereto and other financial and
statistical data appearing elsewhere in this Prospectus.
Six Months
Year Ended October 31, Ended April 30,
-------------------------- --------------------------
1995 1996 1996 1997
----------- ----------- ----------- -----------
Consolidated Statement of Operations Data:
Net sales .............................. $ 22,784 $ 13,910 $ 7,884 $ 8,736
Cost of sales .......................... $ 15,078 $ 8,558 $ 4,798 $ 5,384
----------- ----------- ----------- -----------
Gross profit ........................... $ 7,706 $ 5,352 $ 3,086 $ 3,352
Operating Expenses:
General and administrative ......... $ 2,900 $ 2,055 $ 1,196 $ 900
Selling ............................ $ 3,770 $ 2,387 $ 1,332 $ 1,364
Advertising and marketing .......... $ 2,356 $ 592 $ 341 $ 468
Plant shut down expense ............ $ 850 -- -- --
----------- ----------- ----------- -----------
Total operating expenses ............... $ 9,876 $ 5,034 $ 2,869 $ 2,732
----------- ----------- ----------- -----------
Operating income (loss) ................ $ (2,170) $ 318 $ 217 $ 620
----------- ----------- ----------- -----------
Other income (expense) ................. $ (1,497) $ (495) $ (285) $ (229)
----------- ----------- ----------- -----------
Income (loss) before income taxes ...... $ (3,667) $ (177) $ (68) $ 391
Income tax benefit (expense) ........... $ 774 $ (6) $ -- $ --
----------- ----------- ----------- -----------
Net income (loss) ...................... $ (2,893) $ (183) $ (68) $ 391
Dividends applicable to Convertible
Preferred Stock ....................... -- $ (74) $ (11) $ (65)
----------- ----------- ----------- -----------
Net income (loss) applicable to
common shares ......................... $ (2,893) $ (257) $ (79) $ 326
=========== =========== =========== ===========
Net income (loss) per common and
common equivalent share ............... $ (2.14) $ (.20) $ (.06) $ .26
=========== =========== =========== ===========
Weighted average number
of common and common equivalent
shares outstanding ..................... 1,353,384 1,290,267 1,324,080 1,254,124
=========== =========== =========== ===========
Pro forma per share data
reflecting recapitalization(1):
Net income (loss) per
common share and common
equivalent share .............. $ (.11) $ .17
Weighted average common
shares and common equivalent
shares outstanding ............ 2,301,756 2,265,612
- --------------------
(1) Pro forma per share data gives effect to the conversion of all
convertible preferred stock into common shares as if it occurred as of November
1, 1995 using the treasury stock method.
20
Consolidated Balance Sheet Data: Pro Forma(1)
October 31, April 30,
1996 1997
--------- ---------
Working capital............................. $ 347 $ 1,311
Total assets................................ $ 10,286 $ 11,522
Long term debt, less current portion........ $ 3,105 $ 3,738
Total liabilities........................... $ 9,355 $ 10,114
Stockholders' equity........................ $ 481 $ 958
- --------------------
(1)Gives retroactive effect to recapitalization and conversion of
Convertible Preferred Stock to shares of Class B Common Stock and issuance of
$865,000 of notes in June, 1997. See "Certain Transactions."
21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
In February, 1996, there was a change of control and management of the
Company. Since that time, new management has focused its efforts on (i) reducing
costs of operations, (ii) achieving liquidity, (iii) formulating and
implementing plans and programs to increase revenues and (iv) achieving
profitability. Operating expenses were reduced from 1995 to 1996 by over $4.8
million, a reduction of approximately 49%. The net loss of the Company was
reduced from the 1995 level of $2,893,000 to $183,000 for fiscal 1996. While net
sales decreased 39% in fiscal 1996 to $13,910,000 from $22,784,000 in fiscal
1995, net sales for the six months ended April 30, 1997 have increased 11% from
net sales for the same period in 1996. For the six months ended April 30, 1997,
the Company had net income of $391,000 compared to a net loss of $68,000 for the
same period in 1996. Working capital increased to $490,000 on April 30, 1997
from $347,000 on October 31, 1996. During the past 18 months, the Company has
introduced over 180 new mylar balloon designs, has out-sourced the manufacture
of and engaged in active marketing of latex balloons and introduced several new
products. Approximately $1.9 million of new financing has been provided in
private financings and a new bank loan and line of credit in the aggregate
amount of $6.3 million has been obtained.
The Company anticipates investing $1.1 million of the proceeds of this
offering in capital items and operations to improve the products, production
capacity, marketing efforts, product development and operations of the Company.
The Company plans to make capital investments of approximately $2.8 million, a
portion of which will be financed through equipment leases or otherwise, in
plant improvements and equipment which will increase production capacity and
which will allow the Company to print eight-color designs in the mylar product
line and the laminated and printed films business. The Company plans to make
loans to its supplier of latex balloons to further assure the source of supply.
The Company plans to invest a portion of the proceeds of the Offering for the
hiring of personnel in marketing, product design and development and sales to
enhance the Company's product design and development efforts, its product line,
marketing, customer service and support and sales effort.
Results of Operation
Net Sales. For the six months ended April 30, 1997, net sales increased
to $8,736,000 from $7,884,000 for the same period in 1996, an increase of
approximately 11%. This increase in net sales was a reflection principally of
increases in the sales of latex balloons and printed and laminated films. For
the fiscal year ended October 31, 1996, net sales were $13,910,000, as compared
to net sales of $22,784,000 for the fiscal year ended October 31, 1995. The 39%
decline in sales for that period was a result of (i) a decline of approximately
$2 million in the sales of latex balloons because of the closing of the
Company's latex balloon manufacturing operations in September, 1995 and the lack
of supply of latex balloons from October, 1995 to June, 1996, (ii) a decline in
sales of mylar balloons of approximately $6 million resulting primarily from the
loss of several national account customers and (iii) the elimination of sales of
plush toys which represented approximately $900,000 in sales during fiscal 1995.
During fiscal 1995, mylar balloons represented approximately 87% of
revenues, latex balloons 11% of revenues and laminated and printed films
approximately 2% of sales. During fiscal 1996, mylar balloons represented 87% of
sales, latex balloons 4% of sales and laminated and printed films 9% of sales.
During the six months ended April 30, 1997, mylar balloons represented 80% of
sales, latex balloons 8% of sales and laminated and printed films 12% of sales
as compared to 92%, 2% and 6%, respectively, for the six
22
months ended April 30, 1996. The Company anticipates that the percentage of
sales represented by latex balloons and laminated and printed films will
continue to increase during fiscal 1997 and 1998.
Cost of Sales. For the six months ended April 30, 1997, cost of sales
represented 61.6% of net sales as compared to 60.8% for the same period in 1996.
For the fiscal year ended October 31, 1996, cost of goods represented 61.5% of
net sales as compared to 66.2% for the fiscal year ended October 31, 1995.
Administrative. For the six months ended April 30, 1997, administrative
expenses were $900,000, or 10.3% of sales as compared to $1,196,000, or 15.2% of
sales, for the same period in the prior year. For the fiscal year ended October
31, 1996, general and administrative expenses were $2,055,000, or 14.8% of
sales, as compared to $2,900,000, or 12.7% of sales, for the prior fiscal year.
The decreases were the result of a number of items including the reduction in
accounting and financial staff, and reduction in certain executive salaries and
expenses, and a reduction in overhead expenses.
Selling. For the six months ended April 30, 1997, selling expenses were
$1,364,000, or 15.6% of net sales, as compared to $1,332,000, or 16.9% of net
sales for the same period in the prior year. For the fiscal year ended October
31, 1996, selling expenses were $2,387,000, or 17.2% of net sales, as compared
to selling expenses of $3,770,000, or 16.5% of sales for the fiscal year ended
October 31, 1995.
Advertising and Marketing. For the six months ended April 30, 1997,
advertising and marketing expenses were $468,000, or 5.4% of sales, as compared
to advertising and marketing expenses of $341,000, or 4.3% of sales, for the
same period in the prior year. The increase in these expenses was a result of
catalogue printing costs and service fees paid on national account sales
programs. For the fiscal year ended October 31, 1996, advertising and marketing
expenses were $592,000 compared to $2,356,000 for the fiscal year ended October
31, 1995. This decrease of $1,764,000 was the result of a significant decline in
the cost of printed materials incurred by the Company, particularly in its
catalogue, as well as a decline in print advertising. Service fees related to
national account sales programs declined with the loss of several national
account customers.
Plant Shutdown Expenses and Loss on Disposition of Latex Equipment. In
fiscal 1995, the Company ceased latex manufacturing operations at its Cary,
Illinois facility and sold its latex balloon manufacturing equipment. See
"Business-Manufacturing." Shutdown expenses of $850,000 were accrued for rent,
utilities, operating expenses, building rehabilitation and latex inventory
write-down during this period. A loss on disposition of latex equipment was
incurred in fiscal 1995 of $822,000 upon sale of the equipment and the
forgiveness of the $400,000 receivable relating to the sale.
Other Expenses. For the six months ended April 30, 1997, interest
expense was $304,000 as compared to $317,000 for the same period in the prior
year. For the fiscal years ended October 31, 1995 and 1996, interest expense was
$800,000 and $553,000, respectively. The reduction in interest expense is a
reflection of the reduction in the aggregate indebtedness of the Company and the
new bank loan arrangement in September, 1996 at overall rates of interest less
than the prior bank loan rates.
Net Income or Loss. For the six months ended April 30, 1997, the
Company had net income of $391,000 as compared to a net loss of $68,000 for the
same period in the prior year. For the fiscal year ended October 31, 1996, the
Company had net loss of $183,000 as compared to a net loss of $2,893,000 for the
prior fiscal year.
23
Liquidity and Capital Resources
Cash flow used in operations during the six months ended April 30, 1997
was $911,000. This resulted primarily from increased sales and resulting
increases in accounts receivable of over $1,000,000. During fiscal years 1995
and 1996, the Company had cash flows from operations of $541,000 and $840,000,
respectively. During fiscal 1996, cash raised from the issuance of Preferred
Stock and the new revolving line of credit was used in part to reduce accounts
payable and accrued expenses.
At April 30, 1997 the Company maintained no cash balance, which is
consistent with the Company's current cash management policy of utilizing its
revolving line of credit for liquidity. As of October 31, 1996, the Company had
cash and cash equivalents of $131,000. As of April 30, 1997, the Company had
working capital of $490,000. Working capital as of October 31, 1996 was
$347,000.
During the past eighteen months, the Company has funded its operations
primarily through the cash provided by its operating activities, a private
placement financing of Preferred Stock, funding provided by a new bank loan and
line of credit and a private placement of notes and warrants. In early 1996, the
Company completed a private placement of 1,098,901 shares of Preferred Stock,
par value $.91 per share, for gross proceeds of $1,000,000. The Preferred Stock
included a cumulative preferred dividend at the rate of 13%. The shares of
Preferred Stock will be converted into 1,098,901 shares of Class B Common Stock
upon the closing of this Offering. See "The Company-Recapitalization."
In September, 1996, the Company entered into a Loan Agreement with a
bank under which the bank provided loans and a line of credit to the Company
aggregating $6,300,000. The arrangement included term loans in the amount of
$3,300,000 and a revolving line of credit providing for maximum advances of
$3,000,000 of which $57,000 was unused at April 30, 1997. The term loans are due
on September 1, 2001, and bear interest at either 8.75% or prime plus 1%. The
revolving loan was due on September 1, 1997 and has been renewed until July 1,
1998. The revolving line of credit bears interest at prime plus 1%. During July,
1997, the same bank provided additional term loans to the Company in the
aggregate amount of $475,000. All these loans are secured by all of the
Company's assets. Three principal shareholders of the Company, John H. Schwan,
Howard W. Schwan and Stephen M. Merrick have guaranteed these obligations. A
portion of the proceeds of this Offering will be used to pay down the revolving
line of credit. See "Use of Proceeds."
During June, 1997, the Company completed a private placement of notes
and warrants for gross proceeds of $865,000. The notes issued in the placement
are subordinated unsecured two year notes, bearing interest at the rate of 10%
per annum. Individuals participating in the placement received five year
warrants to purchase 277,244 shares of Common Stock of the Company at the price
of $3.12 per share. Two officers and directors of the Company applied advances
made by them to the Company in January, 1997, in the aggregate amount of
$400,000 toward the purchase of the notes and warrants. See "Certain
Transactions."
During fiscal 1995 and 1996, the Company invested $479,000 and
$496,000, respectively, in plant and equipment and has invested $343,000 during
the six months ended April 30, 1997.
During fiscal 1995 and 1996, the Company utilized $124,000 and
$336,000, respectively, in financing activities, principally the reduction of
bank indebtedness. During the six months ended April 30, 1997, the Company has
generated $1,155,000 in financing activities.
24
The Company believes that the net proceeds of this offering, together
with existing capital resources and cash generated from operations, will be
sufficient to meet the Company's requirements for at least 12 months following
the date of this Prospectus. Thereafter the Company may require additional
capital in order to expand its business and there can be no assurance that the
Company will be able to secure additional debt or equity financing or that such
financing will be available on favorable terms. See "Risk Factors-Additional
Capital Requirements; Uncertainty of Additional Financing."
Seasonality
In the mylar product line, sales have historically been seasonal with
approximately 17% to 27% of annual sales of mylar being generated in December
and January and 13% to 15% of annual mylar sales being generated in June and
July in recent years. The sale of latex balloons and laminated film products
have not historically been seasonal, and to the extent sales in these areas
increase as a percentage of total sales, this should decrease the seasonality of
the Company's total net sales.
25
BUSINESS
General
Background. CTI Industries Corporation (the "Company") manufactures and
sells mylar balloons and believes it is the third largest manufacturer of mylar
balloons in the world. The Company also sells latex balloons, novelty and
"message" items, such as mugs and banners, and toy products, such as inflatable
masks, punch balls and water bombs, and produces laminated and specialty films
for food packaging and other commercial uses. The Company's products are sold
throughout the United States and in 30 foreign countries through a wide variety
of retail outlets including grocery, general merchandise and drugstore chains,
such as Eckerd Drug Stores and Safeway and Winn Dixie grocery chains, card and
gift shops, such as Hallmark and Factory Card Outlet stores, and party goods
stores, such as Party City, as well as through florists and balloon decorators.
The Company estimates the worldwide wholesale market for mylar and latex
balloons to be in excess of $570 million.
The mylar balloon, actually a balloon made of a nylon based material
with metallized and polyethylene coatings, has become a popular medium of social
expression. Most mylar balloons contain printed characters, designs and
messages. The Company maintains licenses on numerous characters and designs,
including, for example, Peanuts(TM) characters, Garfield(TM), Precious
Moments(TM) and Hallmark.
To meet the needs of the mylar balloon market, the Company has
developed sophisticated film products and techniques which have other
application. The Company's expertise in multi-color printing using water-based
ink, in particular, has enabled the Company to expand its business to include
the production of film wrappers for consumables. The Company produces, laminates
and prints films for food packaging companies and provides custom film products
for other commercial uses.
The Company is a fully integrated designer and manufacturer of its
mylar balloon product line and believes that its facilities are among the most
advanced in the industry. The Company is a party to a long term agreement with a
Mexican manufacturer under which a broad line of latex balloons are manufactured
for the Company. The Company thereby has a competitive source of supply of
quality latex balloon products which it markets with its mylar balloon line. The
Company has also established a joint venture with this Mexican manufacturer for
the packaging of balloon products and printing of latex balloons.
Business Plan. Upon assuming control in early 1996, new management
concentrated initially on reducing costs of operations, achieving liquidity and
profitability and formulating plans to increase revenues. Having achieved these
goals in late 1996 and early 1997, management's focus turned to generating
increased sales and market share to position itself as a market leader.
To achieve this goal, the Company is focusing its efforts on developing
sales and marketing programs to strengthen, develop and expand its relationship
and sales to its distributors, national chains and other buyers of its products.
In addition to expanding the core U.S. market, the Company will seek to increase
its presence in emerging markets for its balloon and related products, such as
Europe and Central and South America. The Company will also seek additional
distributors for its toy/novelty line of products and will continue to expand
its customer base for its laminated and specialty film products.
26
To enable the Company to meet customer demand for high quality,
multi-color mylar balloons and custom film products, the Company will invest in
new laminating and graphic equipment, including an eight- color graphic printer.
The Company also intends to assure its supply of competitively priced latex
balloons by providing capital in the form of loans to its Mexican supplier of
such products. The Company believes that this will provide it with added control
over supply and give the Company an advantage over other latex balloon
distributors.
The Company will continue its efforts to license new characters and
designs for its mylar balloons and to develop or license new balloon designs to
increase consumer demand for its products. The Company's catalogue published in
June 1997, introduced over 100 new balloon designs. The Company has recently
introduced a lower-priced, higher quality standard line of latex balloons and
has introduced a number of new latex balloon colors and now manufactures mylar
and latex balloons in coordinated colors. Further, with the introduction of
inflatable masks the Company has entered the novelty/toys market. The Company
believes that its full line of mylar and latex balloons and its manufacturing
capability may afford the Company a competitive advantage in the market.
The Company will continue to seek out new methods for the sale of its
products, including strategic partnerships with companies engaged in the
greeting card, party goods and related businesses to take advantage of these
entities' distribution channels and resources. The Company will continue to
offer custom balloon manufacture for distributors and suppliers to position
itself as a full service manufacturer.
Industry Overview
The mylar balloon came into existence in the late 1970s. During the
1980s, the market for mylar balloons grew rapidly. Initially, the product was
sold principally to individual vendors, small retail outlets and at fairs,
amusement parks, shopping centers and other outdoor facilities and functions.
Because of its ability to remain buoyant for a long period of time when filled
with helium and its facility for the printing of graphics and messages, the
product has significant appeal as a novelty and message item. Mylar balloons
became part of the "social expression" industry, carrying graphics designs,
characters and messages like greeting cards. In the mid-1980s, the Company and
other participants in the market began licensing character and cartoon images
for printing on the balloons and directed marketing of the balloons to retail
outlets including grocery, general merchandise and drugstore chains, card and
gift shops, party goods stores, as well as florists and balloon decorators.
The Company estimates that the wholesale world market for mylar
balloons is approximately $120 million. Mylar balloons are sold in the United
States and in Europe, several countries in the Far East, Canada and to an
increasing extent in Latin America. The United States, however, is by far the
largest market for these products. Particularly in areas of Europe and Latin
America, mylar balloons are also sold by individual vendors at fairs, amusement
parks and other public areas.
There are presently seven manufacturers of mylar balloons whose
products are sold in the United States. Five of these companies maintain their
own production facilities in the United States. Several companies market and
sell mylar balloons designed by them and manufactured by others for them.
Mylar balloons are marketed in the United States and foreign countries
through wholesalers or distributors and directly to retail customers. Often the
sale of mylar balloons by the wholesalers/distributors is accompanied by related
27
products including latex balloons, floral supplies and candy containers.
Although, the latex balloon market overlaps the mylar balloon market, the latex
balloon market has been in existence for a longer period than mylar balloons and
extends to more customers and market categories than mylar balloons.
There are three separate latex balloon product lines: (i) high quality
decorator balloons, (ii) standard novelty balloons and (iii) printed balloons.
The high quality decorator balloons are generally sold to and through balloon
decorators and are generally of higher quality and price than the standard line
of balloons. The standard line of balloons is sold widely in retail stores
including many of the same outlets as mylar balloons. Printed latex balloons are
sold both in retail outlets and for balloon decoration purposes including floral
designs.
There are five principal manufacturers of latex balloons whose products
are sold in the United States. It is estimated that the wholesale world market
for latex balloons exceeds $450 million.
While the market for printed and laminated films is fragmented, the
Company believes it is a multi-billion dollar industry.
Products
Mylar Balloons. The mylar balloon is actually composed of a base nylon
material which is coated on one side with a metal deposit and on the other with
polyethylene. Typically, the balloon film is printed with graphic designs and
messages.
The Company manufactures over 380 balloon designs, in different shapes
and sizes.
o Superloons(TM) are 18" balloons in round or heart shape,
generally made to be filled with helium and remain buoyant for
long periods. This is the predominant mylar balloon size.
o Ultraloons(TM) are 34" balloons made to be filled with helium
and remain buoyant.
o Miniloons(TM) are 9" balloons made to be air-filled and sold
on holder-sticks or for use in
decorations.
o Card-B-Loons(TM) (4 1/2") and Pixiloons(TM) (2 1/2") are
air-filled balloons, often sold on a stick, used in floral
arrangements or with a container of candy.
o Shape-A-Loons(TM) are shaped balloons made to be filled with
helium.
o Minishapes are small shaped balloons designed to be air filled
and sold on sticks as toys or inflated characters.
o Walk-abouts(TM) are helium filled shaped balloons with
attached arms and legs.
o Smackers(TM) are helium filled red lip-shaped balloons.
o You Name It(TM) are balloons to which lettering can be
attached for a personalized message.
28
In addition to size and shape, a principal element of the Company's
mylar balloon products is the printed design or message contained on the
balloon. These designs include figures and licensed characters many of which are
well-known licensed characters. The Company maintains licenses for Peanuts(TM),
Garfield(TM), Precious Moments(TM), Hallmark, Hallmark Shoebox(TM), Ziggy(TM),
Grimmy(TM), Elephantz(TM), Paddington(TM), Face-Offs(TM), Gibson Greetings(TM),
Postman Pat(TM) and several others. See "Business- Patent, Trademarks and
Copyrights."
Latex Balloons. The Company sells a high end line of latex balloons
under the product line name Hi-Tex(TM) and a standard line of latex balloons
marketed under the name Partyloons(TM).
Toys and Novelty. The Company also manufactures or sells additional and
related novelty items including mugs, banners and inflatable masks. With its
standard line of latex balloons and newly introduced inflatable masks, the
Company has made entry into the toy market. The Company intends to develop and
acquire additional novelty and toy lines of products, in many cases products
which can be sold in conjunction with its existing products including latex
punch balls and water bombs.
Packaging Films. The Company fabricates and prints films for use in
food packaging. The Company has developed sophisticated methods for the printing
of films, including the use of water-based ink. These techniques have proven
desirable for companies engaged in packaging food products, particularly candy
and snack items, with the result that the Company now provides printed packaging
films for several food packaging companies, including Farley Candies, and
intends to expand and extend this business line.
Custom Film Products. In addition to printed films for food packaging,
the Company fabricates custom film products for various commercial and
industrial purposes. These now include "dunnage" bags (inflatable film products)
used in the packaging of goods and systems for the storage of clothing items.
Marketing, Sales and Distribution
The Company markets and sells its mylar balloon, latex balloon and
related novelty products throughout the United States and in over 30 foreign
countries. The Company maintains a marketing, sales staff and support staff of
11 individuals and a customer service department of 16 individuals. European
sales are conducted by CTI Balloons, the Company's subsidiary located in Rugby,
England. Sales in other foreign countries are made generally to distributors in
those countries and are managed at the Company's principal offices.
The Company sells and distributes its products principally through a
network of over 350 distributors and wholesalers situated throughout the United
States and in a number of foreign countries. These distributors and wholesalers
are engaged principally in the sale of balloons and related products (including
such items as plush toys, mugs, containers, floral supplies and other items).
These distributors and wholesalers, in turn, sell balloons and related products
to retail outlets including grocery, general merchandise and drug store chains,
card and gift shops, party goods stores, as well as florists and balloon
decorators. The Company intends to use a portion of the proceeds of this
Offering to expand its marketing efforts with current distributors and to seek
out new distributors both in current markets and in new sales areas. While the
Company will continue to focus on the core U.S. market, it will also seek to
exploit other world markets such as Europe and South America. No distributor or
other customer accounts for more than 10% of the Company's sales revenues. Most
sales are on an individual order basis.
29
The Company also sells balloons and related products to certain
national chain stores including grocery, general merchandise and drugstore
chains and party goods stores. The Company's largest chain store customer is
Eckerd Drug Stores. The Company also sells its balloons to individual retail
outlets generally through coordinated efforts with its distributors.
The Company has entered into an agreement with a major greeting card
company under which such company will act as an agent for the sale of the
Company's balloon products in retail outlets to which such company sells
greeting cards. Under the agreement, this company takes orders for balloons,
services the display of balloons and maintains inventory in the stores. The
Company pays this company a commission on sales the company generates and
services. The Company is pursuing similar strategic partnerships with other
companies in the expression industry.
The Company has established independent sales representatives for the
sale of its toy/novelty line which include the standard quality latex balloon,
inflatable masks, punch balls and water bombs. These products constitute a
separate product class requiring a different distribution network.
The Company engages in a variety of advertising and promotional
activities to promote the sale of its balloon products. Each year, the Company
produces a complete catalogue of its balloon products, and also prepares various
flyers and brochures for special or seasonal products, which are disseminated to
thousands of customers, potential customers and others. The Company participates
in numerous trade shows for the gift, novelty, balloon and other industries and
advertises in a number of trade and other publications. The Company also attends
licensing shows for the purpose of seeking out additional design licenses.
The Company markets and sells its printed and laminated films directly
and through independent sales representatives. The Company markets these
products to companies which package their products in plastic wrapping, in
particular food products such as candies.
Manufacturing
Production and Operations. At the Barrington, Illinois headquarters,
the Company owns and operates a modern facility which includes machines of its
own design and construction which fabricate mylar balloons, banners and
packaging bags. These production systems include a patented system for the
production and insertion of valves in balloons. These machines have the capacity
to manufacture approximately 55 million 18" balloons annually.
The Company owns and operates graphic machinery at its facility in
Barrington, Illinois that is used for the printing of films for mylar balloons
and for printed and laminated films. The Company's use of water-based ink makes
its printed films attractive to food processors for the packaging of their
products. The Company intends to use a portion of the proceeds of this Offering
for the acquisition of additional graphic equipment which will be located at
this facility. See "Use of Proceeds."
At the Barrington facility, the Company owns and operates two
laminating machines. The Company intends to use a portion of the proceeds of
this Offering for the purchase of additional laminating machinery which will
substantially enhance the capacity of the Company to produce laminated films.
See "Use of Proceeds."
30
The Company also maintains a graphic arts and development department
which designs its balloon products and graphics. The Creative Department
operates a networked, computerized graphic arts system for the production of
these designs and of printed materials including catalogues, advertisements and
other promotional materials.
The Barrington facility also includes a computerized customer service
department which receives and fulfills over 50,000 orders annually.
Pulidos et Terminados Finos. The Company's latex balloons are
manufactured for it by Pulidos et Terminados Finos S.A. de C.V. ("P&TF"), a
Guadalajara, Mexico company engaged principally in the manufacture of latex
balloons. The Company believes that P&TF owns and operates the second largest
latex balloon manufacturing facility in the world. In 1995, the Company entered
into an agreement with P&TF under which (i) the Company sold to P&TF all of its
latex balloon manufacturing equipment (for the manufacture of decorator
balloons) and such equipment is now operated by P&TF, (ii) P&TF has agreed for a
period of 10 years to supply balloons exclusively to the Company for the United
States and Canada manufactured on such equipment and (iii) for such 10 year
period, P&TF has agreed to supply to the Company, exclusively in the United
States except as to two other companies, all balloons manufactured by P&TF.
Commencing in 1996, P&TF began manufacturing the Company's high-end line of
latex balloons exclusively for the Company for the United States and also
manufactures a standard line of latex balloons which the Company distributes
throughout the United States and in various foreign countries under the product
line name Partyloons(TM).
P&TF has experienced financial difficulties and in 1995, sought
protection from creditors in a "Suspension of Payment" proceeding in Mexico
similar, but not identical to, a reorganization under U.S. bankruptcy laws. See
"Risk Factors--Dependence on Supplier." The Company believes it has an
opportunity to further secure its source of supply by providing necessary
funding to P&TF. In July, 1997, the Company entered into an Agreement with P&TF
whereby it agreed to subscribe for a note of P&TF in the principal amount of
U.S.$1,200,000 and an option to purchase a portion of P&TF's capital stock. The
Company has also agreed to make advances to P&TF in an amount up to U.S.$400,000
prior to the closing of the transaction contemplated by the Agreement. The
advances are secured by shares of capital stock of P&TF. The purchase price for
the note and option is to be paid by (i) applying the advances made prior to the
closing, (ii) by forgiving $400,000 of debt relating to the 1995 acquisition by
P&TF of the Company's latex balloon manufacturing equipment and (iii) a cash
payment for the balance. In addition to the purchase of notes and options, the
Company has also agreed to loan or provide for a loan of up to an additional
$800,000 to P&TF. The Company's obligations to purchase the note and option are
subject to the termination of P&TF's Suspension of Payment proceeding, the
payment or settlement of P&TF's current bank debt and the successful completion
of this Offering. The Company believes this relationship provides the Company
with a competitive advantage over its competition. A portion of the proceeds of
this Offering will be used to finance the acquisition of the note and option.
See "Use of Proceeds."
P&TF maintains two manufacturing facilities in Guadalajara, Mexico
totaling approximately 60,000 square feet of manufacturing, office and warehouse
space and operates seven latex balloon machines having the capacity to produce
approximately 1 billion latex balloons annually.
CTF International. In September, 1996, the Company and P&TF entered
into a joint venture agreement to organize and operate CTF International, a
Mexican corporation. The joint venture is owned equally by the Company and P&TF.
CTF leases a facility of 15,000 square feet in Guadalajara, Mexico.
31
CTF engages in the packaging of balloons for the Company and P&TF and in the
printing of latex balloons. The Company believes it can achieve significant
savings in overhead, labor and other operating costs through the operation of
CTF and expects CTF to be an independent profit center. A portion of the
proceeds of this Offering will be used to finance the operations of CTF. See
"Use of Proceeds."
Competition
The balloon and novelty industry is highly competitive, with numerous
competitors. There are presently seven major manufacturers of mylar balloons
whose products are sold in the United States including Anagram International,
Inc., M&D Balloons, Inc., Pioneer Balloon, Convertidora International, Classic
Balloon and Betallic. Several companies, including American Greetings, Amscan
and Flowers, Inc., market and sell mylar balloons designed by them and
manufactured by others for them.
There are at least seven manufacturers of latex balloons whose products
are sold in the United States including Globus Occidental, Pioneer Balloon,
National Latex, Maple City, Tilco and P&TF. The market for film packaging and
custom products is fragmented, and competition in this area is difficult to
gauge. However, there are numerous participants in this market and the Company
can expect to experience intense quality and price competition.
Many of these Companies offer products and services which are the same
or similar to those offered by the Company and the Company's ability to compete
depends on many factors within and outside its control. There are a number of
well-established competitors in each of the Company's product lines, several of
which possess substantially greater financial, marketing and technical resources
and established, extensive, direct and indirect channels of distribution for
their products and services. As a result, such competitors may be able to
respond more quickly to new developments and changes in customer requirements,
or devote greater resources to the development, promotion and sale of their
products and services than the Company. Competitive pressures include, among
other things, price competition, new designs and product development and
copyright licensing. See "Risk Factors-Competition."
Patents, Trademarks and Copyrights
In connection principally with its mylar balloon business, the Company
has developed or acquired a number of intellectual property rights which are
significant to its business.
Copyright Licenses. The most significant of these rights are licenses
on a number of popular characters. The Company presently maintains approximately
20 licenses and produces balloon designs utilizing the characters covered by the
licenses. Licenses are generally maintained for a one or two year term, although
the Company has maintained long term relationships with a number of its
licensors and has been able to obtain renewal of its license agreements with
them. The Company has held a license on Peanuts(TM) characters for over 11
years, on Garfield(TM) for more than 10 years and on Hallmark designs for
approximately 10 years.
Trademarks. The Company is the owner of over 23 registered trademarks
in the United States relating to its products. Many of these trademarks are
registered in foreign countries, principally in the European Community.
Patent Rights. The Company is the owner of, or licensee under, several
patents relating to balloon products. These include (i) ownership of two
patents, and a license under a third, relating to self-sealing
32
valves for mylar balloons and methods of making balloons with such valves and
(ii) a patent on a combination of a greeting card and balloon connected by a
ribbon contained in single package.
Research and Development
The Company maintains a product development and research department of
six individuals for the development or identification of new balloons and
related products, product components and sources of supply. Research and
development includes (i) creative product development, (ii) creative marketing,
and (iii) engineering development. During its fiscal years 1995 and 1996, the
Company estimates that the total amount spent on research and development
activities was approximately $306,000 and $201,000, respectively.
Employees
As of June 30, 1997, the Company had 146 full-time employees, of whom
nine are executive or supervisory, 22 are in sales, 106 are in manufacturing and
nine are clerical. The Company believes that its relationship with its employees
is satisfactory.
Legal Proceedings
On October 27, 1995, an action entitled National Sales Services, Inc.
v. CTI Industries Corporation, No. 95 L 15381 was filed in the Circuit Court of
Cook County, Illinois. In the action National Sales Services claims that there
is due to it from the Company for service rendered in the maintenance of product
at retail stores, pursuant to an agreement for such services, the sum of
$101,323. The Company has filed an answer to the complaint denying the claims
and asserting several affirmative defenses, including that National Sales
Services (i) failed to perform the agreement, (ii) failed to perform certain
conditions precedent and (iii) failed to perform the services claimed. The
Company also filed a counterclaim alleging damages of $152,512 for breach of the
agreement by National Sales Services. The Company intends to actively defend the
claim and pursue its counterclaim.
By letter dated October 28, 1996, Kredietbank of Antwerp, Belgium
communicated to the Company that it had determined to terminate the opening of a
credit which it claimed to have granted to the Company. In the letter,
Kredietbank claimed that it was entitled to close the current account and claim
repayment of the entire debit balance immediately. Kredietbank further stated
that the letter was a notice of the termination of the credit and included a
request that the Company settle its current account in full. The amount claimed
to be due is believed to be approximately $450,000. Management of the Company
has communicated that Kredietbank advanced certain funds to a former subsidiary
of the Company -- Superloon N.V., a Belgium company -- but has stated that , at
no time, has Kredietbank ever advanced or loaned any funds to the Company.
Management of the Company does not believe the Company is obligated with respect
to the credit referred by Kredietbank.
Regulatory Matters
The Company's manufacturing operations are subject to the U.S.
Occupational Safety and Health Act ("OSHA"). The Company believes it is in
material compliance with OSHA. The Environmental Protection Agency regulates the
handling and disposal of hazardous materials. As the Company printing operations
utilize only water-based ink, the waste generated by the Company's production
process is not deemed hazardous. The Company believes it is in material
compliance with applicable environmental rules
33
and regulations. A number of states have enacted laws limiting or restricting
the release of helium filled mylar balloons. The Company does not believe such
legislation will have any material effect on its operations.
Property
The Company owns its principal plant and offices located in Barrington,
Illinois, approximately 45 miles northwest of Chicago, Illinois. The facility
includes approximately 75,000 square feet of office, manufacturing and warehouse
space.
The Company also leases approximately 62,500 square feet of space in
Cary, Illinois expiring December 31, 1999. The Company has subleased
approximately 70% of this space through August, 1998. The Company's monthly rent
(net of subleases) is $5,957. The facility is utilized for warehouse and latex
balloon printing.
The Company leases 15,000 square feet of office and warehouse space in
Rugby, England at an annual lease cost of $54,000 expiring 2019. This facility
is utilized for product packaging operations and to manage and service the
Company's operations in England and Europe.
34
MANAGEMENT
Directors and Executive Officers
The Company's current directors and executive officers and their ages,
as of June 30, 1997, are as follows:
Name Age Position with Company
----------------- --- --------------------------
John H. Schwan............. 53 Chairman and Director
Stephen M. Merrick......... 55 Chief Executive Officer, Secretary,
Chief Financial Officer and Director
Howard W. Schwan........... 43 President
John C. Davis.............. 64 Executive Vice President and
Director
Sharon Konny............... 39 Manager of Finance and
Administration
Brent Anderson............. 31 Vice President of Manufacturing
Stanley M. Brown........... 51 Director
All directors hold office until the annual meeting of stockholders next
following their election and/or until their successors are elected and
qualified. Officers are elected annually by the Board of Directors and serve at
the discretion of the Board. Information with respect to the business experience
and affiliation of the directors and the executive officers of the Company is
set forth below.
John H. Schwan, Chairman. Mr. Schwan has been an officer and director
of the Company since January, 1996. Mr. Schwan has been the President and
principal executive officer of Packaging Systems, Inc. and affiliated companies
for over the last 10 years. Mr. Schwan has over 20 years of general management
experience, including manufacturing, marketing and sales. Mr. Schwan served in
the U.S. Army Infantry in Vietnam from 1966 to 1969, where he attained the rank
of First Lieutenant. See "Certain Transactions."
Stephen M. Merrick, Chief Executive Officer and Secretary. Mr. Merrick
was President of the Company from January, 1996 to June, 1996 to June, 1997 when
he became Chief Executive Officer of the Company. Mr. Merrick devotes a portion
of his time to his position as Chief Executive Officer of the Company and is
engaged in the practice of law and other business activities. He has been a
director and Secretary of the Company since inception. Mr. Merrick is a
principal of the law firm of Fishman Merrick Miller Genelly Springer Klimek &
Anderson, P.C. of Chicago, Illinois and has been engaged in the practice of law
for more than 30 years. He is also Secretary, Director and a member of the
Management Committee of Reliv' International, Inc. (NASDAQ), a manufacturer and
direct marketer of nutritional supplements and food products.
Howard W. Schwan, President. Mr. Schwan has been associated with the
Company for 17 years principally in the management of the production and
engineering operations of the Company. Mr. Schwan was appointed as Vice
President of Manufacturing in November, 1990, and was appointed as President in
June, 1997. Mr. Schwan manages administration, production and engineering
functions as well as the sales function for latex balloons and custom and
created films. See "Certain Transactions."
John C. Davis, Executive Vice President-Sales. Mr. Davis has been
associated with the Company since 1975 and was President and a director of the
Company from that time to January, 1996. Mr. Davis
35
has been active in a sales and marketing capacity and, in January, 1996, became
Executive Vice President of Sales.
Sharon Konny, Manager of Finance and Administration. Ms. Konny has been
Manager of Finance and Administration at the Company since October, 1996. From
November of 1992 to 1996, she was an Assistant Vice President of First Chicago
Corporation, initially as Loan Servicing Manager of the Mortgage Services
Division and in December, 1994, achieving the position of Manager of Financial
Administration for the First Card Division. She became a Certified Public
Accountant in 1992.
Brent Anderson, Vice President of Manufacturing. Mr. Anderson has been
employed by the Company since January, 1989, and has held a number of
engineering positions with the Company including Plant Engineer and Plant
Manager. In such capacities Mr. Anderson was responsible for the design and
manufacture of much of the Company's manufacturing equipment. Mr. Anderson was
appointed Vice President of Manufacturing in June, 1997.
Stanley M. Brown, Director. Mr. Brown was appointed as a director of
the Company in January, 1996. Mr. Brown has been President of Inn-Room Systems,
Inc., a manufacturer and lessor of in-room vending systems for hotels since
March, 1996 and, since 1990, has been President of Surface Preparation Systems,
Inc., a company engaged in the business of developing and marketing equipment
for the preparation, cleaning and profiling of concrete and other surfaces. From
1968 to 1989, Mr. Brown was with the United States Navy as a naval aviator,
achieving the rank of Captain. During his term with the U.S. Navy he served in
various command and staff positions including an Amphibious Helicopter Carrier
(with 2,500 personnel), an anti-submarine, aviation squadron and at the
Pentagon. Mr. Brown was awarded 2 Meritorious Service Medals, 3 Navy
Commendation Medals and campaign and service medals from the Pacific and
Atlantic Fleets.
John H. Schwan and Howard W. Schwan are brothers.
Executive Compensation
Summary Compensation Table. The following table sets forth certain
information with respect to the compensation paid or accrued by the Company to
its President, Chief Executive Officer and any other officer who received
compensation in excess of $100,000.
Annual Compensation
-------------------------------------------
Name and Principal Other Annual All Other
Position Salary Bonus Compensation Compensation
Year ($) ($) ($) ($)
Stephen M. Merrick 1996 $ 45,000 --- --- ---
Chief Executive 1995 --- --- --- ---
Officer 1994 --- --- --- ---
Howard W. Schwan 1996 $108,500 --- $ 6,957(1) $ 1,250(3)
President 1995 $ 94,231 --- $ 6,933(1) $ 1,242(3)
1994 $ 90,096 $ 28,986 $ 6,813(1) $ 1,159(3)
John C. Davis 1996 $195,177 --- $11,438(2) $ 3,252(3)
Executive Vice 1995 $280,000 $248,000 $23,747(2) $ 5,150(3)
President-Sales 1994 $237,000 $450,000 $44,367(2) $ 7,170(3)
Footnotes on next page
36
- -----------------
(1)Perquisites include country club membership ($5,000).
(2)Perquisites include country club membership ($5,000) and allocated
personal use of Company vehicles ($5,158 in 1996, $16,767 in 1995 and $37,387 in
1994).
(3)Company contribution to the Company 401(k) Plan as pre-tax salary
deferral.
No executive officer owns any options or warrants issued in connection
with their employment. Certain executive officers received warrants to purchase
Common Stock of the Company in connection with their guarantee of certain bank
loans secured by the Company. See "Certain Transactions." No executive officer
received or exercised any stock options during the fiscal year ended October 31,
1996.
Employment Agreement.
In April, 1996, the Company entered into an employment agreement with
John C. Davis as Executive Vice President-Sales, which provided for an annual
salary of $150,000. The term of the agreement was through January 31, 1998. On
June 27, 1997, the agreement was amended to extend the term through January 31,
2000, and to provide for an annual salary of $120,000 per year. The agreement
contains covenants of Mr. Davis with respect to use of the Company's
confidential information and establishing the Company's rights to inventions
created by Mr. Davis during the term of employment.
In June, 1997, the Company entered into an Employment Agreement with
Howard W. Schwan as President, which provides for an annual salary of $135,000.
The term of the Agreement is through June 30, 2002. The Agreement contains
covenants of Mr. Schwan with respect to the use of the Company's confidential
information, establishes the Company's right to inventions created by Mr. Schwan
during the term of employment, and includes a covenant of Mr. Schwan not to
compete with the Company for a period of 3 years after the date of termination
of the Agreement.
Stock Option Plan
A total of 300,000 shares of Common Stock are reserved for issuance
under the Stock Option Plan. No options have yet been granted. The plan provides
for the award of options, which may either be incentive stock options ("ISOs")
within the meaning of Section 422A of the Internal Revenue Code of 1986, as
amended (the "Code") or non-qualified options ("NQOs") which are not subject to
special tax treatment under the Code. The Plan is administered by the Board or a
committee appointed by the Board (the "Administrator"). Officers, directors, and
employees of, and consultants to, the Company or any parent or subsidiary
corporation selected by the Administrator are eligible to receive options under
the plan. Subject to certain restrictions, the Administrator is authorized to
designate the number of shares to be covered by each award, the terms of the
award, the date on which and the rates at which options or other awards may be
exercised, the method of payment and other terms.
The exercise price for ISOs cannot be less than the fair market value
of the stock subject to the option on the grant date (110% of such fair market
value in the case of ISOs granted to a stockholder who owns more than 10% of the
Company's Common Stock). The exercise price of a NQO shall be fixed by the
Administrator at whatever price the Administrator may determine in good faith.
Unless the Administrator determines otherwise, options generally have a 10-year
term (or five years in the case of ISOs granted to a participant owning more
than 10% of the total voting power of the Company's capital stock). Unless the
Administrator provides otherwise, options terminate upon the termination of a
participant's
37
employment, except that the participant may exercise an option to the extent it
was exercisable on the date of termination for a period of time after
termination.
Generally, awards must be exercised by cash payment to the Company of
the exercise price. However, the Administrator may allow a participant to pay
all or a portion of the exercise price by means of a promissory note, stock or
other lawful consideration. The Plan also allows the Administrator to provide
for withholding and employment taxes payable by a participant to the Company
upon exercise of the award.
In the event of any change in the outstanding shares of Common Stock by
reason of any reclassification, recapitalization, merger, consolidation,
reorganization, spin-off, split-up, issuance of warrants or rights or
debentures, stock dividend, stock split or reverse stock split, cash dividend,
property dividend or similar change in the corporate structure, the aggregate
number of shares of Common Stock underlying any outstanding options may be
equitably adjusted by the Administrator in its sole discretion.
The Company has agreed that for a 18-month period commencing on the
date this Prospectus that it will not, without the consent of the Underwriter,
adopt or propose to adopt any plan or arrangement permitting the grant, issue or
sale of any shares of its securities or issue, sell or offer for sale any of its
securities, or grant any options for its securities, except for options to
purchase up to an aggregate of 300,000 shares of Common Stock which shall have
an exercise price per share no less than the greater of (a) the initial public
offering price of the Units set forth herein and (b) the fair market value of
the Common Stock on the date of grant. No option or other right to acquire
Common Stock granted, issued or sold during this period shall permit (a) the
payment with any form of consideration other than cash, (b) payment of less than
the full purchase price or exercise price for such shares of Common Stock or
other securities of the Company on or before the date of issuance, or (c) the
existence of stock appreciation rights, phantom options or similar arrangements.
Limitation of Liability and Indemnification. As permitted by the
Delaware General Corporation Law ("DGCL"), the Company has included in its
Certificate of Incorporation a provision to eliminate the personal liability of
its directors for monetary damages for breach or alleged breach of their
fiduciary duties as directors, except for liability (i) for any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) for acts or
omissions not in good faith or which involved intentional misconduct or a
knowing violation of law, (iii) in respect of certain unlawful dividend payments
or stock redemptions or repurchases, as provided in Section 174 of the DGCL, or
(iv) for any transaction from which the director derived an improper personal
benefit. The effect of this provision in the Company's Certificate of
Incorporation is to eliminate the rights of the Company and its stockholders
(through stockholders' derivative suits on behalf of the Company) to recover
monetary damages against a director for breach of the fiduciary duty of care as
a director except in the situations described in (i) through (iv) above. This
provision does not limit nor eliminate the rights of the Company or any
stockholder to seek non-monetary relief such as an injunction or rescission in
the event of a breach of a director's duty of care. These provisions will not
alter the liability of directors under federal securities laws.
The Certificate of Incorporation and the by-laws of the Company provide
that the Company is permitted to indemnify its officers and directors, employees
and agents under certain circumstances. In addition, if permitted by law, the
Company is permitted to advance expenses to its officers and directors as
incurred in connection with proceedings against them in their capacity as a
director or officer for which they may be indemnified upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that such person is not entitled to
indemnification. At present, the Company is not aware of any pending or
threatened litigation or proceeding involving a director, officer, employee or
agent of the Company in which indemnification would be required or
38
permitted. The Company believes that its charter provisions and indemnification
agreements are necessary to attract and retain qualified persons as directors
and officers.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors and officers of the Company pursuant to the
foregoing provisions or otherwise, the Company has been advised that in the
opinion of the Securities and Exchange Commission ("Commission"), such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
39
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's capital stock, as of the date of this
Prospectus by (i) each stockholder who is known by the Company to be the
beneficial owner of more than 5% of the Company's Common Stock or Class B Common
Stock, (ii) each director and executive officer of the Company who owns any
shares of Common Stock or Class B Common Stock, and (iii) all executive officers
and directors as a group. Except as otherwise indicated, the Company believes
that the beneficial owners of the shares listed below have sole investment and
voting power with respect to such shares.
Shares of Class B Shares of Common
Common Stock Stock Beneficially Percent of Common Stock(4)
Name and Address(1) Beneficially Owned(2)(3) Owned(2) Prior to Offering After Offering
- ------------------- ------------------------ -------- ----------------- --------------
Stephen M. Merrick 219,781 318,807(5) 23.55 14.88
John H. Schwan 329,670 189,103(6) 22.57 14.29
Howard W. Schwan 164,835 92,949(7) 11.70 7.29
John C. Davis ----- 464,281(8) 21.52 13.30
Sharon Konny ----- ------ ------ ------
Brent Anderson ----- ------ ------ ------
Stanley M. Brown
747 Glenn Avenue
Wheeling, IL ----- ------ ------ ------
Frances Ann Rohlen
c/o Cheshire Partners
1504 Wells
Chicago, IL 60610 274,725 ------ 13.03 7.98
Philip W. Colburn 109,890 118,267(9) 10.82 6.63
All directors and
executive officers as
a group (7 persons) 714,286 1,065,140 67.99 45.04
- ------------------
<FN>
(1 Except as otherwise indicated, the address of each stockholder
listed above is c/o CTI Industries Corporation, 22160 North Pepper Road,
Barrington, Illinois 60010.
(2) A person is deemed to be the beneficial owner of securities that
can be acquired within 60 days from the date set forth above through the
exercise of any option, warrant or right. Shares of Common Stock subject to
options, warrants or rights that are currently exercisable or exercisable within
60 days are deemed outstanding for purposes of computing the percentage
ownership of the person holding such options, warrants or rights, but are not
deemed outstanding for purposes of computing the percentage ownership of any
other person.
Footnotes continued on next page
40
(3) Figures below represent all Class B Common Stock outstanding.
Beneficial ownership of shares of Class B Common Stock for Messrs. Merrick, John
Schwan, Howard Schwan and Ms. Rohlen include indirect ownership of such shares
through CTI Investors, L.L.C. See "Certain Transactions."
(4) Assumes conversion of all shares of Class B Common Stock into
shares of Common Stock.
(5)Includes warrants to purchase up to 76,923 shares of Common Stock at
$.91 per share and warrants to purchase up to 100,961 shares of Common Stock at
$3.12 per share.
(6)Includes warrants to purchase up to 76,923 shares of Common Stock at
$.91 per share and warrants to purchase up to 112,180 shares of Common Stock at
$3.12 per share.
(7)Includes warrants to purchase up to 76,923 shares of Common Stock at
$.91 per share and warrants to purchase up to 16,026 shares of Common Stock at
$3.12 per share.
(8)Includes warrants to purchase up to 48,077 shares of Common Stock at
$3.12 per share, and 230,769 shares of Common Stock subject to redemption by the
Company. See "Certain Transactions."
(9)Includes shares held by immediate family members.
</FN>
41
CERTAIN TRANSACTIONS
In March 1996, the Company entered into a Stock Redemption Agreement
with John C. Davis which was subsequently amended June 27, 1997. Under the
amended Stock Redemption Agreement the Company has the right but not the
obligation to redeem up to 333,333 shares of Common Stock owned by Mr. Davis at
the price of $1.95 per share at any time through January 31, 1998. Commencing
March 1, 1998 through February 28, 2000, the Company is obligated to pay to Mr.
Davis, for the redemption of shares at $1.95 per share (i) an amount equal to 2%
of the Company's pretax profits each fiscal quarter (beginning with the quarter
ended February 28, 1998) and (ii) an amount equal to 2% (but not to exceed
$8,000) of the amount by which latex and mylar balloon revenues exceed $1.3
million in any month. The Company also has the right to redeem additional shares
of Common Stock from Mr. Davis during this period at $1.95 per share, provided
that the total number of shares subject to redemption under the Stock Redemption
Agreement does not exceed 333,333. As of the date of this Offering 102,564
shares of Common Stock have been redeemed pursuant to the Stock Redemption
Agreement.
In March and May of 1996, a group of investors made an equity
investment of $1,000,000 in the Company in return for 1,098,901 shares of
Preferred Stock, $.91 par value. Each share of Preferred Stock was entitled to
an annual cumulative dividend of 13% of the purchase price, and was convertible
into one share of Common Stock. The shares of Preferred Stock, voting separately
as a class, were entitled to elect four of the Company's directors. CTI
Investors, L.L.C., an Illinois limited liability company, invested $900,000 in
the shares of Preferred Stock. Members of CTI Investors, L.L.C. include Howard
W. Schwan, John H. Schwan and Stephen M. Merrick, members of management, and
Frances Ann Rohlen. See "Management."
In July, 1997, the shares of Preferred Stock were converted into shares
of Class B Common Stock in connection with the recapitalization of the Company.
See "The Company--Recapitalization" and "Principal Shareholders."
In December, 1996, Howard W. Schwan, John H. Schwan and Stephen M.
Merrick were each issued warrants to purchase 76,923 shares of the Company's
Common Stock at an exercise price of $.91 per share in consideration of their
facilitating and guaranteeing a bank loan to the Company in the amount of $6.3
million. The warrants have a term of six years. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation."
In June, 1997, the Company issued in a private placement notes in the
principal amount of $865,000, together with warrants to purchase up to 277,244
shares of the Company's Common Stock at an exercise price of $3.12 per share.
The warrants have a term of five years. Howard W. Schwan, John H. Schwan,
Stephen M. Merrick and John C. Davis, members of management, purchased $50,000,
$350,000 and $300,000 and $150,000, respectively, of the notes and warrants. Mr.
John Schwan and Mr. Merrick applied advances of $200,000 each, made to the
Company in January, 1997, toward the purchase of notes and warrants. See "Risk
Factors--Related Party Transactions; Potential Conflicts of Interest."
Stephen M. Merrick, Chief Executive Officer of the Company, is a
principal of the law firm of Fishman Merrick Miller Genelly Springer Klimek &
Anderson, P.C. which serves as general counsel of the Company. Fishman Merrick
Miller Genelly Springer Klimek & Anderson, P.C. will pass on the validity of the
Units in the Offering. In addition, Mr. Merrick owns 219,781 shares of Class B
Common Stock, 140,923 shares of Common Stock, warrants to purchase 76,923 shares
of Common Stock at $.91 per share, and warrants to purchase 100,961 shares of
Common Stock at 3.12 per share. Other members of the firm of Fishman Merrick
Miller Genelly Springer Klimek & Anderson, P.C. own an aggregate of 53,561
shares of Common Stock. See "Legal Matters."
John H. Schwan is the president and shareholder of Packaging Systems,
Inc. and affiliated companies. The Company made purchases of packaging materials
from these entities in the amount of $1,106,649 during the year ended October
31, 1996 and $145,267 for the six months ended April 30, 1997.
42
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 11,000,000
shares of Common Stock, $.065 par value, and 1,100,000 shares of Class B Common
Stock, $.91 par value and 2,000,000 shares of Preferred Stock, $.91 par value.
On the date of this Prospectus, after giving effect to the recapitalization and
the conversion, the Company has outstanding 1,010,202 shares of Common Stock
held of record by over 20 stockholders and 1,098,901 shares of Class B Common
Stock held of record by 2 stockholders. All outstanding shares of capital stock
of the Company are fully paid and non-assessable.
Common Stock and Class B Common Stock
The holders of Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of the stockholders. Holders
of Common Stock will vote together with holders of Class B Common Stock, on a
one vote for each share basis, on all matters submitted to a vote of
stockholders except the election of directors. Holders of Common Stock and Class
B Common Stock shall share equally, on a per share basis, in all dividends
declared by the Company and will participate equally in the proceeds of
dissolution of the Company, on a per share basis.
Holders of Class B Common Stock, voting separately as a class, have the
right to elect four of the Company's seven directors, and will vote together
with holders of Common Stock, as a class, on the election of the remaining three
directors. Neither the Common Stock or Class B Common Stock possess cumulative
voting rights or preemptive rights. Holders of Class B Common Stock have the
right to convert their shares into shares of Common Stock, on a share for share
basis at any time, and such shares will automatically convert on July 23, 2002.
The Units
Each Unit consists of one share of Common Stock and one Redeemable
Warrant, which entitles the registered holder thereof to purchase one share of
Common Stock at an initial exercise price of $____ [150% of the initial public
offering price per Unit] per share, subject to adjustment. The shares of Common
Stock and Redeemable Warrants comprising the Units will be detachable and
separately tradeable upon issuance. The Company and the Underwriter may jointly
determine, based upon market conditions, to delist the Units upon the expiration
of the 30-day period commencing on the date of this Prospectus.
The Redeemable Warrants
The Redeemable Warrants will be issued under and subject to the terms
of a Warrant Agreement (the "Warrant Agreement") dated as of the date hereof
between the Company and Continental Stock Transfer & Trust Company, as warrant
agent (the "Warrant Agent"). Set forth below is a summary of certain provisions
of the Warrant Agreement. Such summary does not purport to be complete and is
subject to and qualified in its entirety by reference to all of the provisions
of the Warrant Agreement. A copy of the Warrant Agreement is filed as an exhibit
to the Registration Statement of which this Prospectus forms a part.
General. Each Redeemable Warrant entitles the registered holder thereof
to purchase one share of Common Stock at an initial exercise price of $____
[150% of the initial public offering price per Unit] per share, subject to
adjustment, at any time following the date of issuance until 5:00 p.m. New York
time, on ______, 2002 [60 months from the date of the Prospectus] (the
"Expiration Date"), unless previously
43
redeemed. Each Redeemable Warrant will be issued in registered form and will be
transferable from and after the date of issuance and prior to the Expiration
Date. Warrantholders are not entitled, by virtue of being Warrantholders, to
receive dividends or to vote at or receive notice of any meeting of stockholders
or to exercise any other rights whatsoever as stockholders of the Company.
Commencing ________, 1998 [12 months from the date of the Prospectus], the
Company will have the right to redeem all, but not less than all, of the
Redeemable Warrants at a price of $.05 per Redeemable Warrant on 30 days' prior
written notice, provided that the Company shall have obtained the written
consent of Joseph Stevens & Company, Inc. (the "Underwriter"), and the average
closing bid price of the Common Stock equals or exceeds 150% of the then
exercise price per share, subject to adjustment, for any 20 trading days within
a period of 30 consecutive trading days ending on the fifth trading day prior to
the date of the notice of redemption.
Adjustments. The exercise price of the Redeemable Warrants and the
number of shares of Common Stock issuable upon exercise thereof are subject to
adjustment in certain events, including stock splits or combinations, stock
dividends, or through a recapitalization resulting from a stock split or
combination. The remaining shares of Common Stock issuable upon exercise of the
Redeemable Warrant and the purchase price thereof will be appropriately adjusted
by the Company.
Amendments. The Board of Directors of the Company, in its discretion,
may amend the terms of the Redeemable Warrants to, among other things, reduce
the exercise price; provided, however, that no amendment adversely affecting the
rights of the holders of the Redeemable Warrants may be made without the
approval of the holders of not less than a majority of the Redeemable Warrants
then outstanding.
Exercise of Redeemable Warrants. The Redeemable Warrants may be
exercised by surrendering to the Warrant Agent the warrant certificate
evidencing the Warrant, duly executed by the Warrantholder or his duly
authorized agent and indicating such Warrantholder's election to exercise all or
a portion of the Redeemable Warrants evidenced by such warrant certificate.
Surrendered warrant certificates must be accompanied by payment of the aggregate
exercise price of the Redeemable Warrants to be exercised, which payment may be
made, at the Warrantholder's election, in cash or by delivery of a cashier's or
certified check or any combination of the foregoing. A current Prospectus must
be in effect in order for holders of Redeemable Warrants to exercise such
Redeemable Warrants. Pursuant to the terms of the Warrant Agreement, the Company
has agreed to maintain a current Prospectus in effect until the Expiration Date,
subject to certain exceptions.
Upon receipt of duly executed Redeemable Warrants and payment of the
exercise price, the Company shall issue and cause to be delivered, to or upon
the written order of exercising Warrantholders, certificates representing the
number of shares of Common Stock so purchased, if fewer than all of the
Redeemable Warrants evidenced by any warrant certificate are exercised, a new
warrant certificate evidencing the Redeemable Warrants remaining unexercised
will be issued to the Warrantholder.
The Company has authorized and will reserve for issuance a number of
shares of Common Stock sufficient to provide for the exercise of all Redeemable
Warrants. When delivered in accordance with the Warrant Agreement, such shares
will be fully paid and non-assessable.
The Preferred Stock
The Preferred Stock may be issued in one or more series at such times
and for such consideration as shall be authorized from time to time by the Board
of Directors.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock of the Company is
Continental Stock Transfer & Trust Company, New York, New York.
44
SECURITIES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding an
aggregate of 2,343,535 shares of Common Stock and 1,098,901 shares of Class B
Common Stock assuming (i) the issuance by the Company of 1,333,333 shares of
Common Stock included in the Units offered hereby, (ii) no issuance of shares of
Common Stock underlying the Redeemable Warrants, Underwriter's Warrants or
relating to other outstanding warrants to purchase Common Stock, (iii) no
exercise of outstanding options to purchase Common Stock and (iv) no conversion
of the Class B Common Stock. Of these shares, the 1,333,333 shares included in
the Units will be freely tradeable without restriction or further registration
under the Securities Act, except for shares held by Affiliates of the Company
(whose sales would be subject to certain limitations and restrictions described
below) and the regulations promulgated thereunder).
The remaining shares were sold by the Company in reliance on exemptions
from the registration requirements of the Securities Act and are "restricted
securities" within the meaning of Rule 144 under the Securities Act. Most of
these shares will be eligible for sale in the public market under Rule 144;
however, all of these shares are subject to lock-up agreements whereby such
securities cannot be sold for a period of 18 months from the date of this
Prospectus, unless released therefrom by the Underwriter.
The Redeemable Warrants underlying the Units offered hereby and the
shares of Common Stock underlying such Redeemable Warrants, upon exercise
thereof, will be freely tradeable without restriction under the Securities Act,
except for any Redeemable Warrants or shares of Common Stock purchased by an
Affiliate, which will be subject to the resale limitation of Rule 144 under the
Securities Act.
In addition, without the consent of the Underwriter, the Company has
agreed not to sell or offer for sale any of its securities during the Lock-up
Period, except pursuant to outstanding options and warrants and pursuant to the
Company's existing option plans.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially owned
shares for at least one year is entitled to sell, within any three-month period,
a number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock or (ii) the average weekly trading volume in
the Common Stock during the four calendar weeks preceding such sale, subject to
the filing of a Form 144 with respect to such sale and certain other limitations
and restrictions. In addition, a person who is not deemed to have been an
Affiliate of the Company at any time during the 90 days preceding a sale and who
has beneficially owned the shares proposed to be sold for at least two years
would be entitled to sell such shares under Rule 144 without regard to the
requirements described above. To the extent that shares were acquired from an
Affiliate of the Company, such stockholder's holding period for the purpose of
effecting a sale under Rule 144 commences on the date of transfer from the
Affiliate.
Sales of a substantial amount of Common Stock in the public market
could adversely affect the market price of the Common Stock and could impair the
Company's future ability to raise capital through the sale of its equity
securities.
45
UNDERWRITING
Joseph Stevens & Company, Inc. (the "Underwriter") has entered into an
Underwriting Agreement with the Company pursuant to which, and subject to the
terms and conditions thereof, it has agreed to purchase from the Company, and
the Company has agreed to sell to the Underwriter, on a firm commitment basis,
all of the Units offered by the Company hereby.
The Company has been advised by the Underwriter that the Underwriter
initially proposes to offer the Units to the public at the public offering price
set forth on the cover page of this Prospectus and that the Underwriter may
allow to certain dealers who are members of the National Association of
Securities Dealers, Inc. ("NASD") concessions not in excess of $____ per Unit,
of which amount a sum not in excess of $__________ per Unit may in turn be
reallowed by such dealers to other dealers. After the commencement of the
Offering, the public offering price, concessions and reallowances may be
changed. The Underwriter has informed the Company that it does not expect sales
to discretionary accounts by the Underwriter to exceed five percent of the
securities offered by the Company hereby.
The Company has granted to Underwriter an option, exercisable within 45
days of the date of this Prospectus, to purchase from the Company at the
offering price, less underwriting discounts and the non-accountable expense
allowance, all or part of an additional 199,999 Units on the same terms and
conditions of the Offering for the sole purpose of covering over-allotments, if
any.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act. The Company has
agreed to pay to the Underwriter a non-accountable expense allowance equal to
three percent (3%) of the gross proceeds derived from the sale of the Units
underwritten, $30,000 of which has been paid to date.
Upon the exercise of any Redeemable Warrants more than one year after
the date of this Prospectus, which exercise was solicited by the Underwriter,
and to the extent not inconsistent with the guidelines of the NASD and the Rules
and Regulations of the Commission, the Company has agreed to pay the Underwriter
a commission which shall not exceed five percent (5%) of the aggregate exercise
price of such Redeemable Warrants in connection with bona fide services provided
by the Underwriter relating to any warrant solicitation. In addition, the
individual must designate the firm entitled to such warrant solicitation fee.
However, no compensation will be paid to the Underwriter in connection with the
exercise of the Redeemable Warrants if (a) the market price of the Common Stock
is lower than the exercise price of the Redeemable Warrants, (b) the Redeemable
Warrants were held in a discretionary account or (c) the Redeemable Warrants are
exercised in an unsolicited transaction. Unless granted an exemption by the
Commission from its Rule 101 under Regulation M promulgated under the Exchange
Act, the Underwriter will be prohibited from engaging in any market-making
activities with regard to the Company's securities for the periods prescribed by
exemption (xi) to Rule 101 prior to any solicitation of the exercise of the
Redeemable Warrants until the later of the termination of such solicitation
activity or the termination (by waiver or otherwise) of any right the
Underwriter may have to receive a fee. As a result, the Underwriter may be
unable to continue to provide a market for the Company's Units, Common Stock or
Redeemable Warrants during certain periods while the Redeemable Warrants are
exercisable. If the Underwriter has engaged in any of the activities prohibited
by Rule 101 under Regulation M during the periods described above, the
Underwriter undertakes to waive unconditionally its rights to receive a
commission on the exercise of such Redeemable Warrants.
46
In connection with this Offering, the Underwriter and certain selling
group members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Units, the
Common Stock and/or Redeemable Warrants (the "Securities"). Such transactions
may include stabilization transactions effected in accordance with Rule 104 of
Regulation M, pursuant to which such persons may bid for or purchase Common
Stock for the purpose of stabilizing their respective market prices. The
Underwriter also may create a short position for the account of the Underwriter
by selling more Securities in connection with the Offering than it is committed
to purchase from the Company, and in such case may purchase Securities in the
open market following completion of the Offering to cover all or a portion of
such short position. The Underwriter may also cover all or a portion of such
short position, up to 199,999 Units, by exercising the Over-Allotment Option. In
addition, the Underwriter may impose "penalty bids" under contractual
arrangements whereby it may reclaim from a dealer participating in the Offering
for the account of the Underwriter, the selling concession with respect to
Securities that are distributed in the Offering but subsequently purchased for
the account of the Underwriter in the open market. Any of the transactions
described in this paragraph may result in the maintenance of the prices of the
Securities at levels above that which might otherwise prevail in the open
market. None of the transactions described in the paragraph is required, and, if
they are undertaken, they may be discontinued at any time.
All of the holders of the issued and outstanding shares of Common Stock
and Class B Common Stock prior to the Offering have agreed (i) not to, directly
or indirectly, issue, offer to sell, sell, grant an option for the sale of,
transfer, pledge, assign, hypothecate, or otherwise encumber or dispose of
(collectively, "Transfer"), any securities issued by the Company, including
shares of Common Stock and Class B Common Stock or securities convertible into
or exchangeable or exercisable for or evidencing any right to purchase or
subscribe for any shares of Common Stock or Class B Common Stock for a period of
eighteen (18) months from the effective date of the Registration Statement (the
"Lock-Up Period"), without the prior written consent of the Underwriter, except
in a private transaction where the transferee agrees to such restrictions, and
(ii) that, for twenty-four (24) months following the effective date of the
Registration Statement, any public sales of the Company's securities shall be
made through the Underwriter in accordance with its customary brokerage
practices either on a principal or agency basis. An appropriate legend shall be
marked on the face of certificates representing all such securities.
In connection with the Offering, the Company has agreed to issue and
sell to the Underwriter and/or its designees, at the closing of the proposed
underwriting, for nominal consideration, five (5) year Underwriter's Warrants
(the "Underwriter Warrants") to purchase 133,333 Units. The Underwriter's
Warrants are exercisable at any time during a period of four (4) years
commencing at the beginning of the second year after their issuance and sale at
a price of $__________ [120% of the offering price of the Units] per Unit. The
shares of Common Stock, Redeemable Warrants, and shares of Common Stock
underlying the Redeemable Warrants issuable upon the exercise of the
Underwriter's Warrant are identical to those offered to the public. The
Underwriter's Warrants contain anti-dilution provisions providing for adjustment
of the number of warrants and exercise price under certain circumstances. The
Underwriter's Warrants grant to the holders thereof and to the holders of the
underlying securities certain rights of registration of the securities
underlying the Underwriter's Warrants.
The Company has also agreed that for five (5) years from the effective
date of the Registration Statement, the Underwriter may designate one person for
election to the Company's Board of Directors (the "Designation Right"). In the
event that the Underwriter elects not to exercise its Designation Right, then it
may designate one person to attend all meetings of the Company's Board of
Directors for a period of five (5) years. The Company has agreed to reimburse
the Underwriter's designee for all out-of-pocket expenses
47
incurred in connection with the designee's attendance at meetings of the Board
of Directors. The Company has also agreed to retain the Underwriter as the
Company's financial consultant for a period of twenty-four (24) months from the
date hereof and to pay the Underwriter a monthly retainer of $2,000, all of
which is payable in advance on the closing date set forth in the Underwriting
Agreement. The Underwriting Agreement also provides that the Underwriter has a
right of first refusal for a period of two years from the date of this
Prospectus with respect to any sales of securities by the Company or any of its
present or future subsidiaries.
Prior to this Offering, there has been no public market for the Units,
the Common Stock, or the Redeemable Warrants. Accordingly, the initial public
offering price of the Units and the terms of the Redeemable Warrants were
determined by negotiation between the Company and the Underwriter. Among the
factors considered in determining such prices and terms, in addition to the
prevailing market conditions, included the history of and the prospects for the
industry in which the Company competes, the market price of the Common Stock, an
assessment of the Company's management, the prospects of the Company, its
capital structure and such other factors that were deemed relevant. The offering
price does not necessarily bear any relationship to the assets, results of
operations or net worth of the Company.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a copy
of each such agreement which are filed as exhibits to the Registration
Statement. See "Additional Information."
LEGAL MATTERS
The validity of the Units offered hereby have been passed upon for the
Company by Fishman Merrick Miller Genelly Springer Klimek & Anderson, P.C.,
Chicago, Illinois. Stephen M. Merrick, Chief Executive Officer, and a principal
shareholder, of the Company, is a principal of Fishman Merrick Miller Genelly
Springer Klimek & Anderson, P.C. and members of the firm also have an equity
ownership in the Company. See "Certain Transactions" and "Risk Factors--Related
Party Transactions; Potential Conflicts of Interests." Orrick, Herrington &
Sutcliffe LLP, New York, New York, has acted as counsel for the Underwriter in
connection with the Offering.
EXPERTS
The balance sheets as of October 31, 1996, and the consolidated
statements of operations, stockholders' equity, and cash flows for each of the
two years in the period ended October 31, 1996, included in this Prospectus have
been included herein in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
CHANGE IN INDEPENDENT ACCOUNTANTS
In 1996, the Company voluntarily changed its independent accountants
from Detterbeck & Associates, Ltd. ("Detterbeck") to Jacobson, Scott, Gordon &
Horewitch ("JSG&H"). This change was approved by the Company's Board of
Directors. Detterbeck had been retained to audit the Company's financial
statements as of and for the year ended October 31, 1995. The report of
Detterbeck for the year ended October 31, 1995, which is not included herein,
contained no adverse opinion or disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope or application of accounting principles.
During the year ended October 31, 1995 and through the date of replacement,
there were no disagreements with Detterbeck on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure.
48
In 1997, the Company voluntarily changed its independent accountants
from JSG&H to Coopers & Lybrand L.L.P. This change was approved by the Company's
Board of Directors. The financial statements for each of the years in the two
year period ended October 31, 1996, were audited by Coopers & Lybrand L.L.P.
JSG&H had been retained to audit the Company's financial statements as of and
for the year ended October 31, 1996. The report of JSG&H for the year ended
October 31, 1996, which is not included herein, contained no adverse opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope or application of accounting principles. During the year ended October 31,
1996 and through the date of replacement, there were no disagreements with JSG&H
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on
Form SB-2, including amendments thereto, relating to the Units offered hereby,
the Common Stock and Redeemable Warrants included therein and the Common Stock
underlying the Redeemable Warrants. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits thereto.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete; however, all material
information with respect to such contracts and documents are disclosed in this
Prospectus. In each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
For further information with respect to the Company and the securities
offered hereby, reference is made to such Registration Statement, exhibits and
schedules. A copy of the Registration Statement may be inspected by anyone
without charge at the public reference facilities maintained by the Commission
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and will also be available for inspection and copying at the regional offices of
the Commission located at 7 World Trade Center, New York, New York 10048 and at
Citicorp Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such material may also be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. Such material may also be accessed electronically by means of
the Commission's home page on the Internet at http://www.sec.gov. As a result of
the Offering, the Company will be subject to the informational requirements of
the Exchange Act. So long as the Company is subject to the periodic reporting
requirements of the Exchange Act, it will furnish holders of the Units, the
Common Stock and the Redeemable Warrants with annual reports containing, among
other information, audited financial statements certified by an independent
accounting firm. The Company also intends to furnish such other reports as it
may determine or as may be required by law.
49
No underwriter, dealer, sales representative or any other person has been
authorized to give any information or to make any representations other than
those contained in this Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Company [LOGO]
or the Underwriter. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there has
been no change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any date subsequent to the date
hereof. This Prospectus does not constitute an offer to sell or a solicitation CTI INDUSTRIES CORPORATION
of an offer to buy any securities offered hereby by anyone in any jurisdiction
in which such offer or solicitation is not authorized or in which the person
making such offer or solicitation is not qualified to do so or to anyone to whom
it is unlawful to make such offer or solicitation.
TABLE OF CONTENTS 1,333,333 Units
Page
---- Each Unit Consisting
Prospectus Summary................................... 3 of
Risk Factors......................................... 8 One Share of Common Stock
The Company.......................................... 14 and
Use of Proceeds...................................... 15 One Redeemable Warrant
Dividend Policy...................................... 16
Capitalization....................................... 17
Dilution............................................. 18
Selected Financial Data.............................. 20
Management's Discussion and Analysis of
Financial Condition
and Results of Operations......................... 22
Business............................................. 26
Management........................................... 35
Principal Stockholders............................... 40 PROSPECTUS
Certain Transactions................................. 42
Description of Capital Stock......................... 43
Securities Eligible for Future Sale.................. 45
Underwriting......................................... 46
Legal Matters........................................ 48
Experts.............................................. 48
Change in Independent Accountants.................... 48
Available Information................................ 49 JOSEPH STEVENS & COMPANY, INC.
Index to Financial Statements........................ F-1
, 1997
Until ________, 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement is in addition to the obligations of dealers to
deliver a Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
50
CTI INDUSTRIES CORPORATION AND SUBSIDIARY
REPORT ON AUDIT OF CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 1995 AND 1996
AND THE SIX MONTHS ENDED APRIL 30, 1996 AND 1997 (unaudited)
CTI Industries Corporation and Subsidiary
Table of Contents
Page(s)
Report of Independent Accountants F-1
Consolidated Financial Statements:
Consolidated Balance Sheets as of October 31, 1996
and April 30, 1997 (unaudited) F-2
Consolidated Statements of Operations for the
years ended October 31, 1995 and 1996
and the six months ended
April 30, 1996 and 1997 (unaudited) F-3
Consolidated Statements of Stockholders' Equity
for the years ended October 31, 1995 and 1996 F-4
Consolidated Statements of Cash Flows for the years
ended October 31, 1995 and 1996 and the six months
ended April 30, 1996 and 1997 (unaudited) F-5
Notes to Consolidated Financial Statements F-6 - F-19
Report of Independent Accountants
To the Board of Directors of
CTI Industries Corporation
We have audited the accompanying consolidated balance sheet of CTI Industries
Corporation and subsidiary as of October 31, 1996 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended October 31, 1995 and 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CTI Industries
Corporation and subsidiary as of October 31,1996, and the results of its
operations, stockholders' equity and its cash flows for the years ended October
31,1995 and 1996 in conformity with generally accepted accounting principles.
Chicago, Illinois
July 22, 1997
F-1
CTI Industries Corporation and Subsidiary
Consolidated Balance Sheet
October 31, April 30, 1997
ASSETS 1996 Actual Pro Forma
(unaudited)
Current Assets:
Cash $ 130,818 $ --
Accounts receivable (less allowance
for doubtful accounts of $ 129,998 at
October 31, 1996 and $ 126,313 at April 30, 1997) 1,665,097 2,679,461
Inventories 4,582,593 4,701,640
Other 218,879 306,243
------------ ------------
Total current assets 6,597,387 7,687,344
------------ ------------
Property and equipment:
Machinery and equipment 6,352,054 6,436,719
Building 2,168,563 2,168,563
Office furniture and equipment 1,082,665 1,263,115
Land 250,000 250,000
Leasehold improvements 147,128 147,128
------------ ------------
10,000,410 10,265,525
Less: accumulated depreciation (6,418,486) (6,546,714)
------------ ------------
Total property and equipment, net 3,581,924 3,718,811
------------ ------------
Other assets:
Deferred financing costs, net 106,224 81,847
Investment in joint venture -- 34,575
------------ ------------
106,224 116,422
------------ ------------
Total assets $ 10,285,535 $ 11,522,577
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,755,700 $ 2,377,383
Line of credit 2,058,816 2,942,683
Stock redemption contract payable - current portion 100,000 75,101
Advances from related parties -- 375,600
Notes payable, current portion 402,798 403,914
Accrued liabilities 932,575 1,022,687
------------ ------------
Total current liabilities 6,249,889 7,197,368
------------ ------------
Stock redemption contract payable 47,908 --
Notes payable 3,056,923 2,872,953
------------ ------------
Total long-term liabilities 3,104,831 2,872,953
------------ ------------
Redeemable common stock 450,000 450,000
Stockholders' equity:
Convertible Preferred stock - $.91 par value,
2,000,000 shares authorized, 1,098,901 shares
issued and outstanding, including accumulated
dividends of $27,625 (October 31, 1996)
and $43,875 (April 30, 1997) 1,027,625 1,043,875 $ --
Common stock - $.065 par value, 11,000,000 shares
authorized, 1,131,507 (October 31, 1996) and 1,154,585
(April 30, 1997) shares issued, 987,125 (October 31, 1996)
and 1,010,202 (April 30, 1997) shares outstanding 73,548 75,048 75,048
Class B Common stock - $.91 par value,
1,100,000 shares authorized, 1,098,901 shares outstanding -- -- 1,000,000
Paid-in-capital 230,348 248,348 248,348
Retained earnings 137,194 462,885 462,885
Less:
Treasury stock - 144,382 shares at cost (370,700) (370,700) (370,700)
Redeemable common stock (450,000) (450,000) (450,000)
Stock subscription receivable (167,200) (7,200) (7,200)
------------ ------------ ------------
Total stockholders' equity 480,815 1,002,256 $ 958,381
------------ ------------ ============
Total liabilities and stockholders' equity $ 10,285,535 $ 11,522,577
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
CTI Industries Corporation and Subsidiary
Consolidated Statements of Operations
Years Ended Six Months Ended
--------------------------- ---------------------------
October 31, April 30,
1995 1996 1996 1997
(unaudited)
Net sales $ 22,783,780 $ 13,910,104 $ 7,883,675 $ 8,736,121
Cost of sales 15,077,979 8,558,053 4,798,353 5,384,031
------------ ------------ ------------ ------------
Gross profit on sales 7,705,801 5,352,051 3,085,322 3,352,090
------------ ------------ ------------ ------------
Operating expenses:
Administrative 2,899,640 2,054,780 1,196,072 900,385
Selling 3,770,462 2,387,027 1,332,154 1,363,865
Advertising and marketing 2,356,255 592,309 340,530 468,344
Plant shutdown expense 850,000 -- -- --
------------ ------------ ------------ ------------
Total operating expenses 9,876,357 5,034,116 2,868,756 2,732,594
------------ ------------ ------------ ------------
Income (loss) from operations (2,170,556) 317,935 216,566 619,496
------------ ------------ ------------ ------------
Other income (expense):
Interest expense (799,839) (553,027) (317,185) (303,942)
Other 125,516 57,986 32,081 75,137
Loss on disposition of latex equipment (822,439) -- -- --
------------ ------------ ------------ ------------
Total other expense (1,496,762) (495,041) (285,104) (228,805)
------------ ------------ ------------ ------------
Income (loss) before income taxes (3,667,318) (177,106) (68,538) 390,691
Income tax expense (benefit) (774,143) 5,934 -- --
------------ ------------ ------------ ------------
Net income (loss) (2,893,175) (183,040) (68,538) 390,691
Dividends applicable to convertible
preferred stock -- (74,211) (10,294) (65,000)
------------ ------------ ------------ ------------
Income(loss)applicable to common shares $ (2,893,175) $ (257,251) $ (78,832) $ 325,691
============ ============ ============ ============
Net Income (loss) per common and common
equivalent shares $ (2.14) $ (0.20) $ (0.06) $ 0.26
============ ============ ============ ============
Weighted average number of common and
common equivalent shares outstanding 1,353,384 1,290,267 1,324,080 1,254,124
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
CTI Industries Corporation and Subsidiary
Consolidated Statements of Stockholders' Equity
for the years ended October 31, 1995 and 1996
Less
---------------------------------------
Common Stock Preferred Stock Retained Treasury Stock Redeemable Stock
----------------- Paid-In ----------------- --------------- Common Subscription
Shares Amount Capital Shares Amount Earnings Shares Amount Stock Receivable Total
Balance,
October 31, 1994 1,131,507 $73,548 $230,348 $3,287,620 41,818 $170,700 $126,450 $ 3,294,366
Net loss (2,893,175) (2,893,175)
--------- ------ -------- --------- ------- -------- -------- --------
Balance,
October 31, 1995 1,131,507 73,548 230,348 394,445 41,818 170,700 126,450 401,191
Payment on stock
subscription
receivable (119,250) 119,250
Preferred stock
subscription
receivable 160,000 (160,000)
Issuance of
preferred stock 1,098,901 $1,000,000 1,000,000
Accumulated
preferred stock
dividends 27,625 27,625
Redeemable
common stock $450,000 (450,000)
Acquisition of
treasury stock 102,564 200,000 (200,000)
Net loss (183,040) (183,040)
Preferred
dividends (74,211) (74,211)
--------- ------ -------- --------- ---------- --------- ------- -------- -------- -------- --------
Balance,
October 31, 1996 1,131,507 73,548 $230,348 1,098,901 $1,027,625 $ 137,194 144,382 $370,700 $450,000 $167,200 $480,815
========= ====== ======== ========= ========== ========= ======= ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
CTI Industries Corporation and Subsidiary
Consolidated Statements of Cash Flows
Years Ended Six Months Ended
------------------------- --------------------------
October 31, April 30,
1995 1996 1996 1997
(unaudited)
Cash flows from operating activities:
Net income (loss) $(2,893,175) $ (183,040) $ (68,538) $ 390,691
Adjustments to reconcile net loss to cash provided
by (used in) operating activities:
Depreciation and amortization 755,638 371,893 274,332 230,702
Gain on sale of property and equipment (8,500) (20,712) (20,437) (42,942)
Loss on disposition of latex equipment 822,439 -- -- --
Provision for losses on accounts receivable
and inventory 150,000 255,738 84,262 72,600
Deferred income taxes (211,300) -- -- --
Change in assets and liabilities:
Accounts receivable 1,136,740 1,006,439 546,945 (1,022,464)
Inventories 902,389 486,483 1,195,556 (183,547)
Other assets 361,195 (12,526) 41,442 (87,364)
Accounts payable and accrued expenses (474,072) (1,064,584) (777,867) (268,704)
----------- ---------- ----------- -----------
Net cash provided by (used in)
operating activities 541,354 839,691 1,275,695 (911,028)
----------- ---------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of property and equipment 8,500 45,415 21,452 2,942
Purchases of property and equipment (478,637) (495,880) (256,990) (343,193)
Cash surrender value - officers' life insurance -- 10,700 -- --
Investment in joint venture -- -- -- (34,575)
----------- ---------- ----------- -----------
Net cash used in investing activities (470,137) (439,765) (235,538) (374,826)
----------- ---------- ----------- -----------
Cash flows from financing activities:
Stock redemption contract payments -- (52,092) -- (32,807)
Advances on line of credit 3,232,942 3,270,970 702,239 1,367,205
Repayments on line of credit (3,731,857) (4,843,239) (1,915,187) (483,338)
Proceeds from issuance of long-term debt 1,910,273 3,300,000 -- 18,000
Repayment of long-term debt (1,535,236) 2,694,358) (384,118) (200,874)
Proceeds from debt issued to related parties -- -- -- 375,600
Proceeds from issuance of preferred stock -- 840,000 840,000 160,000
Payment of debt issue costs -- (110,400) -- --
Dividends paid -- (46,586) -- (48,750)
----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities (123,878) (335,705) (757,066) 1,155,036
----------- ----------- ----------- -----------
Net increase (decrease) in cash (52,661) 64,221 283,091 (130,818)
Cash at beginning of period 119,258 66,597 66,597 130,818
----------- ----------- ----------- -----------
Cash at end of period $ 66,597 $ 130,818 $ 349,688 $ --
=========== =========== =========== ===========
Supplemental disclosures:
Cash paid for interest $ 777,227 $ 617,952 $ 374,926 $ 328,319
Cash paid for income taxes 5,776
Non-cash financing activities:
Purchase of treasury stock through issuance of
stock redemption contract payable $ 200,000
Assets exchanged for settlement of debt $ 40,000
Common stock warrants exercised in exchange
for contractual services received 19,500
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements
(Information presented for the six month periods ended April 30, 1996 and 1997
is unaudited)
1. Nature of Operations
CTI Industries Corporation (the "Company") and its United Kingdom subsidiary
(CTI Balloons, Ltd.) design, manufacture and distribute balloon products
throughout the world. The Company also operates systems for the production,
lamination and printing of films used for food packaging and other
commercial uses.
Basis of Presentation
The accompanying interim financial statements as of April 30, 1997 and for
the six months ended April 30, 1997 and 1996 and the related disclosures
have not been audited by independent accountants. However, they have been
prepared in conformity with the accounting principles stated in the audited
financial statements for the two years in the period ended October 31, 1996
and include all adjustments, which were of a normal and recurring nature,
which in the opinion of management are necessary to present fairly the
financial position of the Company and results of operations and cash flows
for the periods presented. The operating results for the interim periods are
not necessarily indicative of results expected for the full year.
2. Summary of Significant Accounting Policies
Principle of Consolidation
The consolidated financial statements include the accounts of CTI Industries
Corporation and its subsidiary. All significant intercompany accounts and
transactions have been eliminated.
Foreign Currency Translation
The financial statements of foreign operations are translated into U.S.
dollars in accordance with Statement of Financial Accounting Standards
(SFAS) No. 52. Accordingly, all assets and liabilities are translated at
current rates of exchange, and operating transactions are translated at
weighted average rates during the year. The translation gains and losses, to
the extent material, are accumulated as a component of stockholders' equity.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using standard costs which approximates costing determined on a first-in,
first-out basis.
F-6
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
(Information presented for the six month periods ended April 30, 1996 and 1997
is unaudited)
2. Summary of Significant Accounting Policies, continued
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line and declining-balance methods over estimated useful lives of
the related assets. The estimated useful lives range as follows:
Building 25 years
Machinery and equipment 3-15 years
Office furniture and equipment 5-8 years
Leasehold improvements 5-8 years
Depreciation expense was $755,636 and $367,717 for the years ended October
31, 1995 and 1996, respectively. Effective November 1, 1995, management
determined that the useful life of certain equipment was longer than
originally estimated. A change in accounting estimate was recognized to
reflect this decision, resulting in a reduction in depreciation expense of
$196,318 in 1996.
Plant Shutdown Expenses
During the fiscal year ended October 31, 1995, the Company ceased latex
manufacturing operations at its Cary, Illinois facility. Shutdown expenses
totaling $850,000 were provided for in 1995. The Company also recorded a
loss on the disposition of latex manufacturing equipment of $822,439.
Deferred Financing Costs
Deferred financing costs consist of unamortized financing costs incurred in
connection with the refinancing of long-term debt during fiscal 1996. These
costs are being amortized on a straight-line basis over the term of the
loans. Amortization expense was $4,176 for the year ended October 31, 1996.
Income Taxes
The provision for income taxes and corresponding balance sheet accounts are
determined in accordance with SFAS No. 109, "Accounting for Income Taxes"
("SFAS 109"). Under SFAS 109, deferred tax assets and liabilities are
determined based on temporary differences between the basis of certain
assets and liabilities for income tax and financial reporting purposes, if
any. The deferred tax assets and liabilities are classified according to the
financial statement classification of the assets and liabilities generating
the differences. Income tax expense (benefit) is comprised of the current
tax payable for the period and the change during the period in the deferred
tax assets and liabilities. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be
realized.
F-7
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
(Information presented for the six month periods ended April 30, 1996 and 1997
is unaudited)
2. Summary of Significant Accounting Policies, continued
Revenue Recognition
The Company recognizes revenue using the accrual method of accounting when
title transfers upon shipment.
Concentration of Credit Risk
Concentration of credit risk with respect to trade accounts receivable is
generally diversified due to the number of entities comprising the Company's
customer base. The Company performs ongoing credit evaluations and provides
an allowance for potential credit losses against the portion of accounts
receivable which is estimated to be uncollectible. Such losses have
historically been within management's expectations.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Unaudited Pro Forma Stockholders' Equity
The pro forma stockholders' equity as reflected on the consolidated balance
sheet at April 30, 1997 presents estimated effects of the anticipated
conversion of all outstanding shares of Preferred Stock into shares of Class
B Common Stock on a one-to-one ratio in conjunction with an initial public
offering (Note 15).
Fair Value of Financial Instruments
The Company utilizes a line of credit to finance short-term obligations.
Management believes that this instrument bears interest at a rate which
approximates prevailing market rates for instruments with similar
characteristics, and accordingly, that the carrying value for this
instrument is a reasonable estimate of fair value.
F-8
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
(Information presented for the six month periods ended April 30, 1996 and 1997
is unaudited)
2. Summary of Significant Accounting Policies, continued
Accounting for Stock Options
The Company intends to apply the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", for its employee
stock-based compensation programs. Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation"
encourages, but does not require, companies to recognize compensation
expense for grants of stock, stock options and other equity instruments to
employees based on new fair value accounting rules. Although expense
recognition for employee stock based compensation is not mandatory, SFAS No.
123 requires companies that choose not to adopt the new fair value
accounting to disclose pro-forma net income and earnings per share under the
new method.
Computation of Income (Loss) Per Share
The computation of income (loss) per share as reflected on the consolidated
statement of operations is based on the weighted average number of common
and common equivalent shares outstanding during the period. Common stock
equivalents consist of outstanding stock options, which pursuant to Staff
Accounting Bulletin No. 83 of the Securities and Exchange Commission, are
included in the weighted average shares as if they were outstanding for the
entire period to the extent granted within the twelve months preceding the
contemplated public offering date, using the treasury stock method until
such time as shares are issued.
Information regarding income (loss) per share has been computed on a
historical basis under the provisions of Accounting Principles Board Opinion
No. 15.
Years ended October 31,
----------------------------
1995 1996
Net loss per share $ (2.66) $ (0.25)
========== ==========
Weighted average shares outstanding 1,089,699 1,026,572
========== ==========
Six months ended April 30,
----------------------------
1996 1997
Primary earnings per share:
Net income (loss) per share $ (0.07) $ 0.26
========== ==========
Weighted average common and common
equivalent shares outstanding 1,060,385 1,254,124
========== ==========
Fully diluted earnings per share:
Net income per share $ 0.17
==========
Weighted average common and common
equivalent shares outstanding 2,265,612
==========
F-9
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
(Information presented for the six month periods ended April 30, 1996 and 1997
is unaudited)
2. Summary of Significant Accounting Policies, continued
Computation of Loss Per Share, continued
For the six month period ended April 30,1996, fully diluted earnings per
share has not been presented as the result would be anti-dilutive to the net
loss per share.
Reverse Stock Split
Effective July 22, 1997, the Company approved a reverse stock split of 1
share for every 2.6 shares of common stock outstanding. All share
information retroactively reflects the effect of this split.
3. Inventory
Inventory is comprised of the following:
October 31, April 30,
1996 1997
(unaudited)
Raw materials $ 278,976 $ 291,648
Work in process 510,098 493,748
Finished goods 3,793,519 3,916,244
----------- -----------
Total inventory $ 4,582,593 $ 4,701,640
============ ===========
4. Line of Credit
The Company has a bank line of credit, due July 1, 1998, which provides for
a maximum borrowing limit of $3,000,000 of which $941,184 and $57,317 was
available at October 31, 1996 and April 30, 1997, respectively. Advances
under the line of credit are subject to a borrowing base, as defined in the
line of credit agreement. Interest is payable monthly at prime plus 1%
(prime was 8.25% and 8.5% at October 31, 1996 and April 30, 1997,
respectively). The line of credit is collateralized by all assets of the
Company. The line of credit agreement contains, among other provisions,
certain covenants relating to the maintenance of tangible net worth.
F-10
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
(Information presented for the six month periods ended April 30, 1996 and 1997
is unaudited)
5. Stock Redemption
In March 1996, the Company entered into a Stock Redemption Agreement with a
shareholder which was subsequently amended June 27, 1997. Under the amended
Stock Redemption Agreement the Company has the right but not the obligation
to redeem up to 333,333 shares of Common Stock owned by the shareholder at
the price of $1.95 per share at any time through January 31, 1998.
Commencing March 1, 1998 through February 28, 2000, the Company is obligated
to pay to the shareholder, for the redemption of shares at $1.95 per share
(i) an amount equal to 2% of the Company's pretax profits each fiscal
quarter (beginning with the quarter ended February 28, 1998) and (ii) an
amount equal to 2% (but not to exceed $3,000) of the amount the latex and
mylar balloon revenues exceed $1.3 million in any month. The Company also
has the right to redeem additional shares of Common Stock from the
shareholder during this period at $1.95 per share, provided total number of
shares subject to redemption under the Stock Redemption Agreement does not
exceed 333,333. As of the date of this report, 102,564 shares of Common
Stock have been redeemed under the Stock Redemption Agreement.
6. Notes Payable
Long-term debt at October 31, 1996 consists of:
First Term Loan, payable in monthly installments
of $18,333 including interest at prime
plus 1% due September 1, 2001.
Collateralized by all assets of the Company. $ 1,063,333
Second Term Loan, payable in monthly installments
of $19,617 with interest at 8.75% due at
various times through September 1, 2001.
Collateralized by all assets of the Company. 2,190,663
Installment Loan, payable in monthly installments
of $9,583 plus interest at 10.5% due May 1, 1998.
Collateralized by equipment purchased. 172,495
Installment Loans, payable in monthly installments
of $2,067 including interest at 8.25% and 8.5%
due at various times through May 18, 1998.
Collateralized by vehicles purchased. 33,230
------------
Total 3,459,721
Less current portion 402,798
------------
Total long-term debt $ 3,056,923
============
F-11
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
(Information presented for the six month periods ended April 30, 1996 and 1997
is unaudited)
6. Notes Payable, continued
Future minimum principal payments for amounts outstanding under long-term
debt agreements are as follows for the years ended October 31:
1997 $ 402,798
1998 331,840
1999 270,708
2000 275,392
2001 2,178,983
-----------
$ 3,459,721
===========
The loan agreements contain, among other provisions, certain covenants
relating to the maintenance of tangible net worth.
7. Convertible Preferred Stock
The Company restated its certificate of incorporation to provide for two
classes of capital stock, Common and Preferred.
The total number of shares of Preferred Stock authorized is 2,000,000, with
a par value of ninety-one cents ($.91) per share. The preferred shares are
entitled to preferential cumulative dividends at the rate of 13% per annum
of the par value, payable only when, as, and if declared by the Board of
Directors. As long as the Preferred Stock is outstanding, there shall be no
dividends declared or paid on any shares of Common Stock. Preferred shares
may be converted by the holder into common shares at any time (See Note 15).
F-12
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
(Information presented for the six month periods ended April 30, 1996 and 1997
is unaudited)
8. Income Taxes
The income tax provisions (benefits) as of October 31, are comprised of the
following:
1995 1996
Current:
Federal $(427,843) $ (34)
State (135,000) 192
Foreign -- 5,776
--------- ---------
(562,843) 5,934
--------- ---------
Deferred:
Federal (172,291) --
State (39,009) --
--------- ---------
(211,300) --
--------- ---------
Total income tax
provision (benefit) $(774,143) $ 5,934
========= =========
The components of the net deferred tax asset (liability) are as follows:
October 31, April 30,
1996 1997
(unaudited)
Deferred tax assets:
Accounts receivable allowance $ 43,331 $ 44,970
Inventory valuation 54,826 80,243
Accrued liabilities 220,964 301,084
Net operating loss carryforwards 452,178 232,740
Alternative minimum tax credit carry forwards 291,759 291,759
---------- ----------
Total deferred tax assets 1,063,058 950,796
---------- ----------
Deferred tax liabilities:
Book over tax basis of capital assets 458,706 476,408
Less: Valuation allowance 604,352 474,388
---------- ----------
Net deferred tax asset (liability) $ -- $ --
========== ==========
F-13
CTI Industries Corporationand Subsidiary
Notes to Consolidated Financial Statements, Continued
(Information presented for the six month periods ended April 30, 1996 and 1997
is unaudited)
8. Income Taxes, continued
The valuation allowance relates principally to deferred tax assets that the
Company estimates may not be realizable, including net operating loss
carryforwards and tax credit carryforwards. At October 31, 1996 and April
30, 1997, the Company has net operating loss carryforwards for tax purposes
of approximately $1,200,000 and $600,000, respectively. These carryforwards
expire in the years 2010 and 2011. In addition, the Company has
approximately $292,000 in alternative minimum tax credits which have no
expiration date.
Income tax provisions differed from the taxes calculated at the statutory
federal tax rate as follows:
Years ended Six months ended
------------------------ ------------------------
October 31, April 30,
1995 1996 1996 1997
(unaudited)
Taxes at statutory rate $(1,246,889) $ (60,216) $ (22,874) $ 108,387
State income taxes (114,846) 127 -- --
Foreign taxes paid -- 5,776 19,168 (113,302)
Increase in valuation allowance 467,707 59,164 3,706 4,915
Other 119,885 1,083 -- --
----------- ----------- ----------- -----------
Income tax provision $ (774,143) $ 5,934 $ -- $ --
=========== =========== =========== ===========
9. Employee Benefit Plan
Effective January 1, 1993, the Company established a defined contribution
plan for substantially all employees. The plan provides for the Company
matching contributions for the first $300 of employee contributions and an
additional bonus match of 1% of compensation for all participants who are
employees on the last day of the plan year. Profit sharing contributions may
also be made at the discretion of the Board of Directors. Employer
contributions to the plan totaled $86,595 and $52,369 for the years ended
October 31, 1995 and 1996, respectively.
F-14
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
(Information presented for the six month periods April 30, 1996 and 1997 is
unaudited)
1O. Related Party Transactions
The Company obtains legal services from a law firm in which several
shareholders of the law firm are also shareholders of the Company, and in
which one shareholder of the law firm is both a director and a shareholder
of the Company. Legal fees incurred with this firm were $95,217 and $123,872
for the years ended October 31, 1995 and 1996 and $72,624 and $62,814 for
the six months ended April 30, 1996 and 1997.
The Company purchases packaging materials from entities in which
shareholders of the Company maintain an ownership interest. Purchases from
these affiliates were $1,106,649 and $145,267 for the periods ended October
31, 1996 and April 30, 1997, respectively.
11. Joint Venture
Effective September 16, 1996, the Company entered into a joint venture
agreement with a manufacturer in Mexico. The joint venture will engage in
the production and packaging of balloons. Under the agreement, both entities
will hold a 50% interest in the joint venture. As of October 31, 1996, the
joint venture has not commenced operations and the Company has made no
capital investment in the joint venture.
12. Commitments and Contingencies
Operating Leases
The Company leases certain production facilities under a noncancelable lease
with monthly payments of $21,432 expiring December 31, 1999. The Company
subleases approximately 70% of this facility through August, 1998. The
Company's United Kingdom subsidiary also maintains a lease for office and
warehouse space which expires in 2019.
The Company leases a computer system, software, office equipment and
automobiles on operating leases which expire on various dates between May
1997 and May 1999.
The net rent expense of all leases was $502,603 in 1995 and $528,654 in 1996
The future aggregate minimum net lease payments under existing agreements
as of October 31, are as follows:
Lease Sublease
Payments Income Net
1997 $ 556,420 $ 155,726 $ 400,694
1998 334,366 139,280 195,O86
1999 326,587 326,587
2000 99,564 99,564
Thereafter 1,026,000 1,026,000
F-15
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
(Information presented for the six month periods ended April 30, 1996 and 1997
is unaudited)
12. Commitments and Contingencies, continued
Litigation
The Company is a defendant in business-related litigation. Management does
not believe the outcome of such litigation will have a material adverse
effect on the Company's financial position and results of operations.
Licenses
The Company has certain merchandising license agreements that require
royalty payments based upon the Company's net sales of the respective
products. The agreements call for guaranteed minimum commitments that are
determined on a calendar year basis. Future guaranteed commitments due, as
computed on a pro rata basis, as of October 31, are as follows:
1997 $ 270,792
1998 142,594
1999 21,042
13. Future Adoption of Recently Issued Accounting Standards
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share", SFAS
No. 129, "Disclosure of Information about Capital Structure," SFAS No. 130,
"Reporting Comprehensive Income Summary," and SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information".
SFAS No. 128 establishes standards for the computation, presentation, and
disclosure requirements for earnings per share. SFAS No. 129 consolidates
the existing requirements relating to the disclosure of certain information
about an entity's capital structure. SFAS No. 130 establishes standards for
reporting comprehensive income to present a measure of all changes in equity
that result from renegotiated transactions and other economic events of the
period other than transactions with owners in their capacity as owners.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from nonowner sources and includes net income. SFAS No. 131
specifies revised guidelines for determining an entity's operating segments
and the type and level of financial information to be disclosed. This
standard requires that management identify operating segments based on the
way that management disaggregates the entity for making internal operating
decisions.
All of the aforementioned statements are effective for fiscal years
beginning after December 15, 1997. Management has not determined what impact
these standards, when adopted, will have on the Company's financial
statements.
F-16
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
(Information presented for the six month periods ended April 30, 1996 and 1997
is unaudited)
14. Geographic Segment Data (Unaudited)
The Company's operations consist of a single business segment which designs,
manufactures, and distributes balloon products. Transfers between geographic
areas were primarily at cost. The Company's subsidiary has assets consisting
primarily of trade accounts receivable and inventory. Sales and selected
financial information by geographic area for the years ended October 31,
1995 and 1996 are as follows:
United
1995 United States Kingdom Eliminations Consolidated
Revenues $ 21,807,836 $ 1,544,384 $ (568,440) $ 22,783,780
Operating income (loss) (2,172,089) 1,533 -- (2,170,556)
Net income (loss) (2,894,708) 1,533 -- (2,893,175)
Total assets 10,997,898 767,766 -- 11,765,664
1996
Revenues $ 13,055,900 $ 1,408,683 $ (554,479) $ 13,910,104
Operating income 289,521 28,414 -- 317,935
Net income (loss) (208,784) 25,744 -- (183,040)
Total assets 9,613,062 672,473 -- 10,285,535
15. Subsequent Events
Recapitalization
In July 1997, the Company authorized a Recapitalization (the
"Recapitalization") without a formal reorganization. As part of the
Recapitalization, the Board of Directors approved the creation of Class B
Common Stock and negotiated a conversion of all then outstanding shares of
the Company's Convertible Preferred Stock into an aggregate of 1,098,901
shares of Class B Common Stock effective with the proposed initial public
offering. The shares of the Class B Common Stock contain rights identical to
shares of Common Stock, except that shares of Class B Common Stock, voting
separately as a class, have the right to elect four of the Company's seven
directors. Shares of the Common Stock and Class B Common Stock, voting
together as a class, vote on all other matters, including the election of
the remaining directors. The Board of Directors also approved a 1 for 2.6
reverse stock split on both the Common Stock and Class B Common Stock. The
Recapitalization and related transactions were approved by written consent
of the shareholders.
F- 17
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
(Information presented for the six month periods ended April 30, 1996 and 1997
is unaudited)
15. Subsequent Events, continued
Stock Option Plan
Under the Company's 1997 Stock Option Plan (effective July 1, 1997), a total
of 300,000 shares of Common Stock are reserved for issuance under the Stock
Option Plan. None of the options have been granted. The Plan provides for
the award of options, which may either be incentive stock options ("ISOs")
within the meaning of Section 422A of the Internal Revenue Code of 1986, as
amended (the "Code") or non-qualified options ("NQOs") which are not subject
to special tax treatment under the Code. The Plan is administered by the
Board or a committee appointed by the Board (the "Administrator"). Officers,
directors, and employees of, and consultants to, the Company or any parent
or subsidiary corporation selected by the Administrator are eligible to
receive options under the Plan. Subject to certain restrictions, the
Administrator is authorized to designate the number of shares to be covered
by each award, the terms of the award, the date on which and the rates at
which options or other awards may be exercised, the method of payment and
other terms.
The exercise price for ISOs cannot be less than the fair market value of the
stock subject to the option on the grant date (110% of such fair market
value in the case of ISOs granted to a stockholder who owns more than 10% of
the Company's Common Stock). The exercise price of a NQO shall be fixed by
the Administrator at whatever price the Administrator may determine in good
faith. Unless the Administrator determines otherwise, options generally have
a 10-year term (or five years in the case of ISOs granted to a participant
owning more than 10% of the total voting power of the Company's capital
stock). Unless the Administrator provides otherwise, options terminate upon
the termination of a participant's employment, except that the participant
may exercise an option to the extent it was exercisable on the date of
termination for a period of time after termination.
Private Placement
In June 1997, the Company issued notes in the principal amount of $865,000,
together with warrants to purchase 277,244 shares of the Company's Common
Stock at $3.12 per share. A substantial portion of these notes and warrants
were purchased by an investor group comprised principally of members of
Company management.
F-18
CTI Industries Corporation and Subsidiary
Notes to Consolidated Financial Statements, Continued
(Information presented for the six month periods ended April 30, 1996 and 1997
is unaudited)
15. Subsequent Events, continued
Public Offering of Common Stock and Warrants
The Company's Board of Directors (the "Board") authorized the filing of a
registration statement on Form SB-2 with the Securities and Exchange
Commission relating to an initial public offering ("IPO") by the Company of
1,333,333 units, each unit consisting of one share of common stock and one
redeemable warrant to purchase one share of common stock. The offering also
includes up to an additional 199,999 units to cover over allotments, if any.
In connection with the offering, the Company has agreed to sell to the
underwriter, for nominal consideration, underwriter's warrants to purchase
an additional 133,333 units.
F-19
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
The Company's Certificate of Incorporation eliminates the
personal liability of directors to the Company or its stockholders for monetary
damages for breach of fiduciary duty to the extent permitted by Delaware law.
The Company's Certificate of Incorporation and By-Laws provide that the Company
shall indemnify its officers and directors to the extent permitted by Subsection
145 of the General Corporation Law of the State of Delaware, which authorizes a
corporation to indemnify directors, officers, employees or agents of the
Corporation in non-derivative suits if such party acted in good faith and in a
manner such party reasonably believed to be in or not opposed to the best
interest of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection 145 further provides that indemnification shall be provided if the
party in question is successful on the merits or otherwise.
Reference is hereby made to the caption "Management -
Limitation of Liability and Indemnification" in the Prospectus which is a part
of this Registration Statement for a description of indemnification arrangements
between the Company and its directors.
The form of Underwriting Agreement, included as Exhibit 1.1,
provides for indemnification of the Company and certain controlling persons
under certain circumstances, including liabilities under the Securities Act of
1933, as amended ("Securities Act"). Insofar as indemnification for liabilities
under the Securities Act may be permitted to directors, officers or persons
controlling the Company pursuant to the foregoing provisions of the Underwriting
Agreement, the Company has been informed that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and therefore is unenforceable.
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses of the distribution other than compensation paid
to the Underwriter, all of which are to be borne by the Company, are as follows:
SEC Registration Fee........................... $ 5,700.00
NASD Fee....................................... 2,500.00
NASDAQ Fees.................................... 10,000.00
*Blue Sky Fees and Expenses..................... 45,000.00
*Transfer Agent Fees............................ 10,000.00
*Accounting Fees and Expenses................... 125,000.00
*Legal Fees and Expenses ....................... 125,000.00
*Printing and Engraving Expenses................ 100,000.00
*Miscellaneous Fees and Expenses................ 26,800.00
------------
Total....................................... $ 450,000.00
============
* All amounts are estimates.
II-1
Item 26. Recent Sales of Unregistered Securities.
In March and May of 1996, a group of investors made an equity
investment of $1,000,000 in the Company in return for 1,098,901 shares of
Preferred Stock, $.91 par value. CTI Investors, L.L.C., an Illinois limited
liability company, invested $900,000 in the shares of Preferred Stock. Members
of CTI Investors, L.L.C. include Howard W. Schwan, John H. Schwan and Stephen M.
Merrick, members of management, and one other accredited investor. One other
accredited investor invested the remaining $100,000. The sale was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act") as a transaction not involving a public offering. Upon the
closing of the Offering, the shares of Preferred Stock will be converted into
shares of Class B Common Stock.
In December, 1996, Howard W. Schwan, John H. Schwan and Stephen M.
Merrick, members of management, were each issued warrants to purchase 76,923
shares of the Company's Common Stock at an exercise price of $.91 per share in
consideration of their facilitating and guaranteeing a bank loan to the Company
in the amount of $6.3 million. The issuance was exempt from regulation under
Section 4(2) of the Securities Act as a transaction not involving a public
offering.
In June, 1997, the Company issued in a private placement notes in the
principal amount of $865,000, together with warrants to purchase up to 277,244
shares of the Company's Common Stock at an exercise price of $3.12 per share.
Howard W. Schwan, John H. Schwan, Stephen M. Merrick and John C. Davis, members
of management, and one other accredited investor participated in the sale. The
offering was exempt from registration under Section 4(2) of the Securities Act
as a transaction not involving a public offering.
Item 27. Exhibits.
1.1 Form of Underwriting Agreement
3.1 Second Restated Certificate of Incorporation of CTI Industries
Corporation
3.2 By-laws of CTI Industries Corporation
*4.1 Form of Certificate for Common Stock of CTI Industries Corporation
4.2 Form of Underwriter's Warrant Agreement
4.3 Form of Warrant Agreement and Warrant
5.1 Opinion, with Consent, of Fishman Merrick Miller Genelly Springer
Klimek & Anderson, P.C.
10.1 CTI Industries Corporation Stock Option Plan
10.2 Employment Agreement dated April 29, 1996 between CTI Industries
Corporation and John C. Davis
10.3 Stock Redemption Agreement dated March 1, 1996 between CTI Industries
Corporation and John C. Davis
10.4 Agreement dated June 27, 1997 between CTI Industries Corporation and
John C. Davis
*10.5 Third Amendment to Lease Agreement dated August 15, 1994, for premises
located at 675 Industrial Drive, Cary, Illinois
10.6 Form of Warrant dated December 3, 1996 to purchase shares of Common
Stock
10.7 Form of Subscription Agreement dated March, 1996, for purchase of
Preferred Stock
10.8 Form of Subscription Agreement dated June 20, 1997 for promissory notes
and warrants to purchase shares of Common Stock
10.9 Employment Agreement dated June 30, 1997, between CTI Industries
Corporation and Howard W. Schwan
II-2
10.10 Joint Venture Agreement dated September 16, 1996, between CTI
Industries Corporation and Pulidos & Terminados Finos S.A. de C.V.
10.11 Agreement for purchase of assets dated September 8, 1995, between CTI
Industries Corporation and Pulidos & Terminados Finos S.A. de C.V.
10.12 Amendment dated May 24, 1996, to Agreement for purchase of assets
between CTI Industries Corporation and Pulidos & Terminados Finos S.A.
de C.V.
10.13 Agreement dated July 14, 1997 between CTI Industries Corporation
and Pulidos & Terminados Finos S.A. de C.V.
10.14 Consulting Agreement dated March, 1996 between CTI Industries
Corporation and Michael R. Miller
10.15 Loan and Security Agreement dated August 22, 1996 between the Company
and First American Bank
10.16 Third Amendment to Loan and Security Agreement dated July 1, 1997,
among CTI Industries Corporation, First American Bank, Stephen M.
Merrick, John H. Schwan and Howard W. Schwan
10.17 First Term Note in the sum of $1,100,000 dated August 22, 1996 made by
CTI Industries Corporation to First American Bank.
10.18 Second Term Note in the sum of $2,200,000 dated August 22, 1996 made by
CTI Industries Corporation to First American Bank.
10.19 Revolving Note in the sum of $3,000,000 dated August 22, 1996 made by
the Company to First American Bank.
10.20 Mortgage dated August 22, 1996 for benefit of First American Bank.
10.21 Guaranty dated July 1, 1997, by Stephen M. Merrick, Howard W. Schwan
and John H. Schwan for benefit of First American Bank.
10.22 Third Term Note in the sum of $275,000 dated July 1, 1997 made by CTI
Industries Corporation to First American Bank.
10.23 Fourth Term Note in the sum of $200,000 dated July 1, 1997, made by CTI
Industries Corporation to First American Bank.
10.24 First Amendment to Revolving Note dated July 1, 1997 made by CTI
Industries Corporation to First American Bank.
10.25 Form of Financial Advisory and Consulting Agreement.
11.1 Computation of Earnings Per Share - Annual.
11.2 Computation of Earnings Per Share - Six Months.
*15.1 Letter from Detterbeck & Associates, Ltd.
*15.2 Letter from Jacobson, Scott, Gordon & Horewitch
21 Subsidiaries (incorporate description in Prospectus under "The
Company")
23.1 Consent of Coopers and Lybrand L.L.P.
23.2 Consent of Fishman Merrick Miller Genelly Springer Klimek & Anderson,
P.C. (included in Exhibit 5.1)
24 Power of Attorney (included in signature page)
27 Financial Data Schedule
- ----------------------------------
* To be filed supplementally.
II-3
Item 28. Undertakings.
1. The Registrant hereby undertakes:
(1) That for purposes of determining any liability under the
Securities Act, treat the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant under Rule 424(b)(1)
or (4) or 497(h) under the Securities Act as part of this Registration
Statement as of the time the Commission declared it effective.
(2) That for the purpose of determining any liability under the
Securities Act, treat each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities offered in the
Registration Statement, and that offering of the securities at that time as
the initial bona fide offering of those securities.
(3) To file, during any period in which it offers or sells
securities, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereto) that, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of Prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in the volume and price represent no more than a 20% change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement;
(iii) to include any additional or changed material
information on the plan of distribution.
(4) To remove from registration by means of a post-effective
amendment any of the securities being registered that remain unsold at the
termination of the offering.
(5) To provide to the Underwriter at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriter to permit prompt delivery to each
purchaser.
2. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling
II-4
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The Registrant has agreed to indemnify the Underwriter and its
officers, directors, partners, employees, agents and controlling persons as to
any losses, claims, damages, expenses or liabilities arising out of any untrue
statement or omission of a material fact contained in the Registration
Statement. The Underwriter has agreed to indemnify the Registrant and its
directors, officers and controlling persons as to any losses, claims, damages,
expenses or liabilities arising out of any untrue statement or omission in the
Registration Statement based on information relating to the Underwriter
furnished by it for use in connection with the Registration Statement.
II-5
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Village of Barrington, State of Illinois, on the 24th day of
July, 1997.
CTI INDUSTRIES CORPORATION
By: /s/ Howard W. Schwan
---------------------------
Howard W. Schwan, President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints John H. Schwan and Stephen M. Merrick,
separately, as his true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitition, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments, including post-effective
amendments and related registration statements, to this Registration Statement,
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, full power and authority to do separately and
perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or their
substitute or substitutes may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signatures Title Date
-------------- ------------ --------
/s/ Howard W. Schwan President and Director July 24, 1997
- -------------------------
Howard W. Schwan
/s/ John H. Schwan Chairman and Director July 24, 1997
- -------------------------
John H. Schwan
/s/ Stephen M. Merrick Chief Executive Officer, July 24, 1997
- ------------------------- Secretary, Chief Financial
Stephen M. Merrick Officer and Director
/s/ John C. Davis Vice President and Director July 24, 1997
- -------------------------
John C. Davis
/s/ Sharon Konny Manager of Finance and July 24, 1997
- ------------------------- Administration
Sharon Konny
/s/ Stanley M. Brown Director July 24, 1997
- -------------------------
Stanley M. Brown
II-6