SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
|X| Filed by the Registrant Filed by a Party other than the Registrant |_|
Check the appropriate box:
|_| Preliminary Proxy Statement
|_| Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
|X| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
CTI INDUSTRIES CORPORATION
(Name of Registrant as Specified In Its Charter)
Payment of Filing Fee (check the appropriate box):
|X| No Fee Required
CTI INDUSTRIES CORPORATION
22160 North Pepper Road
Barrington, Illinois 60010
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO
BE HELD ON OCTOBER 29, 2004
To: Shareholders of CTI Industries Corporation
The annual meeting of the shareholders of CTI Industries Corporation will
be held at The Holiday Inn Crystal Lake, 800 South Route 31, Crystal Lake,
Illinois 60014, on Friday, October 29, 2004, at 10:00 a.m., Central Daylight
Savings Time, for the following purposes:
1. To elect 7 directors to hold office during the year following the
annual meeting or until their successors are elected (Item No. 1 on
proxy card);
2. To ratify the appointment of Eisner, LLP as auditors of the
Corporation for 2004 (Item No. 2 on proxy card); and
3. To transact such other business as may properly come before the
meeting.
The close of business on September 21, 2004, has been fixed as the record
date for determining the shareholders entitled to receive notice of and to vote
at the annual meeting.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Stephen M. Merrick
October 1, 2004 -----------------------------
Stephen M. Merrick, Secretary
YOUR VOTE IS IMPORTANT
It is important that as many shares as possible be represented at
the annual meeting. Please date, sign, and promptly return the proxy
in the enclosed envelope. Your proxy may be revoked by you at any
time before it has been voted.
CTI INDUSTRIES CORPORATION
22160 North Pepper Road
Barrington, Illinois 60010
PROXY STATEMENT
Information Concerning the Solicitation
This statement is furnished in connection with the solicitation of proxies
to be used at the Annual Shareholders Meeting (the "Annual Meeting") of CTI
Industries Corporation (the "Company"), an Illinois corporation, to be held at
10:00 a.m. Central Daylight Savings Time on Friday, October 29, 2004, at The
Holiday Inn Crystal Lake, 800 South Route 31, Crystal Lake, Illinois 60014. The
proxy materials are being mailed to shareholders of record at the close of
business on September 21, 2004.
The solicitation of proxies in the enclosed form is made on behalf of the
Board of Directors of the Company.
The cost of preparing, assembling and mailing the proxy material and of
reimbursing brokers, nominees and fiduciaries for the out-of-pocket and clerical
expenses of transmitting copies of the proxy material to the beneficial owners
of shares held of record by such persons will be borne by the Company. The
Company does not intend to solicit proxies otherwise than by use of the mail,
but certain officers and regular employees of the Company or its subsidiaries,
without additional compensation, may use their personal efforts, by telephone or
otherwise, to obtain proxies.
Quorum and Voting
Only shareholders of record at the close of business on September 21, 2004
are entitled to vote at the Annual Meeting. On that day, there were 1,954,100
shares of Common Stock outstanding. Each share has one vote. A simple majority
of the outstanding shares of Common Stock is required to be present in person or
by proxy at the meeting for there to be a quorum for purposes of proceeding with
the Annual Meeting. The Company's Articles of Incorporation grants the holders
of Common Stock the right to elect up to seven total directors, and seven
directors will be elected by the Company's Common Stockholders at this meeting.
The Common Stock does not possess cumulative voting rights, and the election of
directors will be by the vote of a majority of shares of Common Stock present in
person or by proxy at the Annual Meeting. The ratification of auditors will
require the vote of a simple majority of the shares of Common Stock present at
the Annual Meeting by person or proxy. Abstentions and withheld votes have the
effect of votes against these matters. Broker non-votes (shares of record held
by a broker for which a proxy is not given) will be counted for purposes of
determining shares outstanding for purposes of a quorum, but will not be counted
as present for purposes of determining the vote on any matter considered at the
meeting.
A shareholder signing and returning a proxy on the enclosed form has the
power to revoke it at any time before the shares subject to it are voted by
notifying the Secretary of the Company in writing. If a shareholder specifies
how the proxy is to be voted with respect to any
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of the proposals for which a choice is provided, the proxy will be voted in
accordance with such specifications. If a shareholder fails to so specify with
respect to such proposals, the proxy will be voted "FOR" the nominees for
directors contained in these proxy materials, "FOR" proposal 2 and "FOR"
proposal 3.
Stock Ownership by Management and Others
The following table provides information concerning the beneficial
ownership of the Company's common stock by each director and nominee for
director, certain executive officers, and by all directors and officers of the
Company as a group as of September 15, 2004. In addition, the table provides
information concerning the beneficial owners known to the Company to hold more
than 5 percent of the outstanding common stock of the Company as of September
15, 2004.
Shares of Common Stock Percent of
Name and Address (1) Beneficially Owned (2) Common Stock
-------------------- ---------------------- ------------
John H. Schwan 642,237(3) 29.8%(4)
Stephen M. Merrick 525,758(5) 25.1%(4)
Howard W. Schwan 178,904(6) 9.0%(4)
Brent Anderson 42,795(7) 2.1%
Samuel Komar 24,879(8) 1.3%
Mark Van Dyke 23,809(9) 1.2%
Timothy Patterson 5,000(10)
Stanley M. Brown
1140 Larkin
Wheeling, IL 60090 11,250(11) *
Bret Tayne
6834 N. Kostner Avenue
Lincolnwood, IL 60712 9,923(12) *
Michael Avramovich
70 W. Madison Street, Suite 1400
Chicago, IL 60602 0 *
John Collins (Director Nominee)
262 Pine Street
Deerfield, IL 60015 0 *
All Current Directors and Executive Officers as a group
(10 persons) 1,464,555 59.4%(4)
----------
* Less than one percent
(1) Except as otherwise indicated, the address of each stockholder listed
above is c/o CTI Industries Corporation, 22160 North Pepper Road,
Barrington, Illinois 60010.
(footnotes continued on next page)
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(2) A person is deemed to be the beneficial owner of securities that can be
acquired within 60 days from the date set forth above through the exercise
of any option, warrant or right. Shares of Common Stock subject to
options, warrants or rights that are currently exercisable or exercisable
within 60 days are deemed outstanding for purposes of computing the
percentage ownership of the person holding such options, warrants or
rights, but are not deemed outstanding for purposes of computing the
percentage ownership of any other person.
(3) Includes warrants to purchase up to 79,364 shares of Common Stock at $1.50
per share, warrants to purchase up to 93,000 shares of Common Stock at
$4.87 per share, options to purchase up to 23,810 shares of Common Stock
at $2.08 per share granted under the Company's 1999 Stock Option Plan and
options to purchase up to 5,952 shares of Common Stock at $2.55 per share
granted under the Company's 2002 Stock Option Plan. Also includes indirect
beneficial ownership of 130,821 shares of Common Stock through shares
owned through CTI Investors, L.L.C. See "Board of Directors Affiliations
and Related Transactions."
(4) Assumes the exercise of all warrants and options owned by the named person
into shares of Common Stock and all shares of Common Stock beneficially
owned by the named person through CTI Investors, L.L.C.
(5) Includes warrants to purchase up to 39,683 shares of Common Stock at $1.50
per share, warrants to purchase up to 70,000 shares of Common Stock at
$4.87 per share, options to purchase up to 23,810 shares of Common Stock
at $2.08 per share granted under the Company's 1999 Stock Option Plan and
options to purchase up to 5,952 shares of Common Stock at $2.55 per share
granted under the Company's 2002 Stock Option Plan. Also includes indirect
beneficial ownership of 87,214 shares of Common Stock through shares owned
through CTI Investors, L.L.C. See "Board of Directors Affiliations and
Related Transactions."
(6) Includes options to purchase up to 15,873 shares of Common Stock at $6.30
per share granted under the Company's 1997 Stock Option Plan, options to
purchase up to 23,810 shares of Common Stock at $1.89 per share granted
under the Company's 1999 Stock Option Plan and options to purchase up to
14,285 shares of Common Stock at $2.31 per share granted under the
Company's 2002 Stock Option Plan. Also includes indirect beneficial
ownership of 65,410 shares of Common Stock through shares owned through
CTI Investors, L.L.C. See "Board of Directors Affiliations and Related
Transactions."
(7) Includes options to purchase up to 4,761 shares of Common Stock at $6.30
per share granted under the Company's 1997 Stock Option Plan, options to
purchase up to 17,857 shares of Common Stock at $1.47 per share, granted
under the Company's 2001 Stock Option Plan and options to purchase up to
8,928 shares of Common Stock at $2.31 per share granted under the
Company's 2002 Stock Option Plan.
(footnotes continued on next page)
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(8) Includes options to purchase up to 4,761 shares of Common Stock at $6.30
per share granted under the Company's 1997 Stock Option Plan, options to
purchase up to 7,976 shares of Common Stock at $1.89 per share granted
under the Company's 1999 Stock Option Plan, options to purchase up to
11,904 shares of Common Stock at $1.47 per share granted under the
Company's 2001 Stock Option Plan, and 238 shares of Common Stock held by
immediate family members.
(9) Includes options to purchase up to 23,809 shares of Common Stock at $1.47
per share granted under the Company's 2001 Stock Option Plan.
(10) Includes options to purchase up to 5,000 shares of Common Stock at $2.26
per share granted under the Company's 2002 Stock Option Plan.
(11) Includes options to purchase up to 1,984 shares of Common Stock at $6.30
per share and options to purchase up to 1,984 shares of Common Stock at
$10.08 per share, both granted under the Company's 1997 Stock Option Plan,
options to purchase up to 3,571 shares of Common Stock at $1.89 per share
granted under the Company's 1999 Stock Option Plan and options to purchase
up to 2,976 shares of Common Stock at $2.31 per share granted under the
Company's 2002 Stock Option Plan.
(12) Includes options to purchase up to 1,984 shares of Common Stock at $6.30
per share granted under the Company's 1997 Stock Option Plan, options to
purchase up to 3,571 shares of Common Stock at $1.89 per share granted
under the Company's 1999 Stock Option Plan and options to purchase up to
2,976 shares of Common Stock at $2.31 per share granted under the
Company's 2002 Stock Option Plan.
PROPOSAL ONE - ELECTION OF DIRECTORS
Seven directors will be elected at the Annual Meeting to serve for
one-year terms expiring on the date of the Annual Meeting in 2005. All directors
will be elected by holders of the Company's Common Stock. Each director elected
will continue in office until a successor has been elected. If a nominee is
unable to serve, which the Board of Directors has no reason to expect, the
persons named in the accompanying proxy intend to vote for the balance of those
named and, if they deem it advisable, for a substitute nominee.
THE BOARD OF DIRECTORS RECOMMENDS THE ELECTION OF ALL OF THE NOMINEES
Information Concerning Nominees
The following is information concerning nominees for election as directors
of the Company as of July 15, 2004. Messrs. John Schwan, Howard Schwan, Merrick,
Brown, Tayne and Avramovich are presently directors of the Company.
JOHN H. SCHWAN, age 59, Chairman. Mr. Schwan has been an officer and
director of the Company since January, 1996. Mr. Schwan has been the President
and principal executive officer of Packaging Systems and affiliated companies
for over the last 15 years. Mr. Schwan has
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over 20 years of general management experience, including manufacturing,
marketing and sales. Mr. Schwan served in the U.S. Army Infantry in Vietnam from
1966 to 1969, where he attained the rank of First Lieutenant.
HOWARD W. SCHWAN, age 49, President. Mr. Schwan has been associated with
the Company for 21 years, principally in the management of the production and
engineering operations of the Company. Mr. Schwan was appointed as Vice
President of Manufacturing in November, 1990, was appointed as a director in
January, 1996, and was appointed as President in June, 1997.
John Schwan and Howard Schwan are brothers.
STEPHEN M. MERRICK, age 62, Executive Vice President and Secretary. Mr.
Merrick was President of the Company from January, 1996 to June, 1997 when he
became Chief Executive Officer of the Company. In October, 1999, Mr. Merrick
became Executive Vice President. Mr. Merrick is a principal of the law firm of
Merrick & Klimek, P.C. of Chicago, Illinois and has been engaged in the practice
of law for more than 35 years. Mr. Merrick is also Senior Vice President,
Director and a member of the Management Committee of Reliv International, Inc.
(NASDAQ), a manufacturer and direct marketer of nutritional supplements and food
products.
STANLEY M. BROWN, age 57, Director. Mr. Brown was appointed as a director
of the Company in January, 1996. Since March, 1996, Mr. Brown has been President
of Inn-Room Systems, Inc., a manufacturer and lessor of in-room vending systems
for hotels. From 1968 to 1989, Mr. Brown was with the United States Navy as a
naval aviator, achieving the rank of Captain.
BRET TAYNE, age 45, Director. Mr. Tayne was appointed as a director of the
Company in December, 1997. Mr. Tayne has been the President of Everede Tool
Company, a manufacturer of industrial cutting tools, since January, 1992. Prior
to that, Mr. Tayne was Executive Vice President of Unifin, a commercial finance
company, since 1986. Mr. Tayne received a Bachelor of Science degree from Tufts
University and an MBA from Northwestern University.
MICHAEL AVRAMOVICH, age, 52, Director. Mr. Avramovich is a principal of
the law firm of Avramovich & Associates, P.C. of Chicago, Illinois, and has been
engaged in the practice of law for over 6 years. Prior to the practice of law,
Mr. Avramovich was an Associate Professor of Accounting and Finance at
National-Louis University in Chicago, Illinois. Mr. Avramovich has also worked
in various financial accounting positions at Molex International, Inc. of Lisle,
Illinois. Mr. Avramovich received a Bachelor of Arts degree in History and
International Relations from North Park University, a Master of Management,
Accounting and Information Systems, and Finance from Northwestern University, a
Juris Doctorate from the John Marshall Law School and an L.L.M. in International
and Corporate Law from Georgetown University Law Center.
JOHN I. COLLINS, age 44, Director Nominee. Mr. Collins is currently the
Treasurer of the Illinois Credit Union Executives Society, and is a former
member of the Chicago Federal Reserve Bank Advisory Group. Mr. Collins is also
the Chief Administrative Officer and the former Chief Financial Officer of
Mid-States Corporate Federal Credit Union ("MSCFCU"), a
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$4.5 billion wholesale financial institution located in Warrenville, Illinois.
Mr. Collins' responsibilities at MSCFCU have included all accounting, financial
reporting, strategic planning, risk management, lending and data processing
matters, as well as, more recently, working directly with MSCFCU's Chief
Executive Officer in matters concerning MSCFCU's Board of Directors and Board
Committee matters and administration, corporate governance and legal affairs.
Prior to his affiliation with MSCFCU in 2001, Mr. Collins was employed as both a
Controller and Chief Financial Officer by Great Lakes Credit Union ("GLCU"), a
$350 million financial institution located in North Chicago, Illinois. During
Mr. Collins tenure with GLCU from 1991 to 2001, and MSCFCU from 2001 to the
present, Mr. Collins has experience working with audit committees, public
accounting firms and regulatory agencies on an ongoing basis, has supervised
principal accounting officers, and has had the responsibility of preparing
audited financial statements, internal controls and financial reporting. Mr.
Collins received a Bachelor of Arts degree in Economics, History and English
from Ripon College, and a Masters in Business Administration from Emory
University. Mr. Collins has also participated in the Kellogg Management
Institute and the Consumer Marketing Strategy programs at Northwestern
University on a post-graduate basis.
Executive Officers Other Than Nominees
MARK VAN DYKE, age 54, Senior Vice President. Mr. Van Dyke rejoined the
Company in August, 2001. Mr. Van Dyke has over 25 years experience in the
balloon industry and was previously employed by the Company for 12 years. Prior
to rejoining the Company, Mr. Van Dyke was employed by M&D Balloons, Inc. for
eight years and became Executive Director of that Company.
BRENT ANDERSON, age 37, Vice President of Manufacturing. Mr. Anderson has
been employed by the Company since January, 1989, and has held a number of
engineering positions with the Company including Plant Engineer and Plant
Manager. Mr. Anderson was appointed Vice President of Manufacturing in June,
1997.
SAMUEL KOMAR, age 47, Vice President of Sales. Mr. Komar has been employed
by the Company since March of 1998, and was named Vice-President of Sales in
September of 2001. Mr. Komar has worked in sales for 16 years, and prior to his
employment with the Company, Mr. Komar was with Bob Gable & Associates, a
manufacturer of sporting goods. Mr. Komar received a Bachelor of Science Degree
in Sales and Marketing from Indiana University.
TIMOTHY PATTERSON, age 43, Vice President of Finance and Administration.
Mr. Patterson has been employed by the Company as Vice President of Finance and
Administration since September, 2003. Prior to his employment with the Company,
Mr. Patterson was Manager of Controllers for the Thermoforming group at Solo Cup
Company for two years. Prior to that, Mr. Patterson was Manager of Corporate
Accounting for Transilwrap Company for three years. Mr. Patterson received a
Bachelor of Science degree in finance from Northern Illinois University and an
MBA from the University of Illinois at Chicago.
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Committees of the Board of Directors
The Company's Board of Directors has standing Compensation and Audit
Committees.
During 2003, the Compensation Committee was composed of John H. Schwan,
Stanley M. Brown and Bret Tayne. The Compensation Committee reviews and makes
recommendations to the Board of Directors concerning the compensation of
officers and key employees of the Company. The Compensation Committee met one
time during 2003.
The Company does not have a standing nominating committee or committee
performing similar functions. All of the independent directors of the Board of
Directors of the Company participated in the nominating process and voted in
favor of the nomination of the directors nominated for election at the annual
meeting of shareholders to be held on October 1, 2004. The Company's Board of
Directors intends to establish a nominating committee during 2004 in accordance
with rules of the Securities and Exchange Commission and of the NASDAQ Stock
Market.
Audit Committee
Since 2000, the Company has had a standing Audit Committee, which is
presently composed of Mr. Tayne, Mr. Brown and Mr. Avramovich. Mr. Avramovich
has been designated and is the Company's "Audit Committee Financial Expert"
pursuant to paragraph (h)(1)(i)(A) of Item 401 of Regulation S-K of the Exchange
Act. The Audit Committee held five meetings during fiscal year 2003, including
quarterly meetings with management and independent auditors to discuss the
Company's financial statements. Mr. Avramovich and each appointed member of the
Audit Committee satisfies the definition of "independent" as that term is used
in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act. The Company's Board
of Directors has adopted a written charter for the Company's Audit Committee, a
true and correct copy of which has been included as Exhibit A to this report.
The Audit Committee reviews and makes recommendations to the Company about its
financial reporting requirements. Information regarding the functions performed
by the Committee is set forth in the "Report of the Audit Committee," as
follows:
Report of the Audit Committee
The Audit Committee oversees the Company's financial reporting process on
behalf of the Board of Directors. Management has the primary responsibility for
the financial statements and the reporting process including the systems of
internal controls. In fulfilling its oversight responsibilities, the Committee
reviewed the audited financial statements in the Annual Report with management
including a discussion of the quality, not just the acceptability, of the
accounting principles, the reasonableness of significant judgments, and the
clarity of disclosures in the financial statements.
The Committee reviewed with the independent auditors, who are responsible
for expressing an opinion on the conformity of those audited financial
statements with generally accepted accounting principles, their judgments as to
the quality, not just the acceptability, of the Company's accounting principles
and such other matters as are required to be discussed with the Committee under
generally accepted auditing standards, including but not limited to those
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matters required to be discussed by SAS 61 (Codification of Statements on
Auditing Standards, AU ss.380). In addition, the Committee has discussed with
the independent auditors the auditor's independence from management and the
Company including the matters in the written disclosures required by the
Independence Standards Board.
The Committee discussed with the Company's independent auditors the
overall scope and plans for their respective audits. The Committee meets with
the independent auditors, with and without management present, to discuss the
results of their examinations, their evaluations of the Company's internal
controls, and the overall quality of the Company's financial reporting.
In reliance on the reviews and discussions referred to above, the
Committee recommended to the Board of Directors (and the Board has approved)
that the audited financial statements be included in the Annual Report on Form
10-K/A, Amendment No. 1 for the year ended December 31, 2003 for filing with the
Securities and Exchange Commission. The Committee and the Board have also
recommended, subject to future shareholder approval at the Company's 2004 annual
meeting of shareholders, the selection of Eisner, LLP as the Company's
independent auditors.
Bret Tayne, Audit Committee Chair
Stanley M. Brown, III, Audit Committee Member
Michael Avramovich, Audit Committee Member
Executive Compensation
The following table sets forth a summary of the compensation paid or
accrued during the last three fiscal years by the Company to its President,
Chief Executive Officer and any other officer who was an officer of the Company
at December 31, 2003, and who received compensation in excess of $100,000
("Named Executive Officers").
Summary Compensation Table
Annual Compensation Long Term Compensation
All Other
Name and Principal Salary Other Annual Underlying Compensation
Position Year $ Compensation Options ($)
---------------------------------------------------------------------------------------------------
Howard W. Schwan 2003 $162,500 $5,520 -- --
President 2002 $162,500 $8,100 14,285(1) $1,925(5)
2001 $150,000 $5,000 -- $1,765(5)
Mark Van Dyke 2003 $125,000 -- -- --
Senior Vice President 2002 $123,100 -- -- --
2001 $ 45,900 -- 23,809(2) --
Brent Anderson 2003 $ 95,000 -- -- --
Vice President of Manufacturing 2002 $ 95,000 -- 8,928(3) --
2001 $ 86,700 -- 17,857(3) --
Samuel Komar 2003 $104,200 -- -- --
Vice President of Sales 2002 $104,200 -- -- --
2001 $ 94,450 -- 11,904(4) --
(footnotes continued on next page)
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(1) Stock options to purchase up to 14,285 shares of the Company's Common
Stock at $2.31 per share, and stock options to purchase up to 23,809
shares of the Company's Common Stock at $1.89 per share.
(2) Stock options to purchase up to 23,809 shares of the Company's Common
Stock at $1.47 per share.
(3) Stock options to purchase up to 8,928 shares of the Company's Common Stock
at $2.31 per share, and stock options to purchase up to 17,857 shares of
the Company's Common Stock at $1.47 per share.
(4) Stock options to purchase up to 11,904 shares of the Company's Common
Stock at $1.47 per share.
(5) Company contribution to the Company's 401(k) Plan as a pre-tax salary
deferral.
The Company has never granted any stock appreciation rights. During the
period from January 1, 1999 to December 31, 2003, there have been no awards or
payments made for long-term incentive compensation (other than stock option and
warrant grants) and there have been no restricted stock grants to any of the
Named Executive Officers.
Certain Named Executive Officers have received warrants to purchase Common
Stock of the Company in connection with their guarantee of certain bank loans
secured by the Company and in connection with their participation in a private
offering of notes and warrants conducted by the Company. See "Board of Director
Affiliations and Related Transactions" below. The following stock option grants
were made to certain of the Company's executive officers in the fiscal year
ending December 31, 2003:
Option Grants in Last Fiscal Year
Individual Grants
Number of
Securities % of Total
Underlying Options Granted
Options to Employees in Exercise Price
Name Granted Fiscal Year ($/share) Expiration Date
---- ------- ----------- --------- ---------------
Timothy Patterson 5,000 71.4% $2.26 2/3/2013
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Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
Number of Securities
Shares Underlying Unexercised Value of Unexercised In- the-
Acquired on Value Options at Year End (#) Money Options at Fiscal Year End
Name Exercise (#) Realized ($) Exercisable/Unexercisable ($) Exercisable/Unexercisable
---- ------------ ------------ ------------------------- -------------------------
John H. Schwan 0 0 29,762/0 $ 4,286/0(1)
Howard W. Schwan 0 0 53,968/0 $ 8,810/0(1)
Stephen M. Merrick 0 0 29,762/0 $ 4,286/0(1)
Mark Van Dyke 0 0 23,809/0 $ 18,809/0(1)
Brent Anderson 0 0 31,546/0 $ 14,107/0(1)
Samuel Komar 0 0 24,641/0 $ 12,355/0(1)
----------
(1) The value of unexercised in-the-money options is based on the difference
between the exercise price and the fair market value of the Company's
Common Stock on December 31, 2003.
Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors of the Company is
composed of three members of the Board of Directors. The Compensation Committee
is responsible for establishing the standards and philosophy of the Board of
Directors regarding executive compensation, for reviewing and evaluating
executive compensation and compensation programs, and for recommending levels of
salary and other forms of compensation for executives of the Company to the
Board of Directors. The full Board of Directors of the Company is responsible
for setting and administering salaries, bonus payments and other compensation
awards to executives of the Company.
Compensation Philosophy
The philosophy of the Compensation Committee, and of the Board of
Directors of the Company, regarding executive compensation includes the
following principal components:
To attract and retain quality executive talent, which is regarded as
critical to the long and short-term success of the Company, in substantial
part by offering compensation programs which provide attractive rewards
for successful effort.
To provide a reasonable level of base compensation to senior
executives.
To create a mutuality of interest between executive officers of the
Company and shareholders through long-term compensation structures,
particularly stock option programs, so that executive officers share the
risks and rewards of strategic decision making and its effect on
shareholder value.
The Compensation Committee has recommended, and the Board of Directors has
determined, to take appropriate action to comply with the provisions of Section
162(m) of the Internal Revenue Code so that executive compensation will be
deductible as an expense to the fullest extent allowable.
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The Company's executive compensation program consists of two key elements:
(i) an annual component consisting of base salary and (ii) a long-term
component, principally stock options.
Annual Base Compensation
The Compensation Committee recommends annual salary levels for each of the
Named Executives, and for other senior executives of the Company, to the Board
of Directors. The recommendations of the Compensation Committee for base salary
levels for senior executives of the Company are determined annually, in part, by
evaluating the responsibilities of the position and examining market
compensation levels and trends for similar positions in the marketplace.
Additional factors which the Compensation Committee considers in recommending
annual adjustments to base salaries include: results of operation of the
Company, sales, shareholder returns, and the experience, work-performance,
leadership and team building skills of each executive. The Company receives
information from the Chief Executive Officer with regard to these matters. While
each of these factors is considered in relatively equal weight, the Compensation
Committee does not utilize performance matrices or measured weightings in its
review. Each year, the Compensation Committee conducts a structured review of
base compensation of senior executives with input from the Chief Executive
Officer.
Long-Term Component - Stock Options
The long-term component of compensation provided to executives of the
Company has been in the form of stock options. The Compensation Committee has
recommended to the Board of Directors that a significant portion of the total
compensation to executives be in the form of incentive stock options. Stock
options are granted with an exercise price equal to or greater than the fair
market value of the Company's Common Stock on the date of the grant. Stock
options are exercisable between one and ten years from the date granted. Such
stock options provide incentive for the creation of shareholder value over the
long-term since the full benefit of the compensation package for an executive
cannot be realized unless an appreciation in the price of the Company's Common
Stock occurs over a specified number of years.
The magnitude of the stock option awards are determined annually by the
Compensation Committee and the Board of Directors. Generally, the number of
options granted to an executive has been based on the relative salary level of
the executive.
On October 12, 2002, incentive stock options to purchase up to 14,285,
8,928, 5,952 and 5, 952 shares of the Company's Common Stock were granted to
Messrs. Howard Schwan, Brent Anderson, Stephen M. Merrick and John Schwan,
respectively, under the 2002 Stock Option Plan (the "2002 Plan"). In addition,
on October 12, 2002, non-qualified stock options to purchase up to 2,926 shares
of the Company's Common Stock were granted to each of Messrs. Stan Brown and
Bret Tayne respectively, under the 2002 Stock Option Plan, and incentive stock
options to purchase up to 5,000 shares of the Company's Common Stock were
granted to Timothy Patterson under the 2002 Stock Option Plan on December 31,
2003.
There were no other stock options granted to any of the Named Executives
in 2001, 2002 or 2003.
11
CEO Compensation
The Compensation Committee utilizes the same standards and methods for
recommending annual base compensation for the Chief Executive Officer of the
Company as it does for other senior executive officers of the Company.
In 1997, the Company entered into an Employment Agreement with Howard W.
Schwan, President of the Company, providing that Mr. Schwan's base annual
compensation would not be less than $135,000. During 2001, 2002 and 2003, upon
the recommendation of the Compensation Committee, the base salary of Mr. Schwan
was $150,000, $162,500 and $162,500 respectively. In 2001, 2002 and 2003, annual
incentive compensation was paid to Mr. Schwan in the amounts of $5,000, $8,100
and $5,520, respectively.
The Compensation Committee recommended that Mr. Schwan (and other senior
executives of the Company), receive incentive stock options, consistent with
observed market practices, so that a significant portion of his total
compensation will be based upon, and consistent with, returns to shareholders.
In 2002, Mr. Schwan was granted incentive stock options to purchase up to 14,285
shares of the Company's Common Stock.
Compensation Committee:
John H. Schwan,
Bret Tayne,
Stanley M. Brown, III
Compensation Committee Interlocks and Insider Participation
John H. Schwan, a member of the Compensation Committee, is Chairman of the
Company. Mr. Schwan is an officer and owner of Packaging Systems, L.L.C.,
Shamrock Specialty Packaging and affiliated companies. The Company made
purchases of packaging materials from these entities in the aggregate amounts of
$118,011 and $273,910 during each of the years ended December 31, 2002 and
December 31, 2003, respectively. John Schwan and Howard W. Schwan are brothers.
Comparative Stock Price Performance Graph
The following graph compares, for the period January 1, 1999 to December
31, 2003, the cumulative total return (assuming reinvestment of dividends) on
the Company's Common Stock with (i) the NASDAQ Stock Market Index (U.S.) and
(ii) a peer group including S&P 500 Specialty Stores. The graph assumes an
investment of $100 on January 1, 1999, in the Company's Common Stock and each of
the other investment categories.
The historical stock prices of the Company's Common Stock shown on the
graph below are not necessarily indicative of future price performance. Per
share value as of October 31, 1999, 2000, and December 31, 2001, 2002 and 2003
is based on the Common Stock's closing price as of such date.
12
Total Return To Shareholders
(Includes reinvestment of dividends)
ANNUAL RETURN PERCENTAGE
Years Ending
Company / Index Oct00 Dec00 Dec01 Dec02 Dec03
CTI INDUSTRIES CORP -4.76 -46.67 75.00 325.85 -63.90
NASDAQ U.S. INDEX 13.06 -27.05 -20.63 -30.86 49.51
S&P 500 SPECIALTY STORES -4.69 -13.37 61.41 -11.11 34.66
INDEXED RETURNS
Base Years Ending
Period
Company / Index Oct99 Oct00 Dec00 Dec01 Dec02 Dec03
CTI INDUSTRIES CORP 100 95.24 50.79 88.89 378.53 136.66
NASDAQ U.S. INDEX 100 113.06 82.48 65.47 45.26 67.67
S&P 500 SPECIALTY STORES 100 95.31 82.57 133.28 118.47 159.52
Employment Agreements
In June, 1997, the Company entered into an Employment Agreement with
Howard W. Schwan as President, which provides for an annual salary of not less
than $135,000. The term of the Agreement was through June 30, 2002 and is
automatically renewed thereafter for successive one year terms. The Agreement
contains covenants of Mr. Schwan with respect to the use of the Company's
confidential information, establishes the Company's right to inventions created
by Mr. Schwan during the term of his employment, and includes a covenant of Mr.
Schwan not to compete with the Company for a period of three years after the
date of termination of the Agreement.
Director Compensation
John Schwan was compensated in the amount of $76,500 in fiscal 2003 for
his services as Chairman of the Board of Directors. Directors other than members
of management received a fee of $1,000 for each Board meeting attended.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and with the NASDAQ Stock Market. Officers, directors and greater than
ten-percent shareholders are required by SEC regulation to furnish the Company
with copies of all Section 16(a) forms they file.
13
Based solely on a review of such forms furnished to the Company, or
written representations that no Form 5's were required, the Company believes
that during calendar year 2003, all Section 16(a) filing requirements applicable
to the officers, directors and ten-percent beneficial shareholders were complied
with, except that Brent Anderson was late in filing one Form 4 for an aggregate
of 8,750 shares.
Code of Ethics
The Company has adopted a code of ethics that applies to its senior
executive and financial officers. The Company's Code of Ethics seeks to promote
(i) honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between personal and professional relationships,
(ii) full, fair, accurate, timely and understandable disclosure of information
to the Commission, (iii) compliance with applicable governmental laws, rules and
regulations, (iv) prompt internal reporting of violations of the Code to
predesignated persons, and (v) accountability for adherence to the Code. A copy
of the Company's Code of Ethics has been included as Exhibit B to this report.
Board of Directors Affiliations and Related Transactions
Stephen M. Merrick, Executive Vice President and Secretary of the Company,
is a principal of the law firm of Merrick & Klimek, P.C., which serves as
general counsel of the Company. In addition, Mr. Merrick is a principal
stockholder of the Company. Other principals of the firm of Merrick & Klimek,
P.C. own less than 1% of the Company's outstanding Common Stock. Legal fees
incurred from the firm of Merrick & Klimek, P.C. for the fiscal years ended
December 31, 2003, 2002 and 2001 were $106,750, $102,245 and $121,305,
respectively. Mr. Merrick is also an officer and director of Reliv
International, Inc. (NASDAQ-RELV).
John H. Schwan is an officer and owner of Packaging Systems, L.L.C.,
Shamrock Specialty Packaging and affiliated companies. The Company made
purchases of packaging materials from these entities in the aggregate amounts of
$118,011 and $273,910 during each of the years ended December 31, 2002 and
December 31, 2003, respectively.
In June, 1999, notes of the Company to Howard W. Schwan, John Schwan, and
Stephen Merrick in the amount of, respectively, $50,000, $350,000 and $315,000,
came due. On November 9, 1999, new notes in the same principal amounts were
issued to Messrs. H. Schwan, J. Schwan and Merrick, in payment and replacement
of the prior notes with maturity dates for each of November 9, 2001. As of that
date, each payee under the Notes had executed a consent to extend the maturity
of the Notes to March 1, 2004. In November, 1999, the June, 1997 warrants of
Messrs. H. Schwan, J. Schwan and Merrick to purchase up to (respectively) 6,359,
44,515 and 40,063 shares of the Company's Common Stock at an exercise price of
$7.86 per share were cancelled. At that time, new warrants to purchase up to
35,263, 246,840 and 222,157 shares of the Company's Common Stock at an exercise
price of $1.418 per share were issued to Messrs. H. Schwan, J. Schwan and
Merrick, respectively. Each of these warrants were exercised on June 3, 2002.
The respective $50,000, $350,000 and $315,000 notes were cancelled and used as
payment for the warrant shares.
In July, 2001, the Company issued Warrants to purchase up to 79,364 shares
of the Company's Common
14
Stock to John H. Schwan and 39,683 shares of the Company's Common Stock to
Stephen M. Merrick. The warrants were issued in consideration of Mr. Schwan and
Mr. Merrick guaranteeing and securing loans to the Company in the aggregate
amount of approximately $1,600,000. The warrants are exercisable for a period of
five years at a price of $1.50 per share.
On December 12, 2002, Messrs. John Schwan, Howard Schwan and Stephen
Merrick exercised warrants to purchase 24,572, 30,525 and 28,780 shares of the
Company's Common Stock, respectively. In each instance, the warrant holder
tendered shares of the Company's Common Stock on the date of exercise.
During February, 2003, John H. Schwan loaned $930,000 to the Company and
Stephen M. Merrick loaned $700,000 to the Company, in exchange for (i) two year
promissory notes bearing interest at 9% per annum and (ii) five year warrants to
purchase up to an aggregate of 163,000 shares of Common Stock of the Company at
$4.87 per share, the market price of the Common Stock on the date of the
Warrants. The proceeds of these loans were to (i) re-finance the loan of bank
loan of CTI Mexico in the amount of $880,000 and (ii) to provide financing for
CTI Mexico and Flexo Universal.
During 2003, John H. Schwan loaned to the Company an additional aggregate
amount of $795,024 . Such amount is due on demand and bears interest at the rate
of 8% per annum.
During 2003, John H. Schwan loaned to Flexo Universal the aggregate amount
of $225,000 and Stephen M. Merrick loaned to Flexo Universal the sum of $25,000.
These advances are reflected in notes and bear interest at the rate of 8% per
annum. The notes are unsecured.
On November 10, 1999, the Company entered into a Lease Agreement with
Pepper Road, Inc., an Illinois corporation, to lease certain warehouse and
office space located at 22222 North Pepper Road, Barrington, Illinois, the
building and property immediately adjacent to the Company's manufacturing
facilities at 22160 North Pepper Road, Barrington, Illinois. The lease has a 10
year term and provides for monthly rent payments of $15,500 ($186,000 annually),
plus all utility charges associated with the property. John Schwan, Howard
Schwan and Stephen M. Merrick are officers, directors, and the sole shareholders
of Pepper Road, Inc. On July 6, 2004, the Lease Agreement between the Company
and Pepper Road, Inc. terminated.
The Company believes that each of the transactions set forth above were
entered into, and any future related party transactions will be entered into, on
terms as fair as those obtainable from independent third parties. All related
party transactions must be approved by a majority of disinterested directors and
subject to review in the context of the Company's Code of Ethics.
15
THE BOARD OF DIRECTORS RECOMMENDS SHAREHOLDERS VOTE "FOR" THE SEVEN NOMINEES FOR
DIRECTOR NAMED IN PROPOSAL NO. 1.
PROPOSAL TWO - SELECTION OF AUDITORS
EISNER, LLP
Effective July 22, 2003, CTI Industries Corporation (the "Registrant")
engaged Eisner, LLP as the Registrant's principal accountants to audit the
Registrant's financial statements for the year ending December 31, 2003. Eisner,
LLP replaced McGladrey & Pullen, LLP, which had previously been engaged for the
same purpose, and whose dismissal was effective July 22, 2003. The decision to
change the Registrant's principal accountants was approved by the Registrant's
Board of Directors on July 22, 2003.
The reports of McGladrey & Pullen, LLP, on the Registrant's financial
statements for the fiscal year ended December 31, 2002 did not contain an
adverse opinion or disclaimer of opinion, nor were they qualified or modified as
to uncertainty, audit scope, or accounting principles.
Effective July 24, 2002, the Company engaged McGladrey & Pullen, LLP as
the Registrant's principal accountants to audit the Company's financial
statements for the year ending December 31, 2002. McGladrey & Pullen, LLP
replaced Grant Thornton, LLP, which had previously been engaged for the same
purpose, and whose dismissal was effective July 24, 2002. The decision to change
the Company's principal accountants was approved by the Company's Audit
Committee and Board of Directors on July 24, 2002.
During the Company's fiscal year ended December 31, 2002 and in the
subsequent interim period through March 31, 2003, there were no disagreements
with McGladrey & Pullen, LLP on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of McGladrey & Pullen, LLP
would have caused it to make reference to the subject matter of the
disagreements in connection with its reports on the financial statements for
such periods.
McGladrey & Pullen, LLP has not informed the Company of any reportable
events during the Company's fiscal year ended December 31, 2002 or in the
subsequent interim period ending March 31, 2003.
The reports of Grant Thornton LLP, on the Company's financial statements
for the prior two fiscal years ended December 31, 2000, and December 31, 2001
did not contain an adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope, or accounting principles.
During the Company's fiscal years ended December 31, 2000, and December
31, 2001, and in the subsequent interim periods through July 24, 2002, there
were no disagreements with Grant Thornton, LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of Grant
Thornton, LLP, would have caused it to make reference to the subject
16
matter of the disagreements in connection with its reports on the financial
statements for such periods.
Grant Thornton, LLP has not informed the Company of any reportable events
during the Company's two fiscal years ended December 31, 2000 and 2001 and in
subsequent interim periods through July 24, 2002.
Fees Billed By Independent Public Accountants
The following table sets forth the aggregate amount of audit fees and all
other fees billed or expected to be billed by Eisner, LLP, the Company's
principal auditor, for the year ended December 31, 2003:
Amount
------
Audit fees (1) $ 98,500
Other audit related fees (2) $ 15,000
All other fees(3) $ 15,000
--------
Total fees $128,500
========
(1) Includes the annual financial statement audit and limited quarterly
reviews and expenses.
(2) Includes fees and expenses for other audit related activity provided by
Eisner, LLP.
(3) Primarily represents tax services, which include preparation of tax
returns and other tax consulting services.
Eisner, LLP became the Company's principal auditor in July, 2003,
replacing the Company's principal auditor for the fiscal year ended December 31,
2002, McGladrey & Pullen, LLP. Consequently, Eisner, LLP billed no fees to the
Company in 2002.
The audit-related fees charged to the Company by McGladrey & Pullen, LLP
and RSM McGladrey, Inc. (an affiliate of McGladrey & Pullen, LLP) for the fiscal
year ended December 31, 2002 and in 2003 were as follows:
2002 2003
Amount Amount
------ ------
Audit fees (1) $301,000 $84,200
Other audit related fees (2) $ 8,900 $ 0
All other fees (3) $ 19,100 $ 0
-------- -------
Total fees $329,000 $84,200
======== =======
----------
(footnotes continued on next page)
17
(1) Includes the annual financial statement audit and limited quarterly
reviews and expenses.
(2) Includes fees and expenses for other audit related activity provided by
McGladrey & Pullen, LLP.
(3) Primarily represents tax services provided by RSM McGladrey, Inc. which
include preparation of tax returns and other tax consulting services.
The Board of Directors have selected and approved Eisner, LLP as the
principal independent auditor to audit the financial statements of the Company
for 2004, subject to ratification by the shareholders. It is expected that a
representative of the firm of Eisner, LLP will be present at the annual meeting
and will have an opportunity to make a statement if they so desire and will be
available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS SHAREHOLDERS VOTE "FOR" SUCH RATIFICATION.
Stockholder Proposals for 2005 Proxy Statement
Proposals by shareholders for inclusion in the Company's Proxy Statement
and form of proxy relating to the 2005 Annual Meeting of Stockholders, which is
tentatively scheduled to be held on July 31, 2005 should be addressed to the
Secretary, CTI Industries Corporation, 22160 North Pepper Road, Barrington,
Illinois 60010, and must be received at such address no later than December 31,
2004. Upon receipt of any such proposal, the Company will determine whether or
not to include such proposal in the Proxy Statement and proxy in accordance with
applicable law. It is suggested that such proposal be forwarded by certified
mail, return receipt requested.
Other Matters to Be Acted Upon at the Meeting
The management of the Company knows of no other matters to be presented at
the meeting. Should any other matter requiring a vote of the shareholders arise
at the meeting, the persons named in the proxy will vote the proxies in
accordance with their best judgment.
BY ORDER OF THE
BOARD OF DIRECTORS
Dated: October 1, 2004 /s/ Stephen M. Merrick
--------------------------------------
Stephen M. Merrick, Secretary
18
EXHIBIT A
AUDIT COMMITTEE CHARTER
OF CTI INDUSTRIES CORPORATION
1. Organization
There shall be a committee of the Board of Directors of CTI Industries
Corporation (the "Corporation") to be known as the Audit Committee. This charter
(the "Charter") shall govern the operations of the Audit Committee. The
Committee shall review and reassess the adequacy of this Charter at least
annually, and shall submit any revisions to this Charter to the Board of
Directors for their approval. The Audit Committee shall be composed of at least
three directors who are independent of the management of the Corporation. A
director shall be deemed independent if he is free of any relationship that, in
the opinion of the Board of Directors, would interfere with exercise of
independent judgment as a Committee member. To ensure that an audit committee
member satisfies the definition of "independent" according to both Item 7(d) (3)
(iv) of Schedule 14A under the Securities Exchange Act and NASDAQ's SmallCap
Marketplace Rules, an Audit Committee member may not:
o have been employed by the Corporation or its affiliates in the current or
past three years;
o have accepted any compensation from the Corporation or its affiliates in
excess of $60,000 during the previous fiscal year (except for board
service, retirement plan benefits, or non-discretionary compensation);
o have an immediate family member who is, or has been in the past three
years, employed by the Corporation or its affiliates as an executive
officer;
o have been a partner, controlling shareholder or an executive officer of
any for-profit business to which the Corporation made, or from which it
received, payments (other than those which arise solely from investments
in the Corporation's securities) that exceed five percent of the
organization's consolidated gross revenues for that year, or $200,000,
whichever is more, in any of the past three years; or
o have been employed as an executive of another entity where any of the
Corporation's executives serve on that entity's compensation committee.
In addition, the Corporation shall have one member who is designated and meets
the requirements of an "audit committee financial expert" as that term is
defined in Item 401(h) of Regulation S-K of the Exchange Act. An "audit
committee financial expert" shall possess all of the following five attributes:
o An understanding of generally accepted accounting principles ("GAAP") and
financial statements;
o The ability to assess the general application of such principles in
connection with the accounting for estimates, accruals and reserves;
o Experience preparing, auditing, analyzing or evaluating financial
statements that present a breadth and level of complexity of accounting
issues that are generally comparable to the breadth and complexity of
issues that can reasonably be expected to be raised by the Corporation's
financial statements, or experience actively supervising one or more
persons engaged in such activities;
o An understanding of internal controls and procedures for financial
reporting; and
o An understanding of audit committee functions.
The foregoing attributes must have been acquired by the audit committee
financial expert through one or more of the following means:
(1) Education and experience as a public accountant or a principal
financial officer, controller or principal accounting office of a
company, or experience in one or more positions involving the
performance of similar functions;
(2) Experience actively supervising any of the persons referred to in
(1) above;
(3) Experience in overseeing or assessing the performance of companies
or public accountants with respect to the preparation, auditing or
evaluation of financial statements; or
(4) other relevant experience.
All Audit Committee members shall be able to read and understand fundamental
financial statements, including but not limited to balance sheets, income
statements and cash flow statements.
2. Statement of Policy
The Audit Committee shall provide assistance to the Corporation's
directors in fulfilling their responsibility to the shareholders, potential
shareholders, and investment community relating to corporate accounting and
financial reporting practices of the Corporation, and the quality and integrity
of the financial reports of the Corporation. In so doing, it is the
responsibility of the Audit Committee to maintain free and open means of
communication between the directors, the independent auditors, the internal
auditors, and the financial management of the Corporation. In discharging its
oversight role, the Committee is empowered to investigate any matter brought to
its attention with full access to all books, records, facilities, and counsel or
other experts for this purpose.
3. Responsibilities and Processes
The primary responsibility of the Audit Committee is to oversee the
Corporation's financial reporting process on behalf of the Board and report the
results of their activities to the Board. Management is responsible for
preparing the Corporation's financial statements, and the independent auditors
are responsible for auditing those financial statements. In carrying out its
responsibilities, the Audit Committee believes its policies and procedures
should remain flexible,
2
in order to best react to changing conditions and to ensure to the directors and
shareholders that the corporate accounting and reporting practices of the
Corporation are in accordance with all applicable requirements and are of the
highest quality.
In carrying out these responsibilities, the Audit Committee will:
3.1 Provide an open avenue of communication between the independent
auditor, the internal auditor, management and the Board of Directors. The
Committee shall have a clear understanding with management and the independent
auditors that the independent auditors are ultimately accountable to the Board
and the Audit Committee.
3.2 Meet at least one time per year or more frequently as circumstances
require. The Audit Committee may ask members of management or others to attend
meetings and provide pertinent information as necessary.
3.3 Review and recommend to the Directors the independent auditors to be
selected to audit the financial statements of the corporation, and approve the
compensation of the independent auditors. The Committee shall have the ultimate
authority and responsibility to evaluate and, where appropriate, replace the
independent auditors (or to nominate the independent auditor to be proposed for
shareholder approval in any proxy statement).
3.4 Review and concur in the appointment, replacement, reassignment or
dismissal of the internal auditor.
3.5 Confirm and assure the independence of the independent auditors. The
Audit Committee has the responsibility for ensuring its receipt from the
independent auditors of a formal written statement delineating all relationships
between the auditors and the Corporation. The Audit Committee also has the
responsibility for actively engaging in a dialogue with the independent auditors
with respect to any disclosed relationships or services that may impact the
objectively and independence of the independent auditor and for taking, or
recommending that the full Board take appropriate action to oversee the
independence of the independent auditors.
3.6 Meet with the independent auditors and internal auditors to review the
scope of the proposed audit for the current year and the audit procedures to be
utilized, and at the conclusion thereof review such audit, including any
comments or recommendations of the independent or internal auditors.
3.7 Review with the independent auditors and the internal auditor(s) the
adequacy and effectiveness of the accounting and financial controls of the
Corporation, and elicit any recommendations for the improvement of such internal
control procedures or particular areas where new or more detailed controls or
procedures are desirable. The Audit Committee should also review with the
independent and internal auditors the coordination of audit efforts to assure
3
completeness of coverage, reduction of redundant efforts, and the effective use
of audit resources.
3.8 Inquire of management, the internal auditor(s), and the independent
auditors about significant business risks or exposures and assess the steps
management has taken to minimize such risk to the Corporation.
3.9 Review with management, the independent auditors and the internal
auditor(s) the interim financial report prior to the filing of the quarterly
report on Form 10-Q. The Audit Committee shall discuss the results of the
quarterly review and any other matters required to be communicated to the Audit
Committee by the independent auditors under generally accepted auditing
standards.
3.10 The Audit Committee shall review with management, the independent
auditors and the internal auditor(s) the financial statements to be included in
the Annual Report on Form 10-K, including their judgment about the quality, not
just acceptability, of accounting principles, the reasonableness of significant
judgments, and the clarity of the disclosures in the financial statements. Also,
the Audit Committee shall discuss the results of the annual audit and any other
matters required to be communicated to the Audit Committee by the independent
auditors under generally accepted auditing standards.
3.11 Review with the Board of Directors and the independent auditors at
the completion of the annual examination:
(a) The Corporation's annual financial statements and related
footnotes;
(b) The independent auditor's audit of the financial statements and
his report thereon;
(c) Any significant changes required in the independent auditor's
audit plan;
(d) Any serious difficulties or disputes with management encountered
during the course of the audit; and
(e) Other matters relating to the conduct of the audit which are to
be communicated to the Audit Committee under generally accepted auditor
standards.
3.12 Consider and review with management and the internal auditor(s):
(a) Significant findings during the year and management's responses
thereto;
(b) Any difficulties encountered in the course of their audits,
including any restrictions on the scope of their work or access to
required information;
4
(c) Any changes required in the planned scope of their audit plan;
(d) The internal auditing department budget and staffing; and
(e) Internal auditing's compliance with appropriate accounting
standards.
3.13 Provide sufficient opportunity for the internal and independent
auditors to meet with the members of the Audit Committee with and without
members of management present to discuss results of examinations. Among the
items to be discussed in these meetings are the independent auditors' evaluation
of the corporation's financial, accounting, and auditor personnel, and the
cooperation that the independent auditors received during the course of the
audit.
3.14 Review legal and regulatory matters that may have a material impact
on the financial statements, related company compliance policies, and programs
and reports received from regulators.
3.15 Submit the minutes of all meetings of the Audit Committee to, or
discuss the matters discussed at each committee meeting with, the Board of
Directors.
3.16 Investigate any matter brought to its attention within the scope of
its duties.
3.17 Report Committee actions to the Board of Directors with such
recommendations as the Audit Committee may deem appropriate.
3.18 The duties and responsibilities of a member of the Audit Committee
are in addition to those duties set out for a member of the Board of Directors.
Effective this 8th day of April, 2004, by order of this Corporation's Board of
Directors.
/s/ Stephen M. Merrick
--------------------------------
Stephen M. Merrick, Secretary
5
EXHIBIT B
CTI INDUSTRIES CORPORATION
Code of Ethics
for Senior Executive and Financial Officers
I. General
The policy of CTI Industries Corporation (the "Company") is to comply
strictly with all laws governing its operations and to conduct its affairs in
keeping with the highest moral, legal and ethical standards. Senior executive
and financial officers hold an important and elevated role in maintaining a
commitment to (i) honest and ethical conduct, (ii) full, fair, accurate, timely
and understandable disclosure in the Company's public communications, and (iii)
compliance with applicable governmental rules and regulations. Accordingly, the
Company has adopted this Code of Ethics for its Chief Executive Officer, Chief
Financial Officer, Controller and any other senior executive or financial
officers performing similar functions and so designated from time to time by the
Chief Executive Officer (the "Senior Executive and Financial Officers"). This
Code of Ethics shall be approved annually by the Audit Committee of the Board of
Directors (the "Committee") and disbursed to the public by means of one of the
methods described in Item 406 of Regulation S-K promulgated by the Securities
and Exchange Commission (the "SEC").
II. Honest and Ethical Conduct
Senior Executive and Financial Officers are expected to exhibit and
promote the highest standards of honest and ethical conduct, by, among other
things, their adherence to the following policies and procedures:
o Senior Executive and Financial Officers shall engage in only honest
and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between personal and professional
relationships.
o Senior Executive and Financial Officers shall inform the Company's
Corporate Counsel or, in his absence, the Chairman of the Committee
of (a) deviations in practice from policies and procedures governing
honest and ethical behavior or (b) any material transaction or
relationship that could reasonably be expected to create a conflict
of interest.
o Senior Executive and Financial Officers shall demonstrate personal
support for the policies and procedures set forth in this Code of
Ethics through periodic communications reinforcing these principles
and standards throughout the Company.
o Senior Executive and Financial Officers shall respect the
confidentiality of information acquired in performance of one's
responsibilities and shall not use confidential information for
personal advantage.
III. Financial Records and Periodic Reports
The Company is committed to full, fair, accurate, timely and
understandable disclosures in reports and documents that it files with, or
submits to, the SEC and in other public communications made by the Company. In
support of this commitment, the Company has, among other measures, (a) designed
and implemented disclosure controls and procedures (within the meaning of
applicable SEC rules) and (b) required the maintenance of accurate and complete
records, the prohibition of false, misleading or artificial entries on its books
and records, and the full and complete documentation and recording of
transactions in the Company's accounting records. In addition to performing
their duties and responsibilities under these requirements, each of the Senior
Executive and Financial Officers will establish and manage the Company's
reporting systems and procedures with due care and diligence to ensure that:
o Reports filed with or submitted to the SEC and other public
communications contain information that is full, fair, accurate,
timely and understandable and do not misrepresent or omit material
facts.
o Business transactions are properly authorized and completely and
accurately recorded in all material respects on the Company's books
and records in accordance with generally accepted accounting
principles and the Company's established financial policies.
o Retention or disposal of Company records is in accordance with
established Company policies and applicable legal and regulatory
requirements.
IV. Compliance with Applicable Laws, Rules and Regulations
The policy of the Company is to comply strictly with all laws governing
its operations and to conduct its affairs in keeping with the highest moral,
legal and ethical standards. Accordingly, the Senior Executive and Financial
Officers will comply with all applicable governmental laws, rules and
regulations, and will establish and maintain mechanisms to:
o Monitor compliance of the Company's finance organization and other
key employees with all applicable federal, state and local statutes,
rules, regulations and administrative procedures.
o Identify, report and correct any detected deviations from applicable
federal, state and local statutes, rules, regulations and
administrative procedures.
2
V. Compliance with Code of Ethics
The Senior Executive and Financial Officers shall acknowledge and certify
their ongoing compliance with this Code of Ethics annually and provide a copy of
such certification to the Committee. This Code of Ethics will be published and
made available to all employees, and any employee should promptly report any
violation of this Code of Ethics to the General Counsel or, in his or her
absence, the Chairman of the Committee. The Board of Directors shall take
appropriate action with respect tot he failure of any Senior Executive or
Financial Officer to comply with this Code of Ethics, which may include
reprimand, demotion or dismissal, depending on the seriousness of the offense.
Adopted: April, 2004
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