THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
NO INTEREST IN THIS NOTE MAY BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR (ii) AN EXEMPTION FROM REGISTRATION UNDER SAID ACT AND WHERE THE HOLDER HAS
FURNISHED TO THE COMPANY AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
COMPANY THAT AN EXEMPTION FROM REGISTRATION UNDER SAID ACT IS AVAILABLE.

 

CTI INDUSTRIES CORPORATION
UNSECURED PROMISSORY NOTE

 

$500,000
 February 1, 2006
 
 Barrington, Illinois

   

FOR VALUE RECEIVED, the undersigned, CTI Industries Corporation, an Illinois
corporation (the “Payor”), having its executive offices and principal place of
business at 22160 N. Pepper Road, Barrington, Illinois 60010, hereby promises to
pay to Stephen M. Merrick (the “Payee”), having an address at 27 Watergate,
South Barrington, Illinois 60010, at the Payee’s address set forth hereinabove
or, at such other place as the Payee shall hereafter specify in writing, the
principal sum of Five Hundred Thousand Dollars ($500,000.00) in legal tender of
the United States of America, in the amount and on the dates hereinafter set
forth.
 
1. Interest and Payment

1.1 Unpaid principal and interest due under this Promissory Note shall be
payable in full by Payor or any successor holder of this Promissory Note on
Febrary 1, 2011 (the “Maturity Date”).

1.2 The unpaid principal amount hereof outstanding from time to time shall bear
simple interest from the date hereof at the rate per annum equal to Two Percent
(2%) in excess of the Prime Rate until the first to occur of the Maturity Date
or the date on which the entire principal balance hereof shall have been paid.
For purposes of this Promissory Note, the “Prime Rate” shall mean the Prime Rate
of interest payable as published in the Midwest Edition of the Wall Street
Journal. The Prime Rate shall be determined and applied on the first day of each
calendar quarter for so long as any of the principal amount hereof shall remain
outstanding and such Prime Rate as determined at the first day of each such
quarter shall be applicable for such quarter.
 
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1.3 Interest shall accrue and be payable on a calendar quarterly basis during
such time as any portion of the principal amount of this Promissory Note shall
be outstanding. Payments of interest shall be due and payable one calendar
quarter in arrears, on or before the fifth day of each calendar month
immediately following the expiration of any calendar quarter during which any
portion of the principal amount of this Promissory Note shall be outstanding.

1.4 If payment of the principal amount hereof and interest accrued thereon is
not made on or before the Maturity Date, interest shall thereafter accrue and be
payable at an interest rate equal to the lesser of (i) 12% or (ii) the maximum
rate permitted under applicable law.

1.5 Payor shall be entitled to prepay all or any portion of the principal of
this Promissory Note at any time and from time to time, without penalty,
provided, however, that any such payment on this Promissory Note shall be first
credited against any accrued and unpaid interest hereunder.

2. Replacement of Promissory Note.

2.1.  In case this Promissory Note is mutilated, destroyed, lost or stolen,
Payor shall, at its sole expense, execute, register and deliver, a new
Promissory Note in exchange and substitution for this Promissory Note, if
mutilated, or in lieu of and substitution for this Promissory Note, if
destroyed, lost or stolen. In the case of destruction, loss or theft, Payee
shall furnish to Payor indemnity reasonably satisfactory to Payor, and in any
such case, and in the case of mutilation, Payee shall also furnish to Payor
evidence to its reasonable satisfaction of the mutilation, destruction, loss or
theft of this Promissory Note and of the ownership thereof. Any replacement
Promissory Note so issued shall be in the same outstanding principal amount as
this Promissory Note and dated the date to which interest shall have been paid
on this Promissory Note, or if no interest shall have yet been paid, dated the
date of this Promissory Note.

2.2.  Every Note issued pursuant to the provisions of Section 2.1 hereof in
substitution for this Promissory Note shall constitute an additional contractual
obligation of Payor, whether or not Promissory Note shall be found at any time,
or be enforceable by anyone.

3.  Events of Default.  If any of the following condi-tions, events or acts
shall occur, this Promissory Note shall become immediately due and payable:

3.1. The dissolution of Payor or any vote in favor thereof by the Board of
Directors and stockholders of Payor; or
 
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3.2. Payor's insolvency, assignment for the benefit of creditors, application
for or appointment of a receiver, filing of a voluntary or involuntary petition
under any provision of the Federal Bankruptcy Code or amendments thereto or any
other federal or state statute affording relief to debtors; or there shall be
commenced against Payor any such proceeding or filed against Payor any such
application or petition which proceeding, application or petition is not
dismissed or withdrawn within sixty (60) days of commencement or filing as the
case may be; or

3.3.  The failure by Payor to make any payment of any amount of principal on, or
accrued interest under, this Promissory Note as and when the same shall become
due and payable; or

3.4. The sale by Payor of all or substantially all of its assets (other than the
sale of inventory in the ordinary course of business), or the merger or
consolidation by Payor with or into another corporation, except for mergers or
consolidations where Payor is the surviving entity or where the surviving entity
expressly accepts and assumes all of the obligations of Payor under this
Promissory Note; or

3.5. The commencement of a proceeding to fore-close the security interest or
lien in any property or assets to satisfy the security interest or lien therein
of any secured creditor of Payor whose debt is in excess of $100,000; or

3.6. The entry of a final judgment for the payment of money in excess of
$100,000 by a court of competent jurisdiction against Payor, which judgment
Payor shall not discharge (or provide for such discharge) in accordance with its
terms within sixty (60) days of the date of entry thereof, or procure a stay of
execution thereof within sixty (60) days from the date of entry thereof and,
within such sixty (60) day period, or such longer period during which execution
of such judgment shall have been stayed, appeal therefrom and cause the
execution thereof to be stayed during such appeal; or

3.7. Any attachment or levy, or the issuance of any note of eviction against the
assets or properties of Payor involving an amount in excess of $100,000 which
attachment, levy or issuance is not dismissed, bonded, or otherwise terminated
within sixty (60) days of the effectiveness of such attachment, levy or
issuance; or

3.8 The default in the due observance or performance of any material covenant,
condition or agreement on the part of Payor to be observed or performed pursuant
to the terms of this Promissory Note and such default shall continue uncured for
ten (10) days after written notice thereof, specifying such default, shall have
been given to the Payor by the holder of said Promissory Note; then, in any such
event and at any time thereafter (and, in the case of an event described in
Subsection 3.5 or a default in payment of accrued interest and/or principal as
described in Subsection 3.3, upon ten (10) days written notice), while such
event is continuing, Payee shall have the right to declare an event of default
hereunder ("Event of Default"), provided that upon the occurrence of an event
described in Subsections 3.1 or 3.2 such event shall be deemed to be an Event of
Default hereunder whether or not the Payee makes such a declaration (an
"Automatic Default"), and the indebtedness evidenced by this Promissory Note
shall immediately upon such declaration or Automatic Default become due and
payable, both as to principal and interest, without presentment, demand, protest
or other notice of any kind, all of which are hereby expressly waived,
notwithstanding anything contained herein to the contrary.
 
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4. If any one or more defaults shall occur and be continuing, Payee may proceed
to protect and enforce such Payee's rights either by suit in equity or by action
at law, or both, whether for the specific performance of any covenant, condition
or agreement contained in this Promissory Note or in any agreement or document
referred to herein or in aid of the exercise of any power granted in this
Promissory Note or in any agreement or document referred to herein, or proceed
to enforce the payment of this Promissory Note or to enforce any other legal or
equitable right of Payee of this Promissory Note. No right or remedy herein or
in any other agreement or instrument conferred upon the holder of this
Promissory Note is intended to be exclusive of any other right or remedy, and
each and every such right or remedy shall be cumulative and shall be in addition
to every other right and remedy given hereunder or now or hereafter existing at
law or in equity or by statute or otherwise.

5. Unconditional Obligation; Fees; Waivers; Other.

5.1.  The obligations to make the payments pro-vided for in this Promissory Note
are absolute and unconditional and not subject to any defense, set-off,
counterclaim, rescission, recoupment or adjustment whatsoever.

5.2. No forbearance, indulgence, delay or failure to exercise any right or
remedy with respect to this Promissory Note shall operate as a waiver, nor as an
acquiescence in any default, nor shall any single or partial exercise of any
right or remedy preclude any other or further exercise thereof or the exercise
of any other right or remedy.

5.3.  This Promissory Note may not be modified except by a writing duly executed
by Payor and Payee.

5.4. Payor hereby expressly waives demand and presentment for payment, notice of
payment, notice of dishonor, protest, notice of protest, bringing of suit, and
diligence in taking any action to collect amounts called for hereunder, and
shall be directly and primarily liable for the payment of all sums owing and to
owing herein, regardless of and without notice, diligence, act or omission with
respect to the collection of any amount called for hereunder.
 
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5.5. Payor shall bear all of its expenses, including attorneys' fees incurred in
connection with the preparation of this Promissory Note.

6. Restrictions on Transfer. By its acceptance of this Promissory Note, Payee
acknowledges that this Promissory Note has not been registered under the
securities laws of the United States of America or any state thereof and Payee
represents that this Promissory Note has been acquired for investment and no
interest in this Promissory Note may be offered for sale, sold, delivered after
sale, transferred, pledged, or hypothecated in the absence of registration and
qualification of this Promissory Note under applicable federal and state
securities laws or an opinion of counsel reasonably satisfactory to Payor that
such registration and qualification are not required.

7. Miscellaneous.

7.1. The headings of the various paragraphs of this Promissory Note are for
convenience of reference only and shall in no way modify any of the terms or
provisions of this Promissory Note.

7.2. All notices required or permitted to be given hereunder shall be in writing
and shall be deemed to have been duly given when personally delivered, delivered
by Federal Express or other national overnight courier, three days after mailing
if sent by registered or certified mail, return receipt requested, postage
prepaid, or on the date of delivery if delivered by telecopy, receipt confirmed,
provided that a confirmation copy is sent on the next business day by registered
or certified mail, return receipt requested and postage prepaid, to the address
of the intended recipient set forth in the preamble to this Promissory Note or
at such other address as the intended recipient shall have hereafter given to
the other party hereto pursuant to the provisions hereof.

7.3. This Promissory Note and the obligations of Payor and the rights of Payee
shall be governed by and construed in accordance with the laws of the State of
Illinois, without regard to its conflicts of laws rules or principles, with
respect to contracts made and to be fully performed therein.

7.4. Any legal suit, action or proceeding arising out of or relating to this
Promissory Note will be instituted exclusively in the Circuit Court of Cook
County, Illinois, or in the United States District Court for the Northern
District of Illinois, each and any of which shall apply Illinois law without
reference to its conflicts of laws principles or rules. Payor and Payee (by
accepting this Promissory Note) each waives any objection which Payor or Payee
may have now or hereafter to the venue of any such suit, action or proceeding,
and irrevocably consents to the jurisdiction of the Illinois Circuit Courts,
County of Cook and the United States District Court for the Northern District of
Illinois in any such suit, action or proceeding. Payor and Payee (by accepting
this Promissory Note) each further agree to accept and acknowledge service of
any and all process which may be served in any such suit, action or proceeding
in the Illinois Circuit Courts, County of Cook or in the United States District
Court for the Northern District of Illinois.
 
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7.5. This Promissory Note shall bind Payor and its successors and assigns.

 
 

        CTI INDUSTRIES CORPORATION  
   
   
    By:   /s/ Howard W. Schwan  

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Howard W. Schwan, President    

ATTEST:

/s/ Stephen M. Merrick
 
Stephen M. Merrick, Secretary
 
 
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