CORRESP 1 filename1.htm
CTI INDUSTRIES CORPORATION
22160 N. Pepper Road
Barrington, Illinois 60010
Tel: 847-382-1000/Fax: 847-382-1219

August 11, 2006

Mr. Rufus Decker
Branch Chief
Division of Corporation Finance
Securities and Exchange Commission
Washington, D.C. 20549-7010

 
RE:
Form 10-K for the Fiscal Year ended December 31, 2005
   
Form 10-Q for the Fiscal Quarter ended March 31, 2006
   
File No. 0-23115

Dear Mr. Decker:

This letter is provided in response to your letter to CTI Industries Corporation (“Registrant”) dated July 28, 2006 (“Second Comment Letter”). The responses are keyed to and organized by, the comments set forth in your letter.

Form 10-K for the year ended December 31, 2005

General

1.  
Where a comment below requests additional disclosures or other revisions to be made, please show us in your response what the revisions will look like. With the exception of the comments below that specifically request an amendment, all other revisions may be included in your future fillings.

Response: We will comply with the foregoing request in this response and in future filings.

2.  
We remind you that when you refile your amended Form 10-K you should appropriately address the following:

·  
label as restated the appropriate column of your financial statements,
·  
full compliance in your financial statement footnotes with APB 20,
·  
paragraphs 36 and 37, including the effect of your correction on net loss and the related per share amounts in the period in which the error was discovered and detected,
·  
updated Item 9A. disclosures in the amended Form 10-K should include the following:
 
i.  
a discussion of each restatement
 
1
 
ii.  
how the restatement impacted the CEO and CFO’s original conclusion regarding the effectiveness of your disclosure controls and procedures, and

iii.  
anticipated changes to disclosure controls and procedures and/or internal controls over financial reporting to prevent future misstatements of a similar nature.
Refer to Item 307 and 308 ( c) of regulation S-K.

Response: We will comply with the foregoing request in this response and in future filings.
 
Financial Statements

Consolidated Statement of Operations, page F-4

3.  
We have reviewed your response to comment 4. Please amend your financial statements to include gains on the sale of assets in the amounts of $122,199 in 2004 and $28,007 in 2003 with income (loss) from operations. Please refer to paragraph 45 of SFAS 144. Please also revise your management’s discussion and analysis based on the revised accounting for these transactions.

Response: We will amend the December 31, 2005 Form 10-K and revise our management’s discussion and analysis. The Consolidated Statement of Operations, as it will be restated, is filed with this letter as Schedule A. We will amend the Management’s Discussion and Analysis to reflect that, for 2004 and 2003, certain items included in Other Income (Expense) have been reclassified to be included in Income (Loss) From Operations, and references to the amount of Income From Operations will be changed in accordance with the restatement. We note that the restatement of our Consolidated Statement of Operations will not result in any change in net income, or earnings per share, for 2003, 2004 or 2005.

Consolidated Statement of Cash Flows, page F-6

4.  
We have reviewed your response to comment 5. You stated that you maintain significant cash balances at your UK subsidiary and that over the period from 2003 to 2005, there have been significant fluctuations in exchange rates between the U.S. Dollar and the British Pound which have caused the exchange rate fluctuations in your statements of cash flow. Based on historical foreign exchange rate data, the British Pound appreciated versus the US Dollar by 8.3% over the period from December 31, 2003 to December 31, 2004 while the British Pound depreciated versus the US Dollar by 10.7% over the period from December 31, 2004 to December 31, 2005. Though these fluctuations are not insignificant they do not explain the significant effect of exchange rate changes on your cash balance. More specifically, the $239,797 effect of exchange rate changes on cash in 2005 represent 91% of your cash balances. The $157,884 effect of exchange rate changes on cash in 2004 are equivalent to 30% of your cash balance. These fluctuations are significantly in excess of the fluctuations in the foreign currency exchange rates during these periods. In addition, during a telephone conversation that we had, you requested additional time to respond to our comments since you were in the process of reviewing and modifying your cash flow statements to capture the impact of foreign currencies on your cash position. Please tell us the cash amounts held at your UK and Mexican subsidiaries at December 31, 2003, 2004 and 2005 and any other period that you deem appropriate. Please also provide us with your statements of cash flows worksheets and a reconciliation of the amounts in the cash flow worksheets to the amounts in your statements of cash flows for 2003, 2004 and 2005.
 
2
 
Response: We have filed with this letter Schedule B which includes our worksheets for our Consolidated Statements of Cash Flow for 2003, 2004 and 2005, reconciled to the amounts in our statements of cash flows for each of those years. We have filed with this letter as Schedule C a statement of cash balances of each of our subsidiaries as of the dates requested. We have also prepared a report of cash flows for each of 2003, 2004 and 2005 based upon the specific methods set forth in SFAS 95, Paragraph 146, Appendix C, which is filed with this letter as Schedule D. We have also prepared and are filing with this letter Schedule E which includes our worksheets calculating the amount shown on the line item of Schedule D entitled “Effect of exchange rate changes on cash.” While there is no difference in net changes in cash as we have reported it in our Consolidated Statements of Cash Flow for 2003, 2004 and 2005, and as calculated under Appendix C, there are some differences in certain components of cash flow. Those differences are set forth on Schedule D. We believed the method of calculating cash flow we used for the years 2003, 2004 and 2005, was appropriate, but note that it did result in a greater amount being attributed to Effect of Exchange Rate Changes on Cash than the method prescribed in Appendix C of SFAS 95. If you determine that Consolidated Statements of Cash Flow should be restated, the restated amounts would be as set forth on Schedule D.

Note 9 - Other Income/Expense, page F-15

5.  
We have reviewed your response to comment 9. Please amend your financial statements to classify the reversal of liabilities in the amounts of $395,489 in 2004 and $428,125 in 2003 within income (loss) from operations. Please also revise your management’s discussion and analysis based on the revised accounting for these transactions.

Response: We will amend the December 31, 2005 Form 10-K and revise our management’s discussion and analysis accordingly.

3
 
Note 15 - Sale Leaseback of Building - Related Party, page F-18

6.  
We have reviewed your response to comment 11. Please amend your financial statements to include the deferred gain of $160,000 on the sale and leaseback within income (loss) from operations. Please refer to paragraph 45 of SFAS 144. Please also revise your management’s discussion and analysis based on the revised accounting for these transactions.

Response: We will amend our December 31, 2005 Form 10-K and management’s discussion and analysis as requested. Note that the $160,000 referred above is the gross amount of gain recognized in the referenced transaction, the net amount being $122,000 after deduction of certain losses on the disposal of assets, which is referred in Item 3 of your letter. The net amount of $122,000 will be restated in the amended Form 10-K and we will revise our management’s discussion and analysis accordingly.

 
    Sincerely,
   
 
 		  
 		  
 
     Stephen M. Merrick
  Executive Vice President and
  Chief Financial Officer
 
4
SCHEDULE A
CTI Industries Corporation and Subsidiaries
Consolidated Statements of Operations
 
   
Year Ended December 31,
  
                           
   
2005
  
 2004
  
 2004
  
2003
  
2003
  
        
As Reported
  
 Restated
  
 As Reported
  
 Restated
  
                            
Net sales
  
$
29,189,974
  
$
37,193,109
  
$
37,193,109
  
$
36,259,638
  
$
36,259,638
  
                                 
Cost of sales
    
22,725,825
    
30,840,989
    
30,840,989
    
29,626,450
    
29,626,450
  
                                 
Gross profit
    
6,464,149
    
6,352,120
    
6,352,120
    
6,633,188
    
6,633,188
  
                                 
Operating expenses:
                                
General and administrative
    
3,846,538
    
4,410,595
    
4,410,595
    
4,054,607
    
4,054,607
  
Selling
    
1,064,944
    
1,495,257
   
1,495,257
   
1,441,501
    
1,441,501
  
Advertising and marketing
    
776,571
    
1,014,463
    
1,014,463
    
1,816,301
    
1,816,301
  
(Gain) on sale of assets
                
(122,499
)
        
(28,007
)
Other (income)
                
(395,489
)
        
(428,125
)
Asset impairment loss
    
124,000
                                          
                                 
Total operating expenses
    
5,812,053
    
6,920,315
    
6,402,327
    
7,312,409
    
6,856,277
  
                                 
Income (loss) from operations
    
652,096
    
(568,195
)
  
(50,207
)
  
(679,221
)
  
(223,089
)
                                 
Other income (expense):
                                
Interest expense
    
(1,230,964
)
  
(1,350,085
)
  
(1,350,085
)
  
(1,103,395
)
  
(1,103,395
)
Interest income
    
-
    
-
    
-
    
13,618
    
13,618
  
                                 
Gain (loss) on sale of assets
    
-
    
122,499
          
28,007
        
Foreign currency (loss) gain
    
45,128
    
208,213
    
208,213
    
(36,132
)
  
(36,132
)
Other
            
395,489
              
428,125
            
                                 
Total other (expense) income
    
(1,185,836
)
  
(623,884
)
  
(1,141,872
)
  
(669,777
)
  
(1,125,909
)
                                 
Loss before income taxes and minority interest
    
(533,740
)
  
(1,192,079
)
  
(1,192,079
)
  
(1,348,998
)
  
(1,348,998
)
                                 
Income tax (benefit) expense
    
(200,392
)
  
1,286,232
    
1,286,232
    
(782,468
)
  
(782,468
)
                                 
Loss before minority interest
    
(333,348
)
  
(2,478,311
)
  
(2,478,311
)
  
(566,530
)
  
(566,530
)
                                 
Minority interest in (loss) income of subsidiary
    
(139
)
  
1,063
    
1,063
    
(483
)
  
(483
)
                                 
Net loss
  
$
(333,209
)
$
(2,479,374
)
$
(2,479,374
)
$
(566,047
)
$
(566,047
)
                                 
Loss applicable to common shares
  
$
(333,209
)
$
(2,479,374
)
$
(2,479,374
)
$
(566,047
)
$
(566,047
)
                                 
Basic loss per common share
  
$
(0.17
)
$
(1.28
)
$
(1.28
)
$
(0.30
)
$
(0.30
)
                                 
Diluted loss per common share
  
$
(0.17
)
$
(1.28
)
$
(1.28
)
$
(0.30
)
$
(0.30
)
 
 

CTI Industries Corporation
                                 
Barrington, IL
                          
SCHEDULE B-2003
  
Consolidated Cash Flows - Worksheet
  
From
  
From
  
Per
                     
For the Year Ended December 31, 2003
  
Beginning
  
Ending
  
Change in
                      
   
Consolidated
  
Consolidated
  
Consolidated
              
Reconciliation to Form 10K
  
   
Balance Sheet
  
Balance Sheet
  
Balance
  
Reclass/Adjustment
      
Adjusted
  
Per
      
   
12/31/02
  
12/31/03
  
Sheet
          
Cash Flow
  
Form 10K
  
Variance
  
Cash flows from operating activities:
                                                  
Net Profit (Loss)
    
(2,962,816
)
  
(3,528,863
)
  
(566,047
)
              
(566,047
)
  
(566,047
)
  
0
 
Adjustment to reconcile net loss to cash
                                              
0
 
provided by operating activities:
                                              
0
 
Depreciation and amortization
    
14,166,764
   
14,815,596
   
648,832
         
969,731
   
1,618,563
   
1,618,563
   
0
 
Amortize deferred gain on sale/leaseback
                      
30,047
         
(30,047
)
  
(30,047
)
  
0
 
Amortize debt discount
                            
238,199
   
238,199
   
238,199
   
0
 
Minority Interest
    
25,865
   
9,263
   
(16,602
)
        
16,119
   
(483
)
  
(483
)
  
0
 
Gain on sale of fixed assets
                                              
0
 
Provision for losses on accounts receivable
                            
220,000
   
220,000
   
220,000
   
0
 
Provision for losses on inventory
                            
135,000
   
135,000
   
135,000
   
0
 
Deferred income taxes
    
689,372
   
1,374,116
   
(684,744
)
  
97,724
         
(782,468
)
  
(782,468
)
  
0
 
Change in assets and liabilities:
                                              
0
 
Accounts receivable
    
5,384,839
   
4,820,726
   
564,113
   
145,000
   
200,000
   
619,113
   
619,113
   
0
 
Inventory
    
10,033,593
   
9,263,160
   
770,433
   
210,000
         
560,433
   
560,433
   
0
 
Prepaid Expenses and other assets
    
1,123,693
   
938,985
   
184,708
   
216,119
   
97,724
   
66,313
   
66,313
   
0
 
Accounts payable, accrued expenses and other non-current liabilities
    
11,547,186
   
9,106,237
   
(2,440,949
)
  
14,540
   
3,585,085
   
1,129,596
   
1,129,596
   
0
 
                                                   
Net cash provided by (used in) operating activities
                       
(1,540,256
)
                    
3,208,172
   
3,208,172
   
0
 
                                                   
Cash flows from investing activities:
                                                  
Proceeds from sale of property and equipment
                                                  
Purchases of property and equipment
    
25,881,777
   
27,023,245
   
(1,141,468
)
  
865,636
         
(2,007,104
)
  
(2,007,104
)
  
0
 
Net Investment in and advances to Mexico
                                                  
Acquisition of CTF International
                                                  
Cash acquired in acquisition of CTI Mexico
                                                  
                                                   
Purchase interest in Calidad/Flexo
                                                  
                                                   
                                                   
Net cash provided by (used in) investing activities
                     
(1,141,468
)
                   
(2,007,104
)
  
(2,007,104
)
  
0
 
                                                   
Cash flows from financing activities:
                                                  
Checks outstanding in excess of bank balance
    
113,460
   
341,108
   
227,648
               
227,648
   
227,648
   
0
 
Net change in revolving line of credit
    
5,642,649
   
3,383,343
   
(2,259,306
)
  
238,199
   
549,097
   
(1,948,408
)
  
(1,948,408
)
  
0
 
Warrants Issued with Debt
    
135,462
   
595,174
   
459,712
               
459,712
   
0
   
(459,712
)
Proceeds from issuance of long-term debt
    
7,469,024
   
11,423,628
   
3,954,604
   
4,119,643
   
5,679,062
   
5,514,023
   
6,768,759
   
1,254,736
 
Proceeds from issuance of short-term notes due to officer
    
0
   
795,024
   
795,024
               
795,024
   
0
   
(795,024
)
Repayment of long-term debt
                
0
   
5,649,014
         
(5,649,014
)
  
(5,649,014
)
  
0
 
Collection of Stockhoder Note
    
(56,456
)
  
0
   
56,456
               
56,456
   
56,456
   
0
 
Proceeds from exercise of options
    
9,302,602
   
9,318,352
   
15,750
               
15,750
   
15,750
   
0
 
Distributions & Equity of Pepper Road
                                  
0
   
0
   
0
 
Cash paid for deferred financing fees
    
51,747
   
222,696
   
(170,949
)
  
104,095
         
(275,044
)
  
(275,044
)
  
0
 
                                                   
Net cash provided by (used in) financing activities
                      
3,078,939
                      
(803,853
)
  
(803,853
)
  
0
 
                                                   
Effect of exchange rate changes on cash
    
(6,002
)
  
(233,968
)
  
(227,966
)
              
(227,966
)
  
(227,966
)
  
0
 
                                                   
Net increase (decrease) in cash
                      
169,249
                      
169,249
   
169,249
   
0
 
                                                   
Cash and Equivalents at Beginning of Period
                
160,493
               
160,493
   
160,493
   
0
 
                                                   
Cash and Equivalents at End of Period
                
329,742
               
329,742
   
329,742
   
0
 
                                                   
Per Balance Sheet
                
329,742
               
329,742
   
329,742
       
                                                   
Proof
                
0
               
0
             
 
 
CTI Industries Corporation
                                     
Barrington, IL
                              
SCHEDULE B-2004
  
Consolidated Cash Flows - Worksheet
      
From
  
From
                          
For the Year Ended December 31, 2004
      
Beginning
  
Ending
  
Change in
                      
       
Consolidated
  
Consolidated
  
Consolidated
              
Reconciliation to Form 10K
  
       
Balance
  
Balance
  
Balance
  
Reclass/Adjustment
      
Consolidated
  
Per
      
       
Sheet
  
Sheet
  
Sheet
          
Cash Flow
  
Form 10K
  
Variance
  
Cash flows from operating activities:
                                      
Net Profit (Loss)
          
(3,528,063
)
  
(6,007,437
)
  
(2,479,374
)
              
(2,479,374
)
  
(2,479,374
)
  
0
 
Adjustment to reconcile net loss to cash
                                                    
0
 
provided by operating activities:
                                                    
0
 
Depreciation and amortization
          
14,815,596
   
15,636,451
   
820,855
         
830,467
   
1,651,322
   
1,651,322
   
0
 
Amortize deferred gain on sale/leaseback
          
0
   
0
   
0
   
175,272
         
(175,272
)
  
(175,271
)
  
1
 
Amortize debt discount
          
0
   
0
   
0
         
251,490
   
251,490
   
251,490
   
0
 
Minority Interest
          
9,263
   
10,230
   
967
         
96
   
1,063
   
1,063
   
0
 
Gain on sale of fixed assets
                      
0
               
0
   
0
   
0
 
Provision for losses on accounts receivable
         
0
   
0
   
0
         
288,562
   
288,562
   
288,562
   
0
 
Provision for losses on inventory
                                  
60,000
   
60,000
   
60,000
   
0
 
Deferred income taxes
          
1,374,116
   
152,298
   
1,221,818
   
32,683
         
1,189,135
   
1,189,135
   
0
 
Change in assets and liabilities:
                                                    
0
 
Accounts receivable
          
4,620,276
   
6,123,137
   
(1,502,861
)
  
288,562
         
(1,791,423
)
  
(1,791,423
)
  
0
 
Inventory
          
9,263,160
   
8,348,494
   
914,666
   
60,000
         
854,666
   
854,666
   
0
 
Prepaid Expenses and other assets
    
Sch
    
1,139,435
   
892,182
   
247,253
         
179,409
   
426,662
   
426,662
   
0
 
Accounts payable
          
6,799,490
   
6,147,969
   
(651,521
)
        
25,225
   
(626,296
)
        
626,296
 
Accrued expenses, other current liabilities
    
Sch
    
2,306,745
   
1,811,775
   
(494,970
)
  
96
   
273,951
   
(221,115
)
  
(847,411
)
  
(626,296
)
                                                         
Net cash provided by (used in) operating activities
                             
(1,923,166
)
                 
(570,579
)
  
(570,578
)
  
1
 
                                                         
Cash flows from investing activities:
                                                        
Proceeds from sale of property and equipment
                            
241,268
   
273,362
   
32,094
   
32,094
   
0
 
Purchases of property and equipment
          
27,023,245
   
26,224,962
   
798,283
   
1,103,829
         
(305,546
)
  
(305,546
)
  
0
 
                                                         
Net cash provided by (used in) investing activities
                            
798,283
                   
(273,452
)
  
(273,452
)
  
0
 
                                                         
Cash flows from financing activities:
                                                        
 
                                                        
Net change in revolving line of credit
          
3,383,343
   
6,341,817
                                     
Add back debt discount netted against this account
          
310,898
   
59,408
                                     
Adjusted Net Change in revolving LOC
          
3,694,241
   
6,401,225
   
2,706,984
               
2,706,984
   
2,706,984
   
0
 
                                                     
0
 
Checks outstanding in excess of bank balance
          
341,108
   
513,417
   
172,309
               
172,309
   
172,309
   
0
 
Warrants Issued with Debt
          
595,174
   
595,174
   
0
               
0
   
0
   
0
 
Repayment of long-term debt
    
Sch
    
11,907,754
   
10,028,788
   
(1,878,966
)
  
809,567
   
175,272
   
(2,513,261
)
  
(2,513,261
)
  
0
 
Proceeds from issuance of debt
          
0
   
0
   
0
         
558,077
   
558,077
   
558,077
   
0
 
Repayment of short-term debt
                      
0
               
0
   
0
   
0
 
Collection of short-term debt
          
0
   
0
   
0
               
0
   
0
   
0
 
Proceeds from exercise of options
          
9,318,352
   
9,379,431
   
61,079
   
61,079
         
(0
)
  
(0
)
  
0
 
Cash paid for deferred financing fees
          
222,696
   
120,375
   
102,321
   
143,555
         
(41,234
)
  
(41,234
)
  
0
 
                                                         
Net cash provided by (used in) financing activities
                           
1,163,726
               
882,874
   
882,874
   
0
 
                                                         
Effect of exchange rate changes on cash
          
(234,768
)
  
(76,884
)
  
157,884
               
157,884
   
157,884
   
0
 
                                                         
Net increase (decrease) in cash
                            
196,727
                 
196,727
   
196,728
   
1
 
                                                         
Cash and Equivalents at Beginning of Period
                      
329,742
               
329,742
   
329,742
   
0
 
                                                         
Cash and Equivalents at End of Period
                      
526,469
             
526,469
   
526,470
   
1
 
 
 
CTI Industries Corporation
                                     
Barrington, IL
                              
SCHEDULE B-2005
  
Consolidated Cash Flows - Worksheet
      
From
  
From
                          
For the Year Ended December 31, 2005
      
Beginning
  
Ending
  
Change in
                      
       
Consolidated
  
Consolidated
  
Consolidated
              
Reconciliation to Form 10K
  
       
Balance Sheet
  
Balance Sheet
  
Balance
  
Reclass/Adjustments
      
Consolidated
  
Per
      
       
12/31/04
  
12/31/05
  
Sheet
          
Cash Flow
  
Form 10K
  
Variance
  
Cash flows from operating activities:
                                      
Net Profit (Loss)
          
(6,007,437
)
  
(6,340,646
)
  
(333,210
)
              
(333,210
)
  
(333,209
)
  
1
 
Adjustment to reconcile net loss to cash
                                                    
0
 
provided by operating activities:
                                                    
0
 
Depreciation and amortization
          
15,636,451
   
17,087,622
   
1,451,171
   
23,946
   
36,144
   
1,463,369
   
1,463,369
   
(0
)
Amortize deferred gain on sale/leaseback
          
0
   
0
   
0
               
0
         
0
 
Amortize debt discount
          
0
   
0
   
0
         
35,967
   
35,967
   
35,967
   
0
 
Minority Interest
          
10,230
   
11,368
   
1,138
   
1,073
         
65
   
65
   
0
 
Loss on asset impairment/Gain on sale of fixed assets
                      
0
         
124,000
   
124,000
   
124,000
   
0
 
Provision for losses on accounts receivable
         
0
   
0
   
0
         
145,000
   
145,000
   
145,000
   
0
 
Provision for losses on inventory
                                  
205,000
   
205,000
   
205,000
   
0
 
Shares issued for services
                                  
200,916
   
200,916
   
200,916
   
0
 
Deferred income taxes
          
152,298
   
352,689
   
(200,391
)
  
0
         
(200,391
)
  
(200,392
)
  
(1
)
Change in assets and liabilities:
                                                    
0
 
Accounts receivable
          
6,123,137
   
4,343,671
   
1,779,466
   
145,000
         
1,634,466
   
1,634,466
   
0
 
Inventory
          
8,348,494
   
7,022,569
   
1,325,925
   
205,000
         
1,120,925
   
1,120,925
   
(0
)
Prepaid Expenses and other assets
    
Sch
    
892,182
   
874,890
   
17,291
         
188,440
   
205,731
   
205,731
   
(0
)
Accounts payable
          
6,147,969
   
4,717,733
   
(1,430,236
)
        
653,275
   
(776,961
)
        
776,961
 
Accrued expenses, other current liabilities
    
Sch
    
1,811,775
   
925,717
   
(886,058
)
  
(200,916
)
  
1,073
   
(1,085,901
)
  
(1,862,861
)
  
(776,960
)
                                                         
Net cash provided by (used in) operating activities
                                  
1,725,097
                        
2,738,977
   
2,738,977
   
0
 
                                                         
Cash flows from investing activities:
                                                        
Proceeds from sale of property and equipment
                                  
151,206
   
151,206
   
151,206
   
0
 
Purchases of property and equipment
          
26,224,962
   
26,704,366
   
(479,404
)
  
187,350
   
117,207
   
(549,547
)
  
(549,547
)
  
(0
)
Goodwill
          
1,113,108
   
989,108
   
124,000
   
124,000
         
(0
)
            
                                                         
                                                         
Net cash provided by (used in) investing activities
                              
(355,404
)
                    
(398,341
)
  
(398,341
)
  
(0
)
                                                         
Cash flows from financing activities:
                                                        
                                                         
Net change in revolving line of credit
          
6,341,817
   
5,027,312
                                     
Add back debt discount netted against this account
          
59,408
   
23,441
                                     
Adjusted Net Change in revolving LOC
          
6,401,225
   
5,050,753
   
(1,350,472
)
              
(1,350,472
)
  
(1,350,472
)
  
0
 
 
                                                    
0
 
Checks outstanding in excess of bank balance
          
513,417
   
500,039
   
(13,378
)
              
(13,378
)
  
(13,378
)
  
0
 
Warrants Issued with Debt
          
595,174
   
595,174
   
0
               
0
   
0
   
0
 
Repayment of long-term debt
    
Sch
    
10,028,788
   
9,604,597
   
(424,191
)
  
789,909
   
402,324
   
(811,776
)
  
(811,776
)
  
0
 
Proceeds from issuance of debt
          
0
   
0
   
0
   
453,503
   
753,942
   
300,439
   
300,439
   
0
 
Repayment of short-term debt
                      
0
   
402,324
         
(402,324
)
  
(402,324
)
  
0
 
Collection of short-term debt
          
0
   
0
   
0
               
0
   
0
   
0
 
Proceeds from exercise of options
          
9,379,431
   
9,633,848
   
254,417
   
199,772
         
54,645
   
54,645
   
0
 
Cash paid for deferred financing fees
          
120,375
   
74,396
   
45,979
   
188,440
         
(142,461
)
  
(142,461
)
  
0
 
                                                         
Net cash provided by (used in) financing activities
                              
(1,487,644
)
                       
(2,365,326
)
  
(2,365,326
)
  
0
 
                                                         
Effect of exchange rate changes on cash
          
(76,884
)
  
(223,420
)
  
(146,536
)
  
117,207
   
23,946
   
(239,797
)
  
(239,797
)
  
0
 
                                                         
Net increase (decrease) in cash
                                  
(264,487
)
                        
(264,487
)
  
(264,487
)
  
(0
)
                                                         
Cash and Equivalents at Beginning of Period
                      
526,469
               
526,469
   
526,469
   
0
 
                                                         
Cash and Equivalents at End of Period
                      
261,982
               
261,982
   
261,982
   
0
 
                                                         
Per Balance Sheet
                      
261,982
               
261,982
             
                                                         
DETAIL SCHEDULES
  
                                                         
Prepaid Expenses and other assets
                                                        
                                                         
Pre Paid Expenses
          
181,527
   
130,282
   
51,245
                               
Pre Paid Income Taxes
          
281,370
   
161,846
   
119,523
                               
Other current assets
          
183,909
   
414,954
   
(231,045
)
                              
Other assets
          
245,376
   
167,808
   
77,568
                               
                                                         
           
892,182
   
874,890
   
17,291
                               
                                                         
Accrued expenses and other non-current liabilities & Equity
                                                        
                                                         
                                                         
Accrued Liabs
          
1,786,662
   
898,477
   
(888,185
)
                              
Advances from customers
         
25,113
   
27,241
   
2,128
                               
Deferred income tax liability
         
0
   
0
   
0
                               
Less amount netted against Deferred asset
         
0
   
0
   
0
                               
Due to related parties
         
0
   
(0
)
  
(1
)
                              
                       
0
                               
                                                         
           
1,811,775
   
925,717
   
(886,058
)
                              
                                                         
Proceeds from issuance of long-term debt
                                                        
                                                         
Current portion
          
3,560,669
   
3,448,157
   
(112,512
)
                              
Notes payable
          
2,864,129
   
4,517,609
   
1,653,480
   
753,942
                         
Other Liabs
          
1,348,374
   
1,643,063
   
294,689
                               
                       
0
                               
Notes payable Officers
          
2,315,024
   
19,209
   
(2,295,815
)
                              
Debt Discount
          
(59,408
)
  
(23,441
)
  
35,967
   
35,967
                         
Notes payable Officers - NET
          
2,255,616
   
(4,232
)
  
(2,259,848
)
                              
                                                         
           
10,028,788
   
9,604,597
   
(424,191
)
  
789,909
   
0
                   
 

                       
                   
SCHEDULE C
  
CTI Industries, Inc.  
 
                  
Schedule of Cash Balances of Foreign Subsidiaries  
 
                  
                       
           
In Local Currency at,
 
 
Subsidiary
  
 
  
Location
  
12/31/03
  
12/31/04
  
12/31/05
  
                       
CTI Balloons, Ltd
          
UK
    
100,916
   
246,773
   
151,679
 
                                 
Flexo Universal
          
Mexico
    
42,525
   
601,703
   
0
 
                                 
CTI Mexico
          
Mexico
    
0
   
0
   
0
 
                                 
CTF International
          
Mexico
    
0
   
0
   
13,560
 
 
 
CTI Industries Corporation and Subsidiaries
                            
Consolidated Statements of Cash Flows
                       
 
  
 
                             
 SCHEDULE D
  
     
Year Ended December 31, 
              
           
Restated 
          
Restated 
          
Restated 
  
Cash flows from operating activities:
    
2005
    
2005
    
2004
    
2004
    
2003
    
2003
  
Net loss
  
$
(333,209
)
  
(333,209
)
$
(2,479,374
)
  
(2,479,374
)
$
(566,047
)
$
(566,047
)
Adjustment to reconcile net loss to cash provided by (used in) operating activities:
                                      
Depreciation and amortization
    
1,463,369
    
1,479,916
   
1,651,322
    
1,639,808
   
1,618,563
    
1,628,492
 
Deferred gain on sale/leaseback
    
0
          
(175,271
)
  
(175,271
)
  
(30,047
)
  
(30,047
)
Amortization of debt discount
    
35,967
    
35,967
   
251,490
    
251,490
   
238,199
    
238,199
 
Minority interest in loss of subsidiary
    
65
    
65
   
1,063
    
1,063
   
(483
)
  
(483
)
Loss on asset impairment
    
124,000
    
124,000
                         
Provision for losses on accounts receivable
    
145,000
    
145,000
   
288,562
    
288,562
   
220,000
    
220,000
 
Provision for losses on inventories
    
205,000
    
205,000
   
60,000
    
60,000
   
135,000
    
135,000
 
Shares issued for services
    
200,916
    
200,916
   
0
          
0
        
Deferred income taxes
    
(200,392
)
  
(200,392
)
  
1,189,135
    
1,189,135
   
(782,468
)
  
(782,468
)
Change in operating assets and liabilities:
                                      
Accounts receivable
    
1,634,466
    
1,680,617
   
(1,791,423
)
  
(1,523,274
)
  
619,113
    
430,362
 
Inventories
    
1,120,925
    
1,129,594
   
854,666
    
890,945
   
560,433
    
475,844
 
Other assets
    
205,731
    
167,332
   
426,662
    
397,345
   
66,313
    
60,091
 
Trade payables, accrued and other liabilities
    
(1,862,861
)
  
(1,976,307
)
  
(847,411
)
  
(925,237
)
  
1,129,596
    
1,297,275
 
                                       
Net cash provided by (used in) operating activities
    
2,738,977
    
2,658,499
   
(570,579
)
  
(384,808
)
  
3,208,172
    
3,106,218
 
                                       
Cash flows from investing activities:
                                      
                                       
Purchases of property, plant and equipment
    
(549,547
)
  
(551,256
)
  
(305,546
)
  
(281,494
)
  
(2,007,104
)
  
(2,164,510
)
Proceeds from sale of property, plant and equipment
    
151,206
    
151,206
   
32,094
    
22,123
   
0
        
                                       
 Net cash used in investing activities
    
(398,341
)
  
(400,050
)
  
(273,452
)
  
(259,371
)
  
(2,007,104
)
  
(2,164,510
)
                                       
Cash flows from financing activities:
                                      
Checks written in excess of bank balance
    
(13,378
)
  
(14,225
)
  
172,309
    
172,291
   
227,648
    
228,041
 
Net change in revolving line of credit
    
(1,350,472
)
  
(1,350,472
)
  
2,706,984
    
2,706,984
   
(1,948,408
)
  
(1,948,408
)
Proceeds from issuance of long-term debt (Received from related parties 559,000, 267,000 and 250,000)
    
300,439
    
231,392
   
558,077
    
583,298
   
6,768,759
    
6,725,426
 
Repayment of long-term debt
    
(811,776
)
  
(850,986
)
  
(2,513,261
)
  
(2,552,139
)
  
(5,649,014
)
  
(5,571,574
)
Repayment of short-term debt (Related parties 60,000 in 2005)
    
(402,324
)
  
(402,324
)
                        
Proceeds from exercise of stock options
    
53,501
    
53,501
   
0
          
15,750
    
15,750
 
Collection of stockholder note
    
0
          
0
          
56,456
    
56,456
 
Cash paid for deferred financing fees
    
(141,316
)
  
(141,316
)
  
(41,234
)
  
(41,234
)
  
(275,044
)
  
(275,044
)
                                       
Net cash (used in) provided by financing activities
    
(2,365,326
)
  
(2,474,430
)
  
882,875
    
869,200
   
(803,853
)
  
(769,353
)
                                       
Effect of exchange rate changes on cash
    
(239,797
)
  
(48,506
)
  
157,884
    
(28,293
)
  
(227,966
)
  
(3,106
)
                                       
Net (decrease) increase in cash
    
(264,487
)
  
(264,487
)
  
196,728
    
196,728
   
169,249
    
169,249
 
                                       
Cash at beginning of period
    
526,469
    
526,469
   
329,742
    
329,742
   
160,493
    
160,493
 
                                       
Cash at end of period
  
$
261,982
    
261,982
 
$
526,470
    
526,470
 
$
329,742
  
$
329,742
 
                                       
Supplemental disclosure of cash flow information:
    
950,280
    
950,280
    
952,682
    
952,682
    
865,196
    
865,196
 
Cash payments for interest
    
88,151
    
88,151
    
47,186
    
47,186
    
42,295
    
42,295
 
Cash payments for taxes
                                      
                                       
Supplemental disclosure of non-cash activity:
                                      
Settlement of liability with third party
                
241,268
    
241,268
              
via ownership transfer of long-term asset
                                      
                                       
Stock issued to reduce vendor obligations at fair value
                
61,079
    
61,079
              
                                       
Accounts payable converted to notes payable
    
453,503
    
453,503
                
3,534,326
    
3,534,326
 
                                       
Refinance mortage
                            
2,671,243
    
2,671,243
 
 

CTI Industries, Inc.
Calculation of Effect of Exchange Rate Changes on Cash
Per FAS 95, Appendix C, Paragraph 146
 
                           
 SCHEDULE E
  
                                       
   
2005
  
2004
  
2003
    
       
Total
          
Total
          
Total
      
   
UK
  
Mexico
  
Total
  
UK
  
Mexico
  
Total
  
UK
  
Mexico
  
Total
  
                                       
Effect on Beginning Cash
                                      
Beginning Cash
    
246,773
   
601,703
         
100,918
   
42,525
         
92,132
   
127,255
       
Change in Rate
    
(0.1972
)
  
(0.0049
)
             
0.1657
   
(0.0003
)
           
0.1408
   
(0.0064
)
         
Effect from Cash
    
(48,664
)
  
2,965
   
(45,699
)
  
16,722
   
13
   
16,735
   
12,974
   
(896
)
  
12,078
 
                                                         
Effect on Operating Activities
                                                        
Cash Flow in local currency
    
(62,410
)
  
(2,425,798
)
        
146,841
   
(23,446,556
)
        
15,146
   
2,169,802
       
Year end exchange rate
    
1.7188
   
0.0941
         
1.9160
   
0.0892
         
1.7503
   
0.0889
       
Amount based on Year End rate
    
(107,270
)
  
(228,259
)
        
281,347
   
(2,090,645
)
        
26,509
   
192,849
       
Amount per Cash Flow of Sub at weighted average rate
    
(117,815
)
  
(207,953
)
           
359,408
   
(2,104,224
)
            
23,156
   
219,226
           
Effect from Operations
    
10,545
   
(20,306
)
  
(9,761
)
  
(78,061
)
  
13,579
   
(64,482
)
  
3,353
   
(26,377
)
  
(23,024
)
                                                         
Effect on Investing Activities
                                                        
Cash Flow in local currency
    
(32,684
)
  
(36,444
)
        
(984
)
  
17,816,779
         
(6,362
)
  
(12,847,381
)
      
Year end exchange rate
    
1.7188
   
0.0941
         
1.9160
   
0.0892
         
1.7503
   
0.0889
       
Amount based on YE rate
    
(56,177
)
  
(3,413
)
        
(1,885
)
  
1,588,660
         
(11,136
)
  
(1,141,865
)
      
Amount per Cash Flow of Sub at weighted average rate
    
(59,266
)
  
(3,353
)
           
(1,806
)
  
1,574,163
         
(10,422
)
  
(1,190,605
)
      
Effect from Investing
    
3,089
   
(60
)
  
3,029
   
(79
)
  
14,497
   
14,418
   
(714
)
  
48,740
   
48,026
 
                                                         
                                                         
Effect on Financing Activities
                                                        
Cash Flow in local currency
    
0
   
1,874,097
         
0
   
6,188,915
         
0
   
10,592,848
       
Year end exchange rate
    
1.7188
   
0.0941
         
1.9160
   
0.0892
         
1.7503
   
0.0889
       
Amount based on YE rate
    
0
   
176,332
         
0
   
551,843
         
0
   
941,484
       
Amount per Cash Flow of Sub at weighted average rate
    
0
   
172,408
           
0
   
546,807
           
0
   
981,670
          
Effect from Financing
    
0
   
3,924
   
3,924
   
0
   
5,036
   
5,036
   
0
   
(40,186
)
  
(40,186
)
                                                         
Total Exchange Rate Effect on Cash
    
(35,030
)
  
(13,476
)
  
(48,506
)
  
(61,418
)
  
33,125
   
(28,293
)
  
15,613
   
(18,719
)
  
(3,106
)