UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): September 5, 2006


CTI INDUSTRIES CORPORATION
  (Exact name of registrant as specified in its charter)


Illinois 
0-23115 
36-2848943 
(State or other jurisdiction 
(Commission 
(IRS Employer 
of incorporation) 
File Number) 
Identification No.) 
 
22160 North Pepper Road, Barrington, IL 
60010 
(Address of principal executive offices) 
(Zip Code) 

Registrant's telephone number, including area code (847) 382-1000

N/A
(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17CFR 240.14a-12)

[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 

Item No. 4.02 - Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review

(a) On September 5, 2006, in connection with a review of comments received from the Securities and Exchange Commission related to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 and its Report on Form 10-Q for the quarterly period ended March 31, 2006, after consultation with the Company’s independent registered public accounting firm, management and the Board of Directors determined that there were incorrect classifications in the calculation of Loss from Operations in the Company’s Consolidated Statement of Operations for the years ended December 31, 2004 and 2003, and that there were incorrect classifications in the calculation of certain items in the Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003.

With respect to the incorrect classifications in the calculation of Loss from Operations for 2004 and 2003, the incorrect classifications resulted from the fact that certain items of gain from the sale of assets and other items of income were classified as Other Income Expense and were not included in Loss from Operations. These incorrect classifications in classification did not result in any error in the reporting of Net Loss or Loss per share for those years.

With respect to the incorrect classifications in the calculation of items in the Consolidated Cash Flows for the years ended December 31, 2005, 2004 and 2003, the incorrect classifications resulted from the method used to calculate the effect of changes in the exchange rate of foreign currencies on items of cash flow.

Management and the Board of Directors of the Company have discussed the matters disclosed in this Report with the Company’s independent registered public accounting firms, Weiser LLP pertaining to 2005 and 2004, and Eisner LLP pertaining to 2003.

Accordingly, the audited Consolidated Statements of Cash Flows and Statements of Operations incorporated in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 should not be relied upon. The Company intends to effect the restatement through filing an amended Annual Report on Form 10-K for the year ended December 31, 2005.

The Company issued a press release on September 11, 2006, a copy of which is attached as Exhibit 99 hereto and is incorporated herein by reference.

The following tables summarize the impact of the restatements:

2

Item No. 9.01 - Financial Statements and Exhibits

CTI Industries Corporation and Subsidiaries
                  
                   
                   
2005 Summary Consolidated Statement of Cash Flows
                  
                   
       
As
      
As
 
   
 
  
 Reported
  
Adjustments
  
Restated
  
Cash flows from operating activities:
                          
Net loss
        
$
(333,209
)
  
0
   
(333,209
)
Adjustment to reconcile net loss to cash provided by (used in) operating activities:
                          
Depreciation and amortization
          
1,463,369
    
16,547
   
1,479,916
 
Deferred gain on sale/leaseback
          
0
    
0
       
Amortization of debt discount
          
35,967
    
0
   
35,967
 
Minority interest in loss of subsidiary
          
65
    
0
   
65
 
Loss on asset impairment
          
124,000
    
0
   
124,000
 
Provision for losses on accounts receivable
          
145,000
    
0
   
145,000
 
Provision for losses on inventories
          
205,000
    
0
   
205,000
 
Shares issued for services
          
200,916
    
0
   
200,916
 
Deferred income taxes
          
(200,392
)
  
0
   
(200,392
)
Change in operating assets and liabilities:
                
0
       
Accounts receivable
          
1,634,466
    
46,151
   
1,680,617
 
Inventories
          
1,120,925
    
8,669
   
1,129,594
 
Other assets
          
205,731
    
(38,399
)
  
167,332
 
Trade payables, accrued and other liabilities
          
(1,862,861
)
  
(113,446
)
  
(1,976,307
)
                           
Net cash provided by (used in) operating activities
          
2,738,977
    
(80,478
)
  
2,658,499
 
                           
Cash flows from investing activities:
                          
                           
Purchases of property, plant and equipment
          
(549,547
)
  
(1,709
)
  
(551,256
)
Proceeds from sale of property, plant and equipment
          
151,206
    
0
   
151,206
 
                           
 Net cash used in investing activities
          
(398,341
)
  
(1,709
)
  
(400,050
)
                           
Cash flows from financing activities:
                          
Checks written in excess of bank balance
          
(13,378
)
  
(847
)
  
(14,225
)
Net change in revolving line of credit
          
(1,350,472
)
  
0
   
(1,350,472
)
Proceeds from issuance of long-term debt (Received from related parties 559,000)
          
300,439
    
(69,047
)
  
231,392
 
Repayment of long-term debt
          
(811,776
)
  
(39,210
)
  
(850,986
)
Repayment of short-term debt (Related parties 60,000 in 2005)
          
(402,324
)
  
0
   
(402,324
)
Proceeds from exercise of stock options
          
53,501
    
0
   
53,501
 
Collection of stockholder note
          
0
    
0
       
Cash paid for deferred financing fees
          
(141,316
)
  
0
   
(141,316
)
                           
Net cash (used in) provided by financing activities
          
(2,365,326
)
  
(109,104
)
  
(2,474,430
)
                           
Effect of exchange rate changes on cash
          
(239,797
)
  
191,291
   
(48,506
)
                           
Net (decrease) increase in cash
          
(264,487
)
  
0
   
(264,487
)
                           
Cash at beginning of period
          
526,469
    
0
   
526,469
 
                           
Cash at end of period
        
$
261,982
    
0
   
261,982
 

 
3

2004 Summary Consolidated Statement of Cash Flows
                          
 
          
As 
          
As
 
 
          
Reported 
    
Adjustments
    
Restated
  
Cash flows from operating activities:
                          
Net loss
        
$
(2,479,374
)
  
0
   
(2,479,374
)
Adjustment to reconcile net loss to cash provided by (used in) operating activities:
                          
Depreciation and amortization
          
1,651,322
    
(11,514
)
  
1,639,808
 
Deferred gain on sale/leaseback
          
(175,271
) 
  
0
   
(175,271
)
Amortization of debt discount
          
251,490
    
0
   
251,490
 
Minority interest in loss of subsidiary
          
1,063
    
0
   
1,063
 
Loss on asset impairment
                          
Provision for losses on accounts receivable
          
288,562
    
0
   
288,562
 
Provision for losses on inventories
          
60,000
    
0
   
60,000
 
Shares issued for services
          
0
              
Deferred income taxes
          
1,189,135
    
0
   
1,189,135
 
Change in operating assets and liabilities:
                          
Accounts receivable
          
(1,791,423
)
  
268,149
   
(1,523,274
)
Inventories
          
854,666
    
36,279
   
890,945
 
Other assets
          
426,662
    
(29,317
)
  
397,345
 
Trade payables, accrued and other liabilities
          
(847,411
)
  
(77,826
)
  
(925,237
)
                           
Net cash provided by (used in) operating activities
          
(570,579
)
  
185,771
   
(384,808
)
                           
Cash flows from investing activities:
                          
                           
Purchases of property, plant and equipment
          
(305,546
)
  
24,052
   
(281,494
)
Proceeds from sale of property, plant and equipment
          
32,094
    
(9,971
)
  
22,123
 
                           
 Net cash used in investing activities
          
(273,452
)
  
14,081
   
(259,371
)
                           
Cash flows from financing activities:
                          
Checks written in excess of bank balance
          
172,309
    
(18
)
  
172,291
 
Net change in revolving line of credit
          
2,706,984
    
0
   
2,706,984
 
Proceeds from issuance of long-term debt (Received from related parties 267,000)
         
558,077
    
25,221
   
583,298
 
Repayment of long-term debt
          
(2,513,261
)
  
(38,878
)
  
(2,552,139
)
Repayment of short-term debt (Related parties 60,000 in 2005)
                          
Proceeds from exercise of stock options
          
0
              
Collection of stockholder note
          
0
              
Cash paid for deferred financing fees
          
(41,234
)
  
0
   
(41,234
)
                           
Net cash (used in) provided by financing activities
          
882,875
    
(13,675
)
  
869,200
 
                           
Effect of exchange rate changes on cash
          
157,884
    
(186,177
)
  
(28,293
)
                           
Net (decrease) increase in cash
          
196,728
    
0
   
196,728
 
                           
Cash at beginning of period
          
329,742
    
0
   
329,742
 
                           
Cash at end of period
        
$
526,470
    
0
   
526,470
 
 

4
 
2003 Summary Consolidated Statement of Cash Flows
                          
 
          
As 
          
As
 
 
          
Reported 
    
Adjustments
    
Restated
  
Cash flows from operating activities:
                          
Net loss
        
$
(566,047
)
  
0
   
(566,047
)
Adjustment to reconcile net loss to cash provided by (used in) operating activities:
                          
Depreciation and amortization
          
1,618,563
    
9,929
   
1,628,492
 
Deferred gain on sale/leaseback
          
(30,047
)
  
0
   
(30,047
)
Amortization of debt discount
          
238,199
    
0
   
238,199
 
Minority interest in loss of subsidiary
          
(483
)
  
0
   
(483
)
Loss on asset impairment
                          
Provision for losses on accounts receivable
          
220,000
    
0
   
220,000
 
Provision for losses on inventories
          
135,000
    
0
   
135,000
 
Shares issued for services
          
0
              
Deferred income taxes
          
(782,468
)
  
0
   
(782,468
)
Change in operating assets and liabilities:
                          
Accounts receivable
          
619,113
    
(188,751
)
  
430,362
 
Inventories
          
560,433
    
(84,589
)
  
475,844
 
Other assets
          
66,313
    
(6,222
)
  
60,091
 
Trade payables, accrued and other liabilities
          
1,129,596
    
167,679
    
1,297,275
 
                           
Net cash provided by (used in) operating activities
          
3,208,172
    
(101,954
)
  
3,106,218
 
                           
Cash flows from investing activities:
                          
                           
Purchases of property, plant and equipment
          
(2,007,104
)
  
(157,406
)
  
(2,164,510
)
Proceeds from sale of property, plant and equipment
          
0
              
                           
 Net cash used in investing activities
          
(2,007,104
)
  
(157,406
)
  
(2,164,510
)
                           
Cash flows from financing activities:
                          
Checks written in excess of bank balance
          
227,648
    
393
   
228,041
 
Net change in revolving line of credit
          
(1,948,408
)
  
0
   
(1,948,408
)
Proceeds from issuance of long-term debt (Received from related parties 250,000)
          
6,768,759
    
(43,333
)
  
6,725,426
 
Repayment of long-term debt
          
(5,649,014
)
  
77,440
   
(5,571,574
)
Repayment of short-term debt (Related parties 60,000 in 2005)
                          
Proceeds from exercise of stock options
          
15,750
    
0
   
15,750
 
Collection of stockholder note
          
56,456
    
0
   
56,456
 
Cash paid for deferred financing fees
          
(275,044
)
  
0
   
(275,044
)
                           
Net cash (used in) provided by financing activities
          
(803,853
)
  
34,500
   
(769,353
)
                           
Effect of exchange rate changes on cash
          
(227,966
)
  
224,860
   
(3,106
)
                           
Net (decrease) increase in cash
          
169,249
    
0
   
169,249
 
                           
Cash at beginning of period
          
160,493
    
0
   
160,493
 
                           
Cash at end of period
        
$
329,742
    
0
   
329,742
 
 

5
 

CTI Industries Corporation and Subsidiaries
                  
                   
2004 Summary Consolidated Statement of Operations
                  
                   
       
As
      
As
  
   
 
  
 Reported
  
Adjustments
  
Restated
  
                   
Net sales
        
$
37,193,109
        
$
37,193,109
  
Cost of sales
          
30,840,989
          
30,840,989
  
Gross profit
          
6,352,120
    
0
    
6,352,120
  
Operating expenses:
                          
General and administrative
          
4,410,595
   
-
   
4,410,595
 
Selling
          
1,495,257
   
-
   
1,495,257
 
Advertising and marketing
          
1,014,463
   
-
   
1,014,463
 
Gain on sale of assets
                
(122,499
)
  
(122,499
)
Other income
                
(395,489
)
  
(395,489
)
Total operating expenses
          
6,920,315
    
(517,988
)
  
6,402,327
  
(Loss) from operations
          
(568,195
)
  
517,988
   
(50,207
)
                           
Other income (expense):
                          
Interest expense
          
(1,350,085
)
        
(1,350,085
)
Interest income
          
-
          
-
  
Gain (loss) on sale of assets
          
122,499
    
(122,499
)
      
Foreign currency (loss) gain
          
208,213
          
208,213
  
Other
          
395,489
    
(395,489
)
      
Total other (expense)
          
(623,884
)
  
(517,988
)
  
(1,141,872
)
Loss before income taxes and minority interest
          
(1,192,079
)
  
-
   
(1,192,079
)
Income tax expense
          
1,286,232
   
-
   
1,286,232
 
Loss before minority interest
          
(2,478,311
)
  
0
    
(2,478,311
)
Minority interest in income of subsidiary
          
1,063
   
-
   
1,063
 
Net loss
        
$
(2,479,374
)
$
-
  
$
(2,479,374
)
                           
Loss applicable to common shares
        
$
(2,479,374
)
$
-
  
$
(2,479,374
)
                           
Basic loss per common share
        
$
(1.28
)
      
$
(1.28
)
Diluted loss per common share
        
$
(1.28
)
      
$
(1.28
)

6
 

2003 Summary Consolidated Statement of Operations
                  
                   
       
As
      
As
  
   
 
  
Reported 
  
Adjustments
  
Restated
  
                   
Net sales
        
$
36,259,638
  
$
-
  
$
36,259,638
  
Cost of sales
          
29,626,450
    
0
    
29,626,450
  
Gross profit
          
6,633,188
    
0
    
6,633,188
  
Operating expenses:
                          
General and administrative
          
4,054,607
   
-
   
4,054,607
 
Selling
          
1,441,501
   
-
   
1,441,501
 
Advertising and marketing
          
1,816,301
   
-
   
1,816,301
 
Gain on sale of assets
                
(28,007
)
  
(28,007
)
Other income
                
(428,125
)
  
(428,125
)
Total operating expenses
          
7,312,409
    
(456,132
)
  
6,856,277
  
(Loss) from operations
          
(679,221
)
  
456,132
   
(223,089
)
                           
Other income (expense):
                          
Interest expense
          
(1,103,395
)
        
(1,103,395
)
Interest income
          
13,618
          
13,618
  
Gain (loss) on sale of assets
          
28,007
   
(28,007
)
      
Foreign currency (loss) gain
          
(36,132
)
        
(36,132
)
Other
          
428,125
    
(428,125
)
      
Total other (expense)
          
(669,777
)
  
(456,132
)
  
(1,125,909
)
Loss before income taxes and minority interest
          
(1,348,998
)
  
-
   
(1,348,998
)
Income tax (benefit)
          
(782,468
)
  
-
   
(782,468
)
Loss before minority interest
          
(566,530
)
  
0
    
(566,530
)
Minority interest in (loss) of subsidiary
          
(483
)
  
-
   
(483
)
Net loss
        
$
(566,047
)
$
-
  
$
(566,047
)
                           
Loss applicable to common shares
        
$
(566,047
)
$
-
  
$
(566,047
)
                           
Basic loss per common share
        
$
(0.30
)
      
$
(0.30
)
Diluted loss per common share
        
$
(0.30
)
      
$
(0.30
)

7

(d)
Exhibits:

Exhibit No. 
 Exhibit 
   
99 
 Press Release dated September 11, 2006, captioned: “CTI Industries Corporation Reports Restatement 
  of Certain Financial Statement Items For Fiscal 2005, 2004 and 2003” 
    
8

SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
     
  CTI Industries Corporation
  (Registrant) 
 
 		  
 		  
 
Date: September 11, 2006 By:   /s/ Howard W. Schwan
  Howard W. Schwan, President
   

 
9