CPI AEROSTRUCTURES, INC.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period Commission File Number 1-11398
ended March 31, 2004
CPI AEROSTRUCTURES, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
New York 11-2520310
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(State or Other Jurisdiction (IRS Employer Identification Number)
of Incorporation or Organization)
200A EXECUTIVE DRIVE, EDGEWOOD, NY 11717
(Address of Principal Executive Offices)
Telephone number (631) 586-5200
(Issuer's Telephone Number Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
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As of May 6, 2004, the number of shares of common stock, par value $.001 per
share, outstanding was 5,350,030.
CPI AEROSTRUCTURES, INC.
INDEX
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Part I: Financial Information:
Item 1 - Condensed Consolidated Financial Statements:
Independent Accountant's Report 3
Balance Sheets as of March 31, 2004 (Unaudited) and 4
December 31, 2003
Statements of Income for the Three Months ended March 31, 2004 5
(Unaudited) and 2003 (Unaudited)
Statements of Cash Flows for the Three Months ended March 31, 2004 6
(Unaudited) and 2003 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
Item 2 - Management's Discussion and Analysis of Financial Condition 10
and Results of Operations
Item 3 - Controls and Procedures 13
Part II. Other Information
Item 6 - Exhibits and Reports on Form 8-K 13
Signatures and Certifications 14
2
CPI AEROSTRUCTURES, INC.
PART I: FINANCIAL INFORMATION:
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS:
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors
CPI Aerostructures, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of CPI
Aerostructures, Inc. and Subsidiary as of March 31, 2004, and the related
condensed consolidated statements of income and cash flows for the three-month
periods ended March 31, 2004 and 2003. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit in accordance with generally
accepted auditing standards the objective of which is the expression of an
opinion regarding the consolidated financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above in
order for them to be in conformity with accounting principles generally accepted
in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of CPI
Aerostructures, Inc. and Subsidiary as of December 31, 2003, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
year then ended (not presented herein); and in our report dated January 30,
2004, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 2003, is fairly stated
in all material respects, in relation to the consolidated balance sheet from
which it is derived.
/s/ Goldstein Golub Kessler LLP
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
April 15, 2004
3
CPI AEROSTRUCTURES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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MARCH 31, DECEMBER 31,
2004 2003
(UNAUDITED)
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ASSETS
Current assets:
Cash $1,411,699 $ 2,794,310
Accounts receivable 1,713,076 1,747,824
Costs and estimated earnings in excess of billings on uncompleted
contracts 18,608,793 17,449,887
Deferred income taxes 623,000 1,058,000
Prepaid expenses and other current assets 282,731 349,329
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TOTAL CURRENT ASSETS 22,639,299 23,399,350
Property, plant and equipment, net 380,795 360,514
Other assets 179,226 179,226
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TOTAL ASSETS $23,199,320 $23,939,090
=================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,592,162 $ 3,343,875
Accrued expenses 75,609 541,798
Current capital lease obligation 7,071 7,303
Income tax payable 15,753 187,000
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TOTAL CURRENT LIABILITIES 2,690,595 4,079,976
Capital lease obligation, net of current portion 24,110 26,311
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TOTAL LIABILITIES 2,714,705 4,106,287
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Commitments and contingencies
Shareholders' equity:
Common stock - $.001 par value; authorized 50,000,000 shares,
issued and outstanding 5,301,770 shares 5,302 5,302
Additional paid-in capital 21,713,447 21,713,447
Accumulated deficit (1,234,134) (1,885,946)
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SHAREHOLDERS' EQUITY 20,484,615 19,832,803
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $23,199,320 $23,939,090
=================================================================================================================================
See Notes to Condensed Consolidated Financial Statements
4
CPI AEROSTRUCTURES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
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FOR THE THREE MONTHS ENDED MARCH 31, 2004 2003
(UNAUDITED)
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Revenue $ 6,228,108 $ 6,007,447
Cost of sales 4,302,014 3,841,546
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Gross profit 1,926,094 2,165,901
Selling, general and administrative expenses 838,076 722,919
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Income from operations 1,088,018 1,442,982
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Other income (expense):
Interest/other income 2,211 2,654
Interest expense (3,417) (139,666)
Gain on extinguishment of debt --- 2,431,233
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Total other income (expense), net (1,206) 2,294,221
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Income from continuing operations 1,086,812 3,737,203
Gain on sale of assets held for sale - discontinued operations --- 253,332
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Income before provision for income taxes 1,086,812 3,990,535
Provision for income taxes 435,000 ---
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Net income $ 651,812 $ 3,990,535
==================================================================================================================================
Basic net income per common share:
Income from continuing operations $ 0.12 $ 0.97
Gain on sale of assets held for sale - discontinued operations 0.00 0.07
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Earnings per common share - basic $ 0.12 $ 1.04
==================================================================================================================================
Diluted net income per common share:
Income from continuing operations $ 0.11 $ 0.87
Gain on sale of assets held for sale - discontinued operations 0.00 0.06
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Earnings per common share - diluted $ 0.11 $ 0.93
==================================================================================================================================
Shares used in computing earnings per common share:
Basic 5,301,770 3,848,779
Diluted 5,800,120 4,311,529
See Notes to Condensed Consolidated Financial Statements
5
CPI AEROSTRUCTURES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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FOR THE THREE MONTHS ENDED MARCH 31, 2004 2003
(UNAUDITED)
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Cash flows from operating activities:
Net income from continuing operations $651,812 $3,737,203
Adjustments to reconcile net income from continuing operations to net
cash used in operating activities:
Depreciation and amortization 27,579 27,061
Warrants issued for consulting fees --- 712
Common stock issued for bank fees --- 84,473
Gain on extinguishment of debt --- (2,431,233)
Deferred portion of provision for income taxes 435,000 ---
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 34,748 (1,030,385)
Increase in costs and estimated earnings in excess of billings on
uncompleted contracts (1,158,906) (200,426)
Decrease in prepaid expenses and other current assets 66,598 373,679
Decrease in accounts payable and accrued expenses (1,217,900) (1,390,375)
Decrease in income taxes payable (171,247) ---
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Net cash used in operating activities (1,332,316) (829,291)
Cash used in investing activities - purchase of property, plant and equipment (47,861) (44,309)
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Cash flows from financing activities:
Net repayment of long-term debt (2,434) (5,516,100)
Proceeds from public offering --- 7,661,744
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Net cash (used in) provided by financing activities (2,434) 2,145,644
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Net cash provided by (used in) continuing operations (1,382,611) 1,272,044
Net cash from discontinued operations --- 534,008
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Net (decrease) increase in cash (1,382,611) 1,806,052
Cash at beginning of period 2,794,310 91,537
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Cash at end of period $1,411,699 $ 1,897,589
==================================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $3,417 $ 60,884
==================================================================================================================================
Income taxes $171,247 $ 8,410
==================================================================================================================================
See Notes to Condensed Consolidated Financial Statements
6
CPI AEROSTRUCTURES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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1. INTERIM The financial statements as of March 31, 2004 and for the three months ended March 31,
FINANCIAL 2004 and 2003 are unaudited, however, in the opinion of the management of the Company,
STATEMENTS: these financial statements reflect all adjustments (consisting solely of normal recurring
adjustments) necessary to present fairly the financial position of the Company and
the results of operations. The results of operations for such interim periods are not
necessarily indicative of the results to be obtained for a full year.
The Company has elected to apply Accounting Principles Board ("APB") Opinion No.
25, Accounting for Stock Issued to Employees, and related interpretations in
accounting for its stock options issued to employees (intrinsic value) and has
adopted the disclosure-only provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation. Had the
Company elected to recognize compensation cost based on the fair value of the
options granted at the grant date as prescribed by SFAS No. 123, the Company's
net income and income per common share would have been as follows:
Three months ended March 31, 2004 2003
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Net income - as reported $651,812 $3,990,535
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects 89,621 74,819
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Net income - pro forma $562,191 $3,915,716
====================================================================================================
Basic income per share - as reported $0.12 $ 1.04
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BASIC INCOME PER SHARE - PRO FORMA $0.11 $ 1.02
====================================================================================================
Diluted income per share - as reported $0.11 $ 0.93
====================================================================================================
DILUTED INCOME PER SHARE - PRO FORMA $0.10 $ 0.91
====================================================================================================
7
CPI AEROSTRUCTURES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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2. COSTS AND ESTIMATED Costs and estimated earnings in excess of billings on uncompleted contracts consist of:
EARNINGS IN EXCESS OF
BILLINGS ON UNCOMPLETED March 31, 2004
CONTRACTS: ---------------------------------------------------------------------------------------
U.S.
Government Commercial Total
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Costs incurred on uncompleted
contracts $25,097,415 $13,189,128 $38,286,543
Estimated earnings 13,698,627 6,106,547 19,805,174
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38,796,042 19,295,675 58,091,717
Less billings to date 22,229,328 17,253,596 39,482,924
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COSTS AND ESTIMATED EARNINGS
IN EXCESS OF BILLINGS ON
UNCOMPLETED CONTRACTS $16,566,714 $2,042,079 $18,608,793
=========================================================================================
December 31, 2003
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U.S.
Government Commercial Total
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Costs incurred on uncompleted
contracts $22,466,590 $13,184,968 $35,651,558
Estimated earnings 11,783,814 6,111,775 17,895,589
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34,250,404 19,296,743 53,547,147
Less billings to date 18,866,180 17,231,080 36,097,260
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COSTS AND ESTIMATED EARNINGS
IN EXCESS OF BILLINGS ON
UNCOMPLETED CONTRACTS $15,384,224 $ 2,065,663 $17,449,887
=========================================================================================
8
CPI AEROSTRUCTURES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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3. EARNINGS PER Basic earnings per common share are computed using the
COMMON SHARE: weighted average number of shares outstanding. Diluted
earnings per common share is computed using the
weighted-average number of shares outstanding adjusted for
the incremental shares attributed to outstanding options and
warrants to purchase common stock. Incremental shares of
498,350 and 462,750 were used in the calculation of diluted
earnings per common share in the first three months of 2004
and 2003, respectively.
4. PUBLIC OFFERING In September 2003, the Company entered into a three year,
AND CREDIT $5.0 million revolving credit facility with JP Morgan Chase
FACILITY: Bank, secured by the assets of the Company. The facility
specifies interest rates that range between the Prime Rate
and 225 basis points over LIBOR, depending on certain terms
and conditions. As of March 31, 2004, the Company has not
borrowed any funds pursuant to this facility.
In February 2003, the Company consummated a public offering
of 2,300,000 shares of common stock, which provided the
Company with net proceeds of $7,759,000. Approximately
$2,433,000 of the net proceeds was used to repay bank loans,
$2,700,000 was used to repay the Note Payable - Seller,
which had a carrying value plus accrued interest of
approximately $5,131,000. Accordingly, the Company recorded
a gain of approximately $2,431,000 on the extinguishment of
the debt. The remaining net proceeds of approximately
$2,626,000 are being used to fund continuing operations.
9
CPI AEROSTRUCTURES, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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The following discussion should be read in conjunction with the Company's
Condensed Consolidated Financial Statements and footnotes thereto contained in
this report.
FORWARD LOOKING STATEMENTS
The statements discussed in this Report include forward looking statements that
involve risks and uncertainties, including the timely delivery and acceptance of
the Company's products and the other risks detailed from time to time in the
Company's reports filed with the Securities and Exchange Commission.
CRITICAL ACCOUNTING POLICIES
Revenue Recognition
We recognize revenue from our contracts over the contractual period under the
percentage-of-completion (POC) method of accounting. Under the POC method of
accounting, sales and gross profit are recognized as work is performed based on
the relationship between actual costs incurred and total estimated costs at the
completion of the contract. Recognized revenues that will not be billed under
the terms of the contract until a later date are recorded as an asset captioned
"Costs and estimated earnings in excess of billings on uncompleted contracts."
Contracts where billings to date have exceeded recognized revenues are recorded
as a liability captioned "Billings in excess of costs and estimated earnings on
uncompleted contracts." Changes to the original estimates may be required during
the life of the contract. Estimates are reviewed monthly and the effect of any
change in the estimated gross margin percentage for a contract is reflected in
cost of sales in the period the change becomes known. The use of the POC method
of accounting involves considerable use of estimates in determining revenues,
costs and profits and in assigning the amounts to accounting periods. As a
result, there can be a significant disparity between earnings (both for
accounting and taxes) as reported and actual cash received by us during any
reporting period. We continually evaluate all of the issues related to the
assumptions, risks and uncertainties inherent with the application of the POC
method of accounting, however we cannot assure you that our estimates will be
accurate. If our estimates are not accurate or a contract is terminated, we will
be forced to adjust revenue in later periods. Furthermore, even if our estimates
are accurate, we may have a shortfall in our cash flow and we may need to borrow
money to pay taxes until the reported earnings materialize to actual cash
receipts.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
The Company's revenue for the three months ended March 31, 2004 was $6,228,108
compared to $6,007,447 for the same period last year, representing an increase
of $220,661 or 4%.
Gross profit for the three months ended March 31, 2004 decreased by $239,807 or
11 %, compared with the same period last year. As a percentage of revenue, gross
profit for the three months ended March 31, 2004 was 31% compared to 36% for the
same period last year, due primarily to a less favorable product mix.
Selling, general, and administrative expenses for the three months ended March
31, 2004 were $838,076 compared to $722,919 for the three months ended March 31,
2003, an increase of $115,157, or 16%. The increase was due to additional
professional fees and salaries during the quarter.
10
CPI AEROSTRUCTURES, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
The resulting income from operations for the three months ended March 31, 2004
was $1,088,018, a 25% decrease from $1,442,982 reported in the same period last
year.
Interest expense for the three months ended March 31, 2004 was $3,417, compared
to $139,666 for the three months ended March 31, 2003, a decrease of $136,249,
or 98%. The decrease was primarily due to bank fees associated with the early
extinguishment of approximately $2,433,000 of the Company's bank debt in
February 2003.
Included in other income for the three months ended March 31, 2003 is a gain on
extinguishment of debt of $2,431,233.
Income from continuing operations for the three months ended March 31, 2004 was
$1,086,812 compared to $3,737,203 for the three months ended March 31, 2003. The
decrease was primarily due to a gain on the extinguishment of debt of
$2,431,233, which was realized in conjunction with the public offering of 2.3
million shares of the Company's common stock in February 2003.
During the three months ended March 31, 2003, the Company realized a one time
gain on the disposal of assets held for sale-discontinued operation of $253,332.
The Company recorded a provision for income taxes of $435,000 for the three
months ended March 31, 2004. For the same period last year, the Company was able
to partially realize the benefit of its net operating loss carryforward for
losses occurred in previous years, resulting in a reversal of $1,823,000 of the
previously established valuation allowance and no provision for taxes for the
three months ended March 31, 2003. As a result, net income for the three months
ended March 31, 2004 was $651,812, or $0.12 per share, compared to $3,990,535,
or $1.04 per share, for the same period last year. Diluted income per share for
the three months ended March 31, 2004 was $0.11, calculated utilizing 5,800,120
diluted average shares outstanding for the period, compared to diluted income
per share of $0.93, calculated utilizing 4,311,529 diluted average shares
outstanding for the same period last year.
MATERIAL CHANGES IN FINANCIAL CONDITION
At March 31, 2004, the Company had working capital of $19,948,704 compared to
$19,319,374 at December 31, 2003, an increase of $629,330.
A large portion of the Company's cash is used in paying for materials and
processing costs associated with contracts that are in process and which do not
provide for progress payments. These costs are components of "Costs and
estimated earnings in excess of billings on uncompleted contracts" on the
Company's balance sheet and represent the aggregate costs and related earnings
for uncompleted contracts for which the customer has not yet been billed. These
costs and earnings are recovered upon shipment of products and presentation of
billings in accordance with contract terms.
Net cash used in operating activities for the three months ended March 31, 2004
was $1,332,316, compared to net cash used in operating activities of $829,291
for the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
The Company currently finances its operations through a combination of existing
resources and cash provided by operations. Liquidity and capital resources were
significantly improved as a result of the consummation of the Company's public
offering in February 2003, which provided the Company with approximately
$7,759,000 of net proceeds, approximately $2,626,000 of which have been and will
be used to fund continuing operations.
11
CPI AEROSTRUCTURES, INC.
ITEM2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
In September 2003, the Company entered into a three year, $5.0 million revolving
credit facility with JPMorgan Chase Bank, secured by the assets of the Company.
The facility specifies interest rates that range between the Prime Rate and 225
basis points over LIBOR, depending on certain terms and conditions. As of March
31, 2004, the Company has not borrowed any funds pursuant to this facility.
The Company believes that its current liquidity and capital resources are
sufficient to meet its needs for the foreseeable future.
CONTRACTUAL OBLIGATIONS
The table below summarizes information about our contractual obligations as of
March 31, 2004 and the effects these obligations are expected to have on our
liquidity and cash flow in the future years.
----------------------------------------- --------------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD ($)
----------------------------------------- --------------------------------------------------------------------------------------
LESS THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
----------------------------------------- ----------------- ---------------- ----------------- --------------- -----------------
Short-Term Debt -0- -0- -0- -0- -0-
----------------------------------------- ----------------- ---------------- ----------------- --------------- -----------------
Capital Lease Obligations 31,181 7,071 16,856 7,254 -0-
----------------------------------------- ----------------- ---------------- ----------------- --------------- -----------------
Operating Leases -0- -0- -0- -0- -0-
----------------------------------------- ----------------- ---------------- ----------------- --------------- -----------------
Employment Agreement Compensation * 1,336,300 673,800 662,500 -0- -0-
----------------------------------------- ----------------- ---------------- ----------------- --------------- -----------------
Total Contractual Cash Obligations 1,367,481 680,871 679,356 7,254 -0-
----------------------------------------- ----------------- ---------------- ----------------- --------------- -----------------
* The employment agreements provide for bonus payments that are excluded from
these amounts.
12
CPI AEROSTRUCTURES, INC.
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ITEM 3 - CONTROLS AND PROCEDURES
An evaluation of the effectiveness of the Company's disclosure controls
and procedures was made as of March 31, 2004 under the supervision and with the
participation of the Company's management, including the Company's chief
executive officer and acting chief financial officer (the Company's executive
officer and principal financial officer). Based on that evaluation, he concluded
that the Company's disclosure controls and procedures are effective to ensure
that information required to be disclosed by the Company in reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. During the most recently
completed fiscal quarter, there has been no change in the Company's internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
PART II: OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit 31 Section 302 Certification by CEO and acting CFO
Exhibit 32 Section 906 Certification by CEO and acting CFO
b) During the three months ended March 31, 2004, a Current Report
on Form 8-K, dated March 30, 2004, was filed by the Company
with the Securities and Exchange Commission on March 31, 2004,
reporting events under Items 7 and 12.
13
CPI AEROSTRUCTURES, INC.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
CPI AEROSTRUCTURES, INC.
Dated: May 6, 2004 By /s/ Arthur August
-------------------
Arthur August
Chairman of the Board
Dated: May 6, 2004 By: /s/ Edward J. Fred
-------------------
Edward J. Fred
Chief Executive Officer, President, acting Chief
Financial Officer (Principal Executive,
Accounting and Financial Officer), Secretary and
Director
14