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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A No. 1
[X] Annual Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee required)
For the fiscal year ended December 31, 1995
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[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No fee required)
For the transition period from to
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Commission file number 1-11398
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CPI AEROSTRUCTURES, INC.
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(Name of Small Business Issuer in Its Charter)
New York 11-2520310
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
200A Executive Drive, Edgewood, New York 11717
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(Address of Principal Executive Offices) (Zip Code)
(516) 586-5200
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange on Which
Title of Each Class Each Class is Registered
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None None
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Securities registered under Section 12(g) of the Act:
Common Stock, $.001 par value per share
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(Title of Class)
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 past 90 days. Yes __X__ No _____
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for it's most recent fiscal year were $4,684,378.
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the closing price at which the stock was sold on March
27, 1996 was $2,564,462.
As of March 27, 1996, the Issuer had 3,728,304 shares of Common Stock,
$.001 par value, outstanding.
Transitional Small Business Disclosure Format: Yes No X
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Item 1. DESCRIPTION OF BUSINESS
(a) Business Development
CPI Aerostructures, Inc. (the "Company") is engaged in contract
production of structural aircraft parts and sub-assemblies for the commercial
and military sectors of the aircraft industry. The Company's operations consist
primarily of incorporating component aircraft parts supplied by third parties
into complex sub-assemblies to satisfy specific customer requirements and
precision certification standards. In connection with its commercial assembly
operations, the Company provides engineering, technical and program management
services to its customers.
The Company was incorporated under the laws of the State of New York in
January 1980 under the name Composite Products International, Inc. The Company
changed its name to Consortium of Precision Industries, Inc. in April 1989 and
to CPI Aerostructures, Inc. in July 1992. In September 1992, the Company
completed its initial public offering in which it sold 1,190,000 units
("Units"), with the Company receiving net proceeds of approximately $4,600,000.
On October 7, 1994, the Company's Registration Statement for the issuance of
1,190,000 shares of Common Stock upon the exercise of public warrants was
declared effective. As of January 17, 1995, the redemption date, an aggregate of
1,183,070 warrants were exercised, with the Company receiving net proceeds of
approximately $2,861,000.
(b) Business of Issuer
The aircraft industry is comprised of two distinct markets: commercial
and military. In March 1993, Management determined that the Company would have
to diversify its operations outside of the aerospace industry in view of
significant economic setbacks in such industry. The Company subsequently entered
into letters of intent to acquire three separate companies, but did not complete
any of such acquisitions. In late 1995, the Company was awarded two significant
new aerospace contracts and no longer believes that its future growth depends on
diversification, although it is continuing to evaluate possible acquisitions.
However, the Company has no agreements, understandings or arrangements with
respect to any acquisition. See "Diversification Program" below and "Item 3.
Legal Proceedings."
The Company is engaged in contract production of structural aircraft
parts and sub-assemblies for the commercial and military sectors of the aircraft
industry. The following table sets forth information relating to the approximate
dollar amounts and
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percentages of the Company's revenues from the commercial and military sectors
of the aircraft industry:
<TABLE>
<CAPTION>
Years Ended
December 31, December 31,
1994 1995
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(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Commercial $4,521 89.7% $4,369 93.3%
Military 520 10.3 315 6.7
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Total...................... $5,041 100.0% $4,684 100.0%
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</TABLE>
Sales of the Company's commercial aircraft products accounted for an
increasing portion of the Company's revenues until the Company completed its
transition from military to commercial work in 1992. However, in view of the two
substantial contract awards from the military sector in late 1995, the Company
is expected to experience an increased level of revenues from the military
sector.
Products
The Company's principal commercial aircraft products include pylons,
aprons, spars and lower pan assemblies, which are structures used to attach jet
engine housings to aircraft.
The Company's products are sub-assemblies (a series of parts fitted
together to form a complex aerodynamic structure). These products are
incorporated into jet engine housings (nacelles) by the Company's customers or
aircraft manufacturers to form final aircraft assemblies. The Company's products
are custom designed and developed to fit precise certification standards imposed
by the Company's customers and applicable regulatory bodies. Due to the critical
functions served by the Company's products, sub-assemblies are often
manufactured using durable, heat-resistant, and/or light-weight metals,
including titanium, inconel and various metal alloys containing similar
properties.
Apron assemblies are panels that function as the aerodynamic surface
between pylons and nacelles. As of December 31, 1995, the Company had delivered
two engineering prototypes, three development units, six flight test units and
forty production units of an apron assembly to Rohr Industries, Inc. ("Rohr")
for the McDonnell Douglas MD-90, a 150-200 seat jet aircraft which received FAA
certification in November 1994.
Pan assemblies are structures connected to the rear end of pylons.
Spars are fabricated components of the pylon that are
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connected to nacelles. Spars and lower pan assemblies are produced under Rohr's
production program for the Boeing 757, an existing 200 seat jet aircraft. The
Boeing 757 received FAA certification in December 1982.
Aft fairing assemblies are the exterior portion of a pylon. The Company
produces aft assemblies and portions of the upper forward section of the pylon
under an agreement with Mitsui & Co. (U.S.A.) as agent for Shin-Meiwa Industry
Co., Ltd., a Japanese aerospace firm, in connection with the production of the
McDonnell Douglas MD-11 Tri-jet, an existing 250 to 275 seat jet aircraft. The
McDonnell Douglas MD-11 received FAA certification in November 1991.
Pylons are structures which attach nacelles to the wing or fuselage of
an aircraft. The Company produced pylons under The Nordam Corporation's
("Nordam") production program for Raytheon Company's Hawker 1000 Executive Jet,
an existing eight to ten seat aircraft, which received FAA certification in
November 1991. In September 1995, Nordam terminated the contract for the
manufacture of pylons, as described below, but not the portion of the contract
relating to the manufacture of engine mounts.
The Company also assembles structural replacement parts for military
aircraft, including spoilers, flaps, ducts, skins and doors. Spoilers and flaps
are aerodynamic panels attached to the wings of an aircraft that enable an
aircraft to ascend and brake during takeoff and landing. Ducts are open panels
to enable free airflow within an aircraft. Skins are the outer layer of an
aircraft. In late 1995, the Company announced the award of two significant
contracts with the United States Air Force to supply parts for the C-5 Aircraft
and the A-10 Aircraft. The Company has the capabilities to produce additional
aircraft products for both commercial and military applications.
Customers and Contracts
Commercial
Pursuant to long-term agreements with Rohr, a leading commercial
aircraft supplier of nacelles, the Company operates as a subcontractor under
Rohr's production programs with The Boeing Company and McDonnell Douglas
Corporation. In June 1994, Rohr sold its corporate jet business to Nordam and
the Company's agreement with Rohr concerning the Hawker 1000 was transferred to
Nordam. Through December 31, 1995, most of the Company's revenues attributable
to the commercial sector of the aircraft industry were derived from the three
contracts and purchase orders each
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originally with Rohr, as described below. For the years ended December 31, 1994
and 1995, sales of the Company's products to Rohr/Nordam accounted for
approximately 81% and 89%, respectively, of the Company's revenues. During 1994
and 1995, approximately 8.8% and 4.2%, respectively, of the Company's revenues
were derived from sales to Shin-Meiwa.
Generally, the Company's agreements with Rohr, Mitsui and Nordam
provide that the price for products is subject to annual adjustment calculated
in accordance with an escalation formula that is based on statistics published
by the United States Department of Labor, which account primarily for industry
costs for labor and materials. In addition, the agreements contain repricing
provisions which adjust the price under certain circumstances as a result of
changes in the scope, design, quantity or delivery schedule provisions.
The Company's agreements with Rohr and Nordam contain provisions that
allow termination of such contracts at will, in whole or in part, at the
convenience of the customer and generally provide that the customer must
reasonably compensate the Company for work performed through the termination
date. The Company's agreement with Nordam to provide pylons was terminated by
Nordam in September 1995, in accordance with such terms, as described below.
There can be no assurance that Rohr or Nordam will maintain any of its remaining
contracts with the Company at current levels. Termination of any of the
Company's other contracts by Rohr or Nordam would have a material adverse effect
on the Company.
In May 1990, the Company entered into an agreement with Rohr, pursuant
to which the Company agreed to provide Rohr with pan assemblies in connection
with production of the Boeing 757 jet aircraft. The agreement, as revised,
obligates the Company to deliver a total of 296 units to Rohr for a fixed
aggregate base price of $2,545,000 and entitles Rohr to order additional
assemblies at negotiated prices. As of December 31, 1994 and 1995 the Company
had delivered 202 and 248 assemblies, respectively, to Rohr. Rohr has provided
the Company with all special purpose tooling necessary to produce such
assemblies. The Company anticipates that it will complete production and
delivery of the balance of the currently ordered assemblies under this agreement
by the end of 1996. The Company also provides Rohr with spars for use in
connection with production of the Boeing 757 aircraft pursuant to purchase
orders submitted to the Company from time to time by Rohr. As of December 31,
1994 and 1995, Rohr had ordered an aggregate of 603 and 721 spars, respectively,
for an aggregate purchase price of $2,263,000 as of December 31, 1995 and the
Company had delivered 641 spars to Rohr as of December 31, 1995.
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The Company anticipates that it will complete deliveries of the balance of the
currently ordered assemblies by the end of 1996. For the years ended December
31, 1994 and 1995, approximately 9% and 19%, respectively, of the Company's
revenues were derived from the sale of pan assemblies and spars under this
program. The Boeing 757 is an existing airplane which the Company believes
Boeing will continue to produce based on Boeing's reported backlog.
In March 1991, the Company entered into an agreement with Rohr,
pursuant to which the Company agreed to provide Rohr with apron assemblies and
related components in connection with production of the McDonnell Douglas MD-90
jet aircraft. The Company delivered 34 production units during 1995. As of
December 31, 1995, the Company had delivered an aggregate of two engineering
prototypes, three development units, six flight testing units and 40 production
units. During the years ended December 31, 1994 and 1995, approximately 63% and
57%, respectively, of the Company's revenues were derived from this program.
McDonnell Douglas completed FAA certification for this aircraft at the end of
1994. Under the Company's agreement, the Company must deliver an annual average
minimum of three and an annual average maximum of 12 apron assemblies per month
until at least 1,000 apron assemblies are delivered. The agreement obligates the
Company to deliver an aggregate of 1,000 apron assemblies to Rohr at a fixed
aggregate base price (originally contracted in 1991 unescalated dollars) of
$22,000,000 and entitles Rohr to purchase up to an additional 1,000 apron
assemblies at a price to be negotiated. Due to modifications in the design of
the apron, the price of the production units has increased significantly.
The above agreement provides that the Company was obligated to pay for
non-recurring costs of up to a maximum of approximately $1,700,000, subject to
adjustment by mutual agreement to reflect design changes. In November 1994, due
to delivery stretch-outs which would have extended the number of years before
the Company would have recovered its amortized investment, the Company
negotiated with Rohr for advanced payment of such investment at a net present
value of $1,200,000. This amount was paid to the Company in two installments in
December 1994 and January 1995. Payment to the Company was made in exchange for
the Company's release of all claims for schedule delays and the Company's
transfer of title in the tooling to Rohr and all proprietary rights relating to
the products.
In October 1988, the Company entered into an agreement with Rohr, which
contract was sold to Nordam, pursuant to which the Company agreed to provide
Nordam with pylons, engine mounts and all related sub-assemblies and components
for use in connection with
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production of the Hawker 1000 Executive Jet. For the years ended December 31,
1994 and 1995, approximately 9.1% and 13.9%, respectively, of the Company's
revenues were derived under this program. The Company reported no sales of
pylons under this agreement since the first quarter of 1993. The original
agreement obligated the Company to deliver a total of 300 pylons to Nordam at a
fixed aggregate base price (in 1988 unescalated dollars) of $10,300,000. The
agreement further provided that Nordam was obligated to reimburse the Company
for all non-recurring costs incurred by the Company to design and fabricate
tooling required to produce the product, plan and prepare initial documentation,
and develop prototypes. The Company was amortizing an aggregate of $1,815,900 of
non-recurring costs over the first 300 pylons (150 ship-sets) delivered to
Nordam by attributing a portion of each payment it receives to recover such
costs. The engine mounts for this jet are also common to other executive jets
and may be used for other executive jets.
As of December 31, 1994, the Company had delivered 140 pylons (70
ship-sets) to Nordam; however, the Company has not delivered any pylons under
the agreement since the second quarter of 1993, when Rohr advised the Company of
a delivery stretch out on the Hawker 1000 program. To compensate the Company for
this production delay, Rohr agreed to reimburse the Company for the balance of
the non-recurring investment in this program, which balance of $1,242,975 was
received during 1994. Additionally, the Company negotiated an agreement with
Rohr for Rohr to partially purchase residual pylon inventory for $727,200
payable at the rate of $104,000 per month beginning in April 1994, the full
amount of which was received during 1994. In September 1995, the Company
received notice from Nordam of a termination of CPI's contract with Nordam for
the manufacture of pylons. The portion of the contract relating to the
manufacture of engine mounts has not been terminated, and sales of engine mounts
are expected to continue under the contract.
The Company recorded a charge against cost of sales of approximately
$1,473,000 (based on an estimated impact using the percentage of completion
method of accounting) during the fourth quarter of 1995, but also expects to
negotiate a termination payment with Nordam, which will have a positive impact
on the Company's cash flow. The amounts of the termination payment, however,
cannot be determined at this time.
In May 1992, the Company commenced production of aft fairing assemblies
for Shin-Meiwa Industry Co., Ltd. ("Shin-Meiwa"), a Japanese aerospace firm. On
December 10, 1992, the Company executed an agreement with Mitsui & Co. (U.S.A.),
Inc., as agent
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for Shin-Meiwa to produce aft fairing assemblies in connection with the
production program for the McDonnell Douglas MD-11. The Company's current
arrangement with Shin-Meiwa provides for the Company to assemble products using
tooling and component parts provided by Shin-Meiwa. The contract provides for
the delivery of 251 pieces for an aggregate of approximately $1,590,000. As of
December 31, 1994 and 1995, the Company had delivered 110 and 141 fairing
assemblies pursuant to purchase orders. The Company expects to deliver 18 new or
reworked units through 1996.
Military
The Company supplies structural aircraft parts and sub-assemblies to
the military under prime contracts with several branches of the United States
Government. For the years ended December 31, 1994 and 1995, 10.3% and 6.7%,
respectively, of the Company's revenues were derived from military contracts. No
single military contract accounted for 10% of the Company's revenues for the
years ended December 31, 1994 or 1995. However, in view of the two contracts
awarded by the Air Force in late 1995, the Company is expected to experience an
increased level of revenues from the military sector.
On September 19, 1995, the Company was awarded a contract by the United
States Air Force for the A-10 Aircraft program. The Company will produce leading
edge panels for such aircraft. The total award amount is approximately
$3,074,000, with all deliveries expected to be completed during 1997.
On September 22, 1995, the Company was awarded a contract by the United
States Air Force for the C-5 Aircraft program. The Company is producing
structural supports, plates and brackets, mount assemblies, air deflectors,
mounting blocks, hinge brackets, plate assemblies, fairings, landing gear door
assemblies and panel assemblies for such aircraft. As of March 20, 1996, the
total contract value is $1,036,000 with additional orders anticipated, although
no assurances can be given as to any additional orders.
As of December 31, 1994 and 1995, the Company had five and eight
military contracts, respectively, in various stages of completion. Contract
terms are generally one to two years. Product prices under these contracts are
fixed. Each contract obligates the Company to deliver a specific quantity of
units according to specified delivery schedules. Each contract contains
repricing clauses which adjust the fixed price for each product delivered in the
event that the government requests design, quantity or schedule changes for
products. The Company generally provides its own tooling to produce products
under military
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contracts. The Company typically recovers all of its tooling costs under a
contract following the delivery of the first unit produced. For contracts with
an aggregate dollar amount in excess of $100,000 the Company is generally
entitled to receive progress payments to cover approximately 90% of the
Company's total costs at the time of the request.
Pursuant to military contracts, the Company provides a warranty which
covers defects in materials and workmanship for products delivered to the
government. The warranty provides for the replacement or repair of defective
products. The Company is not required under its contracts to carry liability
insurance. Such contracts incorporate by reference the Federal Acquisition
Regulations (FAR) which provide that the government generally acts as a
self-insurer for loss of or damage to property that occurs after acceptance of
delivered products and results from defects or deficiencies of the products.
Production and Assembly
The Company's assembly operations consist primarily of incorporating
component aircraft parts supplied by third parties into complex sub-assemblies
to satisfy specific customer requirements and precision certification standards.
The Company subcontracts production of component parts in its assembly
operations, which are shaped, formed, welded and/or machined to specified
configurations. This allows the Company to avoid additional costs of extensive
manufacturing and production facilities, parts fabrication and expensive capital
equipment. The Company's employees process component parts to add drilling,
routing, boring and other processes prior to assembly. Components are placed,
attached and incorporated into final assemblies by Company-trained personnel.
The Company's operations are generally conducted on a five-day basis with single
shifts.
The Company packages its products in accordance with specifications for
shipment to its customers. The Company's customers are generally responsible for
arranging product shipment by common carrier.
Marketing
To date, substantially all of the Company's commercial marketing
activities have been conducted by members of management. Such activities have
consisted primarily of personal contact with potential customers.
The Company's sales cycle, which generally commences at the
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time a prospective customer issues a request for proposal and ends upon
execution of a contract with the customer, typically ranges from six months to
one year. A portion of the Company's commercial marketing efforts involves
responding to requests from potential contractors. The Company obtains military
contracts for its products and services through the process of competitive
bidding.
Backlog
The Company produces custom sub-assemblies pursuant to long-term
contracts and customer purchase orders. Backlog consists of aggregate contract
values under basic ordering agreements or for production orders, excluding the
portion previously included in operating revenues on the basis of percentage of
completion accounting, and including estimates of future contract price
escalation. All of the Company's backlog is subject to termination at will and
rescheduling, without significant penalty. As of December 31, 1995 and 1994, the
Company's backlog was approximately $50.4 million and $59.8 million,
respectively.
Of the Company's backlog at December 31, 1995, approximately 92% and
8%, respectively, is attributable to commercial and military contracts.
Approximately $6 million (12%) of the Company's backlog at December 31, 1995 is
scheduled for delivery during the year ending December 31, 1996.
Raw Materials, Suppliers and Manufacturers
The Company makes extensive use of metals, including, titanium,
inconel, steel, aluminum and alloys as raw materials in the production of its
products. Rod, bar tubing and extrusions made of aluminum, steel and titanium
and other materials such as rubber and adhesives are also utilized. The
Company's decision to purchase certain raw materials is generally based on
required specifications of its customers. The Company purchases all of its
supply of metals and other raw materials pursuant to purchase orders from third
party distributors who purchase raw materials from original manufacturers
located throughout the United States. While the Company attempts to maintain
alternative sources of supply for the Company's raw materials and believes that
alternative sources are currently available for most of such materials, the
Company's business is subject to the risk of price fluctuations and periodic
delays in delivery of raw materials.
The Company subcontracts production of substantially all component
parts incorporated into its products to third party manufacturers under firm
fixed price orders. Accordingly, the Company is substantially dependent on the
ability of such
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manufacturers, among other things, to meet stringent performance and quality
specifications and to conform to delivery schedules. The Company believes that
the risk, if any, inherent in this arrangement is minimal. The Company's
decision to purchase certain components is generally based upon whether such
components are available to meet required specifications and at a cost and
delivery consistent with customer requirements. The Company generally solicits
numerous sources for its supplies before making a decision to purchase
components. The Company, from time to time, is required to purchase custom made
parts from sole suppliers and manufacturers in order to meet specific customer
requirements. To date, the Company has not experienced material delays in
connection with obtaining custom parts.
The Company generally does not maintain supply agreements with its
suppliers or manufacturers and purchases raw materials and component parts
pursuant to purchase orders in the ordinary course of business. The Company
believes that the supplies of materials through the end of 1996 will be
adequate.
Competition
The markets for the Company's products are highly competitive. The
Company competes with numerous well-established foreign and domestic
subcontractors engaged in the supply of aircraft parts and assemblies to the
commercial sector of the aircraft industry, including Northrop Grumman
Corporation, Aeronca, Inc., Shin-Meiwa and other subcontractors throughout the
world. The Company also faces competition from foreign and domestic prime
contractors, including Nordam, all of whom possess greater resources than the
Company, thereby permitting such companies to implement extensive production
programs in response to orders from aircraft manufacturers. The market for large
commercial jet aircraft is dominated by The Boeing Company, McDonnell Douglas
Corporation and Airbus Industries, which typically contract production of
assemblies to a limited number of large commercial contractors. Consequently,
the Company's ability to increase market penetration in the commercial sector
may be limited by the relatively limited number of prime contractors in this
market.
The Company competes on the basis of price, development and production
capabilities and service. To the extent possible, the Company seeks to limit its
operations to the assembly of complex sub-assemblies while subcontracting
production of component parts, which allows the Company to avoid the significant
costs associated with maintaining capital equipment. The Company believes that,
by subcontracting production of component parts and providing engineering,
technical and program management services to prime
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contractors, it has enhanced its competitive position in the commercial aircraft
market.
In addition, the Company faces competition from numerous military
subcontractors. The Company competes for military contracts on the basis of
price. The Company is able to obtain military contracts that are "set-aside" for
small businesses.
Government Regulation
The Company is subject to regulations administered by the United States
Environmental Protection Agency, the Occupational Safety and Health
Administration, various state agencies and county and local authorities acting
in cooperation with Federal and state authorities. Among other things, these
regulatory bodies impose restrictions to control air, soil and water pollution,
to protect against occupational exposure to chemicals, including health and
safety risks, and to require notification or reporting of the storage, use and
release of certain hazardous chemicals and substances. The extensive regulatory
framework imposes compliance burdens and risks on the Company. Governmental
authorities have the power to enforce compliance with these regulations and to
obtain injunctions or impose civil and criminal fines in the case of violations.
The Comprehensive Environmental Response, Compensation and Liability
Act of 1980 ("CERCLA") imposes strict, joint and several liability on the
present and former owners and operators of facilities which release hazardous
substances into the environment. The Resource Conservation and Recovery Act of
1976 ("RCRA"), regulates the generation, transportation, treatment, storage and
disposal of hazardous waste. In New York, the handling, storage and disposal of
hazardous substances is governed by the Environmental Conservation Law, which
contains the New York counterparts of CERCLA and RCRA. In addition, the
Occupational Safety and Health Act, which requires employers to provide a place
of employment that is free from recognized and preventable hazards that are
likely to cause serious physical harm to employees, obligates employers to
provide notice to employees regarding the presence of hazardous chemicals and to
train employees in the use of such substances.
The Company's operations require the use of a limited amount of
chemicals and other materials for painting and cleaning, including solvents and
thinners, that are classified under applicable laws as hazardous chemicals and
substances. The Company has obtained a permit from the Town of Islip, New York,
Building Division in order to maintain a paint booth containing flammable
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liquids. The Company believes that it is in substantial compliance with all
federal, state and local laws and regulations governing its operations and has
obtained all material licenses and permits required for the operations of its
business.
Warranty
Pursuant to all of the Company's commercial contracts, the Company
warrants that products will strictly conform to all specifications provided by
the customer and will be free from defects in material and workmanship for a
specified period (ranging from one to four years). The Company's liability is
limited to repair or replacement of defective products. Notwithstanding such
limitation, the Company agreed to indemnify the customers for any costs,
damages, expenses or other loss or liability incurred or paid (including
reasonable attorneys' fees) arising out of asserted claims for property damage,
personal injury or death, or any other damages, including claims of
consequential loss and breach of contract as a result of, among other things,
the performance of work, products or workmanship, provided that such claims do
not arise as a result of the sole fault of the customers.
Pursuant to military contracts, the Company provides a warranty which
covers defects in materials and workmanship for products delivered to the
government. The warranty provides for the replacement or repair of defective
products. The Company is not required under its contracts to carry liability
insurance. Such contracts incorporate by reference the Federal Acquisition
Regulations (FAR) which provide that the government generally acts as a
self-insurer for loss of or damage to property that occurs after acceptance of
delivered products and results from defects or deficiencies of the products.
Insurance
The Company maintains a $2 million general liability insurance policy,
a $10 million products liability insurance policy, and a $5 million umbrella
liability insurance policy, which it believes is adequate coverage for the types
of products presently marketed. The Company generally warrants its products to
be free from defects in materials, workmanship and manufacturing processes for a
specified period, ranging from one to four years from the date of shipment.
Proprietary Information
None of the Company's current assembly processes or products
are protected by patents. The Company relies on proprietary
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know-how and confidential information and employs various methods to protect the
processes, concepts, ideas and documentation associated with its products.
However, such methods may not afford complete protection and there can be no
assurance that others will not independently develop such processes, concepts,
ideas and documentation. The Company has registered the name CPI Aerostructures
and its logo as trademarks.
Employees
As of March 27, 1995, the Company employed 22 full-time employees
including its three executive officers, and two part-time employees, as compared
with 24 full-time employees and two part-time employees as of December 31, 1994.
The 22 full-time employees include two engaged in engineering and design, one
engaged in marketing, seven engaged in assembly operations, three engaged in
quality control/assurance, two engaged in technical support, one engaged in
contracts administration, four engaged in procurement and accounting and two
engaged in administration. The Company also employs temporary personnel with
specialized disciplines on an as-needed basis. None of the Company's employees
are members of unions. The Company believes that its relations with its
employees are good.
Diversification Program
The aircraft industry experienced significant down-sizing commencing in
early 1993. Management determined in March 1993 that the Company would have to
diversify its operations outside of the aerospace industry. In November 1993,
the Company entered into a letter of intent to acquire a manufacturer of
telecommunications towers. The letter of intent was terminated as the Company
was unable to enter into a definitive merger agreement by December 31, 1993.
On July 14, 1994, the Company entered into a letter of intent with
Valentec International Corporation ("Valentec") to acquire substantially all of
the assets and the related liabilities of four operating divisions of Valentec.
The four operating units were involved in the design and manufacture of
components for automotive applications, precision parts for computers, medical
prosthesis applications, and ordnance products for the domestic and
international munitions market. The Company commenced due diligence but was
unable to arrive at a purchase price and the letter of intent was terminated for
the parties' failure to enter into a definitive purchase agreement by December
20, 1994, as amended.
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On August 24, 1995 the Company signed a letter of intent to merge with
VTX Electronics Corporation ("VTX") of Farmingdale, New York, a value added
specialty distributor of electronic components and cable. On October 27, 1995,
the Company announced that it had terminated merger discussions with VTX
pursuant to the terms of the letter of intent and subsequently commenced a
lawsuit against VTX. See "Item 3. Legal Proceedings."
The Company continues to review candidates for potential acquisitions;
however, following the award of two significant new aerospace contracts,
Management does not believe that the Company's future growth depends on
diversification. The Company has no agreements, understandings or arrangements
with respect to any acquisition.
Item 2. DESCRIPTION OF PROPERTY
The Company's executive offices and production facilities are situated
in an approximate 25,000 square foot building located at 200A Executive Drive,
Edgewood, New York 11717. The Company occupies this facility under a lease with
an unaffiliated landlord, which commenced on December 1, 1995 and ends on March
31, 1999. The current monthly base rental is $12,656, increasing to $13,451,
plus common area costs, over a the term of the lease. The Company believes that
its facilities are adequate for its current needs.
In December 1995, the Company sold its land and facilities in
Ronkonkoma, New York which resulted in a substantial reduction of
debt. See "Item 6. Management's Discussion and Analysis."
Item 3. LEGAL PROCEEDINGS
On or about November 22, 1995, the Company commenced an action in the
Supreme Court of the State of New York, County of Nassau, against VTX
Electronics Corp. alleging breach of a contract signed between the parties on
August 24, 1995. CPI seeks damages in the amount of $400,000. Defendant VTX
answered and counterclaimed for $150,000. The matter is in the discovery phase.
On December 26, 1995, the Company commenced an action in the Supreme
Court of the State of New York, County of New York, against Valentec
International Corporation and Price Waterhouse LLP, alleging breach of contract
and unjust enrichment against both of them, and a separate fraud claim against
Valentec. CPI seeks damages of $62,500. Defendant Valentec has answered and
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<PAGE>
counterclaimed for $49,000 in alleged legal fees. The matter is in
the discovery phase.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
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<PAGE>
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's securities have been traded in the over-the-counter
market and listed on the National Association of Securities Dealers Automated
Quotation SmallCap Market ("Nasdaq/SmallCap") since December 22, 1995, and
quoted on the Nasdaq National Market System and traded on the Boston Stock
Exchange prior to such date, from September 16, 1992. The Company's Common Stock
was moved from the Nasdaq National Market System to the Nasdaq SmallCap as a
result of the Company failing to hold an annual shareholders meeting for two
years before holding one on January 12, 1996. The Company has appealed this
decision because it deferred holding meetings each time a proposed acquisition
which would have required shareholder approval was terminated, and views the
decision as being based on a non-substantive requirement.
The Company's Units, each consisting of one share of Common Stock and
one Common Stock warrant traded under the NASDAQ symbol CPIAU until January 19,
1993; the Common Stock trades under the NASDAQ symbol CPIA and the Warrants
traded under the NASDAQ symbol CPIAW. The Warrants were traded until January 12,
1995 when they were redeemed.
The following tables set forth for the last two fiscal years, the range
of high and low bid prices of the Company's Common Stock and Warrants for the
periods indicated and the range of high and low closing prices of the Company's
Common Stock and Warrants since January 1, 1994, as reported by NASDAQ. NASDAQ
prices represent inter-dealer quotations, without retail mark-up, mark-down or
commission, and may not necessarily represent actual transactions.
NASDAQ
Security Period High Low
- -------- ------ ---- ---
Common January 1 -
Stock March 31, 1994 $9 1/4 $6 31/32
April 1 -
June 30, 1994 $7 3/4 $6 1/2
July 1 -
September 30, 1994 $8 1/2 $5
October 1- $8 $4 3/8
December 31, 1994
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<PAGE>
Period High Low
------ ---- ---
January 1 -
March 31, 1995 $5 5/8 $1 3/4
April 1 -
June 30, 1995 $2 1/2 $1 5/16
July 1 -
September 30, 1995 $1 7/8 $15/16
October 1 -
December 31, 1995 $1 7/16 $1
January 1 -
February 29, 1996 $1 1/4 $3/4
Warrants January 1, -
March 31, 1994 $3 3/4 $2
April 1 -
June 30, 1994 $3 1/8 $2
July 1 -
September 30, 1994 $4 1/4 $1 7/8
October 1 -
December 31, 1994 $5 1/8 $3
January 1 -
anuary 11, 1995 $3 $1 1/4
On March 27, 1996, the closing sale price for the Company's Common
Stock on the NASDAQ/SmallCap was $1.0625.
On March 27, 1996, there were 83 holders of record of the Company's
Common Stock. The Company reasonably believes that there are in excess of 400
beneficial holders of its Common Stock.
Dividend Policy
To date, the Company has not paid any dividends on its Common Stock.
The payment of dividends, if any, in the future is within the discretion of the
Board of Directors and will depend on the Company's earnings, if any, its
capital requirements and financial condition and other relevant factors. The
Company's loan agreement with Chrysler prevents the Company from declaring or
paying any dividends or making any other payments to the Company's
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<PAGE>
shareholders. Furthermore, the Board of Directors does not intend to declare any
cash or other dividends in the foreseeable future, but instead intends to retain
earnings, if any, for use in the Company's business operations. See "Item 6.
Management's Discussion and Analysis - Financing Arrangements."
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis should be read in conjunction
with the Financial Statements and Notes thereto appearing under Item 7 of this
Report.
General
Consistent with industry practice, the Company uses the percentage of
completion method of accounting for its business. Under this method, the Company
recognizes revenues as costs are incurred under its contracts, measured by the
percentage of actual costs incurred to date against estimated total costs. Under
the Company's commercial contracts, the Company does not receive cash payments
until products are shipped. Accordingly, revenues may be recognized by the
Company even though associated cash payments have not been received. Provisions
for estimated losses on uncompleted contracts are made in the period in which
such losses are determined. Changes in contract performance may result in
revisions to costs and income, which are recognized in the period in which
revisions are determined to be required. The Company's recorded revenues may be
written-off in later periods in the event the Company's cost estimates prove to
be inaccurate or a contract is terminated.
Results of Operations
Year Ended December 31, 1995 as Compared to the Year Ended December 31, 1994
The Company's revenues for the year ended December 31, 1995 ("1995")
were $4,684,000 compared to $5,041,000 for the year ended December 31, 1994
("1994"), representing a decrease of $357,000, or 7%. This reduction in revenues
was attributable to delays in deliveries relating to certain commercial jobs.
Delivery "stretchouts" on the Boeing 757, as well as on the Raytheon Hawker 1000
prior to the partial termination of the contract, were consistent with the
general slowdown of deliveries announced by the major aircraft manufacturers.
During 1994, the Company began manufacturing for production under the MD-90
program and in 1994 delivered two flight testing units and four production
units. This
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<PAGE>
program began to ramp-up delivery rates to three units per month beginning in
January 1995, increasing to four units per month in January 1996. As of December
31, 1995, the Company had delivered 40 production units out of a total contract
of 1,000. The Company's largest contract with Rohr for the McDonnell Douglas
MD-90 provided that the Company may recover only a portion of its non-recurring
costs in the event of termination prior to delivery of a certain minimum number
of aprons. In November 1994, the Company negotiated with Rohr for an advance
payment of the amortized investment of approximately $1,700,000. In view of
delivery "stretch-outs," it would have been several years before the Company
would have recovered its non-recurring costs. The Company received the net
present value of its investment in two installments of $600,000 each in December
1994 and January 1995. In February 1992, the Company entered into an agreement
with Kaiser Compositek ("Kaiser") (formerly Wyman Gordon Composites), a
subcontractor, to provide the Company with panels used in connection with the
aprons on the MD- 90. Kaiser and its subcontractor have completed the
non-recurring portion of such agreement estimated to be approximately $520,000.
Notwithstanding the Company's agreement with Rohr for advanced payment of its
non-recurring costs, in accordance with the Company's agreement with Kaiser, the
Company was required to begin payment of Kaiser's non-recurring costs in
November 1994, to be amortized over the production cycle.
Commercial aircraft programs represented approximately 93% of total
revenues for 1995, as compared to 90% for 1994.
Gross profit for 1995 was $420,00 compared to $2,112,000 for 1994,
representing a decrease of $1,692,000, or 80%. The decrease in gross profit was
attributable primarily to the termination of the pylon portion of the Company's
contract with Nordam for the Raytheon Hawker 1000. This resulted in a charge
against cost of sales of approximately $1,473,000 based on its impact on past
revenues using the percentage of completion method of accounting. Gross profit
as a percentage of revenues for 1995 was 9%, compared to 42% for 1994,
representing a decrease of 33%. The decrease in gross profit percentage was
attributable primarily to the termination of the pylon contract.
Selling, general and administrative expenses for 1995 were $1,168,000
compared to $1,052,000 for 1994, representing an increase of $116,000, or 11%.
This increase is primarily attributable to expenses incurred in the relocation
of the Company's offices and manufacturing facility. Selling, general and
administrative expenses as a percentage of revenues for 1995 and 1994 were 25%
and 21%, respectively. Interest expense for 1995 was $391,000, compared to
$511,000 for 1994, representing a decrease
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<PAGE>
of $120,000 or 23%. The decrease is attributable to a substantial
reduction of debt during 1995.
The net loss for 1995 was $1,080,000 compared to net income of $233,000
for 1994, representing a decrease in net income of $1,313,000. The decrease is
attributable primarily to (i) the termination of the pylon contract which
resulted in the inclusion in cost of sales of $1,473,000 of revenues which were
previously required to be recognized under the percentage of completion method
of accounting and (ii) the sale of the Company's facilities which resulted in a
non-cash, non-operating loss of $496,000 representing the excess of the
Company's basis in the facility over the net proceeds from the sale thereof. See
"Liquidity and Capital Resources" for a description of the use of proceeds from
the sale of the facility.
Loss per share were $.29 per share for 1995 based on the weighted
average shares outstanding of 3,724,373, as compared to primary earnings per
share of $.06 for 1994, based on the weighted average shares outstanding of
3,800,612.
Liquidity and Capital Resources
The Company has financed its working capital requirements during the
past three years through borrowings from Chrysler, the Company's initial public
offering and subsequent warrant exercise, as well as operating cash flow. A
large portion of the Company's cash has been used for costs incurred on various
commercial contracts that are in process. These costs are components of "Costs
and estimated earnings in excess of billings on uncompleted contracts" and
represents 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. The Company's continued requirement to incur significant
costs, in advance of receipt of associated cash for commercial contracts has
caused an increase in the gap between aggregate costs and earnings and the
related billings to date.
Net cash used in operating activities for 1995 was $271,000, as
compared to $106,000 for 1994. This decrease in cash was primarily attributable
to a net loss of $1,080,000, a decrease in deferred taxes of $336,000, an
increase in accounts receivable of $104,000 and an increase in other current
assets of $154,000, offset by an addback of depreciation and amortization
expenses of $124,000 (non-cash items), and a decrease in costs and estimated
earnings in excess of billings of $820,000.
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<PAGE>
Net cash used in financing activities was $1,738,000, as compared to
net cash provided by financing activities of $1,303,000 for 1994. This decrease
was attributable to the Company using $1,841,000 to pay long-term debt in 1995,
as compared to 1994 when it received proceeds from the exercise of stock
warrants of $2,716,000, and proceeds from the exercise of stock options of
$102,000, offset by the repayment of long-term debt of $1,478,000. Included in
long-term debt repayments were principal payments to Chrysler of $1,166,000 and
$1,040,000 for 1994 and 1995, respectively. Net cash provided by investing
activities of $1,212,000 for 1995 resulted from the Company's sale of its land
and building.
On December 15, 1995 the Company sold its land and building in
Ronkonkoma, New York to an unaffiliated third party. The aggregate purchase
price of $1,249,000 was used by the Company to pay $743,000 to retire its
industrial revenue bonds and $400,000 to reduce the Company's outstanding
indebtedness to Chrysler.
As a result of the foregoing the Company's cash at December 31, 1995
decreased by $798,000 from the prior year to $999,000.
The working capital requirements of the Company vary by market and with
each major contract. The requirements have been financed primarily through
borrowings and proceeds from the Company's initial public offering and warrant
exercise.
In the commercial market the Company is sometimes required to incur
significant non-recurring costs to design and fabricate tooling required to
produce the product, plan and prepare initial documentation and develop
prototypes.
Financing Arrangements
On September 28, 1989, the Company entered into a term loan and
revolving line of credit (the "Loan Agreement") with Chrysler. At December 31,
1995, there was an aggregate of approximately $2,324,000 owed to Chrysler under
the Loan Agreement, as amended. Interest is payable monthly in arrears at 2%
above the prime rate of The Chase Manhattan Bank, N.A.
In October 1993, the Company and Chrysler signed an amendment to the
Loan Agreement under which all outstanding indebtedness to Chrysler was
consolidated under a term loan with a July 1, 1995 maturity date, with automatic
twelve month extensions, provided the Company is not in default or Chrysler
gives 90 days notice of termination.
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<PAGE>
In February 1994, the Company received a deferral of mandatory monthly
debt payments due in January, February and March 1994 and a waiver of default
arising from the non-payment, during such period. In June 1994, the Company
received a deferral of mandatory monthly debt payments due in May, June and July
1994 and a waiver of default arising from the non-payment during such period.
The June deferral and waiver were subject to various conditions as specified in
a letter agreement between the Company and Chrysler. The Company entered into a
Fourth Amendment to the Loan Agreement as of December 31, 1994, with Chrysler
pursuant to which: the October 1993 amendment was modified; the conditions set
forth in the June 1994 letter agreement were rescinded, and the maturity date of
the loan was extended to November 1, 1996. In addition, the December 31, 1994
amendment provided a waiver for defaulting on a loan covenant as specified in
the original loan agreement, as amended in the October 1993 agreement. During
1994 and January 1995, the Company received approximately $2,861,000 in net
proceeds from the exercise of an aggregate of 1,183,070 stock purchase warrants
and remitted approximately one-third to Chrysler to reduce its outstanding
indebtedness, as required under its loan agreement with Chrysler.
In connection with the Company's sale of its land and facilities, the
Company entered into a Note Consolidation and Extension Agreement dated as of
November 1, 1995 (the "1995 Extension Agreement") with Chrysler. This agreement
was conditioned upon Chrysler receiving $400,000 from the Company's real
property sale which occurred in December 1995. Pursuant to the 1995 Extension
Agreement; the maturity date of the loan was extended from November 1, 1996 to
January 31, 1997; the maturity date of the $430,000 Warrant Note was extended
from November 1, 1996 to January 31, 1997; the two existing mortgage notes were
consolidated into a Consolidated Note dated as of November 1, 1995 in the
aggregate principal amount of $784,000. The Second Amended and Restated
Revolving Credit Note to evidence the loan in the principal amount of
$1,510,183. The Consolidated Note, the Second Amended and Restated Revolving
Credit Note and the Warrant Note each bears interest payable monthly in arrears
at 2% above the prime rate and are collateralized by the Company's assets as
previously pledged.
Substantially all of the Company's assets are pledged to Chrysler as
collateral for the loan, and the Company is prohibited from incurring additional
indebtedness. In addition to the covenants requiring the Company to maintain
certain levels of net worth and financial ratios, the Company's Loan Agreement
with Chrysler limits or prohibits the Company, except with the prior consent of
Chrysler, from declaring or paying dividends, making any
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<PAGE>
capital distributions or other payments to shareholders, merging or
consolidating with another corporation or selling all or substantially all of
its assets, and places limits on capital expenditures.
The Company's indebtedness to Chrysler is personally guaranteed by a
pledge of all the Company's outstanding Common Stock held by Arthur August and
Theodore Martines, the Company's President and Executive Vice President,
respectively, and their affiliates pursuant to an Amended and Restated Stock
Pledge Agreement dated as of August 5, 1992. The Company's Loan Agreement with
Chrysler provides that Messrs. August and Martines may not vote their shares on
any matters which, in Chrysler's sole discretion, may adversely affect the value
of the Company's assets or the pledged stock without Chrysler's prior written
consent. See "Item 11. Security Ownership of Certain Beneficial Owners and
Management."
Inflation
Inflation has historically not had a material effect on the Company's
operations.
Item 7. FINANCIAL STATEMENTS
This information appears following Item 13 of this Report and is
incorporated herein by reference.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
As previously reported in the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1994, the Company dismissed the
accounting firm of Coopers & Lybrand L.L.P. (the "Former Accountant") as the
Company's principal accountants on April 29, 1994. Goldstein Golub Kessler &
Company, P.C. (the "New Accountant") was engaged as the Company's principal
accountant to audit the Company's financial statements for the fiscal year ended
December 31, 1994. The Company did not previously consult with the New
Accountant.
The decision to change accountants was approved by the Board of
Directors. During the Company's fiscal years ended December 31, 1993 and 1994
and the subsequent interim period preceding the Former Accountant's dismissal,
current management was unaware of any disagreements with the Former Accountant
on any matter of
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<PAGE>
accounting principles or practices, financial statement disclosure,
or auditing scope or procedure.
-25-
<PAGE>
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT
The directors and executive officers of the Company are as follows:
Name Age Position
---- --- --------
Arthur August (1) 61 Chairman of the Board
of Directors,
President, Chief
Executive Officer and
Director
Theodore J. Martines (1)(2) 63 Executive Vice
President, Secretary/
Treasurer and Director
Stanley Wunderlich 47 Director
Walter Paulick (1)(2) 49 Director
- ----------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
Arthur August, a founder of the Company, has been the Chairman of the
Board, President, Chief Executive Officer and a director since January 1980.
From 1956 to 1979, Mr. August was employed by Northrop Grumman Corporation
("Grumman"), an aerospace products manufacturer, where he last held the position
of Deputy Director. Mr. August holds a degree in Aeronautical Engineering from
the Academy of Aeronautics (1956), a B.S. degree in Industrial Management from
C. W. Post College (1963), a Masters degree in Engineering from New York
University (1965) and is a graduate of the Program for Management Development at
the Harvard Graduate School of Business (1977).
Theodore J. Martines has been the Executive Vice President,
Secretary/Treasurer and a director of the Company since December 1984. From 1957
to 1983, Mr. Martines was employed by Grumman where he last held the position of
Director of Contracts and
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<PAGE>
Business Analysis. From 1955 to 1957, Mr. Martines was employed by Sperry
(Unisys) Corp. as a design engineer. Mr. Martines holds a degree in Mechanical
Engineering from Stevens Institute of Technology and an MBA degree from Adelphi
University.
Stanley Wunderlich has been a Director of the Company since November
1995. He has served as Corporate Development Consultant to the Company since
January 1995. Mr. Wunderlich is currently the Chairman of Consulting for
Strategic Growth, Ltd., a financial consulting company. From November 1992 to
May 1994, Mr. Wunderlich was the Chairman of Renaissance Group, Ltd., a
financial consulting company. From May 1991 to October 1992, Mr. Wunderlich
served as a Managing Director of Robert Todd Financial. From January 1990 to
April 1991, Mr. Wunderlich was a Managing Director of American Fund Advisors,
Inc. From March 1987 to May 1989, Mr. Wunderlich was employed by J.T. Moran &
Co. as a Managing Director. From April 1977 to March 1987, Mr. Wunderlich was a
founder and principal of Krieger, Wunderlich & Co., Inc., a financial consulting
company.
Walter Paulick has been a director of the Company since April 1992. Mr.
Paulick is currently a self employed financial consultant. From 1982 to November
1992, Mr. Paulick was a Vice President of Parr Development Company, Inc., a real
estate development company. From 1980 to 1982, Mr. Paulick was employed by Key
Bank, where he last held the position of Vice President. From 1971 to 1980, Mr.
Paulick was a Vice President of National Westminster U.S.A.
All directors hold office until the next annual meeting of shareholders
and the election and qualification of their successors. Directors currently
receive no cash compensation for serving on the Board of Directors other than
stock options and reimbursement of reasonable expenses incurred in attending
meetings. Officers are elected annually by the Board of Directors and serve at
the discretion of the Board.
The Company has agreed, for a period of five years ending September 16,
1997, if so requested by Whale Securities Co., L.P., to nominate and use its
best efforts to elect a designee of the underwriter as a director of the
Company, or at the underwriter's option, as a non-voting advisor to the
Company's Board of Directors. The Company's officers, directors and their
affiliates who hold approximately 35% of the outstanding shares of Common Stock
of the Company, have agreed to vote their shares in favor of such designee. The
underwriter has not yet exercised its right to designate such a person.
The Company has obtained key-man life insurance on the lives
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<PAGE>
of Mr. August and Mr. Martines in the amount of $1,200,000 and $300,000,
respectively, which policies have been assigned to Chrysler as collateral under
the Company's loan agreement. In the event that the Company is able to replace
its loan agreement with Chrysler, Messrs. August and Martines have agreed to
designate the Company as the beneficiary of these life insurance policies and
the Company will seek to increase the amount of insurance coverage under Mr.
Martines' policy to $1,000,000.
Compliance with 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's Officers, Directors and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, Directors and ten percent stockholders are required by regulation to
furnish the Company with copies of all Section 16(a) forms they file. Based
solely on the Company's copies of such forms received or written representations
from certain reporting persons that no Form 5's were required for those persons,
the Company believes that, during the fiscal year ended December 31, 1995, all
filing requirements applicable to its Officers, Directors and greater than ten
percent beneficial owners were complied with, except that Messrs. August,
Martines and Paulick each filed one late report concerning the grant of employee
stock options.
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<PAGE>
Item 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth all compensation awarded to, earned by,
or paid for all services rendered to the Company, a small business issuer,
during the fiscal years ended December 31, 1995, 1994 and 1993, by the Company's
Chief Executive Officer and the Company's only other executive officer whose
total compensation exceeded $100,000.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- ----------------------
Awards Payouts
------ -------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Long-term
Other Restrict- Incent-
Name Annual ed ive
and Compen- Stock Options/ Plan All
Principal sation Award(s) SARs Payouts Other
Position Year Salary($) Bonus($) ($) ($) ($) ($) Compensation
- -------- ---- --------- -------- -------- --------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arthur August, 1995 $256,281 -0- -0- -0- -0- -0- -0-
Chief Executive 1994 $193,306 $4,354 -0- -0- -0- -0- -0-
Officer and 1993 $213,002 $9,433 -0- -0- -0- -0- -0-
President
Theodore J. 1995 $153,988 -0- -0- -0- -0- -0- -0-
Martines, 1994 $116,479 $1,742 -0- -0- -0- -0- -0-
Executive Vice 1993 $128,731 $3,773 -0- -0- -0- -0- -0-
President and
Director
</TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year
and FYE Option/SAR Values
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Value of
Number of Unexercised
Unexercised In-The-Money
Shares Options/SARs at OptionsSARs
Acquired FYE(#) at FYE ($)
on Exer- Value Exercisable/ Exercisable/
Name cise (#) Realized Unexercisable (1) Unexercisable
- ---- -------- -------- ----------------- -------------
<S> <C> <C> <C> <C>
Arthur August -0- -0- 100,000/-0- -0-/-0-
Theodore J. Martines -0- -0- 80,000/-0- -0-/-0-
</TABLE>
- -------------
(1) On January 26, 1995, the Board of Directors regranted to Messrs. August and
Martines 50,000 and 40,000 of these options, respectively, exercisable at
$3.00 per share, the then current fair market value. These options were
previously exercisable at $5.00 per share.
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<PAGE>
The Company has no long-term incentive plan awards.
Directors currently receive no cash compensation for serving on the
Board of Directors other than reimbursement of reasonable expenses incurred in
attending meetings. Each of the Company's directors has received stock options
from the Company. See "Stock Options" below.
Employment Agreements
Messrs. August and Martines are employed by the Company as Chairman of
the Board, President and Chief Executive Officer; and Executive Vice President,
Secretary and Treasurer; respectively, pursuant to employment agreements which
expire on September 15, 1998. The employment agreements, entered into effective
September 16, 1995, provide Messrs. August and Martines with annual base
salaries of $251,942, and $157,464, respectively, during the first year, which
will increase at a rate of 8% per annum in the second and third years. Pursuant
to their employment agreements, Mr. August and Mr. Martines are entitled to
receive an annual bonus equal to 2.5% and 1% respectively, of the Company's net
income for the years ending December 31, 1995, 1996 and 1997.
The agreements provide that during the term of employment with the
Company, and for a period of one-year thereafter, the employees will not compete
with the Company or engage in any activities that would interfere with the
performance of their duties as employees of the Company. The agreements provide
that the Company will maintain hospital and health insurance benefits for the
employee following retirement.
Employee Benefit Plans
On February 1, 1991, the Board of Directors adopted a Qualified Sick
Pay Plan (the "QSP Plan") which covers full-time executive officers and
managers. The QSP Plan provides covered employees with an income during periods
of disability due to sickness or injury and is funded through the purchase of
disability income insurance policies.
Stock Options
1995 Employee Stock Option Plan
The Company has granted options under the 1995 Employee Stock Option
Plan (the "1995 Option Plan") to purchase an aggregate of 106,000 shares of
Common Stock, at exercise prices ranging from $1.06 to $1.44 per share, to
certain employees, executive officers, and directors of the Company including:
five-year options to
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<PAGE>
purchase 50,000 shares of Common Stock granted to Arthur August, Chairman of the
Board of Directors, Chief Executive Officer and President; and five-year options
to nine non-executive officer employees to purchase an aggregate of 56,000
shares of Common Stock. As of December 31, 1995, options to purchase 60,000
shares were outstanding under the 1995 Option Plan. Pursuant to the terms of his
pledge agreement with Chrysler, Mr. August has pledged to Chrysler the shares of
Common Stock issuable upon exercise of his options.
1992 Employee Stock Option Plan
As of the date of this Report there remained outstanding options to
purchase an aggregate of 216,335 shares of Common Stock under the Company's 1992
Employee Stock Option Plan (the "1992 Plan"). These options are held by 14
different persons including options to purchase: 50,000 shares held by Arthur
August, exercisable at $3.00 per share; 40,000 shares held by Theodore Martines,
Executive Vice President, exercisable at $3.00 per share and 40,000 shares
exercisable at $1.31 per share; 5,000 shares held by Walter Paulick, a director,
exercisable at $3.00 per share and 5,000 shares exercisable at $1.00 per share;
40,000 shares held by Burt Stern, a former officer, exercisable at $3.00 per
share and 5,000 shares held by Craig Sakin, a former director, exercisable at
$3.00 per share. A total of 278,000 options have been granted under the 1992
Plan; 30,001 have been forfeited and 1,501 shares remain eligible for the grant
of options.
Other Options
In October 1994, the Company granted an option to purchase 10,000
shares at $3.00 per share (as amended) to a consultant. On January 26, 1995, the
Company granted an option to purchase 120,000 shares of Common Stock at $3.00
per share to Rickel and Associates, in consideration of business consulting
services to be performed for the Company. In January 1995 the Company also
granted an option to purchase 30,000 shares of Common Stock to Stanley
Wunderlich as a consultant for financial advisory services at $3.00 per share. A
second option to Mr. Wunderlich was granted in January 1996 to purchase 30,000
shares of Common Stock exercisable at $1.06 per share. Mr. Wunderlich became a
director of the Company in November 1995. See "Item 12. Certain Relationships
and Related Transactions." An option to purchase 20,000 shares of Common Stock
was issued to the Company's counsel in April 1995 exercisable at $2.00 per
share.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of the date hereof, certain
information concerning those persons known to the Company, based on
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<PAGE>
information obtained from such persons, with respect to the beneficial ownership
(as such term is defined in Rule 13d-3 under the Securities Exchange Act of
1934) of Common Shares and Preferred Stock by (i) each person known by the
Company to be the owner of more than 5% of the outstanding shares of Common
Stock, (ii) each Director, (iii) each executive officer named in the Summary
Compensation Table and (iv) all Directors and executive officers as a group:
Name and Address Shares Percent of
of Beneficial Owner Beneficially Owned(2) Common Stock(3)
- ------------------- --------------------- ---------------
Arthur August (1) 1,080,000 (4)(5) 28.2% (6)
Theodore J. Martines(1) 215,000 (4)(7)(8) 5.6% (9)
Walter Paulick 15,000 (10) *
Stanley Wunderlich 60,000 (11) 1.6% (12)
All Directors and 1,370,000 (13) 34.4% (14)
Executive Officers
as a group (four persons)
- -------------
* Less than 1%
(1) The business address of such person is care of the Company, 200A Executive
Drive, Edgewood, New York 11717.
(2) Unless otherwise noted, the Company believes that all persons named in the
table have sole voting and investment power with respect to all shares of
Common Stock beneficially owned by them, subject to community property
laws, where applicable. A person is deemed to be the beneficial owner of
securities that can be acquired by such person within 60 days from the date
hereof upon the exercise of warrants or options. Each beneficial owner's
percentage ownership is determined by assuming that options or warrants
that are held by such person (but not those held by any other person) and
which are exercisable within 60 days from the date hereof have been
exercised.
(3) Unless otherwise indicated, based on 3,728,304 shares issued and
outstanding.
(4) All shares of Common Stock owned by Messrs. August and Martines and their
respective affiliates have been pledged (the "Pledged Shares") to Chrysler
Capital Corporation ("Chrysler") to secure the Company's indebtedness to
Chrysler (the "Chrysler Indebtedness") under a loan agreement with
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<PAGE>
Chrysler. In the event of a default by the Company under said loan
agreement and acceleration of the Company's indebtedness thereunder,
Chrysler could foreclose on the Pledged Shares, which would result in a
change in control of the Company. Moreover, the Company's loan agreement
with Chrysler provides that Messrs. August and Martines may not vote their
shares on those matters which, in Chrysler's sole discretion, may adversely
affect the value of the Company's assets or the Pledged Shares, without
Chrysler's prior written consent.
(5) Includes 100,000 shares of Common Stock which Mr. August has the right to
acquire within 60 days upon exercise of options granted pursuant to each of
the Company's 1992 Employee Stock Option Plan and the Company's 1995
Employee Stock Option Plan. Excludes an aggregate of 60,000 shares of
Common Stock owned by Mr. August's children or held in trust for Mr.
August's grandchildren, and 9,000 shares of Common Stock owned by Mr.
August's wife, all of which shares Mr. August disclaims beneficial
ownership.
(6) Assumes, pursuant to Rule 13d-3(d)(1) of the Exchange Act, that there are
3,828,304 shares of Common Stock outstanding.
(7) Includes 80,000 shares of Common Stock which Mr. Martines has the right to
acquire within 60 days upon exercise of options granted pursuant to the
Company's 1992 Employee Stock Option Plan.
(8) Excludes 75,000 shares of Common Stock owned by Mr. Martines' wife and an
aggregate of 50,000 shares of Common Stock held in trust for three children
and two grandchildren of Mr. Martines, as to all of which shares Mr.
Martines disclaims beneficial ownership. All of these shares have been
pledged to secure the Chrysler Indebtedness.
(9) Assumes, pursuant to Rule 13d-3(d)(1) of the Exchange Act, that there are
3,808,304 shares of Common Stock outstanding.
(10) Includes 15,000 shares of Common Stock which Mr. Paulick has the right to
acquire within 60 days upon exercise of options granted pursuant to the
Company's 1992 Employee Stock Option Plan.
(11) Includes 30,000 shares of Common Stock which Mr. Wunderlich has the right
to acquire within 60 days upon exercise of non- qualified stock options
granted outside the Company's Stock Option Plans and 30,000 shares of
Common Stock which Mr. Wunderlich has the right to acquire within 60 days
upon exercise of non-qualified stock options granted pursuant to the
Company's 1995 Employee Stock Option Plan.
-33-
<PAGE>
(12) Assumes pursuant to Rule 13d-3(d)(1) of the Exchange Act, that there are
3,788,304 shares of Common Stock outstanding.
(13) Includes an aggregate of 100,000, 80,000, 15,000 and 60,000 shares of
Common Stock which the individuals included in the group have the right to
acquire within 60 days upon exercise of options granted pursuant to the
Company's 1992 and 1995 Stock Option Plans.
(14) Assumes pursuant to Rule 13d-3(d)(1) of the Exchange Act, that there are
3,983,304 shares of Common Stock outstanding.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning employment agreements with, compensation of,
and stock options granted to the Company's executive officers and directors, see
"Item 10. Executive Compensation -- Employment Agreements; and Stock Options."
In May 1990, Messrs. Arthur August and Theodore J. Martines, President
and Executive Vice President, respectively, entered into a Standby Agreement
with the Company and Chrysler Capital Corporation ("Chrysler"), pursuant to
which they were required to deposit into escrow an aggregate of $161,000 and
$55,000, respectively, to enable the Company on a continuing basis to satisfy
its working capital needs of up to $300,000, to the extent the Company is unable
to borrow such funds under the Loan Agreement with Chrysler. Pursuant to the
terms of the Standby Agreement, in January and March 1992, the Company borrowed
an aggregate of $161,225 on an unsecured demand basis from Mr. August and
$55,145 from Mr. Martines. Messrs. August and Martines have agreed not to demand
payment of these loans prior to either the refinancing of the Chrysler loan or
the reduction of the line of credit below $3,570,000, the latter of which has
occurred. In December 1994, the Company repaid the principal balance of $216,370
to Messrs. August and Martines. In January 1995, the Company paid approximately
$43,000 in accrued interest relating to this indebtedness at the rate of 2%
above the prime rate.
As of January 1, 1996, the Company entered into a consulting agreement
with Stanley Wunderlich, a director of the Company. The agreement terminates on
December 31, 1997, unless sooner terminated on sixty days notice of either
party. Pursuant to the agreement, Mr. Wunderlich provides the Company with
financial advisory consulting services including, but not limited to, assisting
with financial public relations, arranging meetings with securities analysts and
money managers, rendering advice with regard to changes in the capitalization or
corporate structure of the Company, and advising the Company in connection with
potential mergers or acquisition. In consideration for these services, Mr.
Wunderlich is compensated at the rate of $5,000 per month, including reasonable
expenses. In addition, as further
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<PAGE>
compensation for these consulting services, Mr. Wunderlich was granted an option
to purchase 30,000 Common Shares exercisable at $1.06 per share, the then
current fair market value.
Item 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation of the Registrant, as
amended.(1)
3.2 Amended and Restated By-Laws of the Registrant.(1)
4.1 Form of Underwriter's Warrants issued to the
Underwriter.(1)
*10.1 Employment Agreement between Registrant and Arthur August
dated September 15, 1995.
*10.2 Employment Agreement between Registrant and Theodore J.
Martines dated September 15, 1995.
10.3 1992 Stock Option Plan. (1)
*10.4 1995 Employee Stock Option Plan.
10.5 Registrant's Promissory Notes dated January 31, 1992 and
March 6, 1992 to Arthur August with letter dated July 1,
1992.(1)
10.6 Registrant's Promissory Notes dated January 31 and March
6, 1992 to Theodore J. Martines with letter dated July 1,
1992.(1)
10.7 Loan Agreement dated as of September 28, 1989, as
amended, between the Registrant and Chrysler Capital
Corporation.(1)
10.8 Restated Mortgage dated September 28, 1989 from the
Registrant to Chrysler Capital Corporation in the amount
of $200,000.(1)
10.9 Mortgage dated September 28, 1989 from the Registrant to
Chrysler Capital Corporation in the amount of
$584,000.(1)
10.10 Revolving Credit Note dated September 28, 1989 from the
Registrant to Chrysler Capital Corporation in the amount
of $4,216,000.(1)
- --------
* Filed with this Annual Report on Form 10-KSB
-35-
<PAGE>
10.11 Security Agreement dated as of September 28, 1989 between
the Registrant and Chrysler Capital Corporation.(1)
10.12 Stock Pledge Agreement dated as of September 28, 1989 by
and among Arthur August, Theodore J. Martines, Sr. and
Chrysler Capital Corporation.(1)
10.13 Waiver and First Amendment to Loan Agreement between the
Registrant and Chrysler Capital Corporation dated as of
January 1, 1992.(1)
10.14 Rohr Basic Purchase Agreement dated October 5, 1988 for
PW300 Pylon Assembly on BAC 125-100 Executive Jet.(1)
10.15 Rohr Basic Purchase Agreement dated March 12, 1991 for
Apron Assembly on McDonnell Douglas MD-90.(1)
10.16 Rohr Basic Purchase Agreement dated May 8, 1990 for
Boeing 757 Lower Pan Assembly.(1)
10.17 Form of military contract.(1)
10.18 Purchase Orders and Agreement with subcontractor, Wyman
Gordon Composites, for the McDonnell Douglas MD-90.(1)
10.19 Memorandum of Agreement Concerning Select Supplier
Program dated January 30, 1990 by and between the Company
and Rohr Industries, Inc.(1)
10.20 Registrant's Sick Pay Plan.(1)
10.21 Waiver to Loan Agreement dated as of July 24, 1992.(1)
10.22 Amended and Restated Stock Pledge Agreement dated as of
August 5, 1992.(1)
10.23 Waiver and Second Amendment to Loan Agreement and Stock
Pledge Agreement Dated as of August 13, 1992.(1)
10.24 Basic Agreement for Sub-Assembly dated December 10, 1992
by and between the Registrant and Mitsui & Co. (U.S.A.),
Inc.(2)
10.25 Third Amendment to Loan Agreement and Security Agreement
Dated as of October 1, 1993.(3)
10.26 Amended and Restated Revolving Credit Note (Senior Term)
dated October 1, 1993 payable to Chrysler Capital
Corporation.(3)
10.27 Amended and Restated Warrant Note dated October 1, 1993
payable to Chrysler Capital Corporation.(3)
-36-
<PAGE>
10.28 Amended and Restated Mortgage Note dated October 1, 1993
payable to Chrysler Capital Corporation in the amount of
$200,000.(3)
10.29 Amended and Restated Mortgage Note dated October 1, 1993
payable to Chrysler Capital Corporation in the amount of
$584,000.(3)
10.30 Letter Agreement dated February 16, 1994 between the
Company and Chrysler Capital Corporation (4)
10.31 Letter Agreement dated June 13, 1994, between the Company
and Chrysler Capital Corporation (5)
10.32 Fourth Amendment to Loan Agreement and Termination of the
Letter Agreement dated as of December 31, 1994. (6)
10.33 Allonge to Amended and Restated Revolving Credit Note
(Senior Term) dated October 1, 1993 for $3,416,000
payable to Chrysler Capital Corporation. (6)
10.34 Allonge to Amended and Restated Mortgage Note dated
October 1, 1993 for $584,000 payable to Chrysler Capital
Corporation. (6)
10.35 Allonge to Amended and Restated Warrant Note dated
October 1, 1993 for $430,000 payable to Chrysler Capital
Corporation. (6)
10.36 Allonge to Amended and Restated Mortgage Note dated
October 1, 1993 for $200,000 payable to Chrysler Capital
Corporation. (6)
10.37 Consulting Agreement dated January 26, 1995 by and
between the Company and Rickel and Associates, Inc. (6)
10.38 Option dated January 26, 1995 from the Company to Rickel
and Associates, Inc. (6)
10.39 Lock-Up/Modification Agreement dated September 24, 1994 by and
between the Company and Whale Securities Co., L.P. (6)
10.40 First Amendment to BPA MD-90-AP-91-CPI by and between the
Company and Rohr, Inc. for MD90 V2500 Apron Assembly. (6)
*10.41 Lease dated November 15, 1995 by and between the Company and
Heartland Rental Properties Partnership for the Company's
facilities in Edgewood, New York.
*10.42 Contract of Sale dated July 1995, between the Company and
Triangle Electronics Group, Inc. for sale of the
Company's facilities in Ronkonkoma, New York.
-37-
<PAGE>
*10.43 Note Consolidation and Extension Agreement dated as of
November 1, 1995.
*10.44 Consolidated Note dated as of November 1, 1995 in the
amount of $784,000 to Chrysler Capital Corporation.
*10.45 Second Amended and Restated Revolving Credit Note in the
amount of $1,510,183 to Chrysler Capital Corporation.
*10.46 Second Amended and Restated Warrant Note dated as of November
1, 1995 in the amount of $430,000 to Chrysler Capital
Corporation.
*10.47 Solicitation Contract dated September 19, 1995 from the
Department of the Air Force.
*10.48 Solicitation Contract dated September 22, 1995 from the
Department of the Air Force.
*10.49 Consulting Agreement between the Company and Stanley
Wunderlich dated as of January 1, 1996.
11.1 Statement regarding computation of per share earnings.(2)
16.1 Letter on change in certifying accountant. (7)
21.1 Subsidiaries of the Registrant. (None)
- ----------
*Filed with this Annual Report on Form 10-KSB.
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1
(No. 33-49270) declared effective on September 16, 1992 and incorporated
herein by reference.
(2) Filed as an exhibit to the Company's Annual Report on Form 10-K for
December 31, 1992 and incorporated herein by reference.
(3) Filed as an exhibit to Post-Effective Amendment No. 2 to the Company's
Registration Statement on Form S-1 (No. 33-49270) declared effective on
October 26, 1993 and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K for
December 31, 1993 and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Registration Statement on Form SB-2
(No. 33-83150) declared effective October 7, 1994 and incorporated herein
by reference.
-38-
<PAGE>
(6) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
December 31, 1994 and incorporated herein by reference.
(7) Filed as exhibit to the Company's Current Report on Form 8-K for April 29,
1994, as amended, and incorporated herein by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1995.
-39-
<PAGE>
CPI AEROSTRUCTURES, INC.
INDEX TO FINANCIAL STATEMENTS
==============================================================================
Independent Auditor's Report F-1
Financial Statements:
Balance Sheet as of December 31, 1995 F-2
Statement of Operations for the Years
Ended December 31, 1995 and 1994 F-3
Statement of Shareholders' Equity for the
Years Ended December 31, 1995 and 1994 F-4
Statement of Cash Flows for the Years Ended
December 31, 1995 and 1994 F-5
Notes to Financial Statements F-6 - F-14
<PAGE>
[LOGO]
GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
Certified Public Accountants and Consultants
--------------------------------------------
[LOGO]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
CPI Aerostructures, Inc.
We have audited the accompanying balance sheet of CPI Aerostructures, Inc. as of
December 31, 1995 and the related statements of operations, shareholders'
equity, and cash flows for each of the two years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CPI Aerostructures, Inc. as of
December 31, 1995, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
/s/ GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
- --------------------------------------------
GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
New York, New York
February 14, 1996
1185 Avenue of the Americas New York, NY 10036-2602
TEL 212 372 100 * FAX 212 372 1001 * INTERNET [email protected]
NEXIA INTERNATIONAL IS A WORLDWIDE NETWORK OF INDEPENDENT ACCOUNTING AND
CONSULTING FIRMS
LONG ISLAND OFFICE 333 EARLE OVINGTON BLVD. UNIONDALE, NY 19553-3656 *
TEL 516 222 9494 * FAX 516 222 8037
F-1
<PAGE>
<TABLE>
<CAPTION>
CPI AEROSTRUCTURES, INC.
BALANCE SHEET
======================================================================================================================
December 31, 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS (Note 6)
Current Assets:
Cash and cash equivalents (Note 1) $ 998,517
Accounts receivable (Note 1) 1,565,048
Costs and estimated earnings in excess of billings on uncompleted contracts (Notes 1 and 4) 9,677,390
Prepaid expenses and other current assets 329,199
- ----------------------------------------------------------------------------------------------------------------------
Total current assets 12,570,154
Property and Equipment, net (Note 5) 196,384
Deferred Income Taxes (Note 8) 113,000
Other Assets 75,519
- ----------------------------------------------------------------------------------------------------------------------
Total Assets $ 12,955,057
======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,160,285
Accrued expenses 260,288
Current portion of long-term debt (Notes 6 and 7) 630,525
Deferred income taxes (Note 8) 445,000
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,496,098
Long-term Debt (Notes 6 and 7) 1,730,229
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 4,226,327
- ----------------------------------------------------------------------------------------------------------------------
Commitments (Note 7)
Shareholders' Equity (Notes 2 and 10):
Common stock - $.001 par value; authorized 10,000,000 shares,
issued and outstanding 3,728,304 shares 3,728
Additional paid-in capital 7,436,079
Retained earnings 1,288,923
- ----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 8,728,730
======================================================================================================================
Total Liabilities and Shareholders' Equity $ 12,955,057
======================================================================================================================
</TABLE>
See Notes to Financial Statements
F-2
<PAGE>
<TABLE>
<CAPTION>
CPI AEROSTRUCTURES, INC.
STATEMENT OF OPERATIONS
======================================================================================================================
Year ended December 31, 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue (Note 1) $ 4,684,378 $5,041,073
Cost of sales (Note 1) 4,264,071 2,928,644
- ----------------------------------------------------------------------------------------------------------------------
Gross profit 420,307 2,112,429
Selling, general and administrative expenses 1,168,134 1,052,366
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) from operations (747,827) 1,060,063
- ----------------------------------------------------------------------------------------------------------------------
Other (income) expenses:
Interest income (77,858) (25,815)
Interest expense 391,377 511,036
Loss on sale of building 496,071 -
Costs of terminated acquisitions (Note 3) 223,671 241,565
Other income (42,243) (52,210)
- ----------------------------------------------------------------------------------------------------------------------
Total other expenses, net 991,018 674,576
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before provision (benefit) for income taxes and
extraordinary item (1,738,845) 385,487
Provision (benefit) for income taxes (577,000) 152,000
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item (1,161,845) 233,487
Extraordinary item - gain on early extinguishment of debt (Note 6) 81,475 -
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $(1,080,370) $ 233,487
======================================================================================================================
Earnings (loss) per share (Note 1):
Income (loss) before extraordinary item $ (.31) $ .06
Extraordinary item .02 -
======================================================================================================================
Net earnings (loss) $ (.29) $ .06
======================================================================================================================
Weighted average shares and common share equivalents outstanding (Note 1) 3,724,373 3,800,612
======================================================================================================================
</TABLE>
See Notes to Financial Statements
F-3
<PAGE>
<TABLE>
<CAPTION>
CPI AEROSTRUCTURES, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
======================================================================================================================
Years ended December 31, 1994 and 1995
- ----------------------------------------------------------------------------------------------------------------------
Total
Paid-in Retained Shareholders'
Shares Amount Capital Earnings Equity
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 2,512,401 $2,512 $4,474,264 $ 2,135,806 $ 6,612,582
Net income - - - 233,487 233,487
Shares issued upon exercise
of stock options 32,833 33 101,631 - 101,664
Shares issued upon exercise
of stock warrants 1,125,000 1,125 2,715,065 - 2,716,190
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 3,670,234 3,670 7,290,960 2,369,293 9,663,923
Shares issued upon exercise
of stock warrants 58,070 58 145,119 - 145,177
Net loss - - - (1,080,370) (1,080,370)
======================================================================================================================
Balance at December 31, 1995 3,728,304 $3,728 $7,436,079 $ 1,288,923 $ 8,728,730
======================================================================================================================
</TABLE>
See Notes to Financial Statements
F-4
<PAGE>
<TABLE>
<CAPTION>
CPI AEROSTRUCTURES, INC.
STATEMENT OF CASH FLOWS
======================================================================================================================
Year ended December 31, 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,080,370) $ 233,487
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 124,339 177,228
Deferred taxes (336,000) 192,000
Loss on sale of land and building 496,071 -
Extraordinary item (81,475) -
Changes in operating assets and liabilities:
Increase in accounts receivable (104,288) (899,755)
Increase in prepaid expenses and other current assets (154,107) (21,327)
Decrease in costs and estimated earnings in excess of billings on
uncompleted contracts 820,022 652,724
Decrease (increase) in other assets 23,217 (48,523)
Increase (decrease) in accounts payable 12,748 (86,996)
Increase (decrease) in accrued expenses 8,352 (61,360)
Decrease in income taxes payable - (30,998)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (271,491) 106,480
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (36,292) (2,043)
Proceeds from sale of land and building 1,248,581 -
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 1,212,289 (2,043)
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of long-term debt (1,841,128) (1,478,028)
Principal payments under capital lease obligations (42,425) (36,896)
Proceeds from exercise of stock warrants 145,177 2,716,190
Proceeds from exercise of stock options - 101,664
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (1,738,376) 1,302,930
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (797,578) 1,407,367
Cash at beginning of year 1,796,095 388,728
======================================================================================================================
Cash at end of year $ 998,517 $ 1,796,095
======================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 432,000 $ 530,000
======================================================================================================================
Income taxes $ 34,000 $ 21,000
======================================================================================================================
Supplemental schedule of noncash financing activity:
The Company recorded a liability of $100,000 and $50,000 in 1995 and 1994,
respectively, for finance restructuring charges payable in 1997.
======================================================================================================================
</TABLE>
See Notes to Financial Statements
F-5
<PAGE>
CPI AEROSTRUCTURES, INC.
NOTES TO FINANCIAL STATEMENTS
===============================================================================
1. PRINCIPAL BUSINESS The Company's operations consist of the design and
ACTIVITY AND SUMMARY production of complex aerospace structural
OF SIGNIFICANT subassemblies under government and commercial
ACCOUNTING POLICIES: contracts. The length of the Company's contracts
varies but is typically between 1 and 2 years for
U.S. government contracts and up to 10 years for
commercial contracts.
Revenue recognition is based on the percentage of
completion method of accounting for long-term
contracts, measured by the percentage of total
costs incurred to date to estimated total costs
for each contract. Contract costs include all
direct material, labor costs, tooling and those
indirect costs related to contract performance,
such as indirect labor, supplies, tools, repairs
and depreciation costs. Selling, general and
administrative costs are charged to expense as
incurred. Provisions for estimated losses on
uncompleted contracts are made in the period in
which such losses are determined. Changes in job
performance may result in revisions to costs and
income and are recognized in the period in which
revisions are determined to be required. In
accordance with industry practice, costs and
estimated earnings in excess of billings on
uncompleted contracts, included in the
accompanying balance sheet, contain amounts
relating to contracts and programs with long
production cycles, a portion of which will not be
realized within one year. The Company's recorded
revenue may be written off in later periods in the
event that Company's cost estimates prove to be
inaccurate or a contract is terminated.
During 1995, the Company received formal
notification from Nordam Corporation that it was
terminating the pylon portion of its contract with
the Company. This partial termination resulted in
the Company writing off approximately $1,473,000
of previously recorded revenue. The effect of this
write-off is included in cost of sales in 1995.
The Company considers all highly liquid debt
instruments with original maturities not exceeding
three months to be cash equivalents. Cash
equivalents consist primarily of repurchase
agreements at December 31, 1995, which were
subsequent to year-end, rolled over into U.S.
Treasury Bills and commercial paper. The Company's
cash balances, at times, exceed federally insured
limits.
Property and equipment is stated at cost.
Depreciation and amortization is provided for
using the straight-line method over the estimated
useful lives of the related assets.
Substantially all of the Company's accounts
receivable are with two customers.
The preparation of financial statements in
conformity with generally accepted accounting
principles requires the use of estimate by
management. Actual results could differ from these
estimates.
Earnings (loss) per share are computed by dividing
net income (loss) by the weighted average common
and common equivalent shares outstanding.
F-6
<PAGE>
CPI AEROSTRUCTURES, INC.
NOTES TO FINANCIAL STATEMENTS
===============================================================================
Effective December 31, 1995, the Company adopted
Statement of Financial Accounting Standards No.
121 ("SFAS No. 121"), "Accounting for Impairment
of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." SFAS No. 121 requires that
long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed
for impairment whenever events or changes in
circumstances indicate that the carrying value of
an asset may not be recoverable. Adoption of SFAS
No. 121 had no effect on the accompanying
financial statements in 1995 because the same
method was used in the past to measure and review
asset impairments.
In 1996 the Company will adopt SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS
No. 123 establishes the fair value method for
accounting for stock-based compensation plans
either through recognition or disclosure. The
Company has not determined whether it will
recognize or only disclose such information on
adopting, but it believes adoption of SFAS No. 123
will not impact the result of its operations.
2. EXERCISE OF
COMMON STOCK
PURCHASE WARRANTS: On September 12, 1994, the Company announced that
it was calling its outstanding common stock
purchase warrants for redemption and
simultaneously changed the terms of exercise of
the warrants from two warrants plus $5.00 for one
share of common stock to two warrants plus $5.00
for two shares of common stock. These warrants
were originally issued in connection with the
Company's initial public offering in September
1992. The Company's registration statement for the
registration of the warrants and the shares of
common stock underlying the warrants was declared
effective October 7, 1994. The exercise period
expired on January 25, 1995 with all remaining
warrants redeemed at $.10. During 1994, the
Company received $2,716,190 after costs of the
registration of $96,310 on the exercise of
1,125,000 warrants. In total, the Company received
$2,861,365 on the exercise of 1,183,070 warrants
through January 25, 1995. Proceeds from the
exercise of warrants were used to fund working
capital requirements and preliminary acquisition
costs (see Note 3) and to pay down approximately
$915,000 of indebtedness to Chrysler Capital
Corporation ("Chrysler"), required under the
Company's loan agreement, as amended.
3. PROPOSED
ACQUISITIONS: On July 18, 1994, the Company announced that it
had signed a letter of intent to acquire certain
operating divisions of Valentec International
Corporation ("Valentec") of Costa Mesa,
California. On January 9, 1995, the Company
announced that its letter of intent with Valentec
had terminated, by its terms, through the parties'
failure to execute a definitive merger agreement
by December 20, 1994 and because of various
material issues that remained unresolved. During
1994, the Company incurred approximately $242,000
in costs associated with the proposed acquisition.
On August 24, 1995, the Company announced that it
had signed a letter of intent to merge with VTX
Electronics Corporation ("VTX") of Farmingdale,
New York. On October 27, 1995, the Company
announced that it had terminated merger
discussions with VTX pursuant to the terms of the
letter of intent. During 1995, the Company
incurred approximately $224,000 in costs
associated with the proposed acquisition.
F-7
<PAGE>
4. COSTS AND At December 31, 1995, costs and estimated earnings
ESTIMATED in excess of billings on uncompleted contracts
EARNINGS IN consist of:
EXCESS OF
BILLINGS ON
UNCOMPLETED
CONTRACTS:
<TABLE>
<CAPTION>
U.S.
Government Commercial Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Costs incurred on uncompleted
contracts $631,426 $19,738,969 $20,370,395
Estimated earnings 201,250 10,777,343 10,978,593
----------------------------------------------------------------------------------------
832,676 30,516,312 31,348,988
Less billings to date 716,030 20,955,568 21,671,598
========================================================================================
Costs and estimated earnings
in excess of billings on
uncompleted contracts $116,646 $ 9,560,744 $ 9,677,390
========================================================================================
</TABLE>
Unbilled costs and estimated earnings are billed
in accordance with applicable contract terms. As
of December 31, 1995, approximately $4,136,000 of
the balances above are not expected to be
collected within one year. Approximately 75% and
72% of the Company's sales in 1995 and 1994,
respectively, are to Rohr Industries, Inc.
("Rohr") and approximately 14% and 9% of the
Company's sales in 1995 and 1994, respectively are
to Nordam Corporation.
5. PROPERTY AND
EQUIPMENT: Property and equipment consists of the following:
<TABLE>
<CAPTION>
Estimated
December 31, 1995 Useful Life
----------------------------------------------------------------------------------------
<S> <C> <C>
Furniture and fixtures $146,611 7 years
Machinery and equipment 279,353 5 to 10 years
Automobiles 13,015 5 years
Leasehold improvements 36,292 3 years
----------------------------------------------------------------------------------------
475,271
Less accumulated depreciation and
amortization 278,887
----------------------------------------------------------------------------------------
$196,384
========================================================================================
</TABLE>
The Company has certain machinery and equipment
under a capital lease. The cost of such equipment
is approximately $137,000 and its accumulated
depreciation is approximately $68,000.
F-8
<PAGE>
6. LONG-TERM Long-term debt is comprised of:
DEBT:
<TABLE>
<CAPTION>
<S> <C>
Borrowing under loan agreement with Chrysler $2,324,184
Capital lease obligation (Note 7) 36,570
----------------------------------------------------------------------------------------
2,360,754
Less current portion 630,525
========================================================================================
$1,730,229
========================================================================================
</TABLE>
In October 1993, the Company refinanced its loan
with Chrysler, which consolidated all outstanding
indebtedness to Chrysler and extended the maturity
date to July 1, 1995. Under the terms of this
agreement, the Company is required to make
principal payments of $50,000 and interest
payments, at prime plus 2%, each month. In
addition, the Company accrued a $50,000 fee for
not paying the loan in full by July 1, 1994,
another $50,000 for not paying the loan in full by
January 1, 1995 and $100,000 for not paying the
loan in full by July 1, 1995. These amounts are
payable at the time the loan is satisfied in full.
Substantially all of the Company's receivables,
costs and estimated earnings in excess of billings
on uncompleted contracts, and property and
equipment are pledged under this agreement. Two of
the Company's officers have also pledged their
outstanding shares of the Company's common stock
as collateral.
The loan agreement requires the Company to
maintain certain financial ratios regarding, among
other things, net worth and working capital, and
restricts the payment of dividends. In February
1994, the Company received a deferral of mandatory
monthly debt payments due in January, February and
March 1994 and a waiver of default arising from
the nonpayment during such period. In June 1994,
the Company received a deferral of mandatory
monthly debt payments due and a waiver of default
arising from the nonpayment during such period.
The June deferral and waiver were subject to
various conditions as specified in a letter
agreement between the Company and Chrysler. Such
conditions included, among others, completing the
induced exercise of outstanding warrants and
remitting one-third of the net proceeds to
Chrysler, as well as the Company's completing an
offering of its common stock. Such conditions were
required to be satisfied in accordance with a
timetable provided in the deferral and waiver
agreement, over the period June 17, 1994 to
January 15, 1995. On December 31, 1994, the
Company and Chrysler agreed to amend the October
1993 agreement and rescind the conditions set
forth in the June 1994 letter agreement and
extended the maturity date of the loan to October
1, 1996. In addition, the December 1994 agreement
provided a waiver of a default of a loan covenant
as specified in the original loan agreement, as
amended by the October 1993 agreement. On October
18, 1995, the Company and Chrysler agreed to amend
the agreement and extend the maturity date of the
loan to January 31, 1997. During 1994, the Company
received approximately $2,700,000 in proceeds from
the exercise of 1,125,000 stock purchase warrants
and remitted approximately one-third ($915,833) to
Chrysler to reduce its outstanding indebtedness,
as required under its loan agreement with
Chrysler.
F-9
<PAGE>
CPI AEROSTRUCTURES, INC.
NOTES TO FINANCIAL STATEMENTS
===============================================================================
In December 1995, the Company sold its land and
building for approximately $1,240,000 and retired
its industrial development revenue bonds. This
resulted in an extraordinary gain of $81,475 from
the early extinguishment of this obligation. The
Company recorded a loss on the disposal of the
land and building due to the net carrying value
exceeding the sales proceeds by approximately
$496,000. Additionally, the Company remitted
$400,000 of the sale proceeds to Chrysler to
reduce its outstanding indebtedness.
The aggregate maturities of long-term debt,
including capital lease obligations, at December
31, 1995 are as follows:
Year ending December 31,
<TABLE>
<CAPTION>
<S> <C>
1996 $ 630,525
1997 1,730,229
----------------------------------------------------------------------------------------
$2,360,754
========================================================================================
</TABLE>
7. COMMITMENTS: Future minimum lease payments under capital leases
at December 31, 1995 are as follows:
Year ending December 31,
<TABLE>
<CAPTION>
<S> <C>
1996 $32,197
1997 6,690
----------------------------------------------------------------------------------------
Total minimum lease payments 38,887
Less interest included in payments 2,317
----------------------------------------------------------------------------------------
Present value of minimum lease payments $36,570
========================================================================================
</TABLE>
The Company leases office and warehouse facilities
under a noncancelable operating lease expiring in
March 1999.
The aggregate future minimum rental commitments
under this lease at December 31, 1995 are payable
as follows:
Year ending December 31,
<TABLE>
<CAPTION>
<S> <C>
1996 $145,547
1997 156,367
1998 161,211
1999 40,353
----------------------------------------------------------------------------------------
$503,478
========================================================================================
</TABLE>
The Company is required to pay additional
expenses, as defined.
The Company has entered into employment agreements
with two officers which expire in 1997.
F-10
<PAGE>
CPI AEROSTRUCTURES, INC.
NOTES TO FINANCIAL STATEMENTS
===============================================================================
8. INCOME TAXES: The provision (benefit) for income taxes consists
of the following:
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994
----------------------------------------------------------------------------------------
Current:
<S> <C> <C>
Federal $(241,000) $(34,000)
State and local - (6,000)
----------------------------------------------------------------------------------------
(241,000) (40,000)
----------------------------------------------------------------------------------------
Deferred:
Federal (302,000) 173,000
State and local (34,000) 19,000
----------------------------------------------------------------------------------------
(336,000) 192,000
----------------------------------------------------------------------------------------
$(577,000) $152,000
========================================================================================
</TABLE>
The deferred income taxes provision (benefit),
resulting from the differences in the recording of
revenue and expense for federal income tax and
financial reporting purposes, consists of the
following:
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994
----------------------------------------------------------------------------------------
<S> <C> <C>
Long-term contracts $ 183,000 $195,000
Other, including depreciation (3,000) (3,000)
Net operating loss carryforward (516,000) -
----------------------------------------------------------------------------------------
$(336,000) $192,000
========================================================================================
</TABLE>
F-11
<PAGE>
CPI AEROSTRUCTURES, INC.
NOTES TO FINANCIAL STATEMENTS
===============================================================================
The difference between the income tax provision
computed at the federal statutory rate and the
actual tax provision (benefit) is accounted for as
follows:
<TABLE>
<CAPTION>
1995 1994
----------------------------------------------------------------------------------------
<S> <C> <C>
Taxes computed at the federal statutory rate $(591,000) $131,000
State income taxes, including deferred, net of
federal benefit - 15,000
Other, net including permanent differences 14,000 6,000
----------------------------------------------------------------------------------------
$(577,000) $152,000
=========================================================================================
</TABLE>
The components of deferred income tax assets
(liabilities) are as follows:
<TABLE>
<CAPTION>
Current Noncurrent
----------------------------------------------------------------------------------------
<S> <C> <C>
Revenue recognition $(892,000) -
Fixed assets and capital leases - $ 13,000
Net operating loss carryforward 447,000 100,000
----------------------------------------------------------------------------------------
$(445,000) $113,000
=========================================================================================
</TABLE>
The Company has net operating loss carryforwards
of approximately $1,132,000 available to reduce
future federal and state taxable income, which
will expire in 2010.
9. RELATED PARTY In 1992, the Company borrowed $216,370 from two
TRANSACTIONS: officers pursuant to a working capital
requirement provision contained in its agreement
with Chrysler. In December 1994, the Company
repaid the principal balance of $216,370 and in
January 1995 paid approximately $43,000 in
accrued interest relating to this indebtedness.
10. EMPLOYEE STOCK In April 1992, the Company adopted the 1992
OPTION PLANS: Stock Option Plan (the "1992 Plan"). The 1992
Plan, for which 250,000 common shares are reserved
for issuance, provides for the issuance of either
incentive stock options or nonqualified stock
options to employees or consultants or others who
provide services for the Company. In 1992, the
Company also granted options to purchase 25,000
shares to its counsel outside the Plan. These
options were exercised in 1994. Options granted to
employees and directors with three or more years
of service became exercisable as to one-third of
the shares each year beginning on September 16,
1992. Options granted to those with less than
three years of service become exercisable as to
one-third of the shares each year beginning on
September 16, 1993. The options may not be
exercised more than five years from the date of
issuance. In 1995, the option price for all
outstanding employees' and directors' stock
options was lowered to $3.00.
F-12
<PAGE>
CPI AEROSTRUCTURES, INC.
NOTES TO FINANCIAL STATEMENTS
===============================================================================
<TABLE>
<CAPTION>
Number of
Shares Option Price
Under Option Per Share
----------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1993 185,336 -
Options granted (originally issued at an option
price of between $6.00 - $7.00) 11,500 $3.00
Options exercised (7,833) *
Options expired or forfeited (9,334) *
----------------------------------------------------------------------------------------
Outstanding at December 31, 1994 179,669 -
Options granted 110,000 $1.00 - $1.31
Options expired or forfeited (13,334) *
----------------------------------------------------------------------------------------
Outstanding at December 31, 1995 276,335 $1.00 - $3.00
========================================================================================
</TABLE>
* All options exercised or forfeited or that
expired were at an exercise price of $5.00.
In 1995, the Company adopted the 1995 Stock Option
Plan (the "1995 Plan"). The 1995 Plan, for which
300,000 common shares are reserved for issuance,
provides for the issuance of either incentive
stock options or nonqualified stock options to
employees or consultants or others who provide
services for the Company. The options' exercise
price is equal to the closing price of the
Company's shares on the day of issuance, except
for shares issued to the Company's president which
are exercisable at 110% of the closing price of
the Company's shares on the date of issuance. The
Company has 1,501 options available for future
grant under the 1992 Plan and 240,000 options
available for grant under the 1995 Plan.
At December 31, 1995, 271,335 options were
exercisable. The balance will become exercisable
in September 1996.
11. WARRANTS The Company sold 100,000 warrants to the
AND OPTIONS: Company's Underwriter ("Underwriter's Warrants")
in September 1992 for an aggregate of $100. The
Underwriter's Warrants entitle the Underwriter to
purchase up to 100,000 units, each unit consisting
of one share of common stock and one warrant, at
an exercise price of $6.00 during the period
ending September 24, 1998.
The Underwriter has agreed not to sell or
otherwise dispose of Underwriter's Warrants prior
to September 24, 1997, unless the Company (i) is
able to complete an underwritten secondary public
offering, or (ii) obtains $11,000,000 of gross
revenue as shown on its audited financial
statements or as shown on a pro forma basis with
any acquired company, for the then current fiscal
year, at which time the lock-up would be
terminated.
In October 1994, the Company issued stock options
to purchase 10,000 shares at $3.00 per share to a
consultant.
F-13
<PAGE>
CPI AEROSTRUCTURES, INC.
NOTES TO FINANCIAL STATEMENTS
===============================================================================
In February 1995, the Company issued stock options
to purchase 30,000 and 120,000 common shares at
$3.00 per share to two consultants, one of whom is
currently a director. In April 1995, the Company
also granted options to purchase 20,000 shares at
$2.00 per share to its counsel. All of these
options are outside the Plan. In January 1996, the
Company issued stock options to purchase 30,000
shares at $1.06 per share to the consultant
director mentioned above.
12. MD-90
CONTRACT: In March 1991, the Company entered into an
agreement with Rohr, pursuant to which the Company
agreed to provide Rohr with apron assemblies and
related components in connection with production
of the proposed McDonnell Douglas MD-90 jet
aircraft. During the year ended December 31, 1995,
approximately 57% of the Company's revenue was
derived from this program, as compared with 63% in
1994. As of December 31, 1995, an aggregate of
$7,193,862 was included in cost and estimated
earnings. McDonnell Douglas received FAA
certification for the MD-90 in November 1994.
F-14
<PAGE>
CPI 200A EXECUTIVE DRIVE EDGEWOOD, NEW YORK 11717
(516) 586-5200 FAX (516) 586-5840
Letter to Sbarcholders
The year 1995 was we of transition. In the latter part of the year the Company
was awarded two significant contracts from the United States Air Force. These
programs represent major sized procurements and are expected to enhance revenues
into late 1997. The Company also sold its land and building to reduce its debt
by approximately $1,250,000 and reduce on-going operational expenses by about
$IOO,000 per year. The sale resulted in a non-cash loss of approximately
$496,000. Additionally, the Company received notice of the termination of pylons
for the Raytheon Hawker 1000 program, although the sale of engine mounts for
this aircraftare continuing. This partial termination was recorded as a charge
against cost of sales, even though it will result in a positive impact on the
Company's cash flow. As a rcsult of the above write offs, the Company had a net
loss of $1,080,000 for 1995, although operations were profitable.
The commercial market has shown signs of renewed growth as airline orders for
new aircraft are on the rise. A strong economy and an increasingly healthy U.S.
airline industry underpin an optimistic forecast of expanding air travel and
moderate aircraft purchases during the next few years. The military segment has
also become more active as defense budget cuts of the last few years seem to
have run their course.
The contract for C-5 cargo aircraft structural parts, awarded to CPI in late
1995, has ahnost tripled in value as additional components have been ordered by
the Air Force. Further increases are anticipated on this contract with longer
term potential based on the expected operational life of this aircraft.
The previous statements include forward looking expectations that involve risks
and uncertainties, incduding the timely delivery and acceptance of the Company's
products and other risks detailed from time to time in the Company's SEC
reports.
In June 1996 our resstructuring continued with the completion of a $2,050,000
private placement of equity with Barber & Bronson Incorporated, an NASD member
firm based in Fort Lauderdale, Florida. The net proceeds of this offering were
used, along with working capital, to eliminate the debt of the Company held by
Chrysler Capital Corporation. As an essentially debt-free Company, CPI has
weathered the downturn in the aerospace market over the last few years and
emerged as a stronger, leaner Company well positioned for the future.
The Company continued its profitable performance for the second quarter ended
June 30, 1996 as the recently awarded contracts for the United States Air Form
have begun to make a positive contribution to revenues. Revenues for the six
months ended June 30, 1996 reflect a growth of approximately 35% over the
revenue for the same period a year earlier. Net income, after provision for
taxes, has also improved by about 131% as a result of the increased revenues,
debt reduction and other economy measures imnplemented by management over the
last eighteen months.
The Company remains committed to long-term growth through acquisitions while
also pursuing new opportunities in the aircraft industry with a continual focus
on strengthening shareholder value.
On behalf of the Board of Directors:
/s/ Arthur August
- -----------------------------------
Arthur August
Chairman of The Board and President
August 1996
<PAGE>
Officers
Arthur August
President and Chief Executive Officer
Theodore J. Martines
Executive Vice President
Frank Funicelli
Vice President of Operations
Board of Directors
Arthur August
Chairman of The Board
President and Chief Executive Officer
Theodore J. Martines
Executive Vice President
Walter Paulick
President
W.R. Paulick and Associates, Inc.
Financial Consulting Firm
Stanley Wunderlich
Chairman
Consulting For Strategic Growth, Ltd.
Financial Consulting Firm
Corporate Headquarters
CPI Aerostructures, Inc.
200 A Executive Drive
Edgewood, NY 11717
Tel: (516) 586-5200
Fax: (516) 586-5814
Transfer Agent
North American Transfer Co.
147 W. Merrick Road
Freeport, NY 11520
Independent Accountants
Goldstein Golub Kessler & Company, P.C.
1185 Avenue of the Americas
New York, NY 10036
Corporate Counsel
Snow Becker Krauss P.C.
605 Third Avenue
New York, NY 10158
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: March 27, 1996 CPI AEROSTRUCTURES, INC.
By: /s/ Arthur August
----------------------------------
Arthur August,
President
In accordance with the Exchange Act, this Report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Arthur August Chairman of the Board, March 27, 1996
- ------------------------ President (Principal
Arthur August
/s/ Theodore J. Martines Executive Vice March 27, 1996
- ------------------------ President (Principal
Theodore J. Martines Accounting and Financial
Officer) and Director
/s/ Stanley Wunderlich Director March 27, 1996
- ------------------------
Stanley Wunderlich
/s/ Walter Paulick Director March 27, 1996
- ------------------------
Walter Paulick
-40-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit Page No.
- ----------- ------- --------
<S> <C> <C>
10.1 Employment Agreement between Registrant and
Arthur August dated September 15, 1995.
10.2 Employment Agreement between Registrant and
Theodore J. Martines dated September 15,
1995.
10.4 1995 Employee Stock Option Plan.
10.41 Lease dated November 15, 1995 by and between
the Company and Heartland Rental Properties
Partnership for the Company's facilities in
Edgewood, New York.
10.42 Contract of Sale dated July 1995, between the
Company and Triangle Electronics Group, Inc.
for sale of the Company's facilities in
Ronkonkoma, New York.
10.43 Note Consolidation and Extension Agreement
dated as of November 1, 1995.
10.44 Consolidated Note dated as of November 1,
1995 in the amount of $784,000 to Chrysler
Capital Corporation.
10.45 Second Amended and Restated Revolving Credit
Note in the amount of $1,510,183 to Chrysler
Capital Corporation.
10.46 Second Amended and Restated Warrant Note
dated as of November 1, 1995 in the amount of
$430,000 to Chrysler Capital Corporation.
10.47 Solicitation Contract dated September 19,
1995 from the Department of the Air Force.
10.48 Solicitation Contract dated September 22,
1995 from the Department of the Air Force.
10.49 Consulting Agreement between the Company and
Stanley Wunderlich dated as of January 1,
1996.
</TABLE>
-41-
<PAGE>
CPI
AEROSTRUCTURES, INC.
200A EXECUTIVE DRIVE * EDGEWOOD, NEW YORK 11717
(516) 586-5200 * FAX (516) 586-5814
FOR IMMEDIATE RELEASE CONTACT: EDWARD J. FRED
CONTROLLER
(516) 586-5200
STANLEY WUNDERLICH
CORPORATE DEVELOPMENT
CONSULTANT
(800) 625-2236
CPI AEROSTRUCTURES REPORTS 250% NET INCOME INCREASE AND 52%
REVENUE INCREASE FOR THE SECOND QUARTER
Edgewood, NY, July 24, 1996 -- CPI Aerostructures (Nasdaq Symbol: CPIA,), today
announced fiancial results for the second quarter ended June 30, 1996.
Net income for the second quarter increased 250% to $185,426, or $.04 per share,
on 4,396,323 weighted average shares outstanding compared to net income of
$52,951, or $.02 per share, on 3,728,304 shares. Second quarter revenues
increased 52% to $1,635,874, from $1,078,994 for the same period a year ago.
Net income for the six month period ended June 30, 1996 increased 131% to
$325,963, or $.08 per share, on 4,262,336 weighted average shares outstanding
compared to net income of $141,086, or $.04 per share, on 3,720,377 common
shares. Revenues increased 35% to $3,186,493, from $2,362,031 for the same
period a year ago. The increase in revenues was a result of the acceleration of
its commercial contracts and the positive contribution of new government
contracts awarded in late 1995.
The Company recently announced the completion of a $2,050,000 private placement
of equity with Barber & Bronson Incorpotated, an NASD member firm based in Fort
Lauderdale, Florida. The net proceeds of tbis offering were used, along with
working capital, to eliminate the debt of the Company held by Chrysler Capital
Corporafion.
Founded in 1980, CPI Aerostructures, Inc. produces structural aircraft parts and
sub-assemblies for the commercial and military sector of the aircraft industry.
The Company's operations consist primarily of incorporating component aircraft
parts into complex sub-assemblies to safisfy specific customer requirements and
precise certification standards.
<PAGE>
CPI Aerostructures, Inc.
Condensed Statements of Income
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months ended June 30,
(Unaudited) (Unaudited)
------------------------------- --------------------------
1996 1995 1996 1995
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $1,635,874 $1,078,944 $3,186,493 $2,362,031
Gross Profit 586,841 494,783 1,164,311 l,058,043
Income before provision
for income taxes 206,479 92,951 422,016 246,086
Net income 185,426 52,951 325,963 141,086
---------- ---------- ---------- ---------
Net earnings 0.04 0.02 0.08 0.04
========== ========== ========== =========
Waghted average common and
common share equivalents
outstanding 4,396,323 3,728,304 4,262,336 3,720,377
</TABLE>
