<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[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, 1996
-----------------
[ ] Transition Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No fee required)
For the transition period from ______________ to _________________
Commission file number 1-11398
CPI AEROSTRUCTURES, INC.
(Name of Small Business Issuer in Its Charter)
New York 11-2520310
- --------------------------------- -------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
200A Executive Drive, Edgewood, New York 11717
- ----------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(516) 586-5200
------------------------------------------------
(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
------------------- ------------------------------
None None
Securities registered under Section 12(g) of the Act:
Common Stock, $.001 par value per share
-----------------------------------------
(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. [X ]
The issuer's revenues for it's most recent fiscal year were $6,769,712.
The aggregate market value of the 4,781,710 shares of voting stock held
by non-affiliates computed by reference to the closing price at which the stock
was sold on March 3, 1997 was $9,563,420.
As of March 3, 1997, the Issuer had 5,876,710 shares of Common Stock,
$.001 par value, outstanding.
Transitional Small Business Disclosure Format: Yes No X
----- ------
<PAGE>
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, with the
Company receiving net proceeds of approximately $4,600,000. Between October 7,
1994 and January 17, 1995 (the redemption date), the Company received net
proceeds of approximately $2,861,000 from the exercise of 1,183,070 public
warrants. On June 19, 1996 the Company completed a $2,050,000 private placement
consisting of 2,050,000 Common Shares, at $1.00 per share, and 1,025,000
warrants to purchase 1,025,000 Common Shares at $2.00 per share.
Certain statements discussed in this Report include forward looking
statements that involve risks and uncertainties, including the timely delivery
and acceptance of the Company's products, the timing of commercial and
government funding approvals, and the other risks detailed from time to time in
the Company's SEC reports.
(b) Business of Issuer
The aircraft industry is comprised of two distinct markets: commercial
and military. 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. 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. Although
the Company's
-2-
<PAGE>
growth does not depend on diversification, the Company evaluated
possible acquisitions during 1996 and continues to do so. The
Company currently 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 percentages of the Company's revenues from the commercial and
military sectors of the aircraft industry:
<TABLE>
<CAPTION>
Years Ended
December 31, December 31,
1995 1996
------------------------- -------------------------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Commercial $4,369 93.3% $5,120 75.6%
Military 315 6.7 1,650 24.4
------ ------ ------ -----
Total................ $4,684 100.0% $6,770 100.0%
------ ------ ------ ------
</TABLE>
Products
The Company's principal commercial aircraft products include 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, 1996, the Company had delivered
two engineering prototypes, three development units, six flight test units and
102 (62 during 1996) production units of an apron assembly to Rohr Industries,
Inc. ("Rohr") for
-3-
<PAGE>
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 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.
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 the Nordam
Corporation ("Nordam") and the Company's agreement with Rohr concerning the
Hawker 1000 was transferred to Nordam. Through December 31, 1996, 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
originally with Rohr, as described below. For the years ended December 31, 1995
and 1996, sales of the Company's products to Rohr/Nordam accounted for
approximately 89% and 75%, respectively, of the Company's revenues. During 1995
and 1996,
-4-
<PAGE>
approximately 4.2% and 1.1%, 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, 1995 and 1996 the Company
had delivered 248 and 296 assemblies, respectively, to Rohr. Rohr has provided
the Company with all special purpose tooling necessary to produce such
assemblies. The Company completed 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, 1996, Rohr had ordered an
aggregate of 721 spars, for an aggregate purchase price of $2,263,000, and the
Company had delivered 721 spars to Rohr (80 during 1996) as of December 31,
1996.
For the years ended December 31, 1995 and 1996, approximately 19% and
4%, 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
-5-
<PAGE>
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, 1996, the Company had delivered an aggregate of two engineering
prototypes, three development units, six flight testing units and 102 production
units (62 during 1996). During the years ended December 31, 1995 and 1996,
approximately 57% and 58%, 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 (structures which attach nacelles to the wing or fuselage),
engine mounts and all related sub-assemblies and components for use in
connection with production of the Hawker 1000 Executive Jet, an existing eight
to ten seat aircraft. For the years ended December 31, 1995 and 1996,
approximately 14% and 12%, respectively, of the Company's revenues were derived
under this program. The original agreement obligated the Company to deliver a
total of 300 pylons to Nordam at a fixed
-6-
<PAGE>
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 Company had delivered 140 pylons (70 ship-sets) to Nordam, none
however, 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 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 engine mounts for this jet are
also common to other executive jets and may be used for other executive jets.
The Company recorded a charge against cost of sales of approximately
$1,473,000 (using the percentage of completion method of accounting) during the
fourth quarter of 1995, but also negotiated a termination payment with Nordam,
which had a positive impact on the Company's cash flow. The amount of the
termination payment was $750,000 and was received in November, 1996.
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 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, 1995 and 1996, the Company had delivered 141 and
155, respectively, fairing assemblies pursuant to purchase orders. The Company
expects to deliver 10 new or reworked units in 1997.
-7-
<PAGE>
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, 1995 and 1996, 7% and 24%,
respectively, of the Company's revenues were derived from military contracts.
The increased level of revenues from the military sector resulted from contracts
awarded by the Air Force in late 1995 and late 1996.
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 1999.
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 3, 1997, the
total contract value is $4,396,000 with additional orders anticipated, although
no assurances can be given as to any additional orders.
As of December 31, 1995 and 1996, the Company had eight and nine
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 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
-8-
<PAGE>
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 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
-9-
<PAGE>
escalation. All of the Company's backlog is subject to termination at will and
rescheduling, without significant penalty. As of December 31, 1996 and 1995, the
Company's backlog was approximately $49 million and $50 million, respectively.
Of the Company's backlog at December 31, 1996, approximately 86% and
14% is attributable to commercial and military contracts, respectively.
Approximately $8 million (16%) of the Company's backlog at December 31, 1996 is
scheduled for delivery during the year ending December 31, 1997.
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 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
-10-
<PAGE>
component parts pursuant to purchase orders in the ordinary course of business.
The Company believes that the supplies of materials through the end of 1997 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 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
-11-
<PAGE>
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
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
-12-
<PAGE>
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 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 3, 1997, the Company employed 25 full-time employees
including its two executive officers, and two part-time employees, as compared
with 22 full-time employees and two part-time employees as of December 31, 1995.
The 25 full-time employees include two engaged in engineering and design, one
engaged in marketing, eight engaged in assembly operations, three engaged in
quality control/assurance, three engaged in technical
-13-
<PAGE>
support, one engaged in contracts administration, five 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 should
diversify its operations outside of the aerospace industry. Consequently, in
November 1993, the Company entered into a letter of intent to acquire a
manufacturer of telecommunications towers. The letter of intent, however, 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 divisions 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. See "Item 3. Legal Proceedings."
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. See "Item 3. Legal Proceedings."
The Company continues to review candidates for potential acquisitions;
however, following the award of significant new aerospace contracts, Management
does not believe that the Company's future growth depends on diversification.
The Company currently 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
-14-
<PAGE>
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
$13,046, plus common area costs, increasing to $13,451, plus common area costs,
over 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 was in the discovery phase
before VTX filed for bankruptcy protection in January, 1997 under Chapter 11 of
the Bankruptcy Code.
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 ("Valentec") and Price Waterhouse LLP ("PW"), alleging
breach of contract and unjust enrichment against both, and a separate fraud
claim against Valentec. CPI seeks damages of $62,500. Defendant Valentec has
answered and counterclaimed for $49,000 in alleged legal fees.
On October 17, 1996 the Court denied Valentec and PW's motion to
dismiss the Company's lawsuit. The motion was one of forum non- conveniens where
the defendants claimed the suit should have been brought in California. The
Company intends to notice the defendants for trial with limited discovery.
In July, 1996 Rickel & Associates, Inc. ("Rickel"), former consultants
to the Company, commenced an action in the Supreme Court of the State of New
York, County of New York against the Company. Rickel alleged breach of a
Consulting Agreement dated January 26, 1995 pursuant to which Rickel alleged it
is owed $70,000 and is entitled to 120,000 stock options which the Company has
cancelled. The Company denied the allegations, claimed that Rickel did not
perform as required under the Consulting Agreement, and that Rickel fraudulently
induced the Company to enter into the Consulting Agreement.
-15-
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
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, beginning on September 16, 1992. 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 trade prices of the Company's Common Stock for the periods
indicated, as reported by NASDAQ.
NASDAQ
Security Period High Low
- -------- ------ ---- ---
1995
----
Common January 1 -
Stock 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- $1 7/16 $1
December 31, 1995
1996 High Low
---- ---- ---
January 1 -
March 31, 1996 $1 9/16 $ 3/4
-16-
<PAGE>
April 1 -
June 30, 1996 $3 3/8 $1 1/16
July 1 -
September 30, 1996 $4 $1 5/8
October 1 -
December 31, 1996 $2 13/16 $1 7/8
1997
----
January 1 -
February 28, 1997 $2 7/16 $1 3/4
On March 3, 1997, the closing sale price for the Company's Common Stock
on the NASDAQ SmallCap Market was $2.00.
On March 3, 1997, there were 161 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
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
-17-
<PAGE>
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, 1996 as Compared to the Year Ended December
31, 1995
The Company's revenues for the year ended December 31, 1996 ("1996")
were $6,770,000 compared to $4,684,000 for the year ended December 31, 1995
("1995"), representing an increase of $2,086,000, or 45%. This increase is due
in part to an accelerated delivery schedule of apron assemblies which the
Company builds for Rohr Industries, for use on the MD-90 aircraft. Additionally,
revenues were recorded from the Company's new military contracts, which were
awarded in late 1995. During 1994, the Company began manufacturing for
production under the MD-90 program, increasing delivery rates to three units per
month in January 1995, and four units per month in January 1996. As of December
31, 1996, the Company had delivered 102 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 76% of total
revenues for 1996, as compared to 93% for 1995.
-18-
<PAGE>
Gross profit for 1996 was $2,590,000 compared to $420,000 for 1995,
representing an increase of $2,170,000, or 517%. The low level of gross profit
in 1995 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.
The Company reached a settlement with Nordam concerning the Ratheon Hawker 1000,
resulting in a cash payment to CPI of $750,000 in November, 1996, with a
non-cash charge against earnings of approximately $371,000 in the fourth quarter
of 1996. Gross profit as a percentage of revenues for 1996 was 38%, compared to
9% for 1995, representing an increase of 29 percentage points. This increase in
gross profit percentage was attributable primarily to the termination of the
pylon contract in 1995.
Selling, general and administrative expenses for 1996 were $1,751,000
compared to $1,168,000 for 1995, representing an increase of $583,000, or 50%.
This increase is primarily attributable to a non-cash charge of $371,000 for a
write-off of accounts receivable related to the pylon termination settlement.
Selling, general and administrative expenses as a percentage of revenues for
1996 and 1995 were 26% and 25%, respectively. Interest expense for 1996 was
$111,000, compared to $391,000 for 1995, representing a decrease of $280,000 or
72%. The decrease is attributable to a substantial reduction of debt during both
1995 and 1996, primarily from the Company's repayment of its loans from Chrysler
Capital Corporation ("Chrysler").
The net income for 1996 was $504,000 compared to a net loss of
$1,080,000 for 1995, representing an increase in net income of $1,584,000. The
loss in 1995 was attributable primarily to (i) the termination of the pylon
contract which resulted in the inclusion in cost of sales of a non-cash expense
of $1,473,000 for a write-off of revenue which was 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.
Earnings per share were $.09 per share for 1996 based on the weighted
average shares and common share equivalents outstanding of 6,417,824, as
compared to loss per share of $.29 for 1995, based on the weighted average
shares outstanding of 3,724,373.
-19-
<PAGE>
Liquidity and Capital Resources
The Company has financed its working capital requirements during the
past two years through proceeds received from the exercise of warrants, a
June 1996 Private Placement (the "1996 Placement") and from operations. 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 provided by operating activities for 1996 was $588,000, as
compared to net cash used in operating activities of $271,000 for 1995. This
increase in cash was primarily attributable to net income of $504,000, an
increase in deferred taxes of $346,000, a decrease in accounts receivable of
$1,316,000 and a decrease in other current assets of $248,000, offset by an
increase in costs and estimated earnings in excess of billings of $2,029,000.
Net cash used in financing activities was $642,000 in 1996, as compared
to net cash used in financing activities of $1,738,000 in 1995. The Company
received $1,608,000 from the 1996 Placement. The Company repaid long term debt
of $2,324,000 in 1996, as compared to $1,841,000 in 1995. The Company received
$105,000 from the exercise of stock options and warrants in 1996, as compared to
the receipt of $145,000 from the exercise of warrants in 1995. Included in
long-term debt repayments were principal payments to Chrysler of $1,040,000 for
1995. Net cash used in investing activities of $45,000 for 1996 resulted from
the Company's purchase of property and equipment.
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, 1996
decreased by $99,000 from the prior year to $900,000.
-20-
<PAGE>
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, warrant
exercise, and 1996 private placement.
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"), as amended, 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 was payable monthly in
arrears at 2% above the prime rate of The Chase Manhattan Bank, N.A.
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
was extended to January 31, 1997. The Consolidated Note, the Second Amended and
Restated Revolving Credit Note and the Warrant Note each bore interest payable
monthly in arrears at 2% above the prime rate and were collateralized by the
Company's assets as previously pledged. An aggregate of $1,939,779 of
indebtedness to Chrysler was repaid from the net proceeds of the 1996 Placement
plus working capital. The loan agreement was terminated and all liens and
security interests in the Company, as well as the pledge of Management's
personal shareholdings, were released.
On September 17, 1996, the Company announced that the Chase Manhattan
Bank, N.A. (the "Bank") has become its new senior lender. The agreement with the
Bank provides a line of credit which will be used for working capital and other
corporate purposes as needed. The Company has available up to $1,000,000 under
the line of
-21-
<PAGE>
credit, subject to limits based on amounts of accounts receivable and inventory,
as defined. As of December 31, 1996, there was no outstanding balance on this
line of credit.
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
None
-22-
<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) 62 Chairman of the Board
of Directors,
President, Chief
Executive Officer and
Director
Theodore J. Martines (1)(2) 64 Executive Vice
President, Secretary/
Treasurer and Director
Stanley Wunderlich(1)(2) 48 Director
Walter Paulick (1)(2) 50 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 Business Analysis. From 1955 to 1957, Mr. Martines was
employed by
-23-
<PAGE>
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. Directors
receive stock options and reimbursement of reasonable expenses incurred as
compensation for 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 23.0% 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.
-24-
<PAGE>
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, 1996, all
filing requirements applicable to its Officers, Directors and greater than ten
percent beneficial owners were complied with.
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, 1996, 1995 and 1994, 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, 1996 $271,148 $12,611 -0- -0- -0- -0- -0-
Chief Executive 1995 $256,281 -0- -0- -0- -0- -0- -0-
Officer and 1994 $193,306 $4,354 -0- -0- -0- -0- -0-
President
Theodore J. 1996 $164,211 $5,044 -0- -0- -0- -0- -0-
Martines, 1995 $153,988 -0- -0- -0- -0- -0- -0-
Executive Vice 1994 $116,479 $1,742 -0- -0- -0- -0- -0-
President and
Director
</TABLE>
-25-
<PAGE>
Aggregated Option/SAR Exercises in Last Fiscal Year
and FYE Option/SAR Values
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Value of
Number of Unexercised
Unexercised In-The-Money
Shares Options/SARs at Options/SARs
Acquired FYE(#) at FYE ($)
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 re-granted 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.
The Company has no long-term incentive plan awards.
Directors' Compensation
Directors currently receive no cash compensation for serving on the
Board of Directors other than reimbursement of reasonable expenses incurred in
attending meetings. However, the Company's two non-officer directors each
received stock options from the Company, in 1996 and 1997 to purchase 5,000
shares of Common Stock.
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
increased 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. No bonuses were paid in
1995 and bonuses of $12,611 and $5,044 were paid to Messrs. August and Martines,
respectively, for 1996.
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
-26-
<PAGE>
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.
On September 11, 1996 the Company's Board of Directors approved a
motion to institute a fully-qualified 401(k) Employees Savings Plan. The plan is
totally voluntary, and employee contributions to the plan commenced on October
1, 1996. Inherent in the plan is a company option to make voluntary
contributions to the account of its employees. On January 17, 1997, the Company
exercised that option and made a contribution to the plan, which has been
accounted for as an expense in the 1996 financial statements of the Company.
Stock Options
1995 Employee Stock Option Plan
The Company has granted options under the 1995 Employee Stock Option
Plan (the "1995 Option Plan"), which currently authorized the grant of 300,000
options, to purchase an aggregate of 251,000 shares of Common Stock, at exercise
prices ranging from $1.06 to $3.00 per share, to certain employees, executive
officers, and directors of the Company including: five-year options to purchase
an aggregate of 100,000 shares of Common Stock granted to Arthur August,
Chairman of the Board of Directors, Chief Executive Officer and President; five
year options to purchase 40,000 shares of Common Stock to Theodore J. Martines,
Executive Vice President; five-year options to purchase an aggregate of 35,000
shares of Common Stock to Stanley Wunderlich, a Director; five year options to
purchase 5,000 shares of Common Stock to Walter Paulick, a Director; and
five-year options to 14 non-executive officer employees to purchase an aggregate
of 71,000 shares of Common Stock. As of March 3, 1997, options to purchase
237,500 shares were outstanding and options to purchase an additional 49,000
shares were available, under the 1995 Option Plan.
-27-
<PAGE>
1992 Employee Stock Option Plan
As of the date of this Report, a total of 318,500 options have been
granted under the Company's 1992 Employee Stock Option Plan (the "1992 Plan");
70,001 have been forfeited; options to purchase an aggregate of 216,335 shares
of Common Stock remain outstanding; and 1,501 shares remain eligible for the
grant of options. Outstanding options are held by 15 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,
5,000 shares exercisable at $1.00 per share and 5,000 shares exercisable at
$2.00 per share; 5,000 shares held by Stanley Wunderlich, a Director,
exercisable at $2.00 per share and 5,000 shares held by Craig Sakin, a former
director, exercisable at $3.00 per share.
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. This option was cancelled
in April 1996, because of Rickel & Associates' non-performance and is the
subject of a lawsuit. See "Item 3. Legal Proceedings." 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. An option to Mr. Wunderlich was granted in January 1996 to purchase
30,000 shares of Common Stock exercisable at $1.06 per share, of which 11,500
options were exercised by Mr. Wunderlich in December 1996. 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 information
obtained from such persons, with respect to the
-28-
<PAGE>
beneficial ownership (as such term is defined in Rule 13d-3 under the Securities
Exchange Act of 1934) of Common 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) 1,110,000 (4) 18.4% (5)
Theodore J. Martines(1) 245,000 (6)(7) 4.1% (8)
Walter Paulick 20,000 (9) *
Stanley Wunderlich 53,500 (10) *
All Directors and 1,428,500 (11) 23.0% (12)
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 5,876,710 shares issued
and outstanding.
(4) Includes 150,000 shares of Common Stock which Mr. August has the
right to acquire within 60 days upon exercise of options granted
pursuant to both of the Company's 1992 Employee Stock Option Plan and
the 1995 Employee Stock Option Plan.
-29-
<PAGE>
Excludes an aggregate of 100,000 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.
(5) Assumes, pursuant to Rule 13d-3(d)(1) of the Exchange Act, that there
are 6,026,710 shares of Common Stock outstanding.
(6) Includes 120,000 shares of Common Stock which Mr. Martines has the
right to acquire within 60 days upon exercise of options granted
pursuant to both of the Company's 1992 Employee Stock Option Plan and
its 1995 Employee Stock Option
Plan.
(7) Excludes 75,000 shares of Common Stock owned by Mr. Martines' wife
and an aggregate of 60,000 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.
(8) Assumes, pursuant to Rule 13d-3(d)(1) of the Exchange Act, that there
are 5,986,710 shares of Common Stock outstanding.
(9) Includes 20,000 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.
(10) Includes 18,500 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 35,000 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.
(11) Includes an aggregate of 150,000, 120,000, 20,000 and 53,500 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.
(12) Assumes pursuant to Rule 13d-3(d)(1) of the Exchange Act, that there
are 6,210,210 shares of Common Stock outstanding.
-30-
<PAGE>
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."
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 acquisitions. In consideration for these services, Mr.
Wunderlich is compensated at the rate of $5,000 per month, including reasonable
expenses. In addition, as further 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)
4.2 Form of Registration Rights Agreement dated June 17,
1996. (9)
4.3 Form of Subscription Agreement. (9)
4.4 Form of Placement Agent Warrants dated June 17, 1996 (9)
4.5 Form of Consultant's Warrants dated April 3, 1996 (9)
4.6 Form of Redeemable Common Share Purchase Warrant dated
June 17, 1996. (9)
-31-
<PAGE>
10.1 Employment Agreement between Registrant and Arthur August
dated September 15, 1995. (8)
10.2 Employment Agreement between Registrant and Theodore J.
Martines dated September 15, 1995. (8)
10.3 1992 Stock Option Plan. (1)
10.4 1995 Employee Stock Option Plan.
10.5 Rohr Basic Purchase Agreement dated October 5, 1988 for
PW300 Pylon Assembly on BAC 125-100 Executive Jet.(1)
10.6 Rohr Basic Purchase Agreement dated March 12, 1991 for
Apron Assembly on McDonnell Douglas MD-90.(1)
10.7 Rohr Basic Purchase Agreement dated May 8, 1990 for
Boeing 757 Lower Pan Assembly.(1)
10.8 Form of military contract.(1)
10.9 Purchase Orders and Agreement with subcontractor, Wyman
Gordon Composites, for the McDonnell Douglas MD-90.(1)
10.10 Memorandum of Agreement Concerning Select Supplier
Program dated January 30, 1990 by and between the Company
and Rohr Industries, Inc.(1)
10.11 Registrant's Sick Pay Plan.(1)
10.12 Basic Agreement for Sub-Assembly dated December 10, 1992
by and between the Registrant and Mitsui & Co. (U.S.A.),
Inc.(2)
10.13 Lock-Up/Modification Agreement dated September 24, 1994 by and
between the Company and Whale Securities Co., L.P.
(6)
10.14 First Amendment to BPA MD-90-AP-91-CPI by and between the
Company and Rohr, Inc. for MD90 V2500 Apron Assembly. (6)
10.15 Lease dated November 15, 1995 by and between the Company
and Heartland Rental Properties Partnership for the
Company's facilities in Edgewood, New York. (8)
10.16 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. (8)
-32-
<PAGE>
10.17 Solicitation Contract dated September 19, 1995 from the
Department of the Air Force. (8)
10.18 Solicitation Contract dated September 22, 1995 from the
Department of the Air Force. (8)
10.19 Consulting Agreement between the Company and Stanley
Wunderlich dated as of January 1, 1996. (8)
10.20 Placement Agent Agreement dated May 10, 1996 between the
Company and the Placement Agent. (9)
10.21 Financial Consulting Agreement dated April 3, 1996
between the Company and the Placement Agent. (9)
*10.22 Financial Consulting Agreement dated September 11, 1996
between the Company and Andreas Zigouras.
*10.23 Line of Credit Agreement dated September 15, 1996 between
the Company and The Chase Manhattan Bank.
*10.24 Termination letter dated June 28, 1996 between Chrysler
Capital Corporation and the Company.
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
-33-
<PAGE>
Form SB-2 (No. 33-83150) declared effective October 7, 1994 and
incorporated herein by reference.
(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.
(8) Filed as an exhibit to the Company's Annual Report on Form 10- KSB for
December 31, 1996, as amended, and incorporated herein by reference.
(9) Filed as an exhibit to the Company's Current Report of Form 8-K for
June 19, 1996 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, 1996.
-34-
<PAGE>
CPI AEROSTRUCTURES, INC.
INDEX TO FINANCIAL STATEMENTS
==============================================================================
Independent Auditor's Report F-1
Financial Statements:
Balance Sheet as of December 31, 1996 F-2
Statement of Operations for the Years Ended
December 31, 1996 and 1995 F-3
Statement of Shareholders' Equity for the Years Ended
December 31, 1996 and 1995 F-4
Statement of Cash Flows for the Years Ended
December 31, 1996 and 1995 F-5
Notes to Financial Statements F-6 - F-13
<PAGE>
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, 1996 and the related statements of operations, shareholders'
equity, and cash flows for each of the two years in the period ended December
31, 1996. 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, 1996, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
New York, New York
February 10, 1997
F-1
<PAGE>
CPI AEROSTRUCTURES, INC.
<TABLE>
<CAPTION>
BALANCE SHEET
======================================================================================================================
December 31, 1996
- ----------------------------------------------------------------------------------------------------------------------
ASSETS (Note 9)
<S> <C>
Current Assets:
Cash and cash equivalents (Note 1) $ 899,798
Accounts receivable (Note 1) 248,838
Costs and estimated earnings in excess of billings on uncompleted contracts
(Notes 1, 4 and 12) 11,706,261
Prepaid expenses and other current assets 80,743
- ----------------------------------------------------------------------------------------------------------------------
Total current assets 12,935,640
Property and Equipment, net (Notes 1 and 5) 160,037
Other Assets 29,226
======================================================================================================================
Total Assets $13,124,903
======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,292,859
Accrued expenses 118,193
Deferred income taxes (Note 8) 741,000
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,152,052
Deferred Income Taxes (Note 8) 27,000
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 2,179,052
- ----------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 7, 11 and 13)
Shareholders' Equity (Notes 2 and 10):
Common stock - $.001 par value; authorized 10,000,000 shares,
issued and outstanding 5,876,710 shares 5,877
Additional paid-in capital 9,146,628
Retained earnings 1,793,346
- ----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 10,945,851
======================================================================================================================
Total Liabilities and Shareholders' Equity $13,124,903
======================================================================================================================
</TABLE>
See Notes to Financial Statements
F-2
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
======================================================================================================================
Year ended December 31, 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue (Note 1) $6,769,712 $ 4,684,378
Cost of sales (Note 1) 4,179,823 4,264,071
- ----------------------------------------------------------------------------------------------------------------------
Gross profit 2,589,889 420,307
Selling, general and administrative expenses (Note 1) 1,751,064 1,168,134
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 838,825 (747,827)
- ----------------------------------------------------------------------------------------------------------------------
Other (income) expense:
Interest income (36,724) (77,858)
Interest expense 110,631 391,377
Loss on sale of building - 496,071
Costs of terminated acquisitions (Note 3) - 223,671
Other income (6,558) (42,243)
- ----------------------------------------------------------------------------------------------------------------------
Total other expenses, net 67,349 991,018
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before provision (benefit) for income taxes and
extraordinary item 771,476 (1,738,845)
Provision (benefit) for income taxes 318,000 (577,000)
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item 453,476 (1,161,845)
Extraordinary item - gain on early extinguishment of debt (Note 2) 50,947 81,475
======================================================================================================================
Net income (loss) $ 504,423 $(1,080,370)
======================================================================================================================
Earnings (loss) per share (Note 1):
Income (loss) before extraordinary item $ .08 $ (.31)
Extraordinary item .01 .02
======================================================================================================================
Net earnings (loss) (Note 10) $ .09 $ (.29)
======================================================================================================================
Weighted average shares and common share equivalents outstanding 6,417,824 3,724,373
======================================================================================================================
</TABLE>
See Notes to Financial Statements
F-3
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF SHAREHOLDERS' EQUITY
======================================================================================================================
Years ended December 31, 1995 and 1996
- ----------------------------------------------------------------------------------------------------------------------
Total
Common Paid-in Retained Shareholders'
Shares Amount Capital Earnings Equity
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 3,670,234 $3,670 $7,290,960 $ 2,369,293 $ 9,663,923
Net loss - - - (1,080,370) (1,080,370)
Shares issued upon exercise
of stock warrants 58,070 58 145,119 - 145,177
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 3,728,304 3,728 7,436,079 1,288,923 8,728,730
Net income - - - 504,423 504,423
Shares issued upon exercise
of stock options 13,500 14 14,576 - 14,590
Shares issued through private
placement (Note 2) 2,050,000 2,050 1,606,043 - 1,608,093
Shares issued upon exercise of stock
warrants 84,906 85 89,930 - 90,015
======================================================================================================================
Balance at December 31, 1996 5,876,710 $5,877 $9,146,628 $ 1,793,346 $10,945,851
======================================================================================================================
</TABLE>
See Notes to Financial Statements
F-4
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
======================================================================================================================
Year ended December 31, 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 504,423 $(1,080,370)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 81,648 124,339
Deferred taxes 346,000 (336,000)
Loss on sale of land and building 496,071
Extraordinary item (78,947) (81,475)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 1,316,210 (104,288)
Decrease (increase) in prepaid expenses and other current assets 248,456 (154,107)
(Increase) decrease in costs and estimated earnings in excess of billings on
uncompleted contracts (2,028,871) 820,022
Decrease in other assets 46,293 23,217
Increase in accounts payable 222,574 12,748
(Decrease) increase in accrued expenses (69,695) 8,352
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 588,091 (271,491)
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (45,301) (36,292)
Proceeds from sale of land and building - 1,248,581
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (45,301) 1,212,289
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of long-term debt (2,324,184) (1,841,128)
Principal payments under capital lease obligations (30,023) (42,425)
Proceeds from exercise of stock warrants 90,015 145,177
Proceeds from exercise of stock options 14,590 -
Proceeds from private placement, net of costs of private placement of $442,000 1,608,093 -
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (641,509) (1,738,376)
- ----------------------------------------------------------------------------------------------------------------------
Net decrease in cash (98,719) (797,578)
Cash at beginning of year 998,517 1,796,095
======================================================================================================================
Cash at end of year $ 899,798 $ 998,517
======================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 133,000 $ 432,000
======================================================================================================================
Income taxes $ 13,000 $ 34,000
======================================================================================================================
</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. Estimated losses on uncompleted
contracts are recognized 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 adjusted in later periods in the
event that the 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 adjusting previously recorded revenue
by approximately $1,473,000. The effect of this
adjustment is included in cost of sales in 1995.
In 1996 the Company negotiated the final
settlement of this terminated contract which
resulted in an additional adjustment of
approximately $371,000. The effect of this
adjustment in 1996 is included in selling, general
and administrative expenses. The Company received
$750,000 in 1996 in final settlement of this
terminated contract.
The Company considers all highly liquid debt
instruments with original maturities not exceeding
three months to be cash equivalents. Cash
equivalents consist primarily of U.S. Treasury
Bills and commercial paper at December 31, 1996.
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 four customers.
The preparation of financial statements in
conformity with generally accepted accounting
principles requires the use of estimates by
management. Actual results could differ from these
estimates.
F-6
<PAGE>
Loss per share in 1995 is computed by dividing net
loss by the weighted average common and common
equivalent shares outstanding. In 1996, earnings
per share reflects the maximum dilution that would
have resulted from the exercise of stock options
and warrants added to the weighted average number
of shares after adding back interest, net of
income taxes, and adjusting for the 20% limitation
on the number of shares purchased under the
treasury stock method.
In 1996 the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123, Accounting
for Stock-Based Compensation. In accordance with
the provisions of SFAS No. 123, the Company has
elected to apply APB Opinion 25 and related
interpretations in accounting for its stock
options issued to employees and, accordingly, does
not recognize additional compensation cost as
required by the new principle. The Company,
however, has provided the pro forma disclosures as
if the Company had adopted the cost recognition
requirements (see Note 10).
2. PRIVATE PLACEMENT: On June 19, 1996, the Company announced it had
completed a $2,050,000 private placement of its
equity securities. This placement consisted of 82
units, costing $25,000 each. Each unit was
comprised of 25,000 shares of common stock, and
12,500 common stock purchase warrants. Each
warrant enables the holder to purchase one
additional share of common stock at an exercise
price of $2 per share. The warrants may not be
exercised more than five years from the date of
issuance. The Company filed a registration
statement, which was declared effective on August
29, 1996, to register the warrants and the shares
of common stock issued in the private placement.
The net proceeds of this offering were used, along
with working capital, to extinguish long-term debt
of the Company held by Chrysler Capital
Corporation. This resulted in an extraordinary
gain of $50,947, net of $28,000 of income taxes,
from the early extinguishment in 1996.
In 1995, the Company used net proceeds from the
sale of its land and building to extinguish
long-term debt. This resulted in an extraordinary
gain of $81,475 from the early extinguishment in
1995.
3. PROPOSED ACQUISITIONS: 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, which
were written off upon termination of the merger
discussions.
F-7
<PAGE>
4. COSTS AND At December 31, 1996, costs and estimated earnings
ESTIMATED in excess of billings on uncompleted contracts
EARNINGS IN consists of:
EXCESS OF
BILLINGS ON
UNCOMPLETED
CONTRACTS:
<TABLE>
<CAPTION>
U.S.
Government Commercial Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Costs incurred on uncompleted
contracts $1,084,838 $22,784,815 $23,869,653
Estimated earnings 461,236 12,891,832 13,353,068
----------------------------------------------------------------------------------------
1,546,074 35,676,647 37,222,721
Less billings to date 836,512 24,679,948 25,516,460
=========================================================================================
Costs and estimated earnings
in excess of billings on
uncompleted contracts $ 709,562 $10,996,699 $11,706,261
=========================================================================================
</TABLE>
Unbilled costs and estimated earnings are billed
in accordance with applicable contract terms. As
of December 31, 1996, approximately $3,700,000 of
the balances above are not expected to be
collected within one year. Approximately 63% and
75% of the Company's sales in 1996 and 1995,
respectively, are to Rohr Industries, Inc.
("Rohr") and approximately 12% and 14% of the
Company's sales in 1996 and 1995, respectively,
are to the Nordam Corporation. Additionally, in
1996, approximately 24% of the Company's sales are
to the U.S. government.
5. PROPERTY AND EQUIPMENT: Property and equipment consists of the following:
<TABLE>
<CAPTION>
Estimated
December 31, 1996 Useful Life
---------------------------------------------------------------------------------------
<S> <C> <C>
Furniture and fixtures $ 11,686 7 years
Machinery and equipment 432,880 5 to 10 years
Automobiles 13,015 5 years
Leasehold improvements 62,991 3 years
----------------------------------------------------------------------------------------
520,572
Less accumulated depreciation 360,535
========================================================================================
$160,037
========================================================================================
</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 $95,000.
F-8
<PAGE>
6. EMPLOYEE BENEFIT
PLANS: On September 11, 1996, the Company's board of
directors instituted a defined contribution plan
under Section 401(k) of the Internal Revenue Code,
wherein qualified employees may contribute a
percentage of their pretax eligible compensation
to the plan. The Company, at the option of the
board of directors, may make contributions to the
plan on behalf of employees. The amount of
contributions accrued by the Company in 1996 was
$40,982. The Company has applied to the Internal
Revenue Service for qualification of the plan as
tax-exempt.
7. COMMITMENTS: 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, 1996 are payable
as follows:
Year ending December 31,
1997 $156,367
1998 161,211
1999 40,353
============================================
$357,931
============================================
Total rental expense for the year ended December
31, 1996 was $146,050.
The Company is required to pay additional
expenses, as defined.
The Company has entered into employment agreements
with two officers which expire in 1998.
8. INCOME TAXES: The provision for income taxes consists of the
following:
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995
----------------------------------------------------------------------------------------
<S> <C> <C>
Current:
Federal - $(241,000)
State and local - -
----------------------------------------------------------------------------------------
- (241,000)
----------------------------------------------------------------------------------------
Deferred:
Federal $311,000 (302,000)
State and local 35,000 (34,000)
----------------------------------------------------------------------------------------
346,000 (336,000)
----------------------------------------------------------------------------------------
$346,000 $(577,000)
========================================================================================
</TABLE>
F-9
<PAGE>
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, 1996 1995
----------------------------------------------------------------------------------------
<S> <C> <C>
Long-term contracts $ 88,000 $ 183,000
Other, including depreciation 40,000 (3,000)
Net operating loss carryforward 218,000 (516,000)
========================================================================================
$346,000 $(336,000)
========================================================================================
</TABLE>
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>
1996 1995
----------------------------------------------------------------------------------------
<S> <C> <C>
Taxes computed at the federal statutory rate $289,000 $(591,000)
State income taxes, including deferred, net of
federal benefit 24,000 -
Other, including officers' life insurance and
various permanent differences 33,000 14,000
========================================================================================
$346,000 $(577,000)
========================================================================================
</TABLE>
The components of deferred income tax assets
(liabilities) are as follows:
<TABLE>
<CAPTION>
Current Noncurrent
----------------------------------------------------------------------------------------
<S> <C> <C>
Revenue recognition $(804,000) -
Fixed assets and capital leases - $(27,000)
Net operating loss carryforward 63,000 -
========================================================================================
$(741,000) $(27,000)
========================================================================================
</TABLE>
The Company has a net operating loss carryforward
of approximately $175,000 available to reduce
future federal and state taxable income, which
will expire in 2010.
9. LINE OF CREDIT: On September 17, 1996, the Company announced that
the Chase Manhattan Bank, N.A. (the "Bank") has
become its new senior lender. The agreement with
the Bank provides a line of credit through
September 17, 1997, which will be used for working
capital and other corporate purposes as needed.
The Company has available up to $1,000,000 under
the line of credit, subject to limits based on
amounts of accounts receivable and inventory, as
defined. Interest is at the bank's prime rate plus
1%. The line of credit is secured by substantially
all assets of the Company. As of December 31,
1996, there was no outstanding balance on this
line of credit.
F-10
<PAGE>
10. EMPLOYEE STOCK
OPTION PLANS: In April 1992, the Company adopted the 1992 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 to the Company. 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 director's stock
options was lowered to $3.00.
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 to 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 21,501 options available for
future grant under the 1992 Plan and 149,000
options available for grant under the 1995 Plan.
If the Company had elected to recognize
compensation cost based on the fair value of the
options granted at grant date as prescribed by
SFAS No. 123, net income (loss) and earnings
(loss) per share would have been adjusted to the
pro forma amounts indicated in the table below:
<TABLE>
<CAPTION>
As Reported Pro Forma
1996 1995 1996 1995
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $504,243 $(1,080,370) $463,081 $(1,106,701)
========================================================================================
Earnings (loss) per share $ .09$ (.29) $ .08$ (.30)
========================================================================================
</TABLE>
F-11
<PAGE>
A summary of the status of the Company's two stock
option plans as of December 31, 1995 and 1996 and
changes during those years are as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------------------------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Fixed Options Options Price Options Price
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of year 276,335 $2.34 179,669 $3.00
Granted during year 101,000 1.47 110,000 1.34
Exercised (13,500) 1.08
Forfeited (30,000) 3.00 (13,334) 3.00
========================================================================================
Outstanding at end of year 333,835 $2.07 276,335 $2.34
========================================================================================
</TABLE>
The following table summarizes information about
stock options outstanding and exercisable at
December 31, 1996:
<TABLE>
<CAPTION>
Weighted
Number Average
Outstanding Remaining
Range of and Contractual Exercise
Exercise Price Exercisable Life Price
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$1.00 - $3.00 333,835 2.64 years $2.07
========================================================================================
</TABLE>
The Company's assumptions used to calculate the
fair values of options issued was (i) risk-free
interest rate of 5.2%, (ii) expected life of five
years, (iii) expected volatility of 105.95%, and
(iv) expected dividends of zero.
11. WARRANTS
AND OPTIONS: The Company sold 100,000 warrants to the Company's
Underwriter ("Underwriter's Warrants") in
September 1992 for an aggregate of $100. The
Underwriter's Warrants, as
adjusted, entitle the Underwriter, or its
assignees, to purchase up to 566,038 shares of
common stock at an exercise price of $1.06 and an
aggregate of 100,000 warrants exercisable at
$2.50. All of the Underwriter's Warrants expire on
September 24, 1998. In 1996, 84,906 of the
Underwriter's Warrants were exercised.
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.
F-12
<PAGE>
In January 1995, the Company issued stock options
to purchase 30,000 common shares at $3.00 per
share to a consultant, who subsequently became a
director. These options expire in February 2000.
The Company also issued stock options to a
consultant to purchase 120,000 common shares at
$3.00 per share, which options and accompanying
consulting agreement were terminated by the
Company and are the subject of a lawsuit. 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 Employee
Stock Option Plans and expire in April 2000. In
January 1996, the Company issued stock options to
purchase 18,500 shares at $1.06 per share to the
director mentioned above.
In March 1996, the Company issued 300,000 warrants
to Barber and Bronson, Inc. as partial
compensation for acting as the Company's Placement
Agent for its private placement of equity. These
warrants entitle the placement agent to purchase
300,000 shares of common stock at an exercise
price of $1 during the five-year period commencing
June 19, 1996.
The Company's Placement Agent also received a
warrant ("Placement Agent's Warrant") in June
1996. The Placement Agent's Warrant entitles the
Placement Agent to purchase up to 8.2 units, each
consisting of 25,000 shares of common stock and
warrants to purchase 12,500 common shares, at an
exercise price of $1.00 during the five-year
period commencing June 19, 1996. The Placement
Agent, pursuant to a consulting agreement, will
provide financial consulting services for two
years, starting March 5, 1998 at a rate of $3,000
per month.
In September 1996, the Company issued 10,000
warrants to two directors at an exercise price of
$2.00 per share of common stock. These warrants
expire in 2001.
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 then proposed McDonnell Douglas MD-90 jet
aircraft. During the year ended December 31, 1996,
approximately 58% of the Company's revenue was
derived from this program, as compared with 57% in
1995. As of December 31, 1996, an aggregate of
$8,915,177 was included in costs and estimated
earnings in excess of billings on uncompleted
contracts. McDonnell Douglas received FAA
certification for the MD-90 in November 1994.
13. CONTINGENCIES: From time to time the Company is subject to
routine litigation incidental to its business. The
Company believes that the settlement of any
pending legal proceedings will not have a material
adverse effect on the Company's financial
condition.
F-13
<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 25, 1997 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 25, 1997
- ------------------------ President (Principal
Arthur August Executive Officer)
and Director
/S/ Theodore J. Martines Executive Vice March 25, 1997
- ------------------------ President (Principal
Theodore J. Martines Accounting and Financial
Officer) and Director
/S/ Stanley Wunderlich Director March 25, 1997
- ------------------------
Stanley Wunderlich
/S/ Walter Paulick Director March 25, 1997
- ------------------------
Walter Paulick
<PAGE>
EXHIBIT
Exhibit No.
Exhibit Index
10.22 Financial Consulting Agreement dated
September 11, 1996 between the Company
and Andreas Zigouras.
10.23 Line of Credit Agreement dated September
15, 1996 between the Company and the
Chase Manhattan Bank.
10.24 Termination letter dated June 28, 1996
between Chrysler Capital Corporation
and the Company.
<PAGE>
Exhibit No. 10.22
FINANCIAL CONSULTING AGREEMENT
AGREEMENT made as of this 11th day of September, 1996 by and between
CPI Aerostructures, Inc. (the "Company") with an address at 200A Executive
Drive, Edgewood, N.Y. 11717 and Andreas Zigouras (the "Consultant"), with an
address at 17 State Street, New York, NY 10004.
W I T N E S S E T H
WHEREAS, the Consultant has previously provided financial consulting
services to the Company, has continued to assist the Company and desires to
continue to assist the Company.
WHEREAS, the Company desires to retain the Consultant to provide
on-going financial consulting services; and
WHEREAS, the Consultant desires to be retained to render such services.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements hereinafter set forth, the parties hereto hereby agree
as follows:
1. The Company hereby retains the Consultant to perform consulting
services related to corporate finance and other financial services matters, and
the Consultant hereby accepts such retention. In this regard, subject to the
terms set forth below, the Consultant shall furnish to the Company advice and
recommendations with respect to potential acquisitions by the Company as the
Company shall, from time to time, reasonably request upon reasonable notice. In
addition, the Consultant shall hold itself ready to assist the Company in
evaluating and negotiating particular aspects of acquisitions if requested to do
so by the Company, upon reasonable notice.
2. The Consultant intends to make a market in the Company's securities
during the term of the Agreement.
3. In full satisfaction for services to be rendered by Consultant under
this Agreement, the Consultant hereby accepts, upon execution of this agreement:
(a) Warrants (the "Warrants") to purchase 60,000 shares of the
Company's Common Stock as set forth in a separate Warrant Certificate issued on
this date.
(b) The Company shall pay to the Consultant a monthly fee of
$2,500, for the full term of 12 months, payable monthly in advance. In addition
to this monthly compensation hereunder, the Company will reimburse the
Consultant for any and all reasonable expenses incurred by the Consultant in the
performance of its duties hereunder, and the Consultant shall account for such
<PAGE>
expenses to the Company; provided, however, that any expenses in excess of $100
shall require the prior written approval of the Company, which will not be
unreasonably withheld. Such reimbursement shall accumulate and be paid monthly.
(c) The Company hereby amends the Registration Rights
provisions of the Warrants to provide that: If at any time after December 31,
1997 and prior to September 11, 2001 the shares of Common Stock (the "Shares")
remaining issued or issuable upon exercise of the Warrants are not then
registered under one or more Piggyback Registrations and then covered by a
prospectus complying with the requirements of the Securities Act and the
Consultant has not been offered the opportunity by the Company to register such
shares on a Piggyback Registration, the Consultant may by written notice to the
Company require the Company to file a registration statement under the
Securities Act covering such Shares as Consultant may specify in such notice.
The Consultant shall be entitled so to require the Company to file a
registration statement pursuant to this section on only one (1) occasion. The
Company will file such a registration statement within ninety (90) days of
receipt of such notice; and thereafter will process such registration statement
diligently to effectiveness; will cause such registration statement to become
effective as promptly as practicable; will promptly file all such supplements
and post-effective amendments to such registration statement and take any such
other actions as may be necessary or appropriate to make available to Consultant
on as continuous a basis as is practicable, a prospectus meeting the
requirements of the Securities Act through the earliest of (a) the date on which
all of the underlying shares have been sold and distributed by Consultant, (b)
the date on which, in the opinion of counsel for both the Company and
Consultant, all of the Shares which Consultant then holds may be immediately
transferred pursuant to the provisions of Rule 144 under the Securities Act, and
(c) September 11, 2001. In that regard, the Company makes no representations or
warranties as to its ability to have any registration statement or
post-effective amendment thereto declared effective.
4. All obligations of the Consultant contained herein shall be subject
to the Consultant's reasonable availability for such performance, in view of the
nature of the requested service and the amount of notice received. The
Consultant shall devote such time and effort to the performance of its duties
hereunder as the Consultant shall determine is reasonably necessary for such
performance. The Consultant may look to such others for such factual
information, investment recommendations, economic advice and/or research, upon
which to base its advice to the Company hereunder, as it shall deem appropriate.
The Company shall furnish to the Consultant all information relevant to the
performance by the Consultant of his obligations under this Agreement, or
particular projects as to which the Consultant is acting as advisor, which will
permit the Consultant to know all facts
2
<PAGE>
material to the advise to be rendered, and all material or information
reasonably requested by the Consultant. In the event that the Company fails or
refuses to furnish any such material or information reasonably requested by the
Consultant, and thus prevents or impedes the Consultant's performance hereunder,
any inability of the Consultant to perform shall not be a breach of his
obligations hereunder.
5. Nothing contained in this Agreement shall limit or restrict the
right of the Consultant or of any partner, employee, agent or representative of
the Consultant, to be a partner, director, officer, employee, agent or
representative of, or to engage in, any other business, whether of a similar
nature or not, nor to limit or restrict the right of the Consultant to render
services of any kind to any other corporation, firm, individual or association.
6. The Consultant will hold in confidence any confidential information
which the Company provides to the Consultant pursuant to this Agreement unless
the Company gives the Consultant permission in writing to disclose such
confidential information to a specific third party. Notwithstanding the
foregoing, the Consultant shall not be required to maintain confidentiality with
respect to information (i) which is or becomes part of the public domain; (ii)
of which it had independent knowledge prior to disclosure; (iii) which comes
into the possession of the Consultant in the normal and routine course of its
own business from and through independent non-confidential sources; or (iv)
which is required to be disclosed by the Consultant by governmental
requirements. If the Consultant is requested or required (by oral questions,
interrogatories, requests for information or document subpoenas, civil
investigative demands, or similar process) to disclose any confidential
information supplied to it by the Company, or the existence of other
negotiations in the course of its dealing with the Company or its
representatives, the Consultant shall, unless prohibited by law, promptly notify
the Company of such request(s) so that the Company may seek an appropriate
protective order.
7. The Company agrees to indemnify and hold harmless the Consultant,
his partners, employees, agents, representatives and controlling persons (and
the officers, directors, employees, agents, representatives and controlling
persons of each of them) from and against any and all losses, claims, damages,
liabilities, costs and expenses (and all actions, suits, proceedings or claims
in respect thereof) and any legal or other expenses in giving testimony or
furnishing documents in response to a subpoena or otherwise (including, without
limitation, the cost of investigating, preparing or defending any such action,
suit, proceeding or claim, whether or not in connection with any action, suit
proceeding or claim in which the Consultant is a party), as and when incurred,
directly or indirectly, caused by, relating to,
3
<PAGE>
based upon or airing out of the Consultant's service pursuant to this Agreement.
The Company further agrees that the Consultant shall incur no liability to the
Company or any other party on account of this Agreement or any acts or omissions
arising out of or related to the actions of the Consultant relating to this
Agreement or the performance or failure to perform any services under this
Agreement except for the Consultant's intentional or willful misconduct. This
paragraph shall survive the termination of this Agreement.
8. This Agreement may not be transferred, assigned or delegated by any
of the parties hereto without the prior written consent of the other party
hereto.
9. The failure or neglect of the parties hereto to insist, in any one
or more instances, upon the strict performance of any of the terms or conditions
of this Agreement, or their waiver of strict performance of any of the terms or
conditions of this Agreement, shall not be construed as a waiver or
relinquishment in the future of such term or condition, but the same shall
continue in full force and effect.
10. This Agreement is for a term of twelve (12) months and may not be
terminated by the Company except for Cause. For purposes of this Agreement,
Cause is defined as (i) reckless disregard to perform his duties as set forth
herein, or (ii) willful misfeasance, or (iii) any act of dishonesty by the
Consultant with respect to the Company. This Agreement may be terminated by the
Consultant at any time upon 30 days' notice. Paragraphs 6 and 7 shall survive
the expiration or termination of this Agreement under all circumstances.
11. Any notices hereunder shall be sent to the Company and to the
Consultant at their respective addresses set forth above, or to such other
designated address provided for hereinafter. Any notice shall be given by
registered or certified mail, postage prepaid, and shall be deemed to have been
given when deposited in the United States mail. Either party may designate any
other address to which notice shall be given, by giving written notice to the
other.
12. This Agreement has been made in the State of New York and shall be
construed and governed in accordance with the laws thereof without giving effect
to principles governing conflicts of law.
13. This Agreement contains the entire agreement between the parties,
may not be altered or modified, except in writing and signed by the party to be
charged thereby, and supersedes any and all previous agreements between the
parties relating to the subject matter hereof.
14. This Agreement shall be binding upon the parties hereto, the
indemnified parties referred to in Section 7, and their
4
<PAGE>
respective heirs, administrators, successors and permitted assigns.
IN WITNESS WHEREOF, this Agreement has been executed by the parties
hereto as of the date first above written.
CPI Aerostructures, Inc.
By: /s/ Arthur August
------------------------------
Arthur August, President
/s/ Andreas Zigouras
- ----------------------------------
Andreas Zigouras
<PAGE>
CPI AEROSTRUCTURES, INC.
200A EXECUTIVE DRIVE
EDGEWOOD, NY 11717
December 30, 1996
Mr. Andrew Zigouras
Andrew, Alexander,
Wise & Company, Inc.
17 State Street
New York, NY 10004
Dear Andy:
As part of a Financial Consulting Agreement entered into as of
September 11, 1996 by and between CPI Aerostructures, Inc. (the "Company") and
Andreas Zigouras, you were granted warrants (the "Warrants") to purchase 60,000
shares of Common Stock of the Company. It is hereby agreed by your signature
below that the grant of the Warrants is rescinded and the Warrants are hereby
deemed null and void. In consideration for the rescission of the Warrants, the
Company hereby extends the term of the Financial Consulting Agreement for an
additional 12 months and agrees to pay Andreas Zigouras an additional $2,500 per
month, or $30,000. The Financial Consulting Agreement otherwise remains in full
force and effect.
Thank you for your consideration.
Very truly yours,
CPI AEROSTRUCTURES, INC.
By: /s/ Arthur August
-------------------------
Arthur August, President
Accepted and Agreed to:
/s/ Andreas Zigouras
- ---------------------------------
Andreas Zigouras
<PAGE>
Exhibit No. 10.23
[LOGO]
- -------------------------------------------------------------------------------
Chrysler Capital Corporation
Linda A Harvey
Assistant General Counsel
Corporate Lending Group
Business Manager
June 28, 1996
CPI Aerostructures, Inc.
200A Executive Drive
Edgewood, New York 11717
Ladies and Gentlemen:
Reference is made to the Loan Agreement (the "Loan Agreement") dated as
of September 28, 1989 between Consortium of Precision Industries, Inc., now
known as CPI Aerostructures, Inc. ("CPI") and Chrysler Capital Corporation
("Chrysler") and all amendments thereto, and all collateral (the "Collateral")
and documents executed and delivered in connection therewith (the "Loan
Documents").
Upon repayment by CPI of the outstanding indebtedness owed to Chrysler,
plus accrued and unpaid interest, CPI shall have no further obligations to
Chrysler under the Loan Documents, and shall be released from all further
liability with respect thereto, except as specifically set forth under Section
8.03 of the Loan Agreement. Chrysler shall terminate all of its liens and
security interests on any Collateral delivered pursuant to the Loan Documents.
Upon payment of the outstanding indebtedness, Chrysler shall deliver
the original promissory notes (the "Notes") together with the Collateral and
terminations and releases (together the "Releases") with respect thereto.
Chrysler agrees to cooperate with CPI and its attorneys to execute and
deliver any additional documentation reasonably requested by CPI to terminate
any liens on the Collateral which might be necessitated after the closing.
Very truly yours,
CHRYSLER CAPITAL CORPORATION
By: /s/ Linda A. Harvey
---------------------------
Linda A. Harvey
<PAGE>
Exhibit No. 10.24
[LOGO]
Gerald P. Brennan
Vice President
The Chase Manhattan Bank, N.A.
395 North Service Road
Melville, NY 11747
September 10, 1996
Mr. Arthur August
Chairman and President
CPI Aerostructures, Inc.
200A Executive Drive
Edgewood, New York 11717
Dear Arthur:
The Chase Manhattan Bank ("Chase" or the "Bank") is pleased to advise
that it is prepared, in its sole discretion, to offer a Line of Credit to CPI
Aerostructures, Inc. (the "Borrower"), subject to the terms and conditions
described below.
$1,000,000.00 Line of Credit to CPI Aerostructures, Inc.
Amount: $1,000,000.00; provided, however, the maximum
principal amount outstanding under this line of
credit shall not exceed the lesser of
$1,000,000.00 or the Borrowing Base (as determined
by Chase and defined below).
Borrower: CPI Aerostructures, Inc.
Type of Credit: A line of credit repayable on a demand basis.
Maturity: On demand or September 15, 1997 whichever is
earlier, unless this discretionary line is earlier
terminated by the Bank.
Use of Proceeds: Working Capital.
Borrowing Base: Means up to (i) 80% of all eligible domestic
accounts receivable (excluding all government
receivables) under 90 days from the invoice date,
plus (ii) the lesser of 50% of Raw Materials held
in Inventory or $250M. In the event the aggregate
amount borrowed at any time exceeds the Borrowing
Base, such excess shall be immediately due and
payable by Borrower to Bank.
<PAGE>
Interest Rate: All outstanding borrowings under this
arrangement will bear interest equal at all
times to Chase's Prime Rate plus 1.0 percent
(Prime + 1%) in effect from time to time.
Interest is to be computed on an actual/360-day
basis and is payable monthly. Payments will be
debited from the Borrower's deposit account with
Chase when due.
Fees: The Borrower agrees to pay a line origination
fee of $10,000.00 to cover Chase's costs
associated with preparation of this line of
credit.
Clean Up Requirement: This line of credit is subject to the
requirement that for 30 consecutive days during
each twelve month period or during the term
hereof, there shall be no loans outstanding.
Requests for Advances: Any advances made under this line of credit will
be evidenced by a grid demand promissory note
substantially in the form provided to Borrower
with this letter.
Security: A first priority security interest in all of
Borrower's accounts receivable, inventory,
machinery, equipment, fixtures, chattel paper
and general intangibles, including but not
limited to, corporate name, trademarks, trade
names, goodwill, patents, copyrights and know
how.
If at any time borrower requests that Chase
release its lien on any of the above property,
Chase at its sole discretion will consider such
request and respond thereto. However, this is
not a commitment to release its lien on any of
the foregoing.
Additional
Conditions: In addition to the above mentioned terms and
conditions, and in order to enable Chase to
perform its ongoing financial review, the
Borrower will be required to furnish to Chase:
a. Within 90 days after and as at the close of each fiscal year, a
balance sheet of Borrower and its Subsidiaries, and statements of income, cash
flows and changes in shareholders' equity of Borrower and its Subsidiaries
prepared in accordance with GAAP consistently applied, each accompanied by a
statement that they have been audited, by an independent public accounting firm
satisfactory to Chase, and the report of such accountants shall not contain any
qualification or disclaimer or opinion by reason of audit limitations imposed by
Borrower.
b. Within 45 days after the end of each Fiscal Quarter, a balance
sheet(s) of Borrower and its Subsidiaries as at the end of each such Fiscal
Quarter and related statements of income, cash flow and changes in shareholders'
equity of the Borrower and its Subsidiaries for the Fiscal Quarter and from the
beginning of such Fiscal Year to the end of such Fiscal Quarter, together with
<PAGE>
comparisons to the previous year prepared in conformity with GAAP consistently
applied and certified by an appropriate financial officer of the Borrower.
c. Within 10 days after the end of each calendar month, a monthly
Borrowing Base Report together with an accounts receivable aging report, to be
certified by an officer of the Borrower and to be in form and substance
satisfactory to the Bank, substantially in the form of the copy attached.
This line of credit does not constitute a commitment to lend, and the
continued availability of this facility is subject to Chase, in its sole
discretion, continuing to be satisfied with the Borrower's financial condition
and economic prospects, prompt advice to Chase of any circumstances which might
materially or adversely affect the Borrower, and the Borrower's maintenance of a
satisfactory relationship with Chase.
This letter constitutes the entire understanding between Chase and the
Borrower and supersedes all prior discussions. The terms and conditions set
forth in this letter shall survive the execution of the note evidencing the
indebtedness and shall remain in effect so long as this facility remains in
place or any amounts remain outstanding under this line of credit.
Chase will consider requests for advances hereunder until September 15,
1997 unless this discretionary line of credit is earlier terminated by Chase in
its sole discretion.
Please acknowledge your understanding of the foregoing by signing and
returning the enclosed copy of this letter along with the line origination fee
to the undersigned no later than September 23, 1996.
We appreciate the opportunity to be of service to you.
Very truly yours,
THE CHASE MANHATTAN BANK
/s/ Gerald P. Brennan
---------------------
Gerald P. Brennan
Vice President
516-755-5055
Enclosure
ACKNOWLEDGED AND AGREED:
CPI AEROSTRUCTURES, INC.
By: /s/ Arthur August Date: 9/17/96
- -------------------
Its: President
25517
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000889348
<NAME> CPI AEROSTRUCTURES, INC.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 899,798
<SECURITIES> 0
<RECEIVABLES> 248,838
<ALLOWANCES> 0
<INVENTORY> 11,706,261
<CURRENT-ASSETS> 80,743
<PP&E> 520,572
<DEPRECIATION> 360,535
<TOTAL-ASSETS> 13,124,903
<CURRENT-LIABILITIES> 2,152,052
<BONDS> 0
5,877
0
<COMMON> 0
<OTHER-SE> 10,939,974
<TOTAL-LIABILITY-AND-EQUITY> 13,124,903
<SALES> 6,769,712
<TOTAL-REVENUES> 6,769,712
<CGS> 4,179,823
<TOTAL-COSTS> 4,179,823
<OTHER-EXPENSES> 1,751,064
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 110,631
<INCOME-PRETAX> 771,476
<INCOME-TAX> 318,000
<INCOME-CONTINUING> 453,476
<DISCONTINUED> 0
<EXTRAORDINARY> 50,947
<CHANGES> 0
<NET-INCOME> 504,423
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
