SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period Commission File Number 1-11398
ended September 30, 1998
CPI AEROSTRUCTURES, INC.
(Exact Name of Small Business Issuer as Specified in its Character)
New York 11-2520310
- ------------------------------- ------------------------------------
(State or Other Jurisdiction (IRS Employer Identification Number)
of Incorporation or Organization)
200A EXECUTIVE DRIVE, EDGEWOOD, NY 11717
(Address of Principal Executive Offices)
Telephone number (516) 586-5200
(Issuer's Telephone Number Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or such period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No |_|
The number of shares of common stock, par value $.001 per share, outstanding was
7,945,342 as of September 30, 1998.
<PAGE>
INDEX
- -----------------------------------------------------------------------------
Part I. Financial Information:
Item 1 - Consolidated Financial Statements:
Balance Sheets as of September 30, 1998 (Unaudited)
and 3 December 31, 1997 3
Statements of Income for the Three and Nine Months
ended September 30, 1998 (Unaudited) and 1997 (Unaudited) 4
Statements of Cash Flows for the Nine Months ended
September 30, 1998 (Unaudited) and 1997 (Unaudited) 5
Notes to Financial Statements (Unaudited) 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. Other
Item 6 - Exhibits and Reports on Form 8-K 11
Signatures 12
2
<PAGE>
CPI AEROSTRUCTURES, INC.
- -------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
- ----------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 436,393 $ 2,032,183
Accounts receivable 1,070,755 1,820,278
Costs and estimated earnings in excess
contracts (Note 2) 15,568,180 12,923,769
Inventory 2,694,315 2,317,131
Prepaid expenses and other current assets 113,470 123,411
- ----------------------------------------------------------------------------------------------------------------------
Total current assets 19,883,113 19,216,772
Property, Plant and Equipment, net 5,242,849 5,734,572
Goodwill 7,228,000 7,615,863
Other Assets 622,028 546,638
- ----------------------------------------------------------------------------------------------------------------------
Total Assets $32,975,990 $33,113,845
======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,226,725 $ 2,435,361
Accrued expenses 96,449 387,654
Line of credit 375,000 ---
Current portion of long term debt 2,385,075 2,385,075
Income taxes payable 802,650 543,000
Deferred income taxes 775,000 775,000
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 6,660,899 6,526,090
Long term debt 10,191,281 11,979,814
Deferred income taxes 12,000 12,000
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 16,864,180 18,517,904
- ----------------------------------------------------------------------------------------------------------------------
Commitments
Shareholders' Equity
Common stock - $.001 par value; authorized 50,000,000 shares,
7,945,342 issued and outstanding 7,945 7,903
Additional paid-in capital 12,124,960 11,845,965
Retained earnings 3,978,905 2,742,073
- ----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 16,111,810 14,595,941
- ----------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $32,975,990 $33,113,845
======================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
CPI AEROSTRUCTURES, INC.
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Three Months ended For the Nine months Ended
September 30, September 30,
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $5,084,594 $2,215,387 $15,539,656 $7,346,072
Cost of sales 2,944,781 1,383,632 9,474,600 4,841,397
- ----------------------------------------------------------------------------------------------------------------------
Gross profit 2,139,813 831,755 6,065,056 2,504,675
Selling, general and administrative 1,073,738 351,766 3,143,244 1,060,394
expenses
- ----------------------------------------------------------------------------------------------------------------------
Income from operations 1,066,075 479,989 2,921,812 1,444,281
- ----------------------------------------------------------------------------------------------------------------------
Other (income) expense:
Interest/other income (34,850) 517 (112,016) 17,883
Interest expense 311,877 169 971,996 1,364
- ----------------------------------------------------------------------------------------------------------------------
Total other expenses, net 277,027 686 859,980 19,247
- ----------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 789,048 479,303 2,061,832 1,425,034
Provision for income taxes 316,000 192,000 825,000 570,000
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 473,048 $287,303 $1,236,832 $ 855,034
======================================================================================================================
Earnings per common share - Basic $ .06 $ .04 $ .16 $ .13
- ----------------------------------------------------------------------------------------------------------------------
Earnings per common share - Diluted $ .06 $ .04 $ .15 $ .12
- ----------------------------------------------------------------------------------------------------------------------
Shares used in computing earnings per Common share:
Basic 7,945,342 7,119,200 7,940,570 6,717,063
Diluted 8,097,940 7,647,193 8,333,926 7,144,857
======================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
For the Nine Months Ended September 30, 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
(Unaudited)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,236,832 $ 855,034
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 1,279,812 52,576
Loss on sale/disposal of fixed assets --- 25,883
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 749,523 (260,496)
Decrease in prepaid expenses and other current assets 9,941 44,947
Increase in costs and estimated earnings in excess of billings on
uncompleted contracts (2,644,411) (1,810,393)
Increase in inventory (377,184) ---
Increase in other assets (172,405) (296,571)
(Decrease) increase in accounts payable (208,636) 647,590
Decrease in accrued expenses (291,205) (107,624)
Increase in income taxes payable 259,650 570,000
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (158,083) (279,054)
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of fixed assets --- 6,295
Purchase of property and equipment (69,411) (53,863)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (69,411) (47,568)
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from revolving line of credit 375,000 ---
Repayment of long-term debt (1,788,533) (6,547)
Proceeds from exercise of stock options/warrants 45,237 2,467,926
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (1,368,296) 2,461,379
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (1,595,790) 2,134,757
Cash at beginning of period 2,032,183 899,798
- ----------------------------------------------------------------------------------------------------------------------
Cash at end of period $ 436,393 $3,034,555
======================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 971,966 $ 1,364
======================================================================================================================
Income taxes $ 560,819 $ 29,481
======================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
CPI AEROSTRUCTURES, INC.
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- -------------------------------------------------------------------------------
1. INTERIM FINANCIAL STATEMENTS
The financial statements as of September 30, 1998 and for the nine and
three months ended September 30, 1998 and 1997 are unaudited, however, in
the opinion of the management of the Company, these financial statements
reflect all adjustments (consisting solely of normal recurring adjustments)
necessary to present fairly the financial position of the Company and the
results of operations for such interim periods are not necessarily
indicative of the results to be obtained for a full year.
2. COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS:
Costs and estimated earnings in excess of billings on uncompleted contracts
consist of: September 30, 1998
--------------------------------------------------------------------------
U.S.
Government Commercial Total
---------------------------------------------------------------------------
Costs incurred on
uncompleted contracts $6,246,231 $21,678,496 $27,924,727
Estimated earnings 2,342,375 16,009,839 18,352,214
---------------------------------------------------------------------------
8,588,606 37,688,335 46,276,941
Less billings to date 6,541,780 24,166,981 30,708,761
---------------------------------------------------------------------------
Costs and estimated
earnings in excess of
billings on uncompleted
contracts $2,046,826 $13,521,354 $15,568,180
===========================================================================
December 31, 1997
---------------------------------------------------------------------------
U.S.
Government Commercial Total
---------------------------------------------------------------------------
Costs incurred on
uncompleted contracts $4,608,726 $19,944,845 $24,553,571
Estimated earnings 2,055,290 13,880,949 15,936,239
---------------------------------------------------------------------------
6,664,016 33,825,794 40,489,810
Less billings to date 5,670,477 21,895,564 27,566,041
---------------------------------------------------------------------------
Costs and estimated
earnings in excess of
billings on uncompleted
contracts $ 993,539 $11,930,230 $12,923,769
---------------------------------------------------------------------------
6
<PAGE>
CPI AEROSTRUCTURES, INC.
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- -------------------------------------------------------------------------------
3. EARNINGS PER COMMON SHARE:
Basic earnings per share calculations are computed by dividing net income,
by the weighted average number of common shares outstanding.
Diluted earnings per share calculations are computed by dividing net
income, increased by proforma reductions in interest expense (net of tax)
resulting from the assumed exercise of stock options and warrants and the
resulting assumed reduction of outstanding indebtedness, by the weighted
average number of common and common equivalent shares outstanding.
4. MD-90 CONTRACT
In March 1991, CPI 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 then proposed McDonnell
Douglas MD-90 jet aircraft. During the nine months ended September 30,
1998, approximately 19% of the Company's revenue was derived from this
program. As of September 30, 1998, an aggregate of $12,008,538 was included
in costs and estimated earnings in excess of billings on uncompleted
contracts.
In 1997, the Boeing Company acquired the McDonnell Douglas Corporation.
Boeing has announced that it plans to terminate the MD-90 program in 1999
unless it receives sufficient additional orders for such aircraft. To date,
the Company has received no notice of termination. Such termination and the
termination of the Rohr agreement would have a material adverse effect on
the Company's financial position.
7
<PAGE>
CPI AEROSTRUCTURES, INC.
- -------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and
Results of Operations
- -------------------------------------------------------------------------------
Forward Looking Statements
The statements discussed in this Report include forward looking statements that
involve risks and uncertainties, including the timely delivery and acceptance of
the Company's products and the other risks detailed from time to time in the
Company's reports filed with the Securities and Exchange Commission.
Results of Operations
The Company's revenue for the three months ended September 30, 1998 was
$5,084,594 compared to $2,215,387 for the same period last year, representing an
increase of $2,869,207, or 130%. Revenue for the nine month period ended
September 30, 1998 was $15,539,656 compared to $7,346,072 for the same period
last year, representing an increase of $8,193,584 or 112%. Of the total revenue,
$8,399,288 relates to sales by Kolar, Inc. ("Kolar") a wholly owned subsidiary
of the Company, the assets of which were acquired in October 1997 ("Kolar
Acquisition"). This revenue figure is slightly lower than anticipated due to a
slowdown caused by the Asian economic situation. The decrease in sales for the
aircraft segment in this period as compared to same period last year reflects a
combination of (i) the fact that last year's period sales were the largest in
the Company's history, and (ii) this year's period sales were impacted by a
slight decrease in military sales. Commercial aircraft programs represented 25%
of total revenue for the nine months ended September 30, 1998 compared to 43%
for the same period in 1997. Approximately 70% of such change in percentage is
due to the inclusion of the revenue of Kolar from such period.
Gross profit increased by $1,308,058, or 157%, from the three months ended
September 30, 1997 compared to the three months ended September 30, 1998. Gross
profit for the nine month period ended September 30, 1998 was $6,065,056
compared to $2,504,675 for the same period last year, representing an increase
of $3,560,381 or 142%. Kolar, Inc. contributed $3,054,365 or 86 % of this
increase. Gross profit as a percentage of revenue for the nine months ended
September 30, 1998 was 39% compared to 34% for the same period last year. This
increase is primarily attributable to a more profitable sales mix in the
aircraft segment of the Company.
Selling, general, and administrative expenses increased by $721,972 or 205%,
from the three months ended September 30, 1997 compared to the three months
ended September 30, 1998. Selling, general and administrative expenses for the
nine months ended September 30, 1998 were $3,143,244 compared to $1,060,394 for
the same period last year, representing an increase of $2,082,850 or 196%. This
increase relates primarily to the inclusion of the expenses of Kolar and the
associated depreciation of assets and amortization of intangibles that normally
occurs after an acquisition. Interest expense increased by $311,708 for the
three months ended September 30, 1998, which is attributable to a substantial
increase of debt during 1997, primarily due to the Kolar Acquisition.
The resulting net income for the three months ended September 30, 1998, was
$473,048 compared to $287,303 for the same period last year. Net income for the
nine months ended September 30, 1998 was $1,236,832 compared to $855,034 for the
same period last year, representing an increase of $381,798 or 45%. Basic
earnings per share was $0.16 on 7,940,570 average shares outstanding, compared
to $0.13 per share (re-stated from prior year's amount) on 6,717,063 average
shares outstanding for the same period last year. Diluted earnings per share was
$0.15 per share compared to $0.12 per share in 1997 on 8,333,926 and 7,144,857
weighted average shares outstanding, respectively.
8
<PAGE>
CPI AEROSTRUCTURES, INC.
- -------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results
of Operations
- -------------------------------------------------------------------------------
Liquidity and Capital Resources
At September 30, 1998 and December 31, 1997, the Company had working capital of
$13,222,214 and $12,690,682, respectively, an increase of $531,532. This
increase is primarily attributable to an increase in costs and estimated
earnings in excess of billings of $2,644,411, an increase in inventory of
$377,184, a decrease in accounts payable of $208,636, and a decrease in accrued
expenses of $291,205 offset by a decrease in accounts receivable of $749,523,
and a decrease in cash resulting from the Company making its principal payments
on its term loan for the Kolar Acquisition. 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 represent the aggregate costs and related earnings
for uncompleted contracts for which the customer has not yet been billed. These
costs and earnings are recovered upon shipment of products and presentation of
billings in accordance with contract terms. The Company's continued requirement
to incur significant costs, in advance of receipt of associated cash for
commercial aircraft contracts, has caused an increase in the gap between
aggregate costs and earnings and the related billings to date.
Net cash used in operating activities for the nine months ended September 30,
1998 was $158,083. This decrease in cash was primarily the result of an increase
in costs and estimated earnings in excess of billing of $2,644,411, an increase
in inventory of $377,184, an increase in other assets of $172,405, a decrease in
accounts payable of $208,636, and a decrease in accrued expenses of $291,205,
offset by net income of $1,236,832, depreciation and amortization of $1,279,812,
a decrease in accounts receivable of $749,523 and an increase in income taxes
payable of $259,650.
Other Information
In March 1991, CPI 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 then proposed McDonnell Douglas MD-90 jet
aircraft. During the nine months ended September 30, 1998, approximately 19% of
the Company's revenue was derived from this program. As of September 30, 1998,
an aggregate of $12,008,538 was included in costs and estimated earnings in
excess of billings on uncompleted contracts.
In 1997, the Boeing Company acquired the McDonnell Douglas Corporation. Boeing
has announced that it plans to terminate the MD-90 program in 1999 unless it
receives sufficient additional orders for such aircraft. To date, the Company
has received no notice of termination. Such termination and the termination of
the Rohr agreement would have a material adverse effect on the Company's
financial position.
9
<PAGE>
Year 2000 Compliance
The Company has been evaluating the potential impact of the situation
commonly referred to as the "Year 2000" ("Y2K") issue. The Y2K issue results
from the problem with older computer software programs that only recognize the
last two digits of the year in any date (e.g., "98" for "1998"). These programs
were designed and developed without considering the impact of the upcoming
change in the century. If the software is not reprogrammed or replaced, many
computer applications could fail or create erroneous results at the Year 2000.
Since much of the Company's internal information technology has been fairly
recently developed, the Company does not anticipate it will face significant
issues of non-compliance.
Potential impacts of Y2K non-compliance to the Company may arise from
software, computer hardware, and other equipment outside the Company's ownership
yet with which the Company interfaces either electronically or operationally.
The Company has contacted its major suppliers and customers to determine the
state of their assessment and remediation of any Y2K issues they face. The
Company has been advised by substantially all of such third parties that they
believe they are Y2K compliant. Notwithstanding the foregoing, approximately 50%
of the Company's revenues are derived from contracts with agencies or
instrumentalities of the United States government ("Government Agencies"). The
Company has not been able to determine whether these Government Agencies are Y2K
compliant. If these Government Agencies do does not become Y2K compliant, the
financial condition and operations of the Company would be materially and
adversely impacted. The Company has not yet developed a contingency plan in the
event of such non-compliance.
10
<PAGE>
CPI AEROSTRUCTURES, INC.
- -------------------------------------------------------------------------------
ITEM 6. Exhibits and Reports on Form 8-K
a) No Exhibits
b) No reports on Form 8-K were filed with the Securities and
Exchange Commission during the three months ended September
30, 1998.
11
<PAGE>
CPI AEROSTRUCTURES, INC.
- -------------------------------------------------------------------------------
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
CPI AEROSTRUCTURES, INC.
Dated: November 13, 1998
By: /S/ Arthur August
-----------------------
Arthur August
President
(Principal Executive Officer)
Dated: November 13, 1998 By: /S/ Edward J. Fred
------------------------
Edward J. Fred
Chief Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 436,393
<SECURITIES> 0
<RECEIVABLES> 1,070,755
<ALLOWANCES> 0
<INVENTORY> 18,262,495
<CURRENT-ASSETS> 19,883,113
<PP&E> 6,299,286
<DEPRECIATION> 1,056,436
<TOTAL-ASSETS> 32,975,990
<CURRENT-LIABILITIES> 6,660,899
<BONDS> 0
<COMMON> 7,945
0
0
<OTHER-SE> 16,103,865
<TOTAL-LIABILITY-AND-EQUITY> 32,975,990
<SALES> 15,539,656
<TOTAL-REVENUES> 15,539,656
<CGS> 9,474,600
<TOTAL-COSTS> 9,474,600
<OTHER-EXPENSES> 3,143,244
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 971,996
<INCOME-PRETAX> 2,061,832
<INCOME-TAX> 825,000
<INCOME-CONTINUING> 1,236,832
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,236,832
<EPS-PRIMARY> .16
<EPS-DILUTED> .15
</TABLE>
