CPI AEROSTRUCTURES, INC.
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period Commission File Number 1-11398
ended June 30, 1999
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 2,648,509 as of June 30, 1999.
<PAGE>
CPI AEROSTRUCTURES, INC.
INDEX
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Part I. Financial Information:
Item 1 - Consolidated Financial Statements:
Balance Sheets as of June 30, 1999 (Unaudited) and 3
December 31, 1998
Statements of Income for the Three and Six Months ended June 30, 4
1999 (Unaudited) and 1998 (Unaudited)
Statements of Cash Flows for the Six Months ended June 30, 1999 5
(Unaudited) and 1998 (Unaudited)
Notes to Financial Statements (Unaudited) 6
Item 2 - Management's Discussion and Analysis of 8
Financial Condition and Results of Operations
Part II. Other
Item 4 - Submission of matters to a vote of security holders 10
Item 5 - Other information 10
Item 6 - Exhibits and Reports on Form 8-K 10
Signatures 11
2
<PAGE>
CPI AEROSTRUCTURES, INC.
CONSOLIDATED BALANCE SHEETS
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<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(Unaudited)
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<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 191,493 $ 584,296
Accounts receivable 2,283,125 1,689,207
Income tax receivable 516,000 516,000
Costs and estimated earnings in excess of billings on uncompleted
contracts (Note 2) 3,536,618 3,105,924
Inventory 2,326,698 2,438,415
Deferred income taxes net of valuation allowance of $2,304,000 919,000 919,000
Prepaid expenses and other current assets 77,670 102,001
- ----------------------------------------------------------------------------------------------------------------------
Total current assets 9,850,604 9,354,843
Property, Plant and Equipment, net 4,792,270 5,064,840
Goodwill 6,840,752 7,098,917
Other Assets 352,609 417,286
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Total Assets $21,836,235 $21,935,886
======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,033,235 $ 2,272,149
Deferred income taxes 260,000 260,000
Accrued expenses 552,391 351,104
Line of credit 575,000 375,000
Notes payable - officers 130,000 ---
Current portion of long term debt 1,982,795 1,475,075
Income taxes payable 104,703 ---
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Total current liabilities 5,638,124 4,733,328
Long term debt 9,904,580 11,092,239
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Total liabilities 15,542,704 15,825,567
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Commitments
Shareholders' Equity:
Common stock - $.001 par value; authorized 50,000,000 shares,
2,648,509 issued and outstanding 2,649 2,649
Additional paid - in capital 11,954,899 11,931,522
Accumulated deficit (5,664,017) (5,823,852)
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Shareholders' equity 6,293,531 6,110,319
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Total Liabilities and Shareholders' Equity $21,836,235 $21,935,886
======================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
CPI AEROSTRUCTURES, INC.
CONSOLIDATED STATEMENTS OF INCOME
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<TABLE>
<CAPTION>
For the Three Months Ended June 30, For the Six Months Ended June 30,
1999 1998 1999 1998
(Unaudited)
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<S> <C> <C> <C> <C>
Revenue $ 5,218,441 $ 5,339,087 $ 9,443,182 $10,455,062
Cost of sales 3,686,861 3,515,273 6,766,965 6,861,455
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Gross profit 1,531,580 1,823,814 2,676,217 3,593,607
Selling, general and administrative expenses 1,210,906 877,683 2,024,276 1,737,870
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Income from operations 320,674 946,131 651,941 1,855,737
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Other (income) expense:
Interest/other income (133,895) (36,686) (171,095) (77,166)
Interest expense 275,718 319,934 557,201 660,119
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Total other expenses, net 141,823 283,248 386,106 582,953
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Income before provision for income taxes 178,851 662,883 265,835 1,272,784
Provision for income taxes 71,000 265,000 106,000 509,000
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Net income $ 107,851 $ 397,883 $ 159,835 $ 763,784
======================================================================================================================
Earnings per common share - Basic $ .04 $ .15 $ .06 $ .29
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Earnings per common share - Diluted $ .04 $ .14 $ .06 $ .27
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Shares used in computing earnings per Common share:
Basic 2,648,509 2,648,509 2,648,509 2,646,048
Diluted 2,648,509 2,817,648 2,648,509 2,824,617
======================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
CPI AEROSTRUCTURES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1999 1998
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(Unaudited)
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 159,835 $ 763,784
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 713,764 927,987
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (593,918) 428,978
(Increase) decrease in prepaid expenses and other current assets 24,331 (10,606)
Increase in costs and estimated earnings in excess of billings on
uncompleted contracts (430,694) (1,199,303)
(Increase) decrease in inventory 111,717 (475,238)
(Increase) in other assets --- (174,735)
(Decrease) increase in accounts payable (238,914) (288,193)
(Decrease) increase in accrued expenses 201,287 (330,802)
(Decrease) increase in income taxes payable 104,703 (56,350)
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Net cash provided (used) in operating activities 52,111 (414,478)
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Cash flows from investing activities:
Purchase of property and equipment (106,158) (43,446)
Proceeds from sale of fixed assets 11,183 ---
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Net cash used in investing activities (94,975) (43,446)
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Cash flows from financing activities:
Repayment of long-term debt (679,939) (1,192,175)
Proceeds from officers notes 130,000 ---
Proceeds from line of credit 200,000 ---
Proceeds from exercise of stock options/warrants --- 45,237
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Net cash used in financing activities (349,939) (1,146,938)
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Net decrease in cash (392,803) (1,604,862)
Cash at beginning of period 584,296 2,032,183
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Cash at end of period $ 191,493 $ 427,321
======================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 368,530 $ 660,119
======================================================================================================================
Income taxes $ 5,797 $ ---
======================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
CPI AEROSTRUCTURES, INC.
OTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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1. INTERIM The financial statements as of June 30, 1999 and for the six
FINANCIAL months ended June 30, 1999 and 1998 are unaudited, however,
STATEMENTS 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.
Certain 1998 amounts have been reclassified to conform to
the 1999 presentation.
2. COSTS AND Costs and estimated earnings in excess of billings on
ESTIMATED uncompleted contracts consist of:
EARNINGS IN
BILLINGS ON
UNCOMPLETED
CONTRACTS
<TABLE>
<CAPTION>
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U.S.
Government Commercial Total
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<S> <C> <C> <C> <C>
Costs incurred on uncompleted
contracts $8,287,661 $10,285,607 $18,573,268
Estimated earnings 1,812,864 4,879,415 6,692,279
----------------------------------------------------------------------------------------
10,100,525 15,165,022 25,265,547
Less billings to date 8,059,888 13,669,041 21,728,929
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Costs and estimated earnings
in excess of billings on
uncompleted contracts $2,040,637 $1,495,981 $3,536,618
========================================================================================
December 31, 1998
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U.S.
Government Commercial Total
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Costs incurred on uncompleted
contracts $6,887,016 $20,566,914 $27,453,930
Estimated earnings 1,578,270 4,954,810 6,533,080
----------------------------------------------------------------------------------------
8,465,286 25,521,724 33,987,010
Less billings to date 6,703,398 24,177,688 30,881,086
----------------------------------------------------------------------------------------
Costs and estimated earnings
in excess of billings on
uncompleted contracts $1,761,888 $ 1,344,036 $ 3,105,924
========================================================================================
</TABLE>
6
<PAGE>
CPI AEROSTRUCTURES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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3. EARNINGS PER Basic earnings per share calculations are computed by
COMMON SHARE: 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.
On June 24, 1999, the Company enacted a one for three
reverse stock split. All earnings per share calculations
and equity accounts have been restated as if the reverse
split occurred on January 1, 1998.
7
<PAGE>
CPI AEROSTRUCTURES, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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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.
Material Changes in Results of Operations
The Company's revenue for the six months ended June 30, 1999 was $9,443,182
compared to $10,455,062 for the same period last year, representing a decrease
of $1,011,880, or 10%. This decrease is due largely to the termination of the
MD-90 contract. For the year ended December 31, 1998, revenue related to that
contract accounted for 23% of the Company's total revenue.
Gross profit decreased by $917,390, or 26%, from the six months ended June 30,
1998 compared to the six months ended June 30, 1999. Gross profit as a
percentage of revenue for the six months ended June 30, 1999 was 28% compared to
34% for the same period last year. These decreases are primarily attributable to
the termination of the MD-90 contract. For the year ended December 31, 1998,
gross profit related to that contract accounted for 44% of the Company's total
gross profit.
Selling, general, and administrative expenses increased by $286,406, or 16%,
from the six months ended June 30, 1998 compared to the six months ended June
30, 1999. Interest expense decreased by $102,918 for the six months ended June
30, 1999, which is attributable to principal payments on the term loan during
1998 and 1999.
The resulting net income for the six months ended June 30, 1999, was $159,835
compared to $763,784 for the same period last year. This decrease is
attributable to the termination of the MD-90 contract, as well as the non-cash
accrual of bank fees charged this year under the Chase loan agreement. Basic
earnings per share was $.06 on 2,648,509 average shares outstanding, compared to
$.29 per share on 2,646,048 average shares outstanding for fiscal 1998. Diluted
earnings per share decreased to $.06 per share compared to $.27 per share in
1998 on 2,848,509 and 2,824,617 weighted average shares outstanding,
respectively.
Material Changes in Financial Condition
At June 30, 1999 and December 31, 1998, the Company had working capital of
$4,212,480 and $4,621,515, respectively. This $409,035 decrease is primarily
attributable to a decrease in inventory of $111,717, an increase in accounts
receivable of $593,918, an increase in current portion of long-term debt of
$507,720, an increase in accrued expenses of $201,287 and a decrease in cash
resulting from the Company making its principal payments on its term loan for
the Kolar acquisition offset by an increase in costs and estimated earnings in
excess of billings on uncompleted contracts of $430,694, a decrease in accounts
payable of $238,914. A large portion of the Company's cash has been used for
costs incurred on commercial and the numerous government contracts which do not
allow progress payments 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 and government
aircraft contracts, has caused an increase in the gap between aggregate costs
and earnings and the related billings to date.
8
<PAGE>
CPI AEROSTRUCTURES, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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Net cash provided by operating activities for the six months ended June 30, 1999
was $52,111. This increase in cash was primarily the result of net income of
$159,835, depreciation and amortization of $713,764, an increase in income taxes
payable of $104,703, a decrease in inventory of $111,717, a decrease in prepaid
and other current assets of $24,331 and an increase in accrued expenses of
$201,287 offset by an increase in accounts receivable of $593,918, an increase
in costs and estimated earnings in excess of billing of $430,694, and a decrease
in accounts payable of $238,914.
Year 2000 Problem
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 not become Y2K compliant, the financial condition and
operation 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.
9
<PAGE>
CPI AEROSTRUCTURES, INC.
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ITEM 4. Submission of Matter to a Vote of Security Holders
a) An annual meeting of shareholders was held on June 22, 1999 ("Annual
Meeting").
b) Mr. Kenneth McSweeney was elected as a Director at the meeting. The
other Directors are Mr. Arthur August, Mr. Edward J. Fred and Mr.
Walter Paulick.
c) Three matters were voted upon at the Annual Meeting, as follows:
(i) Mr. Kenneth McSweeney was elected as a Director.
The votes were cast for this matter as follows:
For Authority Withheld
---------- -------------------
6,836,453 184,132
(ii) An amendment to the Certificate of Incorporation to implement a
reverse stock split of the Company's Common Stock of between
one-for-two and one-for-four with the exact ratio to be
determined at the sole discretion of the Board of Directors.
The votes were cast for this matter as follows:
For Against Abstaining Not Voted
---------- ------- ---------- ---------
6,464,998 542,387 13,200 924,757
(iii) An amendment to the Company's 1998 Performance Equity Plan to
increase the number of shares issuable under the Plan by 390,000
shares on a pre-split basis. The votes were cast for this matter
as follows:
For Against Abstaining Not Voted
---------- ------- ---------- ---------
6,236,091 764,784 19,710 924,757
ITEM 5. Other Information
Pursuant to the Company's By-laws, stockholders are advised that in
order for a stockholder to present any proposal at the Company's annual
meeting of stockholders to be held in 2000, such proposal must be
submitted in writing to the Company at its principal office in Edgewood,
New York no later than January 20, 2000 (120 days in advance of the date
the Company's proxy statement released to the stockholders in 1999).
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 six months ended June 30, 1999.
10
<PAGE>
CPI AEROSTRUCTURES, INC.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
CPI AEROSTRUCTURES, INC.
Dated: August 13, 1999 By: /S/ Arthur August
------------------
Arthur August
President
(Principal Executive Officer)
Dated: August 13, 1999 By: /S/ Edward J. Fred
------------------
Edward J. Fred
Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 191,493
<SECURITIES> 0
<RECEIVABLES> 2,799,125
<ALLOWANCES> 0
<INVENTORY> 5,863,910
<CURRENT-ASSETS> 996,670
<PP&E> 6,384,910
<DEPRECIATION> 1,592,640
<TOTAL-ASSETS> 21,836,235
<CURRENT-LIABILITIES> 5,638,124
<BONDS> 0
<COMMON> 2,649
0
0
<OTHER-SE> 6,290,882
<TOTAL-LIABILITY-AND-EQUITY> 21,836,235
<SALES> 9,443,182
<TOTAL-REVENUES> 9,443,182
<CGS> 6,766,965
<TOTAL-COSTS> 6,766,965
<OTHER-EXPENSES> 2,024,276
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 557,201
<INCOME-PRETAX> 265,835
<INCOME-TAX> 106,000
<INCOME-CONTINUING> 159,835
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 159,835
<EPS-BASIC> .06
<EPS-DILUTED> .06
</TABLE>
