THIS DOCUMENT IS A COPY OF THE FORM 10-KSB FILED ON MARCH 31, 2000
PURSUANT TO A RULE 201 TEMPORARY HARDSHIP EXEMPTION
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, 1999
---------------------------
[ ] 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)
(631) 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 its most recent fiscal year were $21,603,284.
The aggregate market value of the 2,341,842 shares of voting stock held by
non-affiliates computed by reference to the closing price at which the stock was
sold on March 15, 2000 was $8,781,908.
As of March 15, 2000, the Issuer had 2,648,509 shares of Common Stock,
$.001 par value, outstanding.
Transitional Small Business Disclosure Format: Yes _____ No X
----
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CPI AEROSTRUCTURES, INC.
FORM 10-KSB ANNUAL REPORT-1999
TABLE OF CONTENTS
<TABLE>
PART I PAGE
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<S> <C> <C>
Item 1. Description of Business............................................................ 3
Item 2. Description of Property............................................................ 9
Item 3. Legal Proceedings.................................................................. 9
Item 4. Submission of Matters to a Vote of Security Holders................................ 10
PART II
Item 5. Market for Common Equity and Related Stockholder Matters........................... 10
Item 6. Management's Discussion and Analysis............................................... 11
Item 7. Financial Statements............................................................... 13
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................................. 13
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act................................. 14
Item 10. Executive Compensation............................................................. 15
Item 11. Security Ownership of Certain Beneficial Owners and Management..................... 18
Item 12. Certain Relationships and Related Transactions..................................... 19
Item 13. Exhibits, List and Reports on Form 8-K............................................. 20
</TABLE>
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Item 1. DESCRIPTION OF BUSINESS
(a) Business Development
CPI Aerostructures, Inc. (the "Company") is comprised of two distinct
corporations: CPI Aerostructures, Inc. ("CPI") and Kolar, Inc. ("Kolar;"
together with CPI, the "Company"). CPI is engaged in contract production of
structural aircraft parts and sub-assemblies for the commercial and military
sectors of the aircraft industry. In connection with its commercial assembly
operations, CPI provides engineering, technical and program management services
to its customers. Kolar manufactures precision machine parts and sub-assemblies
for the electronics industry, including computer and microwave device
manufacturers, as well as the materials handling, aerospace and banking
industries.
CPI 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 with the Company receiving net proceeds of approximately
$4,600,000.
Kolar was incorporated under the laws of the State of Delaware in July 1997
to acquire Kolar Machine, Inc., a precision machining and assembly manufacturer
located in Ithaca, New York. On October 9, 1997, Kolar purchased substantially
all of the assets of Kolar Machine, Inc. and the related real property for
approximately $14.5 million. The deal was accomplished using cash and debt
financing which was provided by the Chase Manhattan Bank and a "seller's note."
(b) Business of Issuer
CPI 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 CPI's revenue from the commercial and military
sectors of the aircraft industry:
Years Ended
December 31, December 31,
1999 1998
------------ ------------
(Dollar amounts in thousands)
Commercial $1,408 23.2% $5,102 60.1%
Military 4,672 76.8 3,391 39.9
------ ----- ------ -----
Total $6,080 100.0% $8,493 100.0%
====== ===== ====== =====
The large shift from the commercial to the military sectors was largely due
to the loss of revenue from the MD-90 contract.
Kolar manufactures precision parts and sub-assemblies for a variety of
different markets. Kolar accounted for approximately $15,500,000 of revenue
(72%) in 1999 and $11,300,000 (57%) in 1998, respectively, of the Company's
total revenue for such year.
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Products
CPI
CPI'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 CPI's customers or aircraft manufacturers to form
final aircraft assemblies. CPI's products are custom designed and developed to
fit precise certification standards imposed by CPI's customers and applicable
regulatory bodies. Due to the critical functions served by CPI'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.
CPI's principal commercial aircraft products include aprons and engine
mounts, which are structures used to attach jet engine housings to aircraft.
Apron assemblies are panels that function as the aerodynamic surface between
pylons (structures which attach nacelles to the wing or fuselage) and nacelles.
Aft fairing assemblies are the exterior portion of a pylon.
CPI 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. CPI
has the capabilities to produce additional aircraft products for both commercial
and military applications.
Kolar
Kolar's principal products include detail parts and major sub-assemblies
for high speed machines that route printed circuit boards through a series of
operations while inserting and bonding components to the board. The eventual
printed circuit boards are used in ATM machines, computers, and a variety of
other electronic devices.
In the materials handling market, Kolar's customer produces high speed
equipment used for the weighing and measuring of cartons and containers.
Customers and Contracts
CPI
Commercial
Pursuant to long-term agreements with Rohr Industries, Inc. (owned by B. F.
Goodrich), a leading commercial aircraft supplier of nacelles, CPI operates as a
subcontractor under Rohr's production programs with The Boeing Company. In June
1994, Rohr sold its corporate jet business to the Nordam Corporation ("Nordam")
and CPI's agreement with Rohr concerning the Hawker 1000 Executive Jet, an eight
to ten seat aircraft was transferred to Nordam. CPI provides Nordam with engine
mounts and all related sub-assemblies and components which are now used in
connection with production of the Lear 60 Executive Jet. For the year ended
December 31, 1998 sales of CPI's products to Rohr accounted for approximately
53% of CPI's revenue. For the years ended December 31, 1998 and 1999, sales
derived from Nordam were approximately 7% and 23%, respectively.
CPI's commercial agreements generally provide that the price for products
is subject to annual adjustment calculated in accordance with an escalation
formula (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.
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CPI's agreement with Nordam contains provisions that allow termination of
such contract at will, in whole or in part, at the convenience of the customer
and generally provides that the customer must reasonably compensate CPI for work
performed through the termination date which has happened and may occur again.
In March 1991, CPI entered into an agreement with Rohr, pursuant to which
CPI agreed to provide Rohr with apron assemblies and related components in
connection with production of the McDonnell Douglas MD-90 jet aircraft. CPI
delivered 60 production units during 1998. As of December 31, 1998, CPI had
delivered an aggregate of two engineering prototypes, three development units,
six flight testing units and 238 production units. During the year ended
December 31, 1998, approximately 53%, of CPI's revenue was derived from this
program. In December 1998, based on information received from Rohr, CPI
recognized a termination of this contract. This termination resulted in the
Company writing off approximately $11,850,000 of previously recorded revenue.
The effect of this termination is included in cost of sales in 1998.
In May 1992, CPI commenced production of aft fairing assemblies for
Shin-Meiwa Industry Co., Ltd. ("Shin-Meiwa"), a Japanese aerospace firm. On
December 10, 1992, CPI 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. CPI's arrangement with
Shin-Meiwa provided for CPI to assemble products using tooling and component
parts provided by Shin-Meiwa. The contract provided for the delivery of 251
pieces for an aggregate of approximately $1,590,000. As of December 31, 1998,
CPI had delivered 178 fairing assemblies pursuant to purchase orders. In
November 1998, Shin-Meiwa informed the Company that it would not require any
further deliveries of aft fairing assemblies under this agreement.
Military
CPI 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, 1998 and 1999, 40% and 77%, respectively, of CPI's
revenues were derived from military contracts. The increased level of revenues
from the military sector resulted primarily from the following two contracts:
On September 19, 1995, CPI was awarded a contract by the United States Air
Force for the A-10 Aircraft program. CPI will produce leading edge panels for
such aircraft. The total award amount was approximately $3,354,000, of which all
had been recognized as of December 31, 1999.
On September 22, 1995, CPI was awarded a contract by the United States Air
Force for the C-5 Aircraft program. CPI 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 15, 2000, the total contract value was $4,878,000
of which $4,794,000 has been recognized as of December 31, 1999.
As of December 31, 1998 and 1999, CPI had thirty-nine and eighty-two
military contracts, respectively, in various stages of completion. Additionally,
the Company has added twenty-seven new military contracts since December 31,
1999. Contract terms are generally one to two years. Product prices under these
contracts are fixed. Each contract obligates CPI 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. CPI generally provides its own tooling to produce products under
military contracts. CPI 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, CPI is generally entitled to
receive progress payments to cover approximately 90% of CPI's total costs at the
time of the request.
Pursuant to military contracts, CPI 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. CPI
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.
PAGE 5
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Kolar
Kolar operates almost exclusively on a purchase order basis with its
current customers. The one exception is the Purchase Agreement described below
entered into between Universal Instrument Corporation ("Universal") and Kolar in
November 1997. Kolar has long-standing relationships with its two major
customers, including Universal, which together comprise over 89% of Kolar's
revenues.
Universal has been Kolar's customer for approximately thirteen years, and
accounted for more than 77% and 69% of Kolar's revenues in 1999 and 1998,
respectively, as Kolar's largest customer. Kolar manufactures detail parts and a
major sub-assembly for Universal's high speed machines that route printed
circuit boards through a series of operations while inserting and bonding
components to the board. Kolar also produces numerous other detail parts for
various applications in Universal machinery. In November 1997, Universal entered
into a Purchase Agreement with Kolar setting forth the terms and conditions
under which Universal is purchasing products from Kolar. The agreement is for
four years, unless earlier terminated, however, it does not provide for any
fixed quantities of sales and is subject to Kolar's receipt of purchase orders
thereunder.
Hi Speed Checkweigher ("Hi Speed") is Kolar's second largest customer and
has been a customer of Kolar for approximately 40 years. Hi Speed accounted for
approximately 11% and 17% of Kolar's revenues in 1999 and 1998, respectively. Hi
Speed produces high speed equipment used for the weighing and measuring of
cartons and containers.
Production and Assembly
CPI
CPI'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. CPI
subcontracts production of component parts in its assembly operations, which are
shaped, formed, welded and/or machined to specified configurations. This allows
CPI to avoid additional costs of extensive manufacturing and production
facilities, parts fabrication and expensive capital equipment. CPI'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 CPI-trained personnel. CPI's operations are generally conducted on
a five-day basis with single shifts. CPI packages its products in accordance
with specifications for shipment to its customers. CPI's customers are generally
responsible for arranging product shipment by common carrier.
Kolar
Kolar's production operations consist primarily of machining raw materials
such as aluminum and steel into component parts to satisfy specific customer
requirements and precision standards. In the assembly operations, Kolar
incorporates machined parts, which it manufactures, with components purchased
from subcontractors, to produce assemblies used in high speed, automated
equipment. Kolar packages its products in accordance with specifications for
shipment to its customers. Kolar is generally responsible for arranging product
shipment, usually using its own vehicles.
Marketing
To date, substantially all of CPI's and Kolar's marketing activities have
been conducted by members of management. Such activities have consisted
primarily of personal contact with potential customers.
CPI'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
CPI's commercial marketing efforts involves responding to requests from
potential contractors. CPI obtains military contracts for its products and
services through the process of competitive bidding.
PAGE 6
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In April 1999, the Company introduced its CPI and Kolar websites
(www.cpiaero.com and www.kolar.com). A prospective customer can learn about the
Company and contact management. Additionally, both CPI and Kolar have signed
agreements with a number of sales representatives to market the Company's
products to a broader base of customers.
Backlog
CPI produces custom sub-assemblies pursuant to long-term contracts and
customer purchase orders. Backlog consists of aggregate contract values under
basic ordering agreements or for production orders, excluding the portion
previously included in operating revenues on the basis of percentage of
completion accounting, and including estimates of future contract price
escalation. All of CPI's backlog is subject to termination at will and
rescheduling, without significant penalty. As of December 31, 1999 and 1998,
CPI's backlog was approximately $5.6 million and $4 million, respectively .
Of CPI's backlog at December 31, 1999, approximately 17% and 83% is
attributable to commercial and military contracts, respectively. Approximately
$4.9 million (88%) of CPI's current backlog at December 31, 1999 is scheduled
for delivery during the year ending December 31, 2000.
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.
CPI subcontracts production of substantially all component parts
incorporated into its products to third party manufacturers under firm fixed
price orders. CPI'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. CPI, 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, CPI has
not experienced material delays in connection with obtaining custom parts.
The Company generally does not maintain supply agreements with its
suppliers or manufacturers and purchases raw materials and component parts
pursuant to purchase orders in the ordinary course of business. The Company
believes that the supplies of materials through the end of 2000 will be
adequate.
Competition
The markets for CPI's products are highly competitive. CPI 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. CPI also faces competition from
foreign and domestic prime contractors, including Nordam, all of whom possess
greater resources than CPI, 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
and Airbus Industries, which typically contract production of assemblies to a
limited number of large commercial contractors. Consequently, CPI's ability to
increase market penetration in the commercial sector may be limited by the
relatively limited number of prime contractors in this market.
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CPI competes on the basis of price, development and production capabilities
and service. To the extent possible, CPI seeks to limit its operations to the
assembly of complex sub-assemblies while subcontracting production of component
parts, which allows CPI to avoid the significant costs associated with
maintaining capital equipment.
CPI also faces competition from numerous military subcontractors. CPI
competes for military contracts on the basis of price. CPI is able to obtain
military contracts that are "set-aside" for small businesses.
While the markets for Kolar's products are also highly competitive, its
track record of superior performance with its mature customer base has given
Kolar a slight advantage over new entrants into the precision machining
business, and specifically in the Upstate New York area.
Kolar's two most significant competitors are DFF Corporation of
Massachusetts and Arlington Machine of New York State. DFF Corporation has a
large facility and assembly capability. Arlington Machine has excellent
machining capabilities. Both competitors have a price structure similar to
Kolar.
Government Regulation
The Company is subject to regulations administered by the United States
Environmental Protection Agency, the Occupational Safety and Health
Administration, various state agencies and county and local authorities acting
in cooperation with Federal and state authorities. Among other things, these
regulatory bodies impose restrictions to control air, soil and water pollution,
to protect against occupational exposure to chemicals, including health and
safety risks, and to require notification or reporting of the storage, use and
release of certain hazardous chemicals and substances. The extensive regulatory
framework imposes compliance burdens and risks on the Company. Governmental
authorities have the power to enforce compliance with these regulations and to
obtain injunctions or impose civil and criminal fines in the case of violations.
The Comprehensive Environmental Response, Compensation and Liability Act of
1980 ("CERCLA") imposes strict, joint and several liability on the present and
former owners and operators of facilities which release hazardous substances
into the environment. The Resource Conservation and Recovery Act of 1976
("RCRA"), regulates the generation, transportation, treatment, storage and
disposal of hazardous waste. In New York, the handling, storage and disposal of
hazardous substances is governed by the Environmental Conservation Law, which
contains the New York counterparts of CERCLA and RCRA. In addition, the
Occupational Safety and Health Act, which requires employers to provide a place
of employment that is free from recognized and preventable hazards that are
likely to cause serious physical harm to employees, obligates employers to
provide notice to employees regarding the presence of hazardous chemicals and to
train employees in the use of such substances.
CPI'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. CPI 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 CPI's commercial contracts, CPI 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). CPI's liability is limited to repair or replacement of
defective products. Notwithstanding such limitation, CPI agreed to indemnify the
customers for any costs, damages, expenses or other loss or liability incurred
or paid (including reasonable attorneys' fees) arising out of asserted claims
for property damage, personal injury or death, or any other damages, including
claims of consequential loss and breach of contract as a result of, among other
things, the performance of work, products or workmanship, provided that such
claims do not arise as a result of the sole fault of the customers.
PAGE 8
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Pursuant to military contracts, CPI 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. CPI
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.
Kolar 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.
Insurance
CPI maintains a $2 million general liability insurance policy, a $10
million products liability insurance policy, and a $5 million umbrella liability
insurance policy. Kolar maintains a $1 million general and products liability
insurance policy, and a $10 million umbrella liability insurance policy. The
Company believes this coverage is adequate for the types of products presently
marketed.
Proprietary Information
None of CPI's current assembly processes or products are protected by
patents. CPI 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. CPI has
registered the name CPI Aerostructures and its logo as trademarks.
Employees
As of March 15, 2000, CPI employed 21 full-time employees including its two
executive officers. As of March 15, 2000, Kolar employed 118 full-time employees
including one executive officer.
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
In November 1993, management decided to diversify its operations. This
decision led to the acquisition of Kolar Machine, Inc. in October of 1997. Since
then, the Company has continued to review candidates for potential acquisitions.
The Company signed a letter of intent to acquire a privately owned
precision machining manufacturer in November 1999. This privately owned company
services the commercial and Defense Aerospace Markets. Projected revenues for
the current fiscal year are projected to be in excess of $20 million. The
parties are currently negotiating the terms of a definitive agreement however,
no assurance can be given that a definitive agreement will be signed or that the
acquisition will be consummated.
Item 2. DESCRIPTION OF PROPERTY
CPI Aerostructures' executive offices and production facilities are
situated in an approximate 25,000 square foot building located at 200A Executive
Drive, Edgewood, New York 11717. CPI Aerostructures occupies this facility under
a lease with an unaffiliated landlord, which commenced on December 1, 1995 and
ends on March 31, 2000. The current monthly base rental is $13,451, plus common
area costs, over the term of the lease. The Company believes that its facilities
are adequate for its current needs. As of April 1, 2000 the Company anticipates
to remain in its current facilities on a month to month basis.
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Kolar's executive offices and production facilities are situated in
approximately 46,000 square feet in a total of four buildings that the Company
owns. The buildings are located in Ithaca, New York at 407 Cliff Street, 618
West Buffalo Street, 604 Elmira Road and 612 Elmira Road. Kolar also rents 8,600
square feet located at 239 Cherry Street in Ithaca, New York. Kolar occupies
this facility under a lease with an unaffiliated landlord, which commenced on
September 13, 1999 and on August 31, 2002. The current monthly base rental is
$4,310 plus common area costs over the term of the lease. The Company believes
that its facilities are adequate for its current needs.
Item 3. LEGAL PROCEEDINGS
On or about November 22, 1995, CPI 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. The
Company 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 or about December 1, 1997, the Company agreed to settle any
and all claims against VTX and VTX agreed to settle any and all claims and
counterclaims against the Company. The parties filed a Stipulation of Dismissal
with prejudice in the matter in March 1998.
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 canceled.
The Company denied the allegations, claiming that Rickel did not perform as
required under the Consulting Agreement, and that Rickel fraudulently induced
the Company to enter into the Consulting Agreement.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's securities are traded in the over-the-counter market and
listed on the National Association of Securities Dealers Automated Quotation
SmallCap Market ("Nasdaq").
The following tables set forth for the last two fiscal years, the range of
high and low last sales prices of CPI's Common Stock for the periods indicated,
as reported by Nasdaq. Nasdaq prices represent inter-dealer quotations, without
retail mark-up, mark-down or commission, and may not necessarily represent
actual transactions.
Period High Low
------ ------ ------
1998
----
Quarter Ended March 31, 1998 $8.438 $6.938
Quarter Ended June 30, 1998 $9.375 $6.188
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Period High Low
------ ------ ------
1998
----
Quarter Ended September 30, 1998 $6.563 $2.438
Quarter Ended December 31, 1998 $6.000 $2.438
1999
Quarter Ended March 31, 1999 $3.656 $2.063
Quarter Ended June 30, 1999 $2.344 $1.281
Quarter Ended September 30, 1999 $1.183 $1.25
Quarter Ended December 31, 1999 $3.094 $1.094
On March 15, 2000, the closing sale price for the Company's Common Stock on
the Nasdaq was $3.750.
Holders
On March 15, 2000, there were 146 holders of record of the Company's Common
Stock. The Company reasonably believes that there are in excess of 2,500
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.
In addition, the Company's Credit Agreement with its several lenders
provides that the Company may not declare or pay any dividend on its Common
Stock so long as any amounts are owing to the several lenders. See "Item 6.
Management's Discussion and Analysis - Financing Arrangements."
RECENT SALES OF UNREGISTERED SECURITIES, USE OF PROCEEDS FROM REGISTERED
SECURITIES
None
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.
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.
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General
Consistent with industry practice, CPI uses the percentage of completion
method of accounting for its business. Under this method, CPI recognizes
revenues as costs are incurred under its contracts, measured by the percentage
of actual costs incurred to date against estimated total costs. Under CPI's
commercial contracts, CPI does not receive cash payments until products are
shipped. Accordingly, revenues may be recognized by CPI even though associated
cash payments have not been received. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Changes in contract performance may result in revisions to costs and
income, which are recognized in the period in which revisions are determined to
be required. CPI's recorded revenues may be written-off in later periods in the
event CPI's cost estimates prove to be inaccurate or a contract is terminated.
For Kolar, revenue is recognized when goods are shipped to customers.
Results of Operations
Year Ended December 31, 1999 as Compared to the Year Ended December 31, 1998
The Company's revenue for the year ended December 31, 1999 ("1999") was
$21,603,000 compared to $19,810,000 for the year ended December 31, 1998
("1998"), representing an increase of $1,793,000, or 9%. This increase reflects
an increase in sales by Kolar. Sales by CPI decreased by approximately
$2,413,000 from 1998 to 1999 due to the termination of the MD-90 contract with
Rohr.
Gross profit for 1999 was $5,935,000 compared to gross loss of $4,953,000
for 1998, representing an increase of $10,888,000. Gross profit as a percentage
of revenue for 1999 was 27%, compared to a negative percentage for 1998. This
increase in gross profit percentage was attributable to the termination of the
MD-90 program in 1998 resulting in a write-off of approximately $11,850,000.
Selling, general and administrative expenses for 1999 were $4,018,000
compared to $4,423,000 for 1998, representing a decrease of $405,000. This
decrease is primarily attributable to the retirement of two employees, including
an executive officer. Selling, general and administrative expenses as a
percentage of revenue for 1999 and 1998 were 19% and 22%, respectively. Interest
expense for 1999 was $1,117,000, compared to $1,264,000 for 1998, representing a
decrease of $147,000.
The net income for 1999 was $809,000 compared to net loss of $8,566,000 for
1998, representing an increase of $9,375,000. Basic earnings per share was $.31
on 2,648,509 average shares outstanding compared to basic loss per share of
$(3.23) on 2,647,258 average shares outstanding for fiscal 1998. Diluted
earnings per share was $.30 in 1999 on 2,654,273 weighted average shares
outstanding.
Liquidity and Capital Resources
General
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. CPI'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.
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Net cash provided by operating activities for 1999 was $1,458,000 compared
to $8,000 for 1998. This increase in cash was primarily attributable to net
income of $809,000, depreciation and amortization of $1,704,000, non-cash
consulting fees of $275,000, change in deferred income taxes of 266,000, a
decrease in income tax receivable of $486,000, an increase in accounts payable
and accrued expenses of $ 232,000 and an increase in income taxes payable of
$26,000 offset by an increase in accounts receivable of $656,000, an increase in
costs and estimated earnings in excess of billings of $833,000, an increase in
inventory of $772,000, an increase in prepaid expenses and other current assets
of $19,000 and an increase in other assets of $380,000.
Net cash used in financing activities was $1,512,000 in 1999, compared to
$1,377,000 in 1998. The Company repaid long term debt of $1,512,000 in 1999, as
compared to $1,798,000 in 1998. The Company received $45,000 from the exercise
of stock options and warrants in 1998. Net cash used in investing activities of
$234,000 for 1999 and $79,000 for 1998 resulted from the Company's purchase of
additional property and equipment in 1999.
As a result of the foregoing, the Company's cash at December 31, 1999
decreased by $289,000 from the prior year to $296,000. The Company believes it
will have sufficient cash flow for 2000 to satisfy its cash requirements.
Financing Arrangements
The Company has an agreement with The Chase Manhattan Bank and Mellon Bank
providing a line of credit through June 30, 2000, which will be used for working
capital and other corporate purposes as needed. The Company has available up to
$400,000 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 (8.5% at December 31, 1999) plus 1.5%. The line of credit is secured by
substantially all assets of the Company. As of December 31, 1999, there was an
outstanding balance of $375,000 on this line of credit.
On October 9, 1997, the Company incurred significant indebtedness in
connection with the acquisition of Kolar Machine, Inc. The Company entered into
a term loan agreement with The Chase Manhattan Bank and Mellon Bank in the
amount of $9,400,000. This loan was payable in quarterly installments of
$587,000, plus monthly interest at the Bank's published prime rate plus 1.5%,
maturing December 31, 2001. This loan is collateralized by all of the assets of
the Company and its subsidiary. The Company also entered into a mortgage loan
agreement with The Chase Manhattan Bank in the amount of $975,000. This loan is
payable in monthly installments of $9,487, including interest at 8.3%, maturing
October 31, 2007. This loan is collateralized by Kolar's land and building.
Additionally, the Company entered into a subordinated note agreement with the
seller of Kolar in the amount of $4,000,000. Interest only is payable monthly at
8%, maturing December 31, 2001, payable 91 days following maturity. This note is
currently convertible into 333,334 shares of CPI common stock.
In December 1998 the Company re-structured its term loan agreement with the
Chase and Mellon banks. Under the new arrangement, the principal payment due in
December 1998 was deferred and will be amortized evenly through December 31,
2001. Loan payments for 1999 were payable monthly, at the rate of $120,000 per
month through December 31, 1999. Commencing January 2000, the amortization
increased to $200,000 per month, and will increase to $317,000 per month
commencing January 2001. Additionally, the seller of Kolar has deferred the
Company's payment of interest to him for thirteen months, beginning with the
December 1998 payment. This deferred interest will accrue and become payable
upon maturity of the seller's note. Interest payments began again in January
2000.
Year 2000 Problem
The Company has evaluated 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"). The Company has had no
impacts of Y2K non-compliance from suppliers and customers.
PAGE 13
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Inflation
Inflation has historically not had a material effect on the Company's
operations.
Impact of Accounting Standards Adopted by the Company
The impact of recently adopted accounting standards is discussed in Note 1
of Notes to Financial Statements.
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
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 65 Chairman of the Board of Directors,
President, Chief Executive
Officer and Director
Edward J. Fred (1)(2) 41 Vice President,
Chief Financial Officer,
Secretary and Director
Walter Paulick (1)(2) 53 Director
Kenneth McSweeney (1)(2) 68 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).
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Edward J. Fred has been Secretary and a director of the Company effective
December 31, 1998. Mr. Fred was appointed to the position of Vice President on
December 15, 1998. He was Controller of the Company from February 1995 to April
1998, when he was appointed as Chief Financial Officer. For approximately ten
years prior to joining the Company, Mr. Fred served in various positions for the
international division of Grumman, where he last held the position of
Controller.
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.
Kenneth McSweeney has been a director of the Company since February 1998.
He has provided various consulting services for the Company since January 1995.
Mr. McSweeney is currently an independent consultant to various aerospace
corporations. From 1961 to 1995, Mr. McSweeney served in various management
positions for the Grumman Corporation, most recently as the Vice President of
their Aerostructures Division and a Director of Business Development for the
Mideast and gulf coast region. Mr. McSweeney has extensive experience in
aerostructures and logistics support products and is a licensed professional
engineer in New York State. He holds a Bachelor and Master of Science Degree in
Electrical Engineering from the Polytechnic Institute of Brooklyn and a Masters
in Business Management from CW Post College. He also completed the Executive
Development Program at the Cornell School of Business and Public Administration.
Directors hold office for three years with elections held on a staggered
basis at each annual meeting of shareholders. Directors currently receive no
cash compensation for serving on the Board of Directors. Directors are
reimbursed for reasonable expenses incurred in attending meetings. Officers are
elected annually by the Board of Directors and serve at the discretion of the
Board, subject to the terms of their respective employment agreements.
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, 1999, all filing
requirements applicable to its Officers, Directors and greater than ten percent
beneficial owners were complied with.
Item 10. EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by, or
paid for all services rendered to the Company during the fiscal years ended
December 31, 1999, 1998 and 1997, by the Company's Chief Executive Officer and
the Company's other executive officers whose total compensation exceeded
$100,000.
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SUMMARY COMPENSATION TABLE
Annual Long Term
Compensation Compensation
------------ ------------
Securities
Name and Underlying
Principal Position Year Salary($) Bonus($) Options (#)
Arthur August, 1999 $313,114 $36,000 115,000
Chief Executive 1998 $321,102 -0- 33,334
Officer and President 1997 $294,730 $22,500 66,667
Edward J. Fred, 1999 $102,595 -0- 60,000
Executive Vice President 1998 $92,192 -0- 13,334
and 1997 $81,634 -0- 3,334
Chief Financial Officer
Daniel Ligouri 1999 $156,621 -0- -0-
President - Kolar 1998 $160,470 -0- -0-
1997 (1) $31,375 -0- -0-
(1) Compensation is for the period subsequent to the October 9, 1997 closing of
the Company's acquisition Kolar, Machine, Inc. pursuant to his employment
contract. See "Executive Compensation - Employment Agreements".
OPTION GRANTS IN LAST FISCAL YEAR
Number of Percent of
Securities Options
Underlying Granted to Exercise
Options Employees in Price
Granted(#) Fiscal Year(1) ($/SH) Expiration
--------- -------------- --------- ----------
Arthur August 115,000 42.7% $2.79 12/31/04
Edward J. Fred 60,000 22.3% $2.53 12/31/09
(1) The Company granted a total of 269,000 options to employees in the fiscal
year ended December 31, 1999.
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FYE OPTION VALUES
Value of
Number of Unexercised
Unexercised In-The-Money
Options at FYE(#) Options at FYE
Shares Acquired Value Exercisable/ ($)Exercisable/
Name on Exercise (#) Realized Unexercisable (1) Unexercisable
- ---- --------------- -------- ------------------- --------------
Arthur August -0- -0- 86,168/145,500 -0-
Edward J. Fred -0- -0- 62,836/20,500 -0-
On December 31, 1999, the last reported sales price of the Company's Common
Stock on the Nasdaq SmallCap Market was $2.531.
The Company has no long-term incentive plan awards.
Directors' Compensation
Currently, Directors are not compensated for serving on the Board of Directors
although they are reimbursed for the reasonable expenses they incur in attending
meetings. The Company's two non-officer directors have each received stock
options from the Company. Mr. Paulick received options to purchase 1,667 shares
of Common Stock in each of 1996, 1997 and 1998 and 5,000 in 1999. Mr. McSweeney
received options to purchase 1,667 shares of Common Stock in 1998 and 5,000 in
1999. See "Stock Options" below.
Employment Agreements
Messrs. August and Fred are employed by the Company as Chairman of the Board,
President and Chief Executive Officer, and Vice President, Chief Financial
Officer and Secretary, respectively, pursuant to employment agreements which
expire on December 31, 2001. The employment agreements provide Messrs. August
and Fred with annual base salaries of $300,000, and $100,000, respectively,
during the term of their contracts. Pursuant to his employment agreement, Mr.
August is entitled to receive an annual bonus equal to 4% of the Company's net
income for the years ending December 31, 1999, 2000 and 2001.
The agreements with Messrs. August and Fred provide that during the term of
employment with the Company, and for a period of one-year thereafter, the
employees will not compete with the Company or engage in any activities that
would interfere with the performance of their duties as employees of the
Company. The agreements provide that the Company will maintain hospital and
health insurance benefits for the employee following retirement.
Daniel Liguori is employed as President of Kolar pursuant to an employment
agreement which expires on October 9, 2000 unless extended, at Ligouri's
election, for an additional three years. The employment agreement provides Mr.
Liguori with an annual base salary of $168,000 and provides that during the term
of employment with Kolar, and for a period of five years thereafter, Mr. Liguori
will not compete with Kolar.
Employee Benefit Plans
On February 1, 1991, the Company adopted a Qualified Sick Pay Plan (the "QSP
Plan") which covers full-time executive officers and managers. The QSP Plan
provides covered employees with 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 instituted a fully-qualified 401(k) Employee
Savings Plan. The plan is totally voluntary and employee contributions to the
plan commenced on October 1, 1996. The Company has the option to make voluntary
matching and profit-sharing contributions to the account of its employees.
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Stock Options
1998 Performance Equity Plan
The 1998 Performance Equity Plan ("1998 Plan") authorizes the grant of 463,334
options, of which options to purchase an aggregate of 313,002 shares of Common
Stock have been granted, at exercise prices ranging from $2.53 to $6.90 per
share, to certain employees and executive officers of the Company. These include
five year options to purchase 33,334 and 115,000 shares of Common Stock granted
to Arthur August, Chairman of the Board of Directors, Chief Executive Officer
and President at an exercise price of $6.90 and $2.79 per share respectively;
ten-year options to purchase 13,334 and 60,000 shares of Common Stock to Edward
J. Fred, Vice President, Chief Financial Officer, and Secretary, at an exercise
price of $6.27 and $2.53 per share respectively; ten-year options to one
non-executive officer to purchase 13,334 and 60,000 shares of Common Stock;
ten-year options to purchase 18,000 shares of common stock to employees and
directors at an exercise price of $2.53 per share.. As of March 15, 2000,
options to purchase 150,332 additional shares, remain eligible for the grant of
options.
1995 Stock Option Plan
The 1995 Employee Stock Option Plan (the "1995 Option Plan"), authorizes the
grant of 200,000 options, of which all options to purchase shares of Common
Stock have been granted, at exercise prices ranging from $2.53 to $9.00 per
share, to certain employees, executive officers, and directors of the Company
including: five-year options to purchase an aggregate of 83,335 shares of Common
Stock granted to Arthur August, Chairman of the Board of Directors, Chief
Executive Officer and President, at exercise prices ranging from $4.32 to $6.81
per share; five-year options to purchase 10,002 shares of Common Stock to Edward
J. Fred, Chief Financial Officer; five-year options to purchase an aggregate of
31,501 shares of Common Stock to Stanley Wunderlich, a former Director;
five-year options to purchase 5,000 shares of Common Stock to Craig Sakin, a
former Director; five-year options to purchase 5,001 shares of Common Stock to
Walter Paulick, a Director, five-year options to purchase 1,667 shares of Common
Stock to Kenneth McSweeney, a Director, and five-year options to eleven
non-executive officer employees to purchase an aggregate of 41,309 shares of
Common Stock
1992 Employee Stock Option Plan
The 1992 Employee Stock Option Plan (the "1992 Plan") authorizes the grant of
83,334 options, of which options to purchase 24,501 shares are outstanding at
exercise prices ranging from $2.53 to $6.27 per share to certain employees,
executive officers and directors of the Company, including: 3,334 shares held by
Walter Paulick, a director, exercisable at $3.00 per share, and 1,667 shares
exercisable at $6.00 per share; and 19,502 shares held by six non-executive
employees exercisable at prices ranging from $2.53 to $6.27. As of March 15,
2000, options to purchase 42,778 shares remain eligible for the grant of
options.
Other Options
In October 1994, the Company granted an option to purchase 3,334 shares at $9.00
per share (as amended) to a consultant. On January 26, 1995, the Company granted
an option to purchase 40,000 shares of Common Stock at $9.00 per share to Rickel
and Associates, in consideration of business consulting services to be performed
for the Company. This option was canceled in April 1996, because of Rickel &
Associates' non-performance and is the subject of a lawsuit. See "Item 3. Legal
Proceedings." An option to purchase 6,667 shares of Common Stock was issued to
the Company's former counsel in April 1995 exercisable at $6.00 per share.
In April 1998, the Company issued 33,334 warrants to Gaines, Berland Inc. as
compensation for acting as the Company's investment banker, pursuant to a
consulting agreement. These warrants entitle the investment banker to purchase
33,334 shares of common stock at an exercise price of $7.50 during the five-year
period commencing April 1, 1998.
In May 1999, the Company issued 100,000 warrants to Cataylst Financial Corp as
compensation for acting as the Company's investment banker, pursuant to a
consulting agreement. These warrants entitle the investment banker to purchase
100,000 shares of common stock at an exercise price of $1.875, during the
five-year period commencing May 4, 1999. An option to purchase 15,000 shares of
common stock was issued to a consultant in December 1999 at an exercise price of
$2.53.
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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 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) the Chief
Executive Officer and the Company's other executive officers whose total
compensation exceeded $100,000 and (iv) all directors and executive officers as
a group:
Name and Address Shares Percent of
of Beneficial Owner Beneficially Owned(1) Common Stock(2)
- ------------------- ---------------------- ---------------
Arthur August (3) 392,835 (5) 14.4%
Edward J. Fred(3) 62,836 (6) *
Walter Paulick(3) 15,002 (7) *
Kenneth McSweeney(3) 6,667 (8) *
Daniel Liguori (4) 333,334 (9) 11.2%
All Directors and 810,674 (10) 25.7%
Executive Officers
as a group (five persons)
Steve Bronson
* Less than 1% of the outstanding Common Stock of the Company.
(1) 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.
(2) Based on 2,648,509 shares issued and outstanding. 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) The business address of such person is care of the Company, 200A Executive
Drive, Edgewood, New York 11717.
(4) The business address of such person is care of Kolar, Inc., 407 Cliff
Street, Ithaca, New York 14850.
(5) Includes 86,168 shares of Common Stock which Mr. August has the right to
acquire upon exercise of options granted pursuant to the 1995 Plan and its
1998 Plan. Excludes an aggregate of 40,000 shares of Common Stock owned by
Mr. August's children or held in trust for Mr. August's grandchildren, and
3,000 shares of Common Stock owned by Mr. August's wife, all of which
shares Mr. August disclaims beneficial ownership, and 145,500 shares of
Common Stock underlying options not currently exercisable.
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(6) Includes 62,836 shares of Common Stock which Mr. Fred has the right to
acquire upon exercise of options granted pursuant to the 1995 Plan and 1998
Plan. Excludes 20,500 shares of common stock underlying options not
currently exercisable.
(7) Represents 15,002 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 and 1995 Employee Stock Option
Plan.
(8) Includes 6,667 shares of Common Stock which Mr. McSweeney has the right to
acquire upon exercise of stock options granted pursuant to the 1995 Plan.
(9) Includes 333,334 shares of Common Stock which Mr. Liguori has the right to
acquire by converting the promissory note he received in connection with
the Company's purchase of Kolar Machine, Inc.
(10) Includes an aggregate of 504,007 shares of Common Stock which Messrs.
August, Fred, Paulick, McSweeney and Liguori have the right to acquire upon
exercise of outstanding options and conversion rights.
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."
On January 1, 1996, the Company entered into a consulting agreement with Stanley
Wunderlich. Mr. Wunderlich was a director of the Company from November 1995
until February 1, 1998, when he resigned from the Board of Directors. The
agreement terminated by its own terms on December 31, 1997. The Company and Mr.
Wunderlich entered into a new consulting agreement on January 1, 1998. This
agreement terminated on December 31, 1999. Pursuant to the agreement, Mr.
Wunderlich provided 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 was
compensated at the rate of $1,000 per month, including reasonable expenses. In
addition, in January 1998, as further compensation for these consulting
services, Mr. Wunderlich was granted 25,000 non-qualified stock options
exercisable at a price of $7.50 per share for a period of five years.
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Item 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation of the Registrant, as amended.(1)
3.1(a) Certificate of Amendment of Certificate of Incorporation filed on July
14, 1998.
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)
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.(12)
10.5 Rohr Basic Purchase Agreement dated March 12, 1991 for Apron Assembly on
McDonnell Douglas MD-90.(1)
10.6 Rohr Basic Purchase Agreement dated May 8, 1990 for Boeing 757 Lower Pan
Assembly.(1)
10.7 Form of military contract.(1)
10.8 Registrant's Sick Pay Plan.(1)
10.9 Basic Agreement for Sub-Assembly dated December 10, 1992 by and between the
Registrant and Mitsui & Co. (U.S.A.), Inc.(2)
10.10 Lock-Up/Modification Agreement dated September 24, 1994 by and between the
Company and Whale Securities Co., L.P. (6)
10.11 First Amendment to BPA MD-90-AP-91-the Company by and between the Company
and Rohr, Inc. for MD90 V2500 Apron Assembly. (6)
10.12 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)
10.13 Solicitation Contract dated September 19, 1995 from the Department of the
Air Force. (8)
10.14 Solicitation Contract dated September 22, 1995 from the Department of the
Air Force. (8)
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10.15 Placement Agent Agreement dated May 10, 1996 between the Company and the
Placement Agent. (9)
10.16 Financial Consulting Agreement dated April 3, 1996 between the Company and
the Placement Agent. (9)
10.17 Financial Consulting Agreement dated September 11, 1996 between the
Company and Andreas Zigouras.(10)
10.18 Line of Credit Agreement dated September 15, 1996 between the Company and
The Chase Manhattan Bank.(10)
10.19 Asset Purchase Agreement, dated September 9, 1997 by and among Kolar
Machine, Inc., a New York corporation, Daniel Liguori, Registrant and
Kolar, Inc., a Delaware corporation and wholly-owned subsidiary of
Registrant. (11)
10.20 Consulting Agreement dated January 1, 1998 between the Company and Stanley
Wunderlich.
10.21 Credit Agreement dated as of October 9, 1997 among CPI Aerostructures,
Inc., Kolar, Inc., as Borrower, the Several Lenders from Time to Time
Parties Hereto and The Chase Manhattan Bank, as Administrative Agent
("Credit Agreement").
10.22 Employment Agreement between Kolar, Inc. and Daniel Liguori dated October
9, 1997.
10.23 Purchase Agreement dated as of November 10, 1997 between Kolar and
Universal Instruments Corporation.
10.24 First Amendment to the Credit Agreement dated February 12, 1999.
10.25 Second Amendment to the Credit Agreement dated as of April 15, 1999.
10.26 Employment Agreement between the Company and Arthur August dated December
16, 1998.
10.27 Employment Agreement between the Company and Edward Fred dated December
16, 1998.
10.28 1998 Performance Equity Plan.
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.
*23.1 Consent of Goldstein Golub Kessler, LLP
*99.1 Risk Factors
*27.1 Financial Data Schedule
*Filed with this Annual Report on Form 10-KSB.
PAGE 22
<PAGE>
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1
(No. 33-49270) declared effective on September 16, 1992 and incorporated
herein by reference.
(2) Filed as an exhibit to the Company's Annual Report on Form 10-K for
December 31, 1992 and incorporated herein by reference.
(3) Filed as an exhibit to Post-Effective Amendment No. 2 to the Company's
Registration Statement on Form S-1 (No. 33-49270) declared effective on
October 26, 1993 and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K for
December 31, 1993 and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Registration Statement on Form SB-2
(No. 33-83150) declared effective October 7, 1994 and incorporated herein
by reference.
(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 an 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.
(10) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
December 31, 1996 and incorporated herein by reference.
(11) Filed as an exhibit to CPI's Current Report on Form 8-K for September 9,
1997 and incorporated herein by reference.
(12) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
December 31, 1995 and incorporated herein by reference.
(b) Reports on Form 8-K
None.
PAGE 23
<PAGE>
CPI AEROSTRUCTURES, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Independent Auditor's Report F-1
Consolidated Financial Statements:
Balance Sheet as of December 31, 1999 F-2
Statement of Operations for the Years Ended
December 31, 1999 and 1998 F-3
Statement of Shareholders' Equity for the Years
Ended December 31, 1999 and 1998 F-4
Statement of Cash Flows for the Years Ended
December 31, 1999 and 1998 F-5
Notes to Consolidated Financial Statements F-6 - F-16
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
CPI Aerostructures, Inc.
We have audited the accompanying consolidated balance sheet of CPI
Aerostructures, Inc. and Subsidiary as of December 31, 1999 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the two years in the period ended December 31, 1999. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CPI Aerostructures,
Inc. and Subsidiary as of December 31, 1999, and the results of their operations
and their cash flows for each of the two years in the period ended December 31,
1999 in conformity with generally accepted accounting principles.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
February 11, 2000
F-1
<PAGE>
CPI AEROSTRUCTURES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
- ------------------------------------------------------------------------------
<TABLE>
December 31, 1999
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS (Notes 5 and 7)
Current Assets:
Cash and cash equivalents $ 295,698
Accounts receivable 2,345,490
Income tax refund receivable 29,597
Costs and estimated earnings in excess of billings on uncompleted contracts 3,938,529
Inventory 3,209,931
Deferred income taxes, net of valuation allowance of $2,152,000 759,000
Prepaid expenses and other current assets 121,184
- ----------------------------------------------------------------------------------------------------------------------
Total current assets 10,699,429
Property, Plant and Equipment, net 5,046,021
Goodwill 6,582,588
Other Assets 367,673
- ----------------------------------------------------------------------------------------------------------------------
Total Assets $22,695,711
=======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,185,477
Income taxes payable 25,560
Accrued expenses 643,068
Line of credit 375,000
Current portion of long-term debt 2,537,177
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 5,766,282
Long-term Debt 9,023,024
Accrued Interest 346,667
Deferred Income Taxes 366,000
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 15,501,973
- ----------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Shareholders' Equity:
Common stock - $.001 par value; authorized 50,000,000 shares,
issued and outstanding 2,648,509 shares 2,649
Additional paid-in capital 12,206,024
Accumulated deficit (5,014,935)
- ----------------------------------------------------------------------------------------------------------------------
Shareholders' equity 7,193,738
- ----------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $22,695,711
======================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-2
<PAGE>
CPI AEROSTRUCTURES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
<TABLE>
Year ended December 31, 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue $21,603,284 $ 19,810,471
Cost of sales 15,668,154 24,763,293
- ----------------------------------------------------------------------------------------------------------------------
Gross profit (loss) 5,935,130 (4,952,822)
Selling, general and administrative expenses 4,018,232 4,422,786
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 1,916,898 (9,375,608)
- ----------------------------------------------------------------------------------------------------------------------
Other (income) expense:
Interest income (667) (11,344)
Interest expense 1,116,661 1,263,868
Other income, net (311,013) (122,207)
- ----------------------------------------------------------------------------------------------------------------------
Total other expenses, net 804,981 1,130,317
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before provision (benefit) for income taxes 1,111,917 (10,505,925)
Provision (benefit) for income taxes 303,000 (1,940,000)
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 808,917 $ (8,565,925)
======================================================================================================================
Earnings (loss) per common share - basic $ .31 $ (3.23)
======================================================================================================================
Earnings per common share - diluted $ .30 -
======================================================================================================================
Shares used in computing earnings per common share:
Basic 2,648,509 2,647,258
Diluted 2,654,273 -
=======================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
CPI AEROSTRUCTURES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
Year ended December 31, 1998 and 1999
- ----------------------------------------------------------------------------------------------------------------------
Retained
Additional Earnings Total
Common Paid-in (Accumulated Shareholders'
Shares Amount Capital Deficit) Equity
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1998 2,634,280 $2,634 $11,851,234 $ 2,742,073 $14,595,941
Net loss - - - (8,565,925) (8,565,925)
Amortization of fair value of
warrants issued in conjunction
with consulting agreement - - 35,066 - 35,066
Shares issued upon exercise of
stock warrants 14,229 15 45,222 - 45,237
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 2,648,509 2,649 11,931,522 (5,823,852) 6,110,319
Net income - - - 808,917 808,917
Amortization of fair value of
warrants issued in conjunction
with consulting agreement - - 274,502 - 274,502
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 2,648,509 $2,649 $12,206,024 $(5,014,935) $ 7,193,738
======================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
CPI AEROSTRUCTURES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
- -------------------------------------------------------------------------------
<TABLE>
Year ended December 31, 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 808,917 $(8,565,925)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 1,704,030 1,394,923
Noncash consulting fees 274,502 35,066
Deferred portion of provision for income taxes 266,000 (1,454,000)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (656,283) 131,071
(Increase) decrease in income tax refund receivable 486,403 (516,000)
(Increase) decrease in costs and estimated earnings in excess of billings
on uncompleted contracts (832,605) 9,817,845
Increase in inventory (771,516) (121,284)
Increase in prepaid expenses and other current assets (19,183) -
(Increase) decrease in other assets (379,740) 29,752
Increase (decrease) in accounts payable and accrued expenses 231,959 (200,105)
Increase (decrease) in income taxes payable 25,560 (543,000)
Increase in interest payable 320,000 -
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,458,044 8,343
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property, plant and equipment (245,438) (78,892)
Proceeds from sale of fixed assets 11,183 -
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (234,255) (78,892)
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from line of credit 200,000 375,000
Proceeds from officers note 130,000 -
Repayment of long-term debt (1,512,387) (1,797,575)
Repayment of officers note (130,000) -
Repayment of line of credit (200,000) -
Proceeds from exercise of stock warrants - 45,237
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (1,512,387) (1,377,338)
- ----------------------------------------------------------------------------------------------------------------------
Net decrease in cash (288,598) (1,447,887)
Cash and cash equivalents at beginning of year 584,296 2,032,183
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 295,698 $ 584,296
======================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 795,365 $ 1,237,201
======================================================================================================================
Income taxes $ 11,197 $ 560,819
======================================================================================================================
Supplemental schedule of noncash financing activity:
Financing obligation incurred in connection with
the acquisition of equipment $ 505,274 -
======================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
CPI AEROSTRUCTURES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
1. PRINCIPAL The Company consists of CPI Aerostructures, Inc. ("CPI") and
BUSINESS Kolar, Inc. ("Kolar"), a summary of wholly owned subsidiary
ACTIVITY formed in October 1997, collectively the "Company."
AND SUMMARY
OF CPI's operations consist of the design and production of complex
SIGNIFICANT aerospace structural subassemblies under U.S. government and
ACCOUNTING commercial contracts. The length of the Company's contracts
POLICIES varies but is typically between one and two years for U.S.
government contracts and up to 10 years for commercial contracts.
Kolar's principal business is the precision computer numerical
control machining of metal products on a contract-order basis.
The Company operates in and distributes from New York State.
CPI's revenue is recognized 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 at completion 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 consolidated balance
sheet, contain amounts relating to contracts and programs with
long production cycles, a portion of which will not be realized
within one year. CPI's recorded revenue may be adjusted in later
periods in the event that CPI's cost estimates prove to be
inaccurate or a contract is terminated.
Kolar's revenue is recognized when goods are shipped to
customers.
Inventory is stated at the lower of cost (first-in, first-out
method) or market.
In December 1998, based on information received from Rohr
Industries, Inc. ("Rohr"), CPI recognized a termination of its
contract to produce apron assemblies for the MD-90, and recorded
a noncash charge to cost of sales amounting to approximately
$11,850,000.
The Company maintains cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts. The Company believes it
is not exposed to any significant credit risk on cash.
The Company considers all highly liquid investments with an
original maturity of three months or less to be cash equivalents.
Depreciation and amortization of property, plant and equipment is
provided for by the straight-line method over the estimated
useful lives of the respective assets or the life of the lease,
for leasehold improvements.
F-6
<PAGE>
The Company has incurred approximately $549,000 of costs of
obtaining debt, and has deferred such costs. These costs will be
amortized over the life of the debt. The unamortized portion of
these deferred financing costs, approximately $259,000 at
December 31, 1999, is included in other assets.
On June 24, 1999, the shareholders of the Company voted to enact
a one-for- three reverse stock split. All earnings per share
calculations, number of shares and equity transactions have been
restated as if the reverse split occurred on January 1, 1998.
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.
In accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation, the Company has elected to apply APB Opinion No. 25
and related interpretations in accounting for its stock options
issued to employees and, accordingly, does not recognize
additional compensation cost as required by SFAS No. 123. The
Company, however, has provided the pro forma disclosures as if
the Company had adopted the cost recognition requirements.
Basic earnings per common share is computed using the weighted
average number of shares outstanding. Diluted earnings per common
share is computed using the weighted-average number of shares
outstanding adjusted for the incremental shares attributed to
outstanding options and warrants to purchase common stock.
Incremental shares of 5,764 were used in the calculation of
diluted earnings per common share in 1999. The convertible
securities attributable to the note payable - seller (see Note 5)
have been excluded from the fully diluted computation as their
effect would be antidilutive. In 1998, diluted earnings per share
are not presented as the result is antidilutive.
2. COSTS AND At December 31, 1999, costs and estimated earnings in excess of
ESTIMATED billings on uncompleted contracts consist of:
EARNINGS
IN EXCESS OF
BILLINGS ON
UNCOMPLETED
CONTRACTS:
<TABLE>
U.S.
Government Commercial Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Costs incurred on uncompleted
contracts $3,438,306 $10,581,169 $14,019,475
Estimated earnings 1,147,122 5,358,173 6,505,295
----------------------------------------------------------------------------------------
4,585,428 15,939,342 20,524,770
Less billings to date 2,566,070 14,020,171 16,586,241
----------------------------------------------------------------------------------------
Costs and estimated earnings
in excess of billings on
uncompleted contracts $2,019,358 $ 1,919,171 $ 3,938,529
========================================================================================
</TABLE>
Unbilled costs and estimated earnings are billed in accordance
with applicable contract terms. As of December 31, 1999,
approximately $1,407,000 of the balances above are not expected
to be collected within one year.
F-7
<PAGE>
<TABLE>
3. INVENTORY: Inventory consists of the following:
<S> <C> <C>
Raw materials $1,033,104
Work-in-progress 767,851
Finished goods 1,408,976
----------------------------------------------------------------------------------------
$3,209,931
========================================================================================
4. PROPERTY, Property, plant and equipment, at cost, consists of the following:
PLANT AND
EQUIPMENT
Estimated
December 31, 1999 Useful Life
---------------------------------------------------------------------------------------
Land $ 412,200
Machinery and equipment 5,470,248 5 to 10 years
Building 918,693 39 years
Furniture and fixtures 60,034 7 years
Automobiles and trucks 101,498 5 years
Leasehold improvements 66,791 3 years
----------------------------------------------------------------------------------------
7,029,464
Less accumulated depreciation and amortization 1,983,443
----------------------------------------------------------------------------------------
$5,046,021
========================================================================================
Approximately $505,000 of equipment was financed in 1999 through capital lease
obligations. As of December 31, 1999, the Company recorded approximately $29,000
of depreciation expense on this equipment.
5. LONG-TERM Long-term debt consists of the following:
DEBT:
Note payable - bank (a) $ 6,197,500
Note payable - bank (b) 891,713
Note payable - seller (c) 4,000,000
----------------------------------------------------------------------------------------
Other (d) 470,988
----------------------------------------------------------------------------------------
11,560,201
Less current maturities 2,537,177
----------------------------------------------------------------------------------------
$ 9,023,024
========================================================================================
</TABLE>
(a) The note, as amended in December 1998, is payable to a
commercial bank in monthly installments of $200,000
from January 2000 through December 2000, and $317,000
from January 2001 through December 2001, plus monthly
interest at the bank's published prime rate (8.50% at
F-8
<PAGE>
December 31, 1999) plus 1.5%. This note and the line of
credit disclosed in Note 8 are collateralized by
substantially all of the assets of the Company. The
amended note provides that since certain conditions
were not met by March 31, 1999, the Company was
subjected to an additional $300,000 fee on this note.
(b) The note is payable to a commercial bank in monthly
installments of $9,487, including interest at 8.3%,
maturing October 31, 2007. This note is collateralized
by Kolar's land and building.
(c) In 1997, the Company acquired substantially all of the
assets of Kolar Machine Inc. The acquisition was
partially financed through a $4,000,000 note payable to
the seller ("Seller") of Kolar Machine Inc. The note
payable to the Seller bears interest at 8% per annum.
The Seller has deferred the Company's payment of
interest on this note until January 2000. The accrued
interest through December 1999 will be payable upon
maturity of the Seller's note. Monthly interest
payments will begin again in January 2000. This note
matures April 1, 2002. The note payable - Seller is
convertible into 333,334 shares of the Company's common
stock at any time prior to the maturity of the note.
(d) This item consists of various capital leases on
equipment as well as auto loans.
Maturities of long-term debt are as follows:
Year ending December 31,
2000 $ 2,537,177
2001 3,933,057
2002 4,142,713
2003 149,819
2004 145,385
Thereafter 652,050
-----------------------------------------------------
$11,560,201
=====================================================
At December 31, 1999, the carrying value of the Company's
long-term debt approximated its estimated fair value based
upon current borrowing rates for similar issues.
6. COMMITMENTS: The Company leases office and warehouse facilities under a
noncancelable operating lease expiring in March 2000. As of
April 1, 2000, the Company will continue renting its current
facility on a month-to-month basis.
In September 1999, the Company entered into a noncancelable
operating lease expiring in August 2002 for additional
office and warehouse space.
F-9
<PAGE>
The aggregate future minimum rental commitment under these
leases are as follows:
Year ending December 31,
2000 $ 92,073
2001 51,720
2002 34,480
-------------------------------------------------------
$178,273
=======================================================
Total rental expense for the years ended December 31, 1999
and 1998 amounted to $176,121 and $164,578, respectively.
The Company is required to pay additional expenses, as
defined.
The Company has employment agreements with four employees.
The aggregate future commitment under these agreements are
as follows:
Year ending December 31,
2000 $ 638,077
2001 515,000
-------------------------------------------------------
$1,153,077
=======================================================
These agreements provide for additional bonus payments that
are calculated, as defined.
7. INCOME TAXES The provision (benefit) for income taxes consists of the
following:
<TABLE>
Year ended December 31, 1999 1998
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 4,000 $ (497,000)
State and local 33,000 11,000
-------------------------------------------------------------------------------------------------
37,000 (486,000)
-------------------------------------------------------------------------------------------------
Deferred:
Federal 231,000 (1,309,000)
State and local 35,000 (145,000)
-------------------------------------------------------------------------------------------------
266,000 (1,454,000)
-------------------------------------------------------------------------------------------------
$303,000 $(1,940,000)
=================================================================================================
</TABLE>
F-10
<PAGE>
The difference between the income tax provision (benefit)
computed at the federal statutory rate and the actual tax
provision (benefit) is accounted for as follows:
<TABLE>
December 31, 1999 1998
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Taxes (benefit) computed at the federal
statutory rate $ 378,000 $(3,572,000)
State income taxes (benefit), including
deferred, net of federal benefit 25,000 (686,000)
Other, including officers' life insurance and
various permanent differences 8,000 14,000
Nonutilization of net operating loss carryforward - 2,304,000
Utilization of net operating loss carryforward (108,000) -
-----------------------------------------------------------------------------------------
$ 303,000 $(1,940,000)
==========================================================================================
The components of deferred income tax assets (liabilities)
are as follows:
Current Noncurrent
------------------------------------------------------------------------------------------
Long-term contracts $ (11,000) -
Property, plant and equipment - $(366,000)
Inventory 52,000 -
Net operating loss carryforwards 2,870,000 -
Valuation allowance (2,152,000) -
------------------------------------------------------------------------------------------
$ 759,000 $(366,000)
===========================================================================================
</TABLE>
As of December 31, 1999, the Company had net operating loss
carryforwards of approximately $7,348,000 for federal income
tax purposes expiring in 2013.
8. LINE OF CREDIT: The Company has an aggregate $400,000 line of credit
agreement, expiring June 30, 2000, with The Chase Manhattan
Bank and Mellon Bank for working capital and other corporate
purposes as needed. Borrowings are subject to limits based
on amounts of accounts receivable and inventory, as defined.
Interest is at the banks' prime rate (8.50% at December 31,
1999) plus 1.5%. The line of credit and the note payable
described in Note 5(a) are collateralized by substantially
all of the assets of the Company.
9. EMPLOYEE STOCK In April 1992, the Company adopted the 1992 Stock Option
OPTION PLANS: Plan (the "1992 Plan"). The 1992 Plan, for which 83,334
common shares are reserved for issuance, provides for the
issuance of either incentive stock options or nonqualified
stock options to employees, consultants or others who
provide services to the Company. The initial options granted
F-11
11
<PAGE>
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. The initial
options granted to those with less than three years of
service became 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
$9.00.
In 1995, the Company adopted the 1995 Stock Option Plan (the
"1995 Plan"), as amended, for which 200,000 common shares
are reserved for issuance. The 1995 Plan provides for the
issuance of either incentive stock options or nonqualified
stock options to employees, 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 incentive stock options granted
to the Company's president, which are exercisable at 110% of
the closing price of the Company's shares on the date of
issuance.
In 1998, the Company adopted the 1998 Stock Option Plan (the
"1998 Plan"). The 1998 Plan, as amended, reserved 463,334
common shares for issuance. The 1998 Plan provides for the
issuance of either incentive stock options or nonqualified
stock options to employees, 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 incentive stock options granted
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 42,778 options available for future grant
under the 1992 Plan, no options available for grant under
the 1995 Plan, and 150,332 options available for grant under
the 1998 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>
As Reported Pro Forma
1999 1998 1999 1998
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $ 808,917 $(8,565,925) $ 596,000 $(8,733,702)
====================================================================================
Earnings (loss) per share:
Basic $ .31 $ (3.23) $ .23 $ (3.30)
Diluted $ .30 $ - $ .22 $ -
====================================================================================
</TABLE>
F-12
<PAGE>
A summary of the status of the Company's three stock option
plans as of December 31, 1999 and 1998 and changes during
those years are as follows:
<TABLE>
1999 1998
--------------------------------------------------------------------------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Fixed Options Options Price Options Price
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of year 327,468 $5.97 209,134 $5.52
Granted during year 269,000 2.64 118,334 6.72
Exercised - - - -
Forfeited 81,155 5.72 - -
--------------------------------------------------------------------------------------------------
Outstanding at end of year 515,313 $4.27 327,468 $5.97
==================================================================================================
</TABLE>
The following table summarizes information about stock
options outstanding and exercisable at December 31, 1999:
<TABLE>
Weighted-
Number Average Weighted-
Outstanding Remaining Average
Range of and Contractual Exercise
Exercise Price Exercisable Life Price
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$2.53 - $9.00 515,313 3.79 years $4.27
=================================================================================================
</TABLE>
The Company's assumptions used to calculate the fair values
of options issued were (i) risk-free interest rate of 5.25%,
(ii) expected life of five years, (iii) expected volatility
of 174.71% and (iv) expected dividends of zero.
10. WARRANTS The Company sold 33,334 warrants to the Company's
AND OPTIONS: 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 188,680 shares of common stock at an exercise
price of $3.18 and an aggregate of 33,334 warrants
exercisable at $7.50. In 1997, 68,714 of the Underwriter's
Warrants were exercised. The balance of the Underwriter's
Warrants expired on September 24, 1999.
In February 1995, the Company issued stock options to a
consultant to purchase 40,000 common shares at $9.00 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 6,667 shares at $6.00 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 6,167 shares at $3.18 per
share to a director.
F-13
<PAGE>
In March 1996, the Company issued 100,000 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 100,000 shares of common stock at an exercise price
of $3 during the five-year period commencing June 19, 1996.
In 1997, 10,000 of these warrants were exercised.
In September 1996, the Company issued options to purchase
3,334 shares of common stock to two directors at an exercise
price of $6.00 per share of common stock. These options
expire in 2001.
In February 1997, the Company issued options to purchase
3,334 shares of common stock to two directors at an exercise
price of $6.18 per share of common stock. These options
expire in 2002.
In January 1998, the Company issued options to purchase
25,000 shares of common stock to a consultant, who was also
a director, at an exercise price of $7.50 per share of
common stock. In February 1998, the Company issued options
to purchase 3,334 shares of common stock to two directors at
an exercise price of $6.93 per share of common stock. These
options expire in 2003.
In March 1998, the Company issued 33,334 warrants to Gaines
Berland, Inc. as compensation for acting as the Company's
investment banker pursuant to a consulting agreement. These
warrants entitle the investment banker to purchase 33,334
shares of common stock at an exercise price of $7.50 during
the five-year period commencing April 1, 1998. This
agreement was terminated in 1999. The Company recorded a
charge to operations of $198,734 to write off the
unamortized portion of warrants issued under this agreement.
In May 1999, the Company issued 100,000 warrants to Catalyst
Financial Corp as partial compensation for acting as the
Company's investment banker pursuant to a consulting
agreement. These warrants entitle the investment banker to
purchase 100,000 shares of common stock at an exercise price
of $1.875 during the five-year period commencing May 4,
1999. In December 1999, the Company issued options to
purchase 15,000 shares of common stock to a consultant at
the exercise price of $2.53 per share of common stock. Also
in December 1999, the Company issued options to purchase
10,000 shares of common stock to two directors at an
exercise price of $2.53 per share of common stock.
11. MD-90 In March 1991, CPI entered into an agreement with Rohr,
CONTRACT: 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 year ended December 31, 1998,
approximately 23% of the Company's revenue was derived from
this program.
In 1997, the Boeing Company acquired the McDonnell Douglas
Corporation. Boeing announced that it planned to terminate
the MD-90 program unless it received sufficient additional
orders for such aircraft.
In December 1998, based on information received from Rohr,
the Company recognized a termination of this contract. This
termination resulted in the Company writing off
approximately $11,850,000 of previously recorded revenue.
The effect of this write-off is included in cost of sales in
1998.
F-14
<PAGE>
12. EMPLOYEE On September 11, 1996, CPI's board of directors instituted a
BENEFIT PLANS: defined contribution plan under Section 401(k) of the
Internal Revenue Code (the "Code"). On October 1, 1998, the
Company amended and standardized both the CPI and Kolar
plans as required by the Code. Pursuant to the amended plan,
qualified employees may contribute a percentage of their
pre-tax eligible compensation to the Plan and the Company
will match a percentage of each employee's contribution.
Additionally, the Company has a profit-sharing plan covering
all eligible employees. Contributions by the Company are at
the discretion of management. The amount of contributions
recorded by the Company in 1999 and 1998 amounted to
$119,627 and $116,355, respectively.
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.
14. SEGMENT The Company's operations are classified into two business
INFORMATION: segments: production of complex aerospace structural
subassemblies ("Aerospace") and computer numerical control
machining of metal products ("Machining").
Summarized financial information by business segment for
1999 and 1998 are as follows:
<TABLE>
December 31, 1999 1998
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales:
Aerospace $ 6,079,936 $ 8,492,753
Machining 15,523,348 11,317,718
----------------------------------------------------------------------------------------
$21,603,284 $ 19,810,471
========================================================================================
Operating income (loss):
Aerospace $ 474,212 $(10,174,230)
Machining 1,442,686 798,622
-----------------------------------------------------------------------------------------
$ 1,916,898 $ (9,375,608)
=========================================================================================
Total assets:
Aerospace $ 5,814,906 $ 5,897,982
Machining 16,880,805 16,037,904
-----------------------------------------------------------------------------------------
$22,695,711 $ 21,935,886
=========================================================================================
</TABLE>
F-15
<PAGE>
<TABLE>
December 31, 1999 1998
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Depreciation and amortization:
Aerospace $ 39,913 $ 664,879
Machining 718,433 83,746
----------------------------------------------------------------------------------------
$ 758,346 $ 748,625
========================================================================================
Capital expenditures:
Aerospace $ 23,487 $ 42,512
Machining 727,225 36,380
----------------------------------------------------------------------------------------
$ 750,712 $ 78,892
========================================================================================
</TABLE>
15. MAJOR Approximately 55% and 40% of the Company's sales in 1999 and
CUSTOMERS: 1998, respectively, were to Universal Instruments Inc.
("Universal").
Approximately 22% and 17% of the Company's sales in 1999 and
1998, respectively, were to the U.S. government.
Approximately 23% of the Company's sales in 1998 was to
Rohr. At December 31, 1999, approximately 50% and 16% of
accounts receivable were due from Universal and Rohr,
respectively.
F-16
<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 30, 2000 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:
<TABLE>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/S/ Arthur August Chairman of the Board, March 30, 2000
- ------------------------
Arthur August President (Principal
Executive Officer)
and Director
/S/ Edward J. Fred Vice President March 30, 2000
- ------------------
Edward J. Fred (Principal
Accounting and Financial
Officer) and Director
/S/ Walter Paulick Director March 30, 2000
- ------------------------
Walter Paulick
/S/ Kenneth McSweeney Director March 30, 2000
- -----------------------
Kenneth McSweeney
</TABLE>
INDEPENDENT AUDITOR'S CONSENT
To the Board of Directors
CPI Aerostructures, Inc.
We hereby consent to incorporation by reference in the Registration Statements
(Nos. 333-11669 and 333-42403) on Form S-8 and Registration Statements (Nos.
333-08391 and 333-08216) on Form S-3 of CPI Aerostructures, Inc. of our report
dated February 11, 2000 related to the consolidated balance sheet of CPI
Aerostructures, Inc. and Subsidiary as of December 31, 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the two years in the period ended December 1, 1999, which report appears
in the December 31, 1999 annual report on Form 10-KSB of CPI Aerostructures,
Inc.
/s/ Goldstein Golub Kessler LLP
- -----------------------------------
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of CPI Aerostructures, Inc. and subsidiaries as of December
31, 1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 295,698
<SECURITIES> 0
<RECEIVABLES> 2,345,490
<ALLOWANCES> 0
<INVENTORY> 7,148,460
<CURRENT-ASSETS> 10,699,429
<PP&E> 7,029,462
<DEPRECIATION> 1,983,441
<TOTAL-ASSETS> 22,695,711
<CURRENT-LIABILITIES> 5,766,282
<BONDS> 0
<COMMON> 2,649
0
0
<OTHER-SE> 7,191,089
<TOTAL-LIABILITY-AND-EQUITY> 22,695,711
<SALES> 21,603,284
<TOTAL-REVENUES> 21,503,284
<CGS> 15,668,154
<TOTAL-COSTS> 15,668,154
<OTHER-EXPENSES> 4,018,232
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,116,661
<INCOME-PRETAX> 1,111,917
<INCOME-TAX> 303,000
<INCOME-CONTINUING> 808,917
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 808,917
<EPS-BASIC> .31
<EPS-DILUTED> .30
</TABLE>
EXHIBIT 99.1
Risk Factors
You should consider the following risks carefully in evaluating us and our
business before making an investment decision. The risks described below are not
the only risks we face. Additional risks may also impair our business
operations. If any of the following risks occur, our business, results of
operations or financial condition could be materially adversely affected. If
that happens, the trading price of our common stock could decline, and you may
lose all or part of your investment.
We have been forced to take significant write-offs and may be forced to do so
again in the future.
We account for our long-term contracts using the "percentage of completion"
method. Under this method, we recognize revenues as costs are incurred under our
contracts, measured by the percentage of actual costs incurred to date against
estimated total costs. Under our commercial contracts, we do not receive cash
payments until our products are shipped to our customers. Accordingly, we may
recognize revenues even though we have not received any actual payment. We
therefore bear the risk that one of our contracts will be terminated after we
have expended substantial sums of money on production but prior to our delivery.
In 1998, we were forced to take a write-off of approximately $11,850,000 due to
such a cancellation. There can be no assurance that this will not happen again
to us in the future. If we are forced to take another substantial write-off, our
results of operations will be materially adversely affected.
Possible Delisting of Securities from Nasdaq System
The Company's Common Stock is listed on the Nasdaq SmallCap Market
("Nasdaq"). In March 1999, the Company received a letter from Nasdaq that the
Company must demonstrate compliance with the $1.00 minimum bid price. In June
1999, the Company had a 1 for 3 reverse stock split and the company's stock has
since exceeded the minimum bid price. If the Company fails to meet any
maintenance criteria to be listed on Nasdaq, the Company's Common Stock may be
delisted from Nasdaq and trading, if any, in the Company's securities would
thereafter be conducted on the OTC Bulletin Board. As a result of such
delisting, an investor may find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of, the Company's securities. In
addition, if the Common Stock was to become delisted from trading on Nasdaq and
the trading price of the Common Stock was to fall below $5.00 per share, trading
in the Common Stock would also be subject to the requirements of certain rules
promulgated under the Securities Exchange Act of 1934, as amended ("Exchange
Act"), which require additional disclosure by broker-dealers in connection with
any trades involving a stock defined as a penny stock (generally, any non-Nasdaq
equity security that has a market price of less than $5.00 per share,
<PAGE>
subject to certain exceptions). Such rules require the delivery, prior to any
penny stock transaction, of a disclosure schedule explaining the penny stock
market and the risks associated therewith, and impose various sales practice
requirements on broker-dealers who sell penny stocks to persons other than
established customers and accredited investors (generally institutions). For
these types of transactions, the broker-dealer must make a special suitability
determination for the purchaser and have received the purchaser's written
consent to the transaction prior to sale. The additional burdens imposed upon
broker-dealers by such requirements may discourage them from effecting
transactions in the Company's securities, which could severely limit the
liquidity of the Company's securities.
Our credit agreement contains restrictive covenants which may adversely affect
us.
Our credit agreement contains restrictive covenants which, among other
things, restrict us from:
o incurring additional indebtedness;
o incurring liens;
o paying dividends;
o making certain other restricted payments or investments;
o consummating certain asset sales;
o entering into certain transactions with affiliates; and
o merging or consolidating with another entity.
The credit agreement also requires us to maintain specified financial ratios and
satisfy certain financial tests. Our ability to meet such financial ratios and
tests may be affected by events beyond our control. We cannot assure that we
will meet such tests. A breach of any of these covenants could result in an
event of default under the credit agreement. If such an event of default occurs,
the lenders could accelerate our indebtedness to them under the credit
agreement. We cannot assure you that our assets would be sufficient to repay our
indebtedness in full.
The markets we operate in are highly competitive.
We derive all of our sales and operating income from the services and parts
we provide to our customers in the aviation industry. The aviation industry has
historically been characterized by intense competition. We compete with a large
number of foreign and domestic manufacturing companies including Northrop
Grumman Corporation, Aeronca, Inc., Shin-Meiwa and other subcontractors
throughout the world. Many of these companies have far greater financial and
other resources and more established reputations than we do. There can be no
assurance that our services and products will successfully compete with the
services and products of these companies. Competitive factors that effect our
business include:
2
<PAGE>
o price and quality;
o development and production capabilities;
o customer service; and
o industry experience.
If we are unable to compete effectively in several of these areas, our financial
condition and results of operations will be adversely affected.
Risks of Acquisitions
The Company's strategy involves the acquisition and integration of
additional companies' products, technologies and personnel. The Company has
limited experience in acquiring outside businesses. Acquisition of businesses
requires substantial time and attention of management personnel and may require
also additional equity or debt financings. Further, integration of newly
established or acquired businesses is often disruptive. Since the Company may in
the future acquire additional businesses, there can be no assurance that the
Company will identify appropriate targets, will acquire such businesses on
favorable terms, or will be able to successfully integrate such organizations
into its business. Failure to do so could materially adversely affect the
Company's business, financial condition and results of operations.
Our results could be adversely affected by the potential loss or delay of our
government contracts.
Our business consisted of 76.8% and 39.9% of U.S. Government contracts in
1999 and 1998, respectively. As a Government contractor, we are routinely
subject to audits, reviews and investigations by the Government related to our
negotiation and performance of Government contracts and our accounting for such
contracts. Under certain circumstances, a contractor can be suspended or
debarred from eligibility for Government contract awards. The Government may, in
certain cases, also terminate existing contracts, recover damages and impose
other sanctions and penalties. The loss of any of our contracts with the
Government could have a materially adverse effect on us. Recent U.S. budget
constraints, combined with a shift in the nation's security objectives, have
resulted in a downsizing of the U.S. defense industry.
Our revenues are dependent on a limited and highly concentrated number of
companies.
We have three customers who accounted for more than 10% or more of our
annual revenue for the fiscal years ended December 31, 1999 and 1998. Our
agreements with these customers are subject to termination at will, in whole or
in part, at the convenience of the customer. Although the contracts often
require payment to us for the work we have already performed through the
termination date, the loss of business from one or more of these customers
3
<PAGE>
or any future customers of similar size could have a material adverse effect on
our results of operations or financial condition.
We are subject to strict governmental regulations relating to the environment
and aircraft components.
We are required to comply with extensive and frequently changing
environmental regulations at the federal, state and local levels. Among other
things, these regulatory bodies impose restrictions to control air, soil and
water pollution to protect against occupational exposure to chemicals, including
health and safety risks, and to require notification or reporting of the
storage, use and release of certain hazardous substances into the environment.
This extensive regulatory framework imposes significant compliance burdens and
risks on us and, as a result, substantially affects our operational costs. In
addition, these regulations may impose liability for the cost of removal or
remediation of certain hazardous substances released on or in our facilities
without regard to whether we knew of, or caused, the release of such substances.
Furthermore, we are required to provide a place of employment that is free from
recognized and preventable hazards are likely to cause serious physical harm to
employees, provide notice to employees regarding the presence of hazardous
chemicals and to train employees in the use of such substances. Our operations
require the use of a limited amount of chemicals and other materials for
painting and cleaning that are classified under applicable laws as hazardous
chemicals and substances. While we believe that we are in substantial compliance
with all federal, state and local laws and regulations governing our operations
and have obtained all necessary permits required for the operation of our
business, there can be no assurance we will be able to comply with all
regulations and laws in the future.
We are also subject to regulation by the FAA under the provisions of the
Federal Aviation Act of 1958, as amended. The FAA prescribes standards and
licensing requirements for aircraft and aircraft components. The costs of
compliance with these requirements are significant. We are subject to
inspections by the FAA and may be subjected to fines and other penalties
(including orders to cease production) for noncompliance with FAA regulations.
The failure on our part to comply with applicable regulations could result in
the termination or our disqualification from some of our contracts, which could
have a material adverse effect on our operations.
If the contracts associated with our backlog were terminated, our financial
condition would be adversely affected.
Our backlog and bookings are subject to fluctuations and are not
necessarily indicative of future revenues. Our backlog is subject to termination
at will and rescheduling without a significant penalty. We cannot assure you
that our backlog will be completed and booked as revenue. Cancellations of
pending contracts or terminations or reductions of contracts in progress
4
<PAGE>
could have a material adverse effect on our business, financial condition or
results of operations.
We currently do not plan to pay cash dividends on our shares.
We have never declared or paid any cash dividends on our common stock, nor
do we intend on doing so in the future. The payment of dividends, if any, in the
future is within the discretion of our Board of Directors and will depend upon
our earnings, capital requirements and financial condition as well as other
relevant factors. In addition, our credit agreement with Chase Manhattan Bank
and Mellon Bank provide that we may not declare or pay dividends on our common
stock so long as any amounts are owing to the lenders.
5
