SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period Commission File Number 1-11398
ended September 30, 2002
CPI AEROSTRUCTURES, INC.
(Exact Name of Small Business Issuer as Specified in its Character)
New York 11-2520310
---------------------------------- -----------------------------------
(State or Other Jurisdiction (IRS Employer Identification Number)
of Incorporation or Organization)
200A EXECUTIVE DRIVE, EDGEWOOD, NY 11717
(Address of Principal Executive Offices)
Telephone number (631) 586-5200
(Issuer's Telephone Number Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or such period that the
registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No ____
The number of shares of common stock, par value $.001 per share,
outstanding was 2,735,670 as of November 8 2002.
CPI AEROSTRUCTURES, INC.
AND SUBSIDIARY
INDEX
--------------------------------------------------------------------------------
PART I - Financial Information
ITEM 1. Consolidated Financial Statements
Independent Accountant's Review Report 3
Balance Sheets as of September 30, 2002 (Unaudited) and 4
December 31, 2001 (Audited)
Statements of Operations for the Three Months and Nine Months 5
ended September 30, 2002 (Unaudited) and 2001 (Unaudited)
Statements of Cash Flows for the Nine Months ended 6
September 30, 2002 (Unaudited) and 2001 (Unaudited)
Notes to Financial Statements (Unaudited) 7
ITEM 2. Management's Discussion and Analysis of 10
Financial Condition and Results of Operations
ITEM 3. Controls and Procedures 13
PART II - Other Information
ITEM 2. Changes in Securities and Use of Proceeds 14
ITEM 4. Submission of Matters to a Vote of Security Holders 15
ITEM 6. Exhibits and Reports on Form 8-K 15
Signatures and Certifications 16
2
CPI AEROSTRUCTURES, INC.
AND SUBSIDIARY
Part I - Financial Information
ITEM 1. Consolidated Financial Statements
ACCOUNTANT'S REVIEW REPORT
To the Board of Directors
CPI Aerostructures, Inc.
We have reviewed the accompanying consolidated balance sheet of CPI
Aerostructures, Inc. and Subsidiary as of September 30, 2002, and the related
consolidated statements of operations for the nine-month and three-month periods
ended September 30, 2002 and 2001 and the statement of cash flows for the
nine-month periods ended September 30, 2002 and 2001. These financial statements
are responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the consolidated financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements in order for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
December 31, 2001, and the related consolidated statements of operations,
shareholders' deficiency, and cash flows for the year then ended (not presented
herein); and in our report dated March 29, 2002, except for the last paragraph
of Note 5, as to which the date is April 12, 2002, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 2001, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
/s/ Goldstein Golub Kessler LLP
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
October 24, 2002
3
CPI AEROSTRUCTURES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
September 30, December 31,
2002 2001
(Unaudited) (Audited)
-----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $ 121,002 $ 180,578
Accounts receivable 2,852,597 2,168,369
Costs and estimated earnings in excess of billings on uncompleted
contracts 10,214,846 6,967,385
Deferred Income Taxes, net of valuation allowance 253,000 758,000
Prepaid expenses and other current assets 23,745 84,895
Assets held for sale - discontinued operations 280,676 3,217,984
-----------------------------------------------------------------------------------------------------------------------------------
Total current assets 13,745,866 13,377,211
Property, Plant and Equipment, net 110,340 101,260
Deferred Income Taxes, net of valuation allowance ----- 172,000
Other Assets 179,226 180,226
-----------------------------------------------------------------------------------------------------------------------------------
Total Assets $14,035,432 $13,830,697
===================================================================================================================================
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable $ 4,985,799 $ 4,195,530
Accrued expenses 152,692 535,054
Line of credit ----- 1,700,000
Current portion of long-term debt 3,443,036 9,607,284
Deferred income taxes ----- 147,000
-----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 8,581,527 16,184,868
Long term debt 4,898,035 -----
-----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 13,479,562 16,184,868
-----------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' Equity (Deficiency):
Common stock - $.001 par value; authorized 50,000,000 shares,
issued and outstanding 2,735,670 and 2,657,046 2,736 2,657
Additional paid - in capital 12,483,092 12,367,020
Accumulated deficit (11,929,958) (14,723,848)
-----------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity (deficiency): 555,870 (2,354,171)
-----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Deficiency $14,035,432 $13,830,697
===================================================================================================================================
See Notes to Consolidated Financial Statements
4
CPI AEROSTRUCTURES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
For the Three Months Ended Sept. 30, For the Nine Months Ended Sept. 30,
2002 2001 2002 2001
(Unaudited) (Unaudited)
-----------------------------------------------------------------------------------------------------------------------------------
Revenue $7,088,614 $4,549,873 $17,988,748 $10,631,958
Cost of sales 4,878,932 2,865,814 12,549,892 7,015,993
-----------------------------------------------------------------------------------------------------------------------------------
Gross profit 2,209,682 1,684,059 5,438,856 3,615,965
Selling, general and administrative expenses 775,867 307,360 1,800,641 1,145,607
-----------------------------------------------------------------------------------------------------------------------------------
Income from operations 1,433,815 1,376,699 3,638,215 2,470,358
-----------------------------------------------------------------------------------------------------------------------------------
Other (income) expense:
Interest/other (income) expense 618 (821) (3,642) 9,223
Interest expense 185,997 45,389 318,965 126,707
-----------------------------------------------------------------------------------------------------------------------------------
Total other expenses, net 186,615 44,568 315,323 135,930
-----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before
provision for income taxes 1,247,200 1,332,131 3,322,892 2,334,428
Provision for income taxes 1,000 (534,000) (529,000) (934,000)
-----------------------------------------------------------------------------------------------------------------------------------
Income before operations of discontinued segment 1,248,200 798,131 2,793,892 1,400,428
Loss from operations of discontinued segment ----- (245,997) ----- (1,571,481)
-----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $1,248,200 $ 552,134 $ 2,793,892 $(171,053)
===================================================================================================================================
Basic net income (loss) per common share:
Income before operations of discontinued segment $ .46 $ .30 $ 1.03 $ .53
Loss from operations of discontinued segment ----- (.09) ----- (.59)
-----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share - basic $ .46 $ .21 $ 1.03 $ (.06)
===================================================================================================================================
Diluted net income per common share:
Income before operations of discontinued segment $ .38 $ .30 $ .89 $ -----
Loss from operations of discontinued segment ----- (.09) ----- -----
-----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share - diluted $ .38 $ .21 $ .89 $ -----
===================================================================================================================================
Shares used in computing earnings per common share:
Basic 2,734,898 2,657,046 2,700,785 2,652,355
Diluted 3,299,098 2,690,380 3,136,626 2,652,355
-----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
5
CPI AEROSTRUCTURES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
For the Nine Months Ended September 30, 2002 2001
(Unaudited)
-------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income before operations of discontinued segment $2,793,892 $1,400,428
Adjustments to reconcile net income before operations of discontinued segment
to net cash used in operating activities:
Depreciation and amortization 30,931 26,362
Warrants issued for consulting fees 5,782 47,346
Stock issued for bank fees 26,267 -----
Loss on disposal of fixed assets ----- 6,158
Deferred portion of provision for income taxes 530,000 -----
Changes in operating assets and liabilities:
Increase in accounts receivable (684,228) (326,206)
Decrease in income tax refund receivable ----- -----
Increase in costs and estimated earnings in excess of billings on
uncompleted contracts (3,247,461) (2,260,561)
Decrease in prepaid expenses and other current assets 61,150 9,968
Decrease (increase) in other assets 1,000 (1,000)
Increase in accounts payable and accrued expenses 407,905 180,090
Decrease in income taxes payable ----- (34,000)
-------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (74,762) (951,414)
-------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property, plant and equipment (40,011) (14,507)
Proceeds from sale of fixed assets ----- 1,800
-------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (40,011) (12,707)
-------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment from line of credit ----- -----
Repayment of long-term debt (2,966,213) (1,274,018)
Proceeds from exercise of stock options 84,102 -----
-------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (2,882,111) (1,274,018)
-------------------------------------------------------------------------------------------------------------------------
Net cash used in continuing operations (2,996,884) (2,238,139)
Net cash provided by discontinued operations 2,937,308 2,386,569
-------------------------------------------------------------------------------------------------------------------------
Net increase in (decrease) cash (59,576) 148,430
Cash at beginning of period 180,578 62,979
-------------------------------------------------------------------------------------------------------------------------
Cash at end of period $ 121,002 $ 211,409
=========================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 167,015 $ 589,762
=========================================================================================================================
Income taxes $ 13,355 $ 36,050
=========================================================================================================================
Supplemental schedule of non-cash financing activity:
Financing obligation incurred in connection with the acquisition of equipment $ ----- $ 143,908
=========================================================================================================================
See Notes to Consolidated Financial Statements
6
CPI AEROSTRUCTURES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
1. INTERIM The financial statements as of September 30, 2002 and for the
FINANCIAL nine months ended September 30, 2002 and 2001 are unaudited,
STATEMENTS however, in the opinion of the management of the Company,
these financial statements reflect all adjustments (consisting
solely of normal recurring adjustments) necessary to present
fairly the financial position of the Company and the results
of operations for such interim periods are not necessarily
indicative of the results to be obtained for a full year.
2. COSTS AND Costs and estimated earnings in excess of billings on
ESTIMATED uncompleted contracts consist of:
EARNINGS IN
EXCESS OF
BILLINGS ON September 30, 2002
UNCOMPLETED --------------------------------------------------------------
CONTRACTS: U.S.
Government Commercial Total
--------------------------------------------------------------
Costs incurred
on uncompleted
contracts $18,413,197 $13,017,710 $31,430,907
Estimated
earnings 7,810,645 5,947,898 13,758,543
--------------------------------------------------------------
26,223,842 18,965,608 45,189,450
Less billings
to date 18,063,324 16,911,280 34,974,604
--------------------------------------------------------------
Costs and
estimated
earnings in
excess of
billings on
uncompleted
contracts $ 8,160,518 $ 2,054,328 $10,214,846
==============================================================
December 31, 2001
--------------------------------------------------------------
U.S.
Government Commercial Total
--------------------------------------------------------------
Costs incurred
on uncompleted
contracts $7,359,234 $12,485,185 $19,844,419
Estimated
earnings 2,040,413 6,728,158 8,768,571
--------------------------------------------------------------
9,399,647 19,213,343 28,612,990
Less billings
to date 5,425,681 16,219,924 21,645,605
--------------------------------------------------------------
Costs and
estimated
earnings in
excess of
billings on
uncompleted
contracts $3,973,966 $ 2,993,419 $ 6,967,385
==============================================================
7
CPI AEROSTRUCTURES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
3. EARNINGS PER Basic earnings per common share is computed using the weighted
COMMON SHARE: 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 564,200 and 435,841 were
used in the calculation of diluted earnings per common share
in the nine-month and three-month periods, respectively, ended
September 30, 2002.
The convertible securities attributable to a note payable have
been excluded from the fully diluted computation as their
effect would be antidilutive.
4. DISCONTINUED On January 22, 2002, the Company announced a decision made by
OPERATIONS: the Board of Directors as of December 31, 2001 to close the
Kolar facilities located in Ithaca, New York, and liquidate
its assets through a public auction of its machinery and
equipment and the private sale of its real estate. On
February 21, 2002, Kolar sold a substantial portion of its
machinery and equipment at an auction conducted by
Daley-Hodkin Corporation at Kolar's main facility in Ithaca,
New York. Proceeds from actual sales of machinery, equipment
and real property approximated $2,905,000 as of September 30,
2002. The disposition of Kolar's operations represents a
disposal of a business segment under Accounting Principles
Board ("APB") Opinion No. 30. Accordingly, results of the
operation have been classified as discontinued, and prior
periods have been restated. For business segment reporting
purposes, Kolar's business results were previously classified
as the "Machining" segment.
Net sales and income (loss) from the discontinued operations
are as follows:
For the nine months ended September 30, 2002 2001
--------------------------------------------------------------
Net sales $ --- $6,840,056
==============================================================
Pretax loss from discontinued operations $ --- $2,505,481
Income tax benefit --- 934,000
--------------------------------------------------------------
Net loss from discontinued operations $ --- $1,571,481
==============================================================
For the three months ended September 30, 2002 2001
--------------------------------------------------------------
Net sales $ --- $2,624,512
==============================================================
Pretax loss from discontinued operations $ --- $ 779,997
Income tax benefit --- 534,000
--------------------------------------------------------------
Net loss from discontinued operations $ --- $ 245,997
==============================================================
Assets of the discontinued operations are as follows:
September 30, 2002
--------------------------------------------------------------
Property, plant and equipment, net $ 280,676
==============================================================
8
CPI AEROSTRUCTURES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
5. DEBT: Debt consists of the following:
Note payable - bank (a) $2,431,571
Note payable - bank (b) 259,077
Note payable - bank (c) 624,484
Note payable - Seller (d) 4,898,035
Capitalized lease obligations payable (e) 127,904
--------------------------------------------------------------
$ 8,341,071
==============================================================
(a) The note, as amended in June 2002, is payable to a
commercial bank in monthly installments from $50,000 to
$100,000 through May 30, 2003, and the remaining unpaid
balance at June 30, 2003, plus monthly interest at the
bank's published prime rate (4.75% at September 30, 2002)
plus 3.5%. This note is collateralized by substantially
all of the assets of the Company. Approximately $1,249,000
of this loan was repaid upon the sale of certain assets at
auction. The note requires the Company to maintain
specified levels of working capital and other financial
ratios, as defined. The line of credit of $1,700,000
previously listed separately on the balance sheet is now
incorporated into this note.
(b) The note is payable to a commercial bank in monthly
installments of $9,847, including interest at 8.3%. This
note is collateralized by Kolar's land and buildings. The
Company sold certain of the underlying land and buildings
during 2002 at an aggregate selling price of approximately
$555,000. The Company estimates that the sale of the
remaining land and buildings will yield proceeds
sufficient to repay the note in full.
(c) The note is payable to a commercial bank in monthly
installments of $20,000 through May 30, 2003, and the
remaining unpaid balance at June 30, 2003, plus monthly
interest at the bank's published prime rate (4.75% at
September 30, 2002) plus 3.5%. This note is collateralized
by substantially all of the assets of the Company and was
previously included in the capitalized lease obligations
payable of the Company.
(d) 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 note will
mature ninety days after the maturity of the bank loans
but not later than June 30, 2007. Until then, it will
continue to accrue interest, which will be paid at
maturity together with the principal amount, pursuant to
the terms of the subordination agreement between the bank
lenders and Seller. Seller is presently prohibited from
receiving current payments of interest on its note. 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. The note is subordinated to the
notes payable - bank.
(e) The Company leases equipment under a capital lease which
expires October 24, 2003. The leases require a monthly
payment of $10,227.02, including interest at 9.35%. As of
September 30, 2002, proceeds of approximately $674,000
were received upon the sale of certain leased equipment,
which amount was remitted to the owners of the equipment.
9
CPI AEROSTRUCTURES, INC.
AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
--------------------------------------------------------------------------------
Forward Looking Statements
The statements discussed in this Report include forward looking statements that
involve risks and uncertainties, including the timely delivery and acceptance of
the Company's products and the other risks detailed from time to time in the
Company's reports filed with the Securities and Exchange Commission.
As a result of the Company's decision to close its Kolar, Inc. facilities and
liquidate Kolar's assets, Kolar's operations have been classified as
discontinued, and the following discussion does not take Kolar into effect
unless otherwise stated.
Critical Accounting Policies
Revenue Recognition
-------------------
The Company recognized revenue from long-term contracts over the contractual
period under the percentage-of-completion ("POC") method of accounting. Under
this method of accounting, sales and gross profit are recognized as work is
performed based on the relationship between actual costs incurred and total
estimated costs at the completion of the contract. Recognized revenues that will
not be billed under the terms of the contract until a later date are recorded as
an asset captioned "Costs and estimated earnings in excess of billings on
uncompleted contracts." Contracts where billings to date have exceeded
recognized revenues are recorded as a liability captioned "Billings in excess of
costs and estimated earnings on uncompleted contracts." Changes to the original
estimates may be required during the life of the contract. Estimates are
reviewed monthly and the effect of any change in the estimated gross margin
percentage for a contract is reflected in cost of sales in the period the change
becomes known. The use of the POC method of accounting involves considerable use
of estimates in determining revenues, costs and profits and in assigning the
amounts to accounting periods. The Company continually evaluates all of the
issues related to the assumptions, risks and uncertainties inherent with the
application of the POC method of accounting. In all other cases, the Company
recognizes revenue at the time products are shipped and title passes to the
customer or as services are performed.
Income Taxes
------------
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The Company records a
valuation allowance that represents federal and state operating loss
carryforwards for which utilization is uncertain. Management judgment is
required in determining the Company's provision for income taxes, deferred tax
assets and liabilities and the valuation allowance recorded against the
Company's net deferred tax assets. The valuation allowance would need to be
adjusted in the event future taxable income is materially different than amounts
estimated. We have recorded valuation allowances of $4,487,000 and $2,074,000
against our deferred tax assets at September 30, 2002 and December 31, 2001,
respectively.
10
CPI AEROSTRUCTURES, INC.
AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition and Results
of Operations
--------------------------------------------------------------------------------
Material Changes in Results of Operations
The Company's revenue for the nine months ended September 30, 2002 was
$17,988,748 compared to $10,631,958 for the same period last year, representing
an increase of $7,356,790 or 69%. This increase is largely attributable to an
increase in the number of government contracts.
Gross profit increased by $1,822,891 or 50%, from the nine months ended
September 30, 2001 to the nine months ended September 30, 2002. Gross profit as
a percentage of revenue for the nine months ended September 30, 2002 was 30%
compared to 34% for the same period last year.
Selling, general, and administrative expenses increased by $655,034, or 57%,
from the nine months ended September 30, 2001 to the nine months ended September
30, 2002. This increase is largely due to legal fees associated with
restructuring existing debt. Interest expense increased $192,258 for the nine
months ended September 30, 2002, compared to the same period last year. The
increase in interest expense is from Kolar's debt shown for the previous year in
income (loss) from operations of discontinued segment.
The resulting income before operations of discontinued segment for the nine
months ended September 30, 2002, was $3,638,215 compared to income before
operations of discontinued segment of $ 2,470,358 for the same period last year.
The 2002 results include income taxes computed at an effective tax rate of 15.9%
because the Company estimates that it will utilize $800,000 of its net operating
loss carry-forward. Basic income per share was $1.03 on 2,700,785 average shares
outstanding, compared to a loss of $.06 per share on 2,652,355 average shares
outstanding for fiscal 2001. Diluted earnings per share was $.89 on 3,136,626
weighted average shares outstanding compared to a loss of $.06 per share in 2001
on 2,652,355 weighted average shares outstanding.
The Company's revenue for the three months ended September 30, 2002 was
$7,088,614 compared to $4,549,873 for the same period last year, representing an
increase of $2,538,741 or 56%.
Gross profit increased by $525,623 or 31%, from the three months ended September
30, 2001 to the three months ended September 30, 2002. Gross profit as a
percentage of revenue for the three months ended September 30, 2002 was 31%
compared to 37% for the same period last year.
Selling, general, and administrative expenses increased by $468,507, or 152%,
from the three months ended September 30, 2001 to the three months ended
September 30, 2002. Interest expense increased $140,608 for the three months
ended September 30, 2002, compared to the same period last year.
The resulting income before operations of discontinued segment for the three
months ended September 30, 2002, was $1,433,817 compared to income before
operations of discontinued segment of $1,376,699 for the same period last year.
The 2002 results include no provision for income taxes as the Company estimates
that it will utilize $500,000 of its net operating loss carry-forward. Basic
income per share was $.46 on 2,734,898 average shares outstanding, compared to
income of $.21 per share on 2,657,046 average shares outstanding for fiscal
2001. Diluted earnings per share was $.38 on 3,299,098 weighted average shares
outstanding compared to income of $.21 per share in 2001 on 2,690,380 weighted
average shares outstanding.
The current provision for income taxes was derived by applying statutory federal
tax rates to the income from continuing operations and offsetting the resulting
charge by the tax benefit associated with that portion of net operating losses
that the Company deems utilizable. The Company has operating loss carryforwards
of approximately $8,035,000 and $5,672,000 for federal and state income tax
purposes, respectively, expiring through 2021.
11
CPI AEROSTRUCTURES, INC.
AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition and Results
of Operations
--------------------------------------------------------------------------------
Material Changes in Financial Condition
At September 30, 2002 the Company had working capital of $5,164,339 compared to
a deficiency of $2,807,657 at December 31, 2001, an increase of $7,971,996. This
increase is attributable to a reclassification of approximately $4,900,000 of
debt to non-current liabilities and an increase in costs and estimated earnings
in excess of billings on uncompleted contracts of approximately $3,250,000.
A large portion of the Company's cash has been used for costs incurred on
commercial and the numerous government contracts that are in process and which
do not allow progress payments. These costs are components of "Costs and
estimated earnings in excess of billings on uncompleted contracts" and represent
the aggregate costs and related earnings for uncompleted contracts for which the
customer has not yet been billed. These costs and earnings are recovered upon
shipment of products and presentation of billings in accordance with contract
terms.
Net cash used in operating activities for the nine months ended September 30,
2002 was $74,762. This decrease in cash was primarily the result of cash being
used for new contracts of $3,247,461.
Liquidity and Capital Resources
On June 25, 2002, the Company and Kolar, Inc. ("Kolar", and together with the
Company, the "Borrowers") signed the Amended and Restated Credit Agreement with
the several banks and other financing institutions or entities from time to time
parties thereto and JPMorgan Chase Bank, as Administrative Agent ("JPMorgan"),
restructuring their original debt facilities with JPMorgan (formerly known as
Chase Manhattan Bank) and GE Capital CFE, Inc. (as assignee of Mellon Bank,
N.A.).
Under the Amended and Restated Credit Agreement, one tranche ("Tranche A") of
the senior bank loans will be amortized at an amount beginning at $50,000 per
month, increasing to $100,000 during the term, with a final payment of the
balance due on June 30, 2003. The aggregate principal amount of the Tranche A
loan currently outstanding $2,431,571.
A second tranche ("Tranche B"), the amount representing the remaining mortgage
debt from the Kolar properties, will be repaid in monthly installments
accordance with the terms of the original Credit Agreement, with a final payment
on September 30, 2007. The aggregate remaining principal amount of the Tranche B
loan is $259,077.
A third tranche ("Tranche C"), the amount representing the net deficiency
arising from the sale of certain equipment previously leased to Kolar by
JPMorgan Leasing, Inc. (formerly Chase Equipment Leasing, Inc.), an affiliate of
JPMorgan, will be amortized at $20,000 per month, with a final payment on June
30, 2003. The aggregate remaining principal amount of the Tranche C loan is
$624,484.
In 1997, the Borrowers entered into a purchase money note agreement with Kolar
Machine, Inc. (now known as Ralok, Inc. ("Ralok")) in the principal amount of
$4,000,000. The note issued was originally due on June 30, 2002 and is secured
by a security interest on all of the assets of the Borrowers that is subordinate
to the security interest of the bank lenders. The note is currently convertible,
at Ralok's option, into 333,334 shares of Common Stock of the Company. Pursuant
to the terms of the subordination agreement between the bank lenders and Ralok,
Ralok was prohibited from receiving current payments of interest on its note. As
amended, the subordinated note issued in connection with the Kolar acquisition
will mature ninety days after the maturity of the bank loans but not later than
September 30, 2007. Until then, it will continue to accrue interest, which will
be compounded monthly and paid at maturity together with the principal amount.
As of September 30, 2002, $996,650 of unpaid interest has accrued.
The Company is currently exploring alternative financing for its existing debt
which will become due on June 30, 2003, including bank refinancing, public
and/or private placements of equity, other forms of debt, and a combination of
these methods. The Company believes one or more of these options will be
available to it.
12
CPI AEROSTRUCTURES, INC.
AND SUBSIDIARY
Management's Discussion and Analysis of Financial Condition and Results
of Operations
--------------------------------------------------------------------------------
The table below summarizes information about our contractual obligations as of
September 30, 2002 and the effects these obligations are expected to have on our
liquidity and cash flow in the future years.
___________________________________________________________________________________________________
| | Payments Due by Period |
| |__________________________________________________________________________|
| Contractual | | Less than 1 | | | |
| Obligations | Total | year | 1-3 years | 4 - 5 years | After 5 years |
| | ($) | ($) | ($) | ($) | ($) |
|_______________________|____________|______________|_____________|_______________|________________|
|Long-Term Debt | 4,898,035 | 0 | 0 | 4,898,035 | 0 |
|_______________________|____________|______________|_____________|_______________|________________|
|Capital Lease | | | | | |
|Obligations | 127,904 | 117,756 | 10,148 | 0 | 0 |
|_______________________|____________|______________|_____________|_______________|________________|
|Operating Leases | 40,728 | 40,728 | 0 | 0 | 0 |
|_______________________|____________|______________|_____________|_______________|________________|
|Total Contractual Cash | | | | | |
|Obligations | 5,066,667 | 158,484 | 10,148 | 4,898,035 | 0 |
|_______________________|____________|______________|_____________|_______________|________________|
ITEM 3. Controls and Procedures
Within the 90-day period prior to the filing of this report, an evaluation of
the effectiveness of the Company's disclosure controls and procedures was made
under the supervision and with the participation of the Company's management,
including the chief executive officer and chief financial officer. Based on that
evaluation, the CEO and CFO concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in reports that it files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms.
Subsequent to the date of their evaluation, there were no significant changes in
the Company's internal controls or in other factors that could significantly
affect these controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.
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AND SUBSIDIARY
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Part II - Other Information
ITEM 2. Changes In Securities and Use of Proceeds
(c) Recent Sales of Unregistered Securities
During the three months ended September 30, 2002, the Company made the
following sales of unregistered securities:
____________________________________________________________________________________________________________________
| | | | Consideration | | |
| | | | Received and | | |
| | | | Description of | | If Option, |
| | | | Underwriting or | | Warrant or |
| | | | Other Discounts to | | Convertible |
| | | | Market Price | Exemption from | Security, Terms |
| | | Number Sold | Afforded to | Registration | of Exercise or |
|Date of Sale | Title of Security | Or Forfeited | Purchasers | Claimed | Conversions |
|_________________|_____________________|_______________|_____________________|__________________|__________________|
| 09/09/02 | Common Stock | 1,000 |Common Stock issued | 4(2) | N/A |
| | | |upon the exercise of | | |
| | | |options; $2,870 cash | | |
| | | |consideration | | |
| | | |received by the | | |
| | | |Company | | |
|_________________|_____________________|_______________|_____________________|__________________|__________________|
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AND SUBSIDIARY
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ITEM 4. Submission of Matters to a Vote of Security Holders
a) An Annual Meeting of Shareholders was held on September 18, 2002
("Annual Meeting")
b) One matter was voted upon at the Annual Meeting, as follows:
1) Kenneth McSweeney was re-elected to serve as director for the
ensuing three years and until his successor is elected and
qualified with 2,250,490 votes cast and 31,831 votes
withholding authority for his re-election. Arthur August,
Edward J. Fred and Walter Paulick's term of offices as
directors continued after the meeting.
ITEM 6. Exhibits and Reports on Form 8-K
a) No Exhibits
b) During the three months ended September 30, 2002, no Current
Reports on Form 8-K were filed by the Company.
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CPI AEROSTRUCTURES, INC.
AND SUBSIDIARY
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CPI AEROSTRUCTURES, INC.
Dated: November 13, 2002 By: /s/ Arthur August
-------------------------------------
Arthur August
Chairman and Chief Executive
Officer (Principal Executive Officer)
Dated: November 13, 2002 By: /s/ Edward J. Fred
-------------------------------------
Edward J. Fred
President, Chief Financial Officer
and Secretary (Principal Financial
Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CPI Aerostructures, Inc.
(the "Company") on Form 10-QSB for the period ended September 30, 2002 as filed
with the Securities and Exchange Commission (the "Report"), each of the
undersigned, in the capacities and on the dates indicated below, hereby
certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
1. the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operation of the
Company.
Dated: November 13, 2002 By: /s/ Arthur August
-------------------------------------
Arthur August
Chairman and Chief Executive
Officer (Principal Executive Officer)
Dated: November 13, 2002 By: /s/ Edward J. Fred
-------------------------------------
Edward J. Fred
President, Chief Financial Officer
and Secretary (Principal Financial
Officer)
16
CPI AEROSTRUCTURES, INC.
AND SUBSIDIARY
--------------------------------------------------------------------------------
CERTIFICATION
PURSUANT TO RULE 13a-14 AND 15d-14 UNDER
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Arthur August, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of CPI
Aerostructures, Inc.;
2. based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. the registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
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CPI AEROSTRUCTURES, INC.
AND SUBSIDIARY
--------------------------------------------------------------------------------
6. the registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: November 13, 2002 By: /s/ Arthur August
-------------------------------------
Arthur August
Chairman and Chief Executive
Officer (Principal Executive Officer)
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CPI AEROSTRUCTURES, INC.
AND SUBSIDIARY
--------------------------------------------------------------------------------
CERTIFICATION
PURSUANT TO RULE 13a-14 AND 15d-14 UNDER
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Edward J. Fred, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of CPI
Aerostructures, Inc.;
2. based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. the registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days of the
filing date of this quarterly report (the "Evaluation Date");
and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and to the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
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AND SUBSIDIARY
--------------------------------------------------------------------------------
6. the registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: November 13, 2002 By: /s/ Edward J. Fred
-------------------------------------
Edward J. Fred
President, Chief Financial Officer
and Secretary (Principal Financial
Officer)
20