CPI AEROSTRUCTURES, INC.
--------------------------------------------------------------------------------
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, 2003
CPI AEROSTRUCTURES, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
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
5,285,353 as of October 31, 2003.
CPI AEROSTRUCTURES, INC.
INDEX
--------------------------------------------------------------------------------
Part I: Financial Information:
Item 1 - Condensed Consolidated Financial Statements:
Independent Accountant's Report 3
Balance Sheets as of September 30, 2003 (Unaudited) and
December 31, 2002 4
Statements of Income for the Three Months and Nine Months ended
September 30, 2003 (Unaudited) and 2002 (Unaudited) 5
Statements of Cash Flows for the Nine Months ended
September 30, 2003 (Unaudited) and 2002 (Unaudited) 6
Notes to Financial Statements (Unaudited) 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3 - Controls and Procedures 15
Part II. Other
Item 2 - Changes in Securities and Use of Proceeds 15
Item 6 - Exhibits and Reports on Form 8-K 16
Signatures and Certifications 17
2
Part I: Financial Information:
Item 1 - Consolidated Financial Statements:
CPI AEROSTRUCTURES, INC.
--------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors
CPI Aerostructures, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of CPI
Aerostructures, Inc. and Subsidiary as of September 30, 2003, and the related
condensed consolidated statements of income for the three-month and nine-month
periods ended September 30, 2003 and 2002 and the condensed consolidated
statements of cash flows for the nine-month periods ended September 30, 2003 and
2002. 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 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 condensed 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 condensed consolidated financial statements referred to above in
order for them to be in conformity with accounting principles generally accepted
in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of CPI
Aerostructures, Inc. and Subsidiary as of December 31, 2002, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
year then ended (not presented herein); and in our report dated February 4,
2003, except for the second paragraph of Note 15 and Note 16, as to which the
date is February 19, 2003, 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, 2002,
is fairly stated in all material respects, in relation to the consolidated
balance sheet from which it is derived.
/s/ Goldstein Golub Kessler LLP
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
October 15, 2003
3
CPI AEROSTRUCTURES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
September 30, December 31,
2003 2002
(Unaudited)
------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $3,712,088 $ 91,537
Accounts receivable 2,334,365 2,331,775
Costs and estimated earnings in excess of billings on uncompleted
contracts 15,620,556 11,382,106
Deferred income taxes, net of valuation allowance of $928,000 and 651,000 651,000
$900,000, respectively
Prepaid expenses and other current assets 67,537 465,498
Assets held for sale - discontinued operations --- 280,676
------------------------------------------------------------------------------------------------------------------------------------
Total current assets 22,385,546 15,202,592
Property, plant and equipment, net 313,626 222,928
Deferred income taxes, net of valuation allowance of $ -0-
and $2,910,000, respectively --- ---
Other assets 179,226 179,226
------------------------------------------------------------------------------------------------------------------------------------
Total assets $22,878,398 $15,604,746
====================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $4,495,119 $ 4,574,678
Accrued expenses 340,055 628,180
Current portion of long-term debt 20,196 8,024,160
------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 4,855,370 13,227,018
Long-term debt 32,656 40,192
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 4,888,026 13,267,210
------------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity:
Common stock - $.001 par value; authorized 50,000,000 shares,
5,285,353 and 2,785,668 issued and outstanding 5,286 2,786
Additional paid - in capital 21,159,833 12,613,974
Accumulated deficit (3,174,747) (10,279,224)
------------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 17,990,372 2,337,536
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $22,878,398 $15,604,746
====================================================================================================================================
See Notes to Condensed Consolidated Financial Statements
4
CPI AEROSTRUCTURES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------------------------
For the Three Months Ended Sept 30, For the Nine Months Ended Sept 30,
2003 2002 2003 2002
(Unaudited) (Unaudited)
------------------------------------------------------------------------------------------------------------------------
Revenue $7,851,067 $7,088,614 $20,752,731 $17,988,748
Cost of sales 5,329,091 4,878,932 14,049,424 12,549,892
------------------------------------------------------------------------------------------------------------------------
Gross profit 2,521,976 2,209,682 6,703,307 5,438,856
Selling, general and administrative expenses 723,160 775,867 2,362,480 1,800,641
------------------------------------------------------------------------------------------------------------------------
Income from operations 1,798,816 1,433,815 4,340,827 3,638,215
------------------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest/other income (expense) 5,577 (618) 13,341 3,642
Interest (expense) (825) (185,997) (142,159) (318,965)
Gain on extinguishment of debt ----- ----- 2,431,233 -----
------------------------------------------------------------------------------------------------------------------------
Total other income (expenses), net 4,752 (186,615) 2,302,415 (315,323)
------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 1,803,568 1,247,200 6,643,242 3,322,892
Gain on sale of assets held for sale
- discontinued operations 41,236 ----- 461,235 -----
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Income before provision for income taxes 1,844,804 1,247,200 7,104,477 3,322,892
(Provision for) benefit from income taxes ----- 1,000 ----- (529,000)
------------------------------------------------------------------------------------------------------------------------
Net income $1,844,804 $1,248,200 $7,104,477 $ 2,793,892
========================================================================================================================
Basic net income per common share:
Income from continuing operations $ 0.34 $ 0.46 $1.40 $.03
Gain on sale of assets held for sale
- discontinued operations 0.01 ----- 0.10 -----
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Earnings per common share - basic $ 0.35 $ 0.46 $1.50 $1.03
========================================================================================================================
Diluted net income per common share:
Income from continuing operations $ 0.29 $ 0.38 $1.22 $ 0.89
Gain on sale of assets held for sale
- discontinued operations 0.01 ----- 0.09 -----
------------------------------------------------------------------------------------------------------------------------
Earnings per common share - diluted $ 0.30 $ 0.38 $1.31 $ 0.89
========================================================================================================================
Shares used in computing earnings per common share:
Basic 5,217,733 2,734,898 4,730,803 2,700,785
Diluted 6,053,689 3,299,098 5,426,145 3,136,626
------------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
5
CPI AEROSTRUCTURES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
For the Nine Months Ended September 30, 2003 2002
(Unaudited)
-----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income from continuing operations $6,643,242 $2,793,892
Adjustments to reconcile net income from continuing operations to net
cash used in operating activities:
Depreciation and amortization 91,694 30,931
Warrants issued for consulting fees 60,506 5,782
Common stock issued for bank fees 88,669 26,267
Gain on extinguishment of debt (2,431,233) -----
Deferred portion of provision for income taxes --- 530,000
Changes in operating assets and liabilities:
Increase in accounts receivable (2,590) (684,228)
Increase in costs and estimated earnings in excess of billings on
uncompleted contracts (4,238,450) (3,247,461)
Decrease in prepaid expenses and other current assets 397,961 61,150
Decrease in other assets ----- 1,000
Increase (decrease) in accounts payable and accrued expenses (367,684) 407,905
-----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 242,115 (74,762)
Cash used in investing activities - purchase of property, plant and equipment (182,392) (40,011)
-----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net repayment of long-term debt (5,580,267) (2,966,213)
Proceeds from exercise of stock options 642,516 84,102
Proceeds from public offering 7,756,668 ---
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Net cash provided by (used in) financing activities 2,818,917 (2,882,111)
-----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) continuing operations 2,878,640 (2,996,884)
Net cash from discontinued operations 741,911 2,937,308
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Net increase (decrease) in cash 3,620,551 (59,576)
Cash at beginning of period 91,537 180,578
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Cash at end of period $3,712,088 $ 121,002
=============================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $108,177 $ 167,015
=============================================================================================================================
Income taxes $8,610 $ 13,355
=============================================================================================================================
See Notes to Condensed Consolidated Financial Statements
6
CPI AEROSTRUCTURES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
1. INTERIM FINANCIAL STATEMENTS:
The financial statements as of September 30, 2003 and for the nine months
ended September 30, 2003 and 2002 are unaudited, however, in the opinion of
the management of the Company, these financial statements reflect all
adjustments (consisting solely of normal recurring adjustments) necessary
to present fairly the financial position of the Company and the results of
operations for such interim periods are not necessarily indicative of the
results to be obtained for a full year.
The Company has elected to apply Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations in accounting for its stock options issued to employees
(intrinsic value) and has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting
for Stock-Based Compensation. Had the Company elected to recognize
compensation cost based on the fair value of the options granted at the
grant date as prescribed by SFAS No. 123, the Company's net income and
income per common share would have been adjusted as follows:
Three months ended September 30, 2003 2002
---------------------------------------------------------------------------
Net income - as reported $1,844,804 $ 1,248,200
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects 347,967 74,819
----------------------------------------------------------------------------
Net income - pro forma $1,496,837 $ 1,173,381
============================================================================
Basic income per share - as reported $0.35 $0.46
Basic income per share - pro forma $0.29 $0.43
Diluted income per share - as reported $0.30 $0.38
Diluted income per share - pro forma $0.25 $0.36
============================================================================
Nine months ended September 30, 2003 2002
----------------------------------------------------------------------------
Net income - as reported $7,104,477 $2,793,892
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects 513,482 1,769,911
----------------------------------------------------------------------------
Net income - pro forma $6,590,995 $1,023,981
============================================================================
Basic income per share - as reported $1.50 $1.03
Basic income per share - pro forma $1.39 $0.38
Diluted income per share - as reported $1.31 $0.89
Diluted income per share - pro forma $1.21 $0.33
============================================================================
7
CPI AEROSTRUCTURES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
2. COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPELTED
CONTRACTS:
Costs and estimated earnings in excess of billings on uncompleted contracts
consist of:
U.S.
Government Commercial Total
-----------------------------------------------------------------------------------
Costs incurred on uncompleted
contracts $27,211,678 $13,178,944 $40,390,622
Estimated earnings 13,189,248 6,104,282 19,293,530
-----------------------------------------------------------------------------------
40,400,926 19,283,226 59,684,152
Less billings to date 26,885,212 17,178,384 44,063,596
-----------------------------------------------------------------------------------
Costs and estimated earnings
in excess of billings on
uncompleted contracts $13,515,714 $2,104,842 $15,620,556
====================================================================================
December 31, 2002
-----------------------------------------------------------------------------------------
U.S.
Government Commercial Total
------------------------------------------------------------------------------------------
Costs incurred on uncompleted
contracts $13,272,589 $13,068,603 $26,341,192
Estimated earnings 6,508,822 5,969,156 12,477,978
------------------------------------------------------------------------------------------
19,781,411 19,037,759 38,819,170
Less billings to date 10,429,184 17,007,880 27,437,064
------------------------------------------------------------------------------------------
Costs and estimated earnings
in excess of billings on
uncompleted contracts $9,352,227 $ 2,029,879 $11,382,106
==========================================================================================
8
CPI AEROSTRUCTURES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
3. EARNINGS PER COMMON SHARE:
Basic earnings per common share are 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 835,956 and 695,342 were used
in the calculation of diluted earnings per common share in the three-month
and nine-month periods, ended September 30, 2003, respectively.
4. DEBT AND EQUITY:
Debt consists of the following:
Sept 30,2003 Dec 31,2002
---------------------------------------------------------------------------
Revolving Credit Facility ----- -----
Notes payable - banks ----- $3,017,572
Note payable - seller ----- 4,898,034
Capitalized lease obligations payable $52,852 148,746
---------------------------------------------------------------------------
8,064,352
Less current portion 20,196 8,024,160
---------------------------------------------------------------------------
Long-term debt $32,656 $ 40,192
===========================================================================
The Company leases equipment under capital leases, which expire at various
dates through December 2007. The leases require monthly aggregate payments
of $11,064, including interest at 9.35%. Proceeds of approximately $674,000
were received during 2002 upon the sale of certain leased equipment, which
amount was remitted to the owners of the equipment.
In September, 2003, the Company entered into a three year, $5.0 million
revolving credit facility with JP Morgan Chase Bank, secured by the assets
of the Company. The facility specifies interest rates that range between
the Prime Rate and 225 basis points over LIBOR, depending on certain terms
and conditions. The Company has not borrowed any funds pursuant to this
facility.
At December 31, 2002, the Company had in place three notes payable to banks
and a note payable - seller, related to its discontinued Kolar, Inc.
operation. The notes payable - banks were each collateralized and called
for monthly installments, each under independent terms and conditions. The
note payable -- seller totaled approximately $4,898,000.
In February 2003, the Company consummated the public offering of 2,300,000
shares of common stock, which provided the Company with net proceeds of
$7,757,000.
Each of the notes payable to banks and the note payable - seller were
extinguished in conjunction with the February 2003 public offering of the
Company's common stock. In conjunction with the repayment of the note
payable -- seller, the Company recognized a gain of $2,431,233.
9
.
CPI AEROSTRUCTURES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
5. INCOME TAXES:
There was no provision for income taxes for the quarter ended September 30,
2003 due to the utilization of federal and state net operating loss
carryforwards.
6. CONTINGENCIES
In connection with the publication of a newspaper article about the Company
prior to the public offering of 2,300,000 common shares on February 19,
2003, the Company may, upon the occurrence of certain future events through
February 19, 2004, be required to return to certain investors all or part
of their purchase price. The net proceeds to the Company from the offering
therefore could be reduced.
10
CPI AEROSTRUCTURES, INC.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
--------------------------------------------------------------------------------
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and footnotes thereto contained in this
report.
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.
Critical Accounting Policies
Revenue Recognition
Revenue is recognized from contracts over the life of the contract utilizing the
percentage-of-completion (POC) method of accounting. Under the POC method of
accounting, revenue 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 revenue 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."
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 revenue, costs and profits
and in assigning the amounts to accounting periods. We continually evaluate all
of the issues related to the assumptions, risks and uncertainties inherent with
the application of the POC method of accounting.
Income Taxes
Income taxes are accounted for 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. We record a valuation allowance that represents federal
and state operating loss carryforwards for which utilization is uncertain.
Management judgment is required in determining our provision for income taxes,
deferred tax assets and liabilities and the valuation allowance recorded against
our net deferred tax assets. The valuation allowance would need to be adjusted
in the event future taxable income is materially different than amounts
estimated. Valuation allowances of $928,000 and $3,810,000 have been recorded
against our deferred tax assets at September 30, 2003 and December 31, 2002,
respectively.
Material Changes in Results of Operations
The Company's revenue, for the three months ended September 30, 2003 was
$7,851,067, compared with $7,088,614 for the three months ended September 30,
2002, an increase of $762,453, or 10.8%. For the nine months ended September 30,
2003, revenue increased $2,763,983, or 15.4% to $20,752,731, compared to
$17,988,748 for the same period last year.
The increases in both the three-month and nine-month periods are primarily due
to the increase in the value of government contracts awarded to the Company.
During the third quarter of this year, new contract awards increased $700,000,
or 12% to $7.2 million, compared with $6.4 million in the same quarter last
year. For the nine month period ended September 30, 2003, new contract awards
increased $6.8 million, or 35% to $26.6 million, compared with $19.8 million for
the same period last year.
11
CPI AEROSTRUCTURES, INC.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
--------------------------------------------------------------------------------
Gross profit for the three months ended September 30, 2003 was $2,521,976, or
32% of revenue, compared with $2,209,682, or 31% of revenue for the quarter
ended September 30, 2002. For the nine months ended September 30, 2003 gross
profit was $6,703,307, or 32% of revenue, compared with $5,438,856, or 30% of
revenue for the first nine months of last year. The improvement in gross profit
margin as a percentage of sales is due primarily to a more favorable product
mix.
Selling, general, and administrative expenses for the three months ended
September 30, 2003 were $723,160, or 9% of revenue, compared with $775,867, or
11% of revenues for the same period last year. For the nine-month period ended
September 30, 2003, selling, general and administrative expenses were
$2,362,480, or 11% of revenue, compared with $1,800,641, or 10% of revenues for
the same period last year.
During the quarter ended September 30, 2003, selling, general and administrative
expenses decreased $52,707, or 7%, reflecting a decrease in our legal and
accounting costs, compared with the prior year, offset by smaller increases in
other general and administrative costs associated with the higher level of
business activity. For the nine months ended September 30, 2003, selling,
general and administrative expenses increased $561,839, or 31%, due to higher
costs associated with the higher level of business activity offset slightly by a
decline in legal and accounting costs compared with the same period last year.
The resulting income from operations, for the three months ended September 30,
2003 increased $356,001, or 25% to $1,798,816, or 23% of revenue, compared with
$1,433,815, or 20% of revenue for the same period last year. For the nine months
ended September 30, 2003, income from operations increased $702,612, or 19% to
$4,340,827, or 21% of revenue, compared with $3,638,215, or 20% of revenue for
the same period last year.
For the three months ended September 30, 2003, the Company had interest income
of $4,752, compared with net interest expense of $186,615 for the same period
last year. Net interest expense for the nine months ended September 30, 2003 was
$128,818, compared with $315,323 for the same period last year. In February of
2003, the Company's early extinguishment of approximately $2.4 million of bank
debt and a seller note payable, of approximately $4.9 million, resulted in
larger interest charges in the first quarter of fiscal 2003, however, the second
and third quarters of fiscal 2003 have benefited from the significant reduction
in interest bearing debt.
Included in other income for the nine months ended September 30, 2003, is a gain
of $2,431,233 from the early extinguishment of the note payable-seller.
Income from continuing operations for the three months ended September 30, 2003
was $1,803,568, or 23 % of revenue, as compared with $1,247,200, or 18% of
revenue for the same period last year. The improvement resulted from the
improved gross profit margin, lower selling general and administrative expenses
and the reduction in interest expense. For the nine months ended September 30,
2003, income from continuing operations was $6,643,242, or 32% of revenue,
compared with $3,322,892, or 18% of revenue for the same period last year. The
increase in income from continuing operations for the nine-month period was due
primarily to a gain on the early extinguishment of debt of $2.4 million, which
was realized in conjunction with the public offering of 2.3 million shares of
the Company's common stock in February 2003 as well as the variations discussed
above.
During the three months ended September 30, 2003, the Company realized a one
time gain on the disposal of assets held for sale - discontinued operations of
$41,236, bringing the total gain on the disposal of assets held for sale -
discontinued operations for the nine month period ended September 30, 2003 to
$461,235, compared to zero in the prior year periods.
As a result, income before provision for income taxes for the three months ended
September 30, 2003 was $1,844,804, or 23% of revenue, compared with $1,247,200,
or 18% of revenue for the same period last year. For the nine months ended
September 30, 2003, income before provision for income taxes was $7,104,477, or
12
CPI AEROSTRUCTURES, INC.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
--------------------------------------------------------------------------------
34% of revenue, compared with $3,322,892, or 18% of revenue for the same period
last year. Due to losses incurred in prior years, the Company was able to
partially realize the benefit of its net operating loss carryforward during the
quarter and nine month periods, resulting in a reversal of a previously
established valuation allowance and no provision for taxes for the three-month
and nine-month periods ended September 30, 2003.
Net income for the quarter was $1,844,804, or $0.35 per share, compared with
$1,248,200, or $0.46 per share for the same period last year. For the nine
months ended September 30, 2003, net income was $7,104,477 or $1.50 per share,
compared with $2,793,892, or $1.03 per share for the same period last year.
Diluted earnings per share, for the three months ended September 30, 2003, were
$0.30, calculated utilizing 6,053,689 diluted average shares outstanding for the
period, compared with diluted net income per share of $0.38, calculated
utilizing 3,299,098 diluted average shares outstanding for the same period last
year.
Diluted earnings per share, for the nine months ended September 30, 2003, were
$1.31, calculated utilizing 5,426,145 diluted average shares outstanding for the
period, compared with diluted net income per share of $0.89, calculated
utilizing 3,136,626 diluted average shares outstanding for the same period last
year.
Material Changes in Financial Condition
At September 30, 2003, the Company had working capital of $17,530,176, compared
with $1,975,574, at December 31, 2002, an increase of $15,554,602. This increase
is primarily attributable to the public offering of 2.3 million shares of common
stock consummated in February 2003, which provided the Company with net proceeds
of $7,757,000 and year to date net income of $7,104,477. The net proceeds of the
offering were used to repay approximately $2,433,000 of the Company's bank debt,
and approximately $4,898,000 of note payable - seller, at a discount of
$2,431,000, plus accrued interest of approximately $233,000. The discount was
recorded as a gain on the early extinguishment of the note payable-seller. The
remaining net proceeds of the public offering of $2,660,000 were available to
fund continuing operations.
A large portion of the Company's cash is used in paying for materials and
processing costs associated with contracts that are in process and which do not
provide for progress payments. These costs are components of "Costs and
estimated earnings in excess of billings on uncompleted contracts" on the
Company's balance sheet 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 provided by operating activities for the nine-month period ended
September 30, 2003 was $237,920, compared with net cash used in operating
activities of $74,762 for the same period last year.
Liquidity and Capital Resources
The Company currently finances its operations through a combination of existing
resources and cash provided by operations. In September 2003, the Company
entered into a three year, $5.0 million revolving credit agreement with JPMorgan
Chase Bank. The facility provides the Company with up to $5.0 million, based
upon percentages of certain assets and certain terms and conditions. The
proceeds of this facility are intended to partially finance the Company's
ongoing working capital requirements. The Company has not borrowed any funds
pursuant to this agreement as the Company's liquidity and capital resources were
significantly improved as a result of the consummation of the public offering in
February 2003, and further enhanced by net cash provided by operating
activities. The Company believes that its current liquidity and capital
resources are sufficient to meet its needs for the foreseeable future.
13
CPI AEROSTRUCTURES, INC.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
--------------------------------------------------------------------------------
Contractual Obligations
The table below summarizes contractual obligations as of September 30, 2003 and
the effects these obligations are expected to have on liquidity and cash flow in
the future years.
----------------------------------------- --------------------------------------------------------------------------------------
Contractual Obligations Payments Due By Period ($)
----------------------------------------- --------------------------------------------------------------------------------------
----------------------------------------- ----------------- ---------------- ----------------- --------------- -----------------
Total Less than 1-3 years 4-5 years After 5 years
1 year
----------------------------------------- ----------------- ---------------- ----------------- --------------- -----------------
Short-Term Debt $ -0- $ -0- $ -0- $ -0- $ -0-
----------------------------------------- ----------------- ---------------- ----------------- --------------- -----------------
Capital Lease Obligations 52,852 20,196 30,144 2,512 -0-
----------------------------------------- ----------------- ---------------- ----------------- --------------- -----------------
Operating Leases -0- -0- -0- -0- -0-
----------------------------------------- ----------------- ---------------- ----------------- --------------- -----------------
Employment Agreement Compensation * 1,216,780 628,960 587,820 -0- -0-
----------------------------------------- ----------------- ---------------- ----------------- --------------- -----------------
Total Contractual Cash Obligations $ 1,269,632 $649,156 $617,964 $ 2,512 $ -0-
----------------------------------------- ----------------- ---------------- ----------------- --------------- -----------------
* The employment agreements provide for bonus payments that are excluded from
these amounts.
14
CPI AEROSTRUCTURES, INC.
--------------------------------------------------------------------------------
Item 3 - Controls and Procedures
An evaluation of the effectiveness of the Company's disclosure controls and
procedures as of September 30, 2003 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,
they 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.
During the most recently completed fiscal quarter, there has been no
significant change in the Company's internal control over financial
reporting that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
Part II: Other
Item 2. - Change in Securities and Use of Proceeds
c) Recent sale of Unregistered Securities
During the three months ended September 30, 2003, the Company made the
following sales of unregistered securities:
----------- ----------- ------------- -------------------------------- --------------------- ------------------------
Consideration Received and If Option, Warrant or
Description of Underwriting or Convertible Security,
Date of Title of Number Sold Other Discounts to Market Exemption from Terms of Exercise or
Sale Security or Forfeited Price Afforded to Purchaser Registration Claimed Conversions
----------- ----------- ------------- -------------------------------- --------------------- ------------------------
7/14/03 Common 1,500 Common Stock issued upon the 4(2) N/A
Shares exercise of options at $6.35
per share; $9,525 cash
consideration received by the
Company.
----------- ----------- ------------- -------------------------------- --------------------- ------------------------
8/4/03 Common 168,001 Common Stock issued upon the 4(2) N/A
Shares exercise of options at prices
per share ranging from $2.00
to $6.35; $622,196 cash
consideration received by the
Company
----------- ----------- ------------- -------------------------------- --------------------- ------------------------
9/2/03 Common 5,000 Common Stock issued upon the 4(2) N/A
Shares exercise of options at $1.65
per share; $8,250 cash
consideration received by the
Company
----------- ----------- ------------- -------------------------------- --------------------- ------------------------
15
CPI AEROSTRUCTURES, INC.
--------------------------------------------------------------------------------
Item 6 - Exhibits and Reports on Form 8 - K
a) Exhibit 31--Rule 13a-14 (a) and 15d-14(a) Certifications
Exhibit 32--Section 1350 Certifications
b) During the three months ended September 30, 2003, the Company filed
one current report on Form 8 - K, dated July 31, 2003, which Form 8 -
K reported events under Items 7 and 12.
16
CPI AEROSTRUCTURES, INC.
--------------------------------------------------------------------------------
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
CPI AEROSTRUCTURES, INC.
Dated: November 7, 2003 By: /S/ Edward J. Fred
--------------------------
Edward J. Fred
Chief Executive Officer, President,
(Principal Executive Officer),
Secretary and Director
Dated: November 7, 2003 By: /S/ Anthony M. D'Agostino
----------------------------
Anthony M. D'Agostino
Chief Financial Officer,
(Principal Accounting and
Financial Officer)
17