CPI AEROSTRUCTURES, INC.
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period Commission File Number 1-11398
ended September 30, 2005
CPI AEROSTRUCTURES, INC.
(Exact name of registrant as specified in its charter)
New York 11-2520310
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
60 Heartland Blvd., Edgewood, NY 11717
(Address of principal executive offices) (zip code)
(631) 586-5200
(Registrant'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 for such shorter 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 [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes [_] No [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes [_] No [X]
As of November 11, 2005, the number of shares of common stock, par value $.001
per share, outstanding was 5,425,400.
CPI AEROSTRUCTURES, INC.
INDEX
================================================================================
Part I: Financial Information:
Item 1 - Condensed Financial Statements:
Balance Sheets as of September 30, 2005 (Unaudited) and
December 31, 2004 3
Statements of Income for the Three Months and Nine Months ended
September 30, 2005 (Unaudited) and 2004 (Unaudited) 4
Statements of Cash Flows for the Nine Months ended September 30, 2005
(Unaudited) and 2004 (Unaudited) 5
Notes to Condensed Financial Statements (Unaudited) 6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 15
Item 4 - Controls and Procedures 15
Part II. Other Information
Item 2 - Unregistered Sales of Equity Securities 16
Item 5 - Other Information 16
Item 6 - Exhibits 16
Signatures and Certifications 17
2
CPI AEROSTRUCTURES, INC.
PART I: FINANCIAL INFORMATION:
ITEM 1 - FINANCIAL STATEMENTS:
CONDENSED BALANCE SHEETS
================================================================================
SEPTEMBER 30, DECEMBER 31,
2005 2004
(UNAUDITED)
-----------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $ 773,280 $ 1,756,350
Accounts receivable 1,757,747 1,641,002
Costs and estimated earnings in excess of billings on
uncompleted contracts 27,872,082 26,030,507
Prepaid expenses and other current assets 150,975 182,003
-----------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 30,554,084 29,609,862
Plant and equipment, net 994,654 882,758
Other assets 249,048 266,504
-----------------------------------------------------------------------------------------------
TOTAL ASSETS $31,797,786 $30,759,124
===============================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,692,966 $ 4,332,255
Accrued expenses 163,472 525,061
Current portion of long-term debt 94,526 83,144
Deferred income taxes 180,000 144,000
Income taxes payable 459,000 129,000
-----------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 4,589,964 5,213,460
Long-term debt, net of current portion 66,324 129,276
Other liabilities 41,172 --
-----------------------------------------------------------------------------------------------
TOTAL LIABILITIES 4,697,460 5,342,736
-----------------------------------------------------------------------------------------------
Commitments
Shareholders' Equity:
Common stock - $.001 par value; authorized 50,000,000 shares,
issued 5,456,415 and 5,443,415 shares, respectively, and
outstanding 5,425,400 and 5,412,400 shares, respectively 5,456 5,443
Additional paid-in capital 22,589,294 22,541,716
Retained earnings 4,826,432 3,190,085
Treasury stock (320,856) (320,856)
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TOTAL SHAREHOLDERS' EQUITY 27,100,326 25,416,388
-----------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $31,797,786 $30,759,124
===============================================================================================
See Notes to Condensed Financial Statements
3
CPI AEROSTRUCTURES, INC.
CONDENSED STATEMENTS OF INCOME
================================================================================
-------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2005 2004 2005 2004
(UNAUDITED) (UNAUDITED)
-------------------------------------------------------------------------------------------------------------
Revenue $6,452,246 $7,877,023 $19,010,780 $21,297,456
Cost of sales 4,769,256 5,183,011 13,763,040 14,290,873
-------------------------------------------------------------------------------------------------------------
Gross profit 1,682,990 2,694,012 5,247,740 7,006,583
Selling, general and administrative expenses 803,143 728,613 2,563,470 2,405,263
-------------------------------------------------------------------------------------------------------------
Income from operations 879,847 1,965,399 2,684,270 4,601,320
-------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest/other income 1,156 1,549 3,816 5,353
Interest expense (1,505) (1,477) (10,739) (5,191)
-------------------------------------------------------------------------------------------------------------
Total other income (expense), net (349) 72 (6,923) 162
-------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 879,498 1,965,471 2,677,347 4,601,482
Provision for income taxes 331,000 640,000 1,041,000 1,661,000
-------------------------------------------------------------------------------------------------------------
Net income $ 548,498 $1,325,471 $ 1,636,347 $ 2,940,482
Income per common share - basic $ 0.10 $ 0.25 $ 0.30 $ 0.55
Income per common share - diluted $ 0.09 $ 0.22 $ 0.27 $ 0.48
=============================================================================================================
Shares used in computing earnings per common share:
Basic 5,412,650 5,405,184 5,419,411 5,358,025
Diluted 6,115,014 6,132,425 6,120,977 6,091,338
-------------------------------------------------------------------------------------------------------------
See Notes to Condensed Financial Statements
4
CPI AEROSTRUCTURES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
================================================================================
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 2004
(UNAUDITED)
------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 1,636,347 $ 2,940,482
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 143,685 119,785
Deferred rent 41,172 --
Deferred portion of provision for income taxes 36,000 1,058,000
Tax benefit for stock options -- 421,000
Changes in operating assets and liabilities:
Increase in accounts receivable (116,745) (935,798)
Increase in costs and estimated earnings in excess of billings on
uncompleted contracts (1,841,575) (4,561,244)
Decrease in prepaid expenses and other assets 48,484 43,349
Decrease in accounts payable and accrued expenses (1,000,878) (233,916)
Increase (decrease) in income taxes payable 330,000 (5,000)
------------------------------------------------------------------------------------------------------
Net cash used in operating activities (723,510) (1,153,342)
------------------------------------------------------------------------------------------------------
Cash used in investing activities - purchase of plant and equipment (255,581) (305,664)
------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net repayment of long-term debt (51,570) 157,292
Proceeds from exercise of stock options 47,591 50,600
------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (3,979) 207,892
------------------------------------------------------------------------------------------------------
Net decrease in cash (983,070) (1,251,114)
Cash at beginning of period 1,756,350 2,794,310
------------------------------------------------------------------------------------------------------
Cash at end of period $ 773,280 $ 1,543,196
======================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 10,739 $ 5,191
======================================================================================================
Income taxes $ 675,000 $ 218,037
======================================================================================================
See Notes to Condensed Financial Statements
5
CPI AEROSTRUCTURES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
================================================================================
1. INTERIM FINANCIAL The financial statements as of September 30,
STATEMENTS: 2005 and for the three and nine months ended
September 30, 2005 and 2004 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. The results of
operations for such interim periods are not
necessarily indicative of the results to be
obtained for a full year.
The balance sheet at December 31, 2004 has been
derived from the audited financial statements
at that date but does not include all of the
information and notes required by accounting
principles generally accepted in the United
States for complete financial statements. For
further information, refer to the financial
statements and notes thereto included in the
Company's Annual Report on Form 10-KSB for the
year ended December 31, 2004.
The Company measures employee stock-based
compensation cost using Accounting Principles
Board Opinion ("APB") No. 25 as is permitted by
Statement of Financial Accounting Standards No.
123 ("SFAS 123"), Accounting for Stock-Based
Compensation.
In December 2004, the FASB issued Statement of
Financial Accounting Standards No. 123R
(Revised 2004), "Share-Based Payment" ("SFAS
123R"), which requires that the compensation
cost relating to share-based payment
transactions be recognized in financial
statements based on alternative fair value
models. The share-based compensation cost will
be measured based on the fair value of the
equity instruments issued. The Company
currently discloses pro forma compensation
expense quarterly and annually by calculating
the stock option grants' fair value using the
Black-Scholes model and disclosing the impact
on net income and net income per share in a
note to the financial statements. Upon
adoption, pro forma disclosure no longer will
be an alternative. The table set forth below
reflects the estimated impact that such a
change in accounting treatment would have had
on the Company's net income and net income per
share if it had been in effect during the
nine-months and three-months ended September
30, 2005 and 2004. SFAS No. 123R also requires
the benefits of tax deductions in excess of
recognized compensation cost to be reported as
financing cash flow rather than as an operating
cash flow as required under current literature.
This requirement will reduce operating cash
flows and increase net financing cash flows in
periods after adoption. The Company will begin
to apply SFAS 123R as of the interim reporting
period ending March 31, 2006.
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 123R, the Company's net
income and income per common share would have
been as follows:
6
CPI AEROSTRUCTURES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
================================================================================
THREE MONTHS ENDED SEPTEMBER 30, 2005 2004
-----------------------------------------------------------------
Net income - as reported $548,498 $1,325,471
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects 76,287 123,597
-----------------------------------------------------------------
Net income - pro forma $472,211 $1,201,874
=================================================================
Basic income per share - as reported $ 0.10 $ 0.25
=================================================================
BASIC INCOME PER SHARE - PRO FORMA $ 0.09 $ 0.22
=================================================================
Diluted income per share - as reported $ 0.09 $ 0.22
=================================================================
DILUTED INCOME PER SHARE - PRO FORMA $ 0.08 $ 0.20
=================================================================
NINE MONTHS ENDED SEPTEMBER 30, 2005 2004
-------------------------------------------------------------------
Net income - as reported $1,636,347 $2,940,482
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects 406,918 353,268
-------------------------------------------------------------------
Net income - pro forma $1,229,429 $2,587,214
===================================================================
Basic income per share - as reported $ 0.30 $ 0.55
===================================================================
BASIC INCOME PER SHARE - PRO FORMA $ 0.23 $ 0.48
===================================================================
Diluted income per share - as reported $ 0.27 $ 0.48
===================================================================
DILUTED INCOME PER SHARE - PRO FORMA $ 0.20 $ 0.42
===================================================================
In June 2005 the FASB issued Statement of
Financial Accounting Standard No. 154
"Accounting Changes and Error Corrections"
("SFAS No. 154"). This statement applies to all
voluntary changes in accounting principle and
changes the requirements for accounting for and
reporting of a change in accounting principle.
It replaces APB No. 20 "Accounting Changes."
Management does not believe that the adoption
of SFAS No. 154 will have a material effect on
the accompanying financial statements.
7
CPI AEROSTRUCTURES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
================================================================================
2. COSTS AND ESTIMATED Costs and estimated earnings in excess of
EARNINGS IN EXCESS OF billings on uncompleted contracts consist of:
BILLINGS ON UNCOMPLETED
CONTRACTS:
September 30, 2005
-----------------------------------------------------------------------
U.S.
Government Commercial Total
-----------------------------------------------------------------------
Costs incurred on uncompleted
contracts $39,089,391 $13,373,694 $52,463,085
Estimated earnings 24,464,120 6,672,592 31,136,712
-----------------------------------------------------------------------
63,553,511 20,046,286 83,599,797
Less billings to date 37,114,467 18,613,248 55,727,715
-----------------------------------------------------------------------
COSTS AND ESTIMATED EARNINGS
IN EXCESS OF BILLINGS ON
UNCOMPLETED CONTRACTS $26,439,044 $ 1,433,038 $27,872,082
=======================================================================
December 31, 2004
-----------------------------------------------------------------------
U.S.
Government Commercial Total
-----------------------------------------------------------------------
Costs incurred on uncompleted
contracts $32,764,584 $13,373,694 $46,138,278
Estimated earnings 20,351,259 6,187,927 26,539,186
-----------------------------------------------------------------------
53,115,843 19,561,621 72,677,464
Less billings to date 28,746,944 17,900,013 46,646,957
-----------------------------------------------------------------------
COSTS AND ESTIMATED EARNINGS
IN EXCESS OF BILLINGS ON
UNCOMPLETED CONTRACTS $24,368,899 $ 1,661,608 $26,030,507
=======================================================================
8
CPI AEROSTRUCTURES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
================================================================================
3. INCOME PER Basic income per common share is computed using the
COMMON SHARE: weighted average number of shares outstanding. Diluted
income 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 693,364 and 701,566 were used in the calculation of
diluted income per common share in the three month and
nine-month periods ended September 30, 2005, respectively.
Incremental shares of 210,000 and 100,000 were not
included in the diluted earnings per share calculations at
September 30, 2005 as their exercise price was in excess
of the Company's stock price at the end of each respective
period and, accordingly, these shares are not assumed to
be exercised for the diluted earnings per share
calculation, as they would be anti-dilutive. Incremental
shares of 75,000 and 25,000, respectively, were not
included in the diluted earnings per share calculations at
September 30, 2004 because the effect would be
anti-dilutive.
4. CREDIT FACILITY: 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 facility requires the Company to maintain specified
levels of working capital and other financial ratios, as
defined. At September 30, 2005, the Company was in
compliance with all the covenants related to this
facility.
As of September 30, 2005, the Company had not borrowed any
funds pursuant to this facility.
9
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
Condensed 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.
BUSINESS OPERATIONS
Our operations consist of the design and production of structural aircraft
parts principally for the United States Air Force and other branches of the U.S.
armed forces. We also provide aircraft parts to the commercial sector of the
aircraft industry, but we are not currently pursuing new business in this
sector.
We compete with other prime contractors to win contracts through a process
of competitive bidding. Additionally, we bid on subcontract work to leading
aerospace prime contractors. This is a field of opportunity that has opened up
to us over the past 21 months. After winning a contract, the length of the
contract varies but is typically between one and two years for U. S. Government
contracts (although recent large government contracts have been for periods of
up to 10 years, as is the case with the T-38 Propulsion Modification Program)
and up to 10 years for commercial contracts. Except in cases where contract
terms permit us to bill on a progress basis, we must incur upfront costs in
producing assemblies and bill our customers upon delivery. Because of the
upfront costs incurred, the timing of our billings and the nature of the
percentage-of-completion method of accounting described below, there can be a
significant disparity between the period in which (a) costs are expended, (b)
revenue and earnings are recorded and (c) cash is received.
We have received new contract awards of $6,323,942 as of September 30,
2005. Included in this amount is approximately $157,000 related to a subcontract
with Vought Aircraft Industries, Inc. ("Vought") to supply up to 17 parts for
the C-5 Galaxy aircraft. Vought has an Indefinite Delivery/Indefinite Quantity
(ID/IQ) contract with U.S. Air Force Warner Robins Air Logistics Center (WR-ALC)
for its C-5 work. The potential value of CPI's subcontract with Vought could be
in excess of $12 million.
REVENUE RECOGNITION
We recognize revenue from our contracts over the contractual period under
the percentage-of-completion (POC) method of accounting. Under the POC 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. As a
result, there can be a significant disparity between earnings (both for
accounting and taxes) as reported and actual cash received by us during any
reporting period.
10
CPI AEROSTRUCTURES, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
We continually evaluate all of the issues related to the assumptions, risks and
uncertainties inherent with the application of the POC method of accounting;
however, we cannot assure you that our estimates will be accurate. If our
estimates are not accurate or a contract is terminated, we will be forced to
adjust revenue in later periods. Furthermore, even if our estimates are
accurate, we may have a shortfall in our cash flow and we may need to borrow
money to pay taxes until the reported earnings materialize to actual cash
receipts.
RESULTS OF OPERATIONS
REVENUE
Revenue for the three months ended September 30, 2005 was $6,452,246 compared to
$7,877,023 for the same period last year, representing a decrease of $1,424,777
or 18%. For the nine months ended September 30, 2005, revenue decreased
$2,286,676, or 11%, to $19,010,780, compared to $21,297,456 for the same period
last year, due primarily to fewer contract awards in the current period. We
generate revenue primarily from government contracts and to a lesser extent from
one commercial contract. For the three months ended September 30, 2005, all of
our revenue was from government contracts. Revenue from government contracts for
the nine months ended September 30, 2005 was $18,526,114 compared to $21,180,710
for the same period last year, a decrease of $2,654,596 or 13%. This decrease
was due to the significant slowdown in government procurement in our market.
Although we are not actively pursuing commercial contract work, during late 2004
and early 2005, we received a release on our one remaining commercial contract,
which accounted for revenue of $484,666 for the nine months ended September 30,
2005 compared to $116,746 for the nine months ended September 30, 2004.
We project that revenue for the fourth quarter of 2005 will be in the range of
$6-$7 million.
GROSS PROFIT
Gross profit for the three months ended September 30, 2005 decreased by
$1,011,022 or 38%, compared with the same period last year. As a percentage of
revenue, gross profit for the three months ended September 30, 2005 was 26%
compared to 34% for the same period last year. For the nine months ended
September 30, 2005, gross profit was $5,247,740, or 28% of revenue, compared
with $7,006,583, or 33% of revenue for the first nine months of last year. The
decrease in gross profit percentage was due primarily to a less favorable
product mix as compared to last year and an increase in factory overhead related
to rent, utilities, maintenance, and indirect labor, of approximately $300,000
as a result of our move to new facilities. Lastly, we incurred approximately
$112,000 of extra costs to rework a first article that was rejected by the
government. This rejection was the result of non-conforming component parts
purchased from a vendor. We no longer do business with this vendor and,
therefore, we do not anticipate that this situation will recur in future
periods.
We project that the gross profit percentage for the fourth quarter of 2005 will
be consistent with that experienced over the prior two quarters ended June 30,
2005 and September 30, 2005, within the range of 26%-28%.
11
CPI AEROSTRUCTURES, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
================================================================================
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended
September 30, 2005 were $803,143 compared to $728,613 for the three months ended
September 30, 2004, an increase of $74,530, or 10%. For the nine months ended
September 30, 2005, selling, general, and administrative expenses were
$2,563,470 compared to $2,405,263 for the same period last year, an increase of
$158,207, or 6.6%. These increases were due to increased costs of rent,
utilities, maintenance and equipment related to our new, larger office facility.
INCOME FROM OPERATIONS
Income from operations for the three months ended September 30, 2005 was
$879,847, a decrease of $1,085,552, or 55%, from $1,965,399 reported in the same
period last year. For the nine months ended September 30, 2005, income from
operations was $2,684,270 compared with $4,601,320 for the same period last
year, a decrease of $1,917,050, or 42%. The decrease was primarily due to the
decrease in gross profit described above.
PROVISION FOR INCOME TAXES
We recorded a provision for income taxes of $331,000 for the three months ended
September 30, 2005 as compared to $640,000 recorded in the same period last
year. For the nine months ended September 30, 2005, we recorded a provision for
income taxes of $1,041,000, compared to $1,661,000 recorded in the same period
last year.
NET INCOME
As a result, basic net income for the three months ended September 30, 2005 was
$548,498, or $0.10 per share, compared to $1,325,471, or $0.25 per share, for
the same period last year. For the nine months ended September 30, 2005, basic
net income was $1,636,347, or $0.30 per share, compared with $2,940,482, or
$0.55 per share for the same period last year. Diluted income per share for the
three months ended September 30, 2005 was $0.09, calculated utilizing 6,115,014
diluted average shares outstanding for the period, compared to diluted income
per share of $0.22, calculated utilizing 6,132,425 diluted average shares
outstanding for the same period last year. Diluted income per share for the nine
months ended September 30, 2005 was $0.27, calculated utilizing 6,120,977
diluted average shares outstanding for the period, compared to diluted income
per share of $0.48, calculated utilizing 6,091,338 diluted average shares
outstanding for the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
General
At September 30, 2005, we had working capital of $25,964,120 compared to
$24,396,402 at December 31, 2004, an increase of $1,567,718. This increase is
primarily attributable to decreases in accounts payable and accrued expenses of
$1,000,878, which resulted from the Company using current cash from net income
to pay down liabilities and an increase in costs and estimated earnings in
excess of billings on uncompleted contracts. These decreases were offset by an
increase in income taxes payable.
12
CPI AEROSTRUCTURES, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
This increase resulted from utilizing our remaining net operating loss
carryforward for federal income tax purposes during 2004. Therefore, during
2005, we are required to make quarterly estimated federal income tax payments.
Net cash used in operating activities for the nine months ended September
30, 2005 was $723,510 compared to net cash used in operating activities of
$1,153,342 for the same period last year. The decrease in cash was the result of
a build-up in accounts receivable and a pay down of accounts payable and an
increase in costs and estimated earnings in excess of billings on uncompleted
contracts.
Net cash used in investing activities for the nine months ended September
30, 2005 was $255,581 compared to $305,664 for the same period last year. All
cash used in investing activities relates to purchases of plant and equipment.
Cash Flow
A large portion of our 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 our 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.
Because the POC method of accounting requires us to use estimates in
determining revenues, costs and profits and in assigning the amounts to
accounting periods, there can be a significant disparity between earnings (both
for accounting and taxes) as reported and actual cash received by us during any
reporting period. Accordingly, it is possible that we may have a shortfall in
our cash flow and may need to borrow money until the reported earnings
materialize to actual cash receipts.
JP Morgan Chase Credit Facility
In September 2003, we entered into a three year, $5.0 million revolving
credit facility with JPMorgan Chase Bank, secured by our assets. The facility
specifies interest rates that range between the Prime Rate and 225 basis points
over LIBOR, depending on certain terms and conditions. As of September 30, 2005,
we had not borrowed any funds pursuant to this facility.
The facility requires us to maintain specified levels of working capital
and other financial ratios, as defined. At September 30, 2005, we were in
compliance with all the covenants related to this facility.
We believe that our existing resources, together with the availability under our
credit facility, will be sufficient to meet our working capital needs for at
least the next 12 months.
13
CPI AEROSTRUCTURES, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
================================================================================
CONTRACTUAL OBLIGATIONS
The table below summarizes information about our contractual obligations as of
September 30, 2005 and the effects these obligations are expected to have on our
liquidity and cash flow in the future years.
---------------------------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD ($)
-------------------------------------------------------------
LESS THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
---------------------------------------------------------------------------------------------------
Short-Term Debt -0- -0- -0- -0- -0-
---------------------------------------------------------------------------------------------------
Long-Term Obligations 160,850 94,526 66,324 -0- -0-
---------------------------------------------------------------------------------------------------
Operating Leases 4,017,706 383,438 801,730 850,555 1,981,983
---------------------------------------------------------------------------------------------------
Employment Agreement Compensation * 1,469,182 625,597 843,585 -0- -0-
---------------------------------------------------------------------------------------------------
Total Contractual Cash Obligations 5,647,738 1,103,561 1,711,639 850,555 1,981,983
---------------------------------------------------------------------------------------------------
* The employment agreements provide for bonus payments that are excluded from
these amounts.
14
CPI AEROSTRUCTURES, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None
ITEM 4 - CONTROLS AND PROCEDURES
An evaluation of the effectiveness of our disclosure controls and
procedures was made as of September 30, 2005 under the supervision and with the
participation of our management, including our chief executive officer and chief
financial officer. Based on that evaluation, they concluded that our disclosure
controls and procedures are effective to ensure that information required to be
disclosed by us in reports that we file or submit 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 change in our
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
15
CPI AEROSTRUCTURES, INC.
PART II: OTHER INFORMATION
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES
---------------------------------------------------------------------------------------------------------------
Consideration Received and
Description of If Option, Warrant
Underwriting or Exemption or Convertible
Other Discounts to from Security, Terms of
Market Price Afforded Registration Exercise or
Date of Sale Title of Security Number Sold To Purchasers Claimed Conversion
---------------------------------------------------------------------------------------------------------------
9/7/05 Common Stock 5,000 Common stock issued upon 4(2) N/A
exercise of options;
$8,250 cash consideration
received by the Company
---------------------------------------------------------------------------------------------------------------
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS
Exhibit 31.1 Section 302 Certification by Chief Executive Officer
Exhibit 31.2 Section 302 Certification by Chief Financial Officer
Exhibit 32 Section 906 Certification by Chief Executive Officer
and Chief Financial Officer
16
CPI AEROSTRUCTURES, INC.
SIGNATURES
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 14, 2005 By /S/ Edward J. Fred
-------------------------------------
Edward J. Fred
Chief Executive Officer, President,
and Secretary
Dated: November 14, 2005 By: /S/ Vincent Palazzolo
------------------------------------
Vincent Palazzolo
Chief Financial Officer
17
