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 June 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 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
--- ---
As of August 12, 2005, the number of shares of common stock, par value $.001 per
share, outstanding was 5,420,400.
CPI AEROSTRUCTURES, INC.
INDEX
================================================================================
<TABLE>
Part I: Financial Information:
Item 1 - Condensed Financial Statements:
Balance Sheets as of June 30, 2005 (Unaudited) and 3
December 31, 2004
Statements of Income for the Three Months and Six Months ended June 30, 2005 4
(Unaudited) and 2004 (Unaudited)
Statements of Cash Flows for the Six Months ended June 30, 2005 5
(Unaudited) and 2004 (Unaudited)
Notes to Condensed Financial Statements (Unaudited) 6
Item 2 - Management's Discussion and Analysis of Financial Condition 10
and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 13
Item 4 - Controls and Procedures 14
Part II. Other Information
Item 2 - Unregistered Sales of Equity Securities 15
Item 4 - Submission of Matters to a Vote of Security Holders 15
Item 5 - Other Information 15
Item 6 - Exhibits and Reports on Form 8-K 15
Signatures and Certifications 17
</TABLE>
2
CPI AEROSTRUCTURES, INC.
PART I: FINANCIAL INFORMATION:
ITEM 1 - FINANCIAL STATEMENTS:
<TABLE>
CONDENSED BALANCE SHEETS
=========================================================================================================================
JUNE 30, DECEMBER 31,
2005 2004
(UNAUDITED)
-------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $1,000,380 $1,756,350
Accounts receivable 2,002,571 1,641,002
Costs and estimated earnings in excess of billings on uncompleted
contracts 26,420,609 26,030,507
Prepaid expenses and other current assets 189,704 182,003
-------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 29,613,264 29,609,862
Plant and equipment, net 978,322 882,758
Other assets 254,867 266,504
-------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $30,846,453 $30,759,124
=========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,479,367 $4,332,255
Accrued expenses 142,100 525,061
Current portion of long-term debt 83,596 83,144
Deferred income taxes 180,000 144,000
Income taxes payable 303,000 129,000
-------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 4,188,063 5,213,460
Long-term debt, net of current portion 87,365 129,276
Other liabilities 27,448 --
-------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 4,302,876 5,342,736
-------------------------------------------------------------------------------------------------------------------------
Commitments
Shareholders' Equity:
Common stock - $.001 par value; authorized 50,000,000 shares, issued 5,451,415
and 5,443,415 shares, respectively, and outstanding 5,420,400
and 5,412,400 shares, respectively 5,451 5,443
Additional paid-in capital 22,581,048 22,541,716
Retained earnings 4,277,934 3,190,085
Treasury stock (320,856) (320,856)
-------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 26,543,577 25,416,388
-------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $30,846,453 $30,759,124
=========================================================================================================================
</TABLE>
See Notes to Condensed Financial Statements
3
CPI AEROSTRUCTURES, INC.
<TABLE>
CONDENSED STATEMENTS OF INCOME
=========================================================================================================================
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
2005 2004 2005 2004
(UNAUDITED) (UNAUDITED)
-------------------------------------------------------------------------------------------------------------------------
Revenue $ 6,313,432 $7,192,324 $12,558,534 $13,420,432
Cost of sales 4,570,799 4,805,847 8,993,784 9,107,861
-------------------------------------------------------------------------------------------------------------------------
Gross profit 1,742,633 2,386,477 3,564,750 4,312,571
Selling, general and administrative expenses 874,816 838,573 1,760,327 1,676,650
-------------------------------------------------------------------------------------------------------------------------
Income from operations 867,817 1,547,904 1,804,423 2,635,921
-------------------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest/other income 1,144 1,593 2,660 3,804
Interest expense (3,768) (298) (9,234) (3,714)
-------------------------------------------------------------------------------------------------------------------------
Total other income (expense), net (2,624) 1,295 (6,574) 90
-------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 865,193 1,549,199 1,797,849 2,636,011
Provision for income taxes 356,000 586,000 710,000 1,021,000
-------------------------------------------------------------------------------------------------------------------------
Net income $ 509,193 $ 963,199 $ 1,087,849 $ 1,615,011
Income per common share - basic $ 0.09 $ 0.18 $ 0.20 $ 0.30
Income per common share - diluted $ 0.08 $ 0.16 $ 0.18 $ 0.27
=========================================================================================================================
Shares used in computing earnings per common share:
Basic 5,419,235 5,365,542 5,418,273 5,333,832
Diluted 6,092,287 6,119,278 6,128,560 6,076,255
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Financial Statements
4
CPI AEROSTRUCTURES, INC.
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
=========================================================================================================================
FOR THE SIX MONTHS ENDED JUNE 30, 2005 2004
(UNAUDITED)
-------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $1,087,849 $1,615,011
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 94,204 56,740
Deferred rent 27,448
Deferred portion of provision for income taxes 36,000 613,000
Tax benefit for stock options -- 393,000
Changes in operating assets and liabilities:
Increase in accounts receivable (361,569) (165,063)
Increase in costs and estimated earnings in excess of billings on
uncompleted contracts (390,102) (3,206,671)
Decrease in prepaid expenses and other assets 3,936 66,570
Decrease in accounts payable and accrued expenses (1,235,849) (624,045)
Increase (decrease) in income taxes payable 174,000 (187,000)
-------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (564,083) (1,438,458)
-------------------------------------------------------------------------------------------------------------------------
Cash used in investing activities - purchase of plant and equipment (189,768) (65,218)
-------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net repayment of long-term debt (41,459) (4,116)
Proceeds from exercise of stock options 39,340 31,625
-------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (2,119) 27,509
-------------------------------------------------------------------------------------------------------------------------
Net decrease in cash (755,970) (1,476,167)
Cash at beginning of period 1,756,350 2,794,310
-------------------------------------------------------------------------------------------------------------------------
Cash at end of period $1,000,380 $1,318,143
=========================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 9,234 $ 3,715
=========================================================================================================================
Income taxes $ 500,000 $ 211,247
=========================================================================================================================
</TABLE>
See Notes to Condensed Financial Statements
5
CPI AEROSTRUCTURES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
================================================================================
1. INTERIM The financial statements as of June 30, 2005 and for the
FINANCIAL three and six months ended June 30, 2005 and 2004 are
STATEMENTS: 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 No. 25
("APB 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
six-months and three-months ended June 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
base 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.
<TABLE>
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
========================================================================================================================
Three months ended June 30, 2005 2004
Net income - as reported $509,193 $ 963,199
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects 195,221 202,126
-----------------------------------------------------------------------------------------------------------------------
Net income - pro forma $313,972 $761,073
===============================================================================================
Basic income per share - as reported $0.09 $ 0.18
===============================================================================================
BASIC INCOME PER SHARE - PRO FORMA $0.06 $ 0.14
===============================================================================================
Diluted income per share - as reported $0.08 $ 0.16
===============================================================================================
DILUTED INCOME PER SHARE - PRO FORMA $0.05 $ 0.12
===============================================================================================
Six months ended June 30, 2005 2004
-----------------------------------------------------------------------------------------------
Net income - as reported $1,087,849 $1,615,011
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects 330,630 225,312
-----------------------------------------------------------------------------------------------
Net income - pro forma $757,219 $1,389,699
===============================================================================================
Basic income per share - as reported $0.20 $ 0.30
===============================================================================================
BASIC INCOME PER SHARE - PRO FORMA $0.14 $ 0.26
===============================================================================================
Diluted income per share - as reported $0.18 $ 0.27
===============================================================================================
DILUTED INCOME PER SHARE - PRO FORMA $0.12 $ 0.23
===============================================================================================
</TABLE>
7
CPI AEROSTRUCTURES, INC.
<TABLE>
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
===========================================================================================================================
2. COSTS AND Costs and estimated earnings in excess of billings on uncompleted contracts
ESTIMATED consist of:
EARNINGS IN
EXCESS OF
BILLINGS ON June 30, 2005
UNCOMPLETED ---------------------------------------------------------------------------------------------------
CONTRACTS: U.S.
Government Commercial Total
---------------------------------------------------------------------------------------------------
Costs incurred on uncompleted
contracts $37,986,076 $13,373,694 $51,359,770
Estimated earnings 22,945,855 6,672,592 29,618,447
---------------------------------------------------------------------------------------------------------------------------
60,931,931 20,046,286 80,978,217
Less billings to date 36,142,103 18,415,505 54,557,608
---------------------------------------------------------------------------------------------------------------------------
COSTS AND ESTIMATED EARNINGS
IN EXCESS OF BILLINGS ON
UNCOMPLETED CONTRACTS $24,789,828 $1,630,781 $26,420,609
===========================================================================================================================
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
===========================================================================================================================
</TABLE>
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 673,051 and 710,287 were used in
the calculation of diluted income per common share in
the three month and six-month periods ended
June 30, 2005, respectively. Incremental shares of
100,000 were not included in the diluted earnings per
share calculations at June 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. All shares were included in the
calculation at June 30, 2004.
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. As of June
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 believe that significantly weaker business
prospects exist 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 18 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.
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. 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.
10
CPI AEROSTRUCTURES, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
================================================================================
RESULTS OF OPERATIONS
REVENUE
Revenue for the three months ended June 30, 2005 was $6,313,432 compared to
$7,192,324 for the same period last year, representing a decrease of $878,892 or
12%. For the six months ended June 30, 2005, revenue decreased $861,898, or 6%
to $12,558,534, compared to $13,420,432 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 June 30, 2005 all of our revenue was from
government contracts. Revenue from government contracts for the six months ended
June 30, 2005 was $12,074,167 compared to $13,415,432 for the same period last
year, a decrease of $1,341,265 or 10%. Our 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 $484,667 for the six months ended June 30, 2005 compared to $5,000 for the
six months ended June 30, 2004.
GROSS PROFIT
Gross profit for the three months ended June 30, 2005 decreased by $643,844 or
27%, compared with the same period last year. As a percentage of revenue, gross
profit for the three months ended June 30, 2005 was 28% compared to 33% for the
same period last year. For the six months ended June 30, 2005, gross profit was
$3,564,750, or 28% of revenue, compared with $4,312,571, or 32% of revenue for
the first six 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 $200,000 as a result of our moving 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended June 30,
2005 were $874,816 compared to $838,573 for the three months ended June 30,
2004, an increase of $36,243, or 4.3%. For the six months ended June 30, 2005,
selling, general, and administrative expenses were $1,760,327compared to
$1,676,650 for the same period last year, an increase of $83,677, or 5.0%. 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 June 30, 2005 was $867,817, a
44% decrease from $1,547,904 reported in the same period last year. For the six
months ended June 30, 2005, income from operations was $1,804,423 compared with
$2,635,921 for the same period last year, a decrease of $831,498, or 31.5%. The
decrease was primarily due to the decrease in gross profit described above.
11
CPI AEROSTRUCTURES, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
================================================================================
PROVISION FOR INCOME TAXES
We recorded a provision for income taxes of $356,000 for the three months ended
June 30, 2005 as compared to $586,000 recorded in the same period last year. For
the six months ended June 30, 2005, we recorded a provision for income taxes of
$710,000, compared to $1,021,000 recorded in the same period last year.
NET INCOME
As a result, basic net income for the three months ended June 30, 2005 was
$509,193, or $0.09 per share, compared to $963,199, or $0.18 per share, for the
same period last year. For the six months ended June 30, 2005, basic net income
was $1,087,849, or $0.20 per share, compared with $1,615,011, or $0.30 per share
for the same period last year. Diluted income per share for the three months
ended June 30, 2005 was $0.08, calculated utilizing 6,092,287 diluted average
shares outstanding for the period, compared to diluted income per share of
$0.16, calculated utilizing 6,119,278 diluted average shares outstanding for the
same period last year. Diluted income per share for the six months ended June
30, 2005 was $0.18, calculated utilizing 6,128,560 diluted average shares
outstanding for the period, compared to diluted income per share of $0.27,
calculated utilizing 6,076,255 diluted average shares outstanding for the same
period last year.
LIQUIDITY AND CAPITAL RESOURCES
General
At June 30, 2005, we had working capital of $25,425,201 compared to
$24,396,402 at December 31, 2004, an increase of $1,028,799. This increase is
primarily attributable to decreases in accounts payable and accrued expenses of
$1,235,849, 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. 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 six months ended June 30,
2005 was $564,083 compared to net cash used in operating activities of
$1,438,458 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, an
increase in costs and estimated earnings in excess of billings on uncompleted
contracts and an increase in prepaid expenses and other assets.
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.
12
CPI AEROSTRUCTURES, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
================================================================================
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, $5.0 million revolving
credit facility with JPMorgan Chase Bank, secured by our assets. The facility
specifies interest rates that range between the Prime Rate and 225 basis points
over LIBOR, depending on certain terms and conditions. As of June 30, 2005, we
had not borrowed any funds pursuant to this facility.
We believe that our existing resources, together with the availability
under our credit facility, will be sufficient to meet our working capital needs
for at least the next 12 months.
CONTRACTUAL OBLIGATIONS
The table below summarizes information about our contractual obligations as of
June 30, 2005 and the effects these obligations are expected to have on our
liquidity and cash flow in the future years.
<TABLE>
----------------------------------------- --------------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD ($)
--------------------------------------------------------------------------------------
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 170,961 83,596 87,365 -0- -0-
----------------------------------------- ----------------- ---------------- ----------------- --------------- -----------------
Operating Leases 4,111,455 380,625 795,849 844,316 2,090,665
----------------------------------------- ----------------- ---------------- ----------------- --------------- -----------------
Employment Agreement Compensation * 1,684,343 840,758 843,585 -0- -0-
----------------------------------------- ----------------- ---------------- ----------------- --------------- -----------------
Total Contractual Cash Obligations 5,966,759 1,304,979 1,726,799 844,316 2,090,665
----------------------------------------- ----------------- ---------------- ----------------- --------------- -----------------
</TABLE>
* The employment agreements provide for bonus payments that are excluded from
these amounts.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None
13
CPI AEROSTRUCTURES, INC.
ITEM 4 - CONTROLS AND PROCEDURES
An evaluation of the effectiveness of our disclosure controls and
procedures was made as of June 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.
14
CPI AEROSTRUCTURES, INC.
PART II: OTHER INFORMATION
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES
<TABLE>
================= =================== ================ ============================ ================ ======================
Consideration Received and
Description of If Option, Warrant
Underwriting or or Convertible
Other Discounts to Exemption from Security, Terms of
Market Price Afforded Registration Exercise or
Date of Sale Title of Security Number Sold To Purchasers Claimed Conversion
----------------- ------------------- ---------------- ---------------------------- ---------------- ----------------------
5/23/05 Common Stock 2,000 Common stock issued upon 4(2) N/A
exercise of options;
$5,060 cash consideration
received by the Company
----------------- ------------------- ---------------- ---------------------------- ---------------- ----------------------
</TABLE>
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on May 24, 2005. At
the meeting, the directors nominated for election, Kenneth McSweeney and A. C.
Providenti, were reelected to a three year term expiring in 2008, receiving the
number of votes as follows:
Name Votes for Authority Withheld
---- --------- ------------------
Kenneth McSweeney 4,972,194 278,179
A. C. Providenti 4,959,601 290,772
The terms of office of Walter Paulick and Eric Rosenfeld will expire at the
Annual Meeting of Shareholders to be held in 2006 and the terms of office of
Edward Fred and Arthur August will expire at the Annual Meeting of Shareholders
to be held in 2007.
The shareholders also considered and approved a proposal to increase
the number of shares available for issuance under the Performance Equity Plan
2000 from 830,000 to 1,230,000. 1,914,747 shares were voted for, 1,153,689 were
voted against, 58,602 shares abstained and 2,123,335 shares were not voted.
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) 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
b) Reports on Form 8-K
During the three months ended June 30, 2005, we filed the following
Current Reports on Form 8-K:
1. Form 8-K dated May 24, 2005, and filed with the SEC on May 24,
2005, which Form 8-K reported events under Items 1.01 and 9.01.
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CPI AEROSTRUCTURES, INC.
2. Form 8-K dated May 11, 2005, and filed with the SEC on May 11,
2005, which Form 8-K reported events under Items 2.02 and 9.01.
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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: August 15, 2005 By /s/ Edward J. Fred
-----------------------------------
Edward J. Fred
Chief Executive Officer, President,
and Secretary
Dated: August 15, 2005 By: /s/ Vincent Palazzolo
---------------------------------
Vincent Palazzolo
Chief Financial Officer
17
