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, 2006
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act (Check
one):
Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer [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 10, 2006, the number of shares of common stock, par value $.001
per share, outstanding was 5,447,042.
INDEX
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Part I: Financial Information:
Item 1 - Condensed Financial Statements:
Condensed Balance Sheets as of September 30, 2006 (Unaudited) and
December 31, 2005 3
Condensed Statements of Operations for the Three Months and Nine
Months ended September 30, 2006 (Unaudited) and 2005 (Unaudited) 4
Condensed Statements of Cash Flows for the Nine Months ended
September 30, 2006 (Unaudited) and 2005 (Unaudited) 5
Notes to Condensed Financial Statements (Unaudited) 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3 - Quantitative and Qualitative Disclosures About Market
Risk 18
Item 4 - Controls and Procedures 18
Part II. Other Information
Item 1A. - Risk Factors 19
Item 2 - Unregistered Sales of Equity Securities 19
Item 6 - Exhibits 19
Signatures and Certifications 20
2
PART I: FINANCIAL INFORMATION:
ITEM 1 - FINANCIAL STATEMENTS:
CONDENSED BALANCE SHEETS
--------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
2006 2005
(UNAUDITED) (NOTE 1)
------------- ------------
ASSETS
Current Assets:
Cash $ 85,412 $ 877,182
Accounts receivable 2,016,089 1,849,796
Costs and estimated earnings in excess of billings on uncompleted
contracts 26,272,509 28,389,202
Prepaid expenses and other current assets 136,008 342,165
Refundable income taxes 878,987 --
----------- -----------
TOTAL CURRENT ASSETS 29,389,005 31,458,345
Plant and equipment, net 894,110 962,209
Other assets 249,775 267,230
----------- -----------
TOTAL ASSETS $30,532,890 $32,687,784
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,347,959 $ 4,559,181
Accrued expenses and other current liabilities 541,899 648,521
Current portion of long-term debt 57,568 87,617
Line of credit 350,000 --
Income taxes payable -- 133,110
----------- -----------
TOTAL CURRENT LIABILITIES 4,297,426 5,428,429
Long-term debt, net of current portion 2,474 42,188
Other liabilities 87,630 54,895
----------- -----------
TOTAL LIABILITIES 4,387,530 5,525,512
=========== ===========
Commitments
Shareholders' Equity:
Common stock - $.001 par value; authorized 50,000,000 shares, issued 5,478,057
and 5,475,057 shares, respectively, and
outstanding 5,447,042 and 5,444,042 shares, respectively 5,478 5,475
Additional paid-in capital 23,028,237 22,768,135
Retained earnings 3,432,501 4,709,518
Treasury stock, 31,015 shares of common stock (at cost) (320,856) (320,856)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 26,145,360 27,162,272
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $30,532,890 $32,687,784
=========== ===========
See Notes to Condensed Financial Statements
3
CONDENSED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2006 2005 2006 2005
(UNAUDITED) (UNAUDITED)
-------------------------- ---------------------------
Revenue $4,412,931 $6,452,246 $11,900,141 $19,010,780
Cost of sales 3,651,385 4,769,256 11,077,893 13,763,040
---------- ---------- ----------- -----------
Gross profit 761,546 1,682,990 822,248 5,247,740
Selling, general and administrative expenses 774,123 803,492 2,756,265 2,570,393
---------- ---------- ----------- -----------
Income (loss) before provision for (benefit from)
income taxes (12,577) 879,498 (1,934,017) 2,677,347
---------- ---------- ----------- -----------
Provision for (benefit from) income taxes -- 331,000 (657,000) 1,041,000
---------- ---------- ----------- -----------
Net income (loss) $ (12,577) $ 548,498 $(1,277,017) $ 1,636,347
Income (loss) per common share - basic $ 0.00 $ 0.10 $ (0.23) $ 0.30
Income (loss) per common share - diluted $ 0.00 $ 0.09 $ (0.23) $ 0.27
========== ========== =========== ===========
Shares used in computing earnings (loss) per common share:
Basic 5,447,042 5,421,650 5,446,526 5,419,411
Diluted 5,447,042 6,115,014 5,446,526 6,120,977
---------- ---------- ----------- -----------
See Notes to Condensed Financial Statements
4
CONDENSED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 2005
------------------------------------------------------------------------- ----------- -----------
(UNAUDITED)
Cash flows from operating activities:
Net income (loss) $(1,277,017) $ 1,636,347
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 158,633 143,685
Deferred rent 21,822 41,172
Stock-based compensation expense 241,054 --
Tax benefit from stock option exercise (4,600) --
Deferred portion of provision for income taxes (48,000) 36,000
Changes in operating assets and liabilities:
Increase in accounts receivable (166,293) (116,745)
(Increase) decrease in costs and estimated earnings in excess of
billings on uncompleted contracts 2,116,692 (1,841,575)
Decrease in prepaid expenses and other assets 223,612 48,484
Increase in refundable income taxes (878,987) --
Decrease in accounts payable, accrued expenses and other current
liabilities (1,258,931) (1,000,878)
Increase (decrease) in income taxes payable (133,110) 330,000
----------- -----------
Net cash used in operating activities (1,005,125) (723,510)
----------- -----------
Cash used in investing activities - purchase of plant and equipment (90,532) (255,581)
----------- -----------
Cash flows from financing activities:
Net repayment of long-term debt (69,763) (51,570)
Proceeds from line of credit 350,000 --
Proceeds from exercise of stock options 19,050 47,591
Tax benefit from stock option exercise 4,600 --
----------- -----------
Net cash provided by (used in) financing activities 303,887 (3,979)
----------- -----------
Net decrease in cash (791,770) (983,070)
Cash at beginning of period 877,182 1,756,350
----------- -----------
Cash at end of period $ 85,412 $ 773,280
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 8,891 $ 10,739
=========== ===========
Income taxes $ 403,093 $ 675,000
=========== ===========
See Notes to Condensed Financial Statements
5
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
1. INTERIM FINANCIAL The financial statements of CPI Aerostructures,
STATEMENTS: Inc. ("the Company") as of September 30, 2006
and for the three and nine months ended
September 30, 2006 and 2005 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 its results of operations and cash flows.
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, 2005 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-K for the
year ended December 31, 2005.
Certain reclassifications have been made in the
prior period financial statements to conform to
the current period presentation.
2. STOCK-BASED COMPENSATION Effective January 1, 2006, the Company began
recording compensation expense associated with
stock options in accordance with Statement of
Financial Accounting Standard ("SFAS") No.
123R, "Share-Based Payment." Prior to January
1, 2006 the Company accounted for stock-based
compensation related to stock options under the
recognition and measurement principles of
Accounting Principles Board Opinion No. 25;
therefore, the Company measured compensation
expense for its stock option plans using the
intrinsic value method, that is, as the excess,
if any, of the fair market value of the
Company's stock at the grant date over the
amount required to be paid to acquire the
stock, and provided the disclosures required by
SFAS No. 123 and 148. The Company has adopted
the modified prospective transition method
provided under SFAS 123R, and as a result, has
not retroactively adjusted results from prior
periods. Under this transition method,
compensation expense associated with stock
options in the three and nine month periods
ended September 30, 2006 includes: (1) period
expense related to the remaining unvested
portion of all stock option awards granted
prior to January 1, 2006, based on the grant
date fair value estimated in accordance with
the original provisions of SFAS 123; and (2)
expense related to all stock option awards
granted subsequent to January 1, 2006, based on
the grant date fair value estimated in
accordance with the provisions of SFAS 123R.
As a result of the adoption of SFAS 123R, the
Company's net loss for the nine months ended
September 30, 2006 includes approximately
$252,000 of non-cash compensation expense
related to the Company's stock options. The
Company recorded no compensation expense
related to stock options for the three month
period ended September 30, 2006. The non-cash
compensation expense related to all of the
Company's stock-based compensation arrangements
is recorded as a component of selling, general
and administrative expense. Prior to the
Company's adoption of SFAS 123R, the Company
presented tax benefits resulting from the
exercise of stock options as cash flows from
operating activities on the Company's
consolidated statements of cash flows. SFAS
123R requires cash flows resulting from tax
deductions in excess of the cumulative
compensation cost recognized for options
exercised (excess tax benefits) be classified
as cash inflows from financing activities and
cash outflows from operating activities.
6
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
In November 2005, the FASB issued FASB Staff
Position No. FAS 123R-3, "Transition Election
Related to Accounting for the Tax Effects of
Share-Based Payment Awards." The Company has
elected to adopt the alternative transition
method provided in the FASB Staff Position for
calculating the tax effects of share-based
compensation pursuant to SFAS 123R. The
alternative transition method includes a
simplified method to establish the beginning
balance of the additional paid-in capital pool
related to the tax effects of employee
share-based compensation, which is available to
absorb tax deficiencies recognized subsequent
to the adoption of SFAS 123R.
In April 1992, the Company adopted the 1992
Stock Option Plan (the "1992 Plan"). The 1992
Plan, for which 83,334 common shares are
reserved for issuance, provides for the
issuance of either incentive stock options or
nonqualified stock options to employees,
consultants, directors or others who provide
services to the Company. The options may not be
exercised more than five years from the date of
issuance. No more options may be granted under
the 1992 Plan.
In 1995, the Company adopted the 1995 Stock
Option Plan (the "1995 Plan"), as amended, for
which 200,000 common shares are reserved for
issuance. The 1995 Plan provides for the
issuance of either incentive stock options or
nonqualified stock options to employees,
consultants, directors or others who provide
services to the Company. The options' exercise
price is equal to the closing price of the
Company's shares on the day of issuance, except
for incentive stock options granted to the
Company's former president, which are
exercisable at 110% of the closing price of the
Company's shares on the date of issuance.
In 1998, the Company adopted the 1998
Performance Equity Plan (the "1998 Plan"). The
1998 Plan, as amended, reserved 463,334 common
shares for issuance. The 1998 Plan provides for
the issuance of either incentive stock options
or nonqualified stock options to employees,
consultants, directors or others who provide
services to the Company. The options' exercise
price is equal to the closing price of the
Company's shares on the day prior to the date
of issuance, except for incentive stock options
granted to the Company's former president,
which are exercisable at 110% of the closing
price of the Company's shares on the date of
issuance.
In 2000, the Company adopted the Performance
Equity Plan 2000 (the "2000 Plan"). The 2000
Plan, as amended, reserved 1,230,000 common
shares for issuance. The 2000 Plan provides for
the issuance of either incentive stock options
or nonqualified stock options to employees,
consultants, directors or others who provide
services to the Company. The options' exercise
price is equal to the closing price of the
Company's shares on the day prior to the date
of issuance, except for incentive stock options
granted to the Company's former president,
which are exercisable at 110% of the closing
price of the Company's shares on the date of
issuance.
At September 30, 2006, the Company had 285
options available for grant under the 1995
Plan, 666 options available for grant under the
1998 Plan, and 313,025 options available for
grant under the 2000 Plan.
The estimated fair value of each option award
granted was determined on the date of grant
using the Black-Scholes option valuation model.
The following weighted-
7
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
average assumptions were used for option grants
during the nine month period ended September
30, 2006 and 2005:
September 30,
2006 2005
------- ------
Risk-free interest rate 4.2% 3.9%
Expected volatility 22% 32%
Dividend yield 0% 0%
Expected option term 5 years 5years
The risk free interest rate for the nine months
ended September 30, 2006 and 2005 is based on
the 5 year U.S. Treasury note rate on the day
of grant. The expected volatility computation
is based on the average of the volatility over
the most recent two year period. The Company
has never paid a dividend, and is not expected
to pay a dividend in the foreseeable future,
therefore the dividend yield is assumed to be
zero.
A summary of the status of the Company's stock
option plans as of September 30, 2006 and
changes during the period is as follows:
Weighted Weighted
average average remaining Aggregate
Exercise contractual Intrinsic
Fixed Options Options Price term (in years) Value
------------------------- --------- -------- ----------------- ----------
Outstanding
at beginning of period 1,130,085 $4.89
Granted during period 85,000 8.57
Exercised (3,000) 6.35
Forfeited/Expired --
--------- ----- ---- ----------
Outstanding and vested
at end of period 1,212,085 $5.14 4.55 $1,542,050
========= ===== ==== ==========
The weighted-average fair value of each option
granted during the nine months ended September
30, 2006 and 2005, estimated as of the grant
date using the Black-Scholes option valuation
model was $2.45 and $3.49, respectively.
As of September 30, 2006 there was no
unrecognized compensation cost related to
non-vested stock option awards.
The net income for the three months and nine
months ended September 30, 2005 does not
include any compensation charges related to
options granted to employees. The following
table illustrates the pro forma effect on net
loss and loss per share assuming the Company
had applied the fair value recognition
provisions of SFAS 123 instead of the intrinsic
value method under APB No. 25 to stock-based
employee compensation for the three month and
nine month periods ended September 30, 2005:
8
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
Three Months Nine Months
------------ -----------
Net income, as reported $548,498 $1,636,347
Stock compensation expense, net of tax 76,287 406,918
-------- ----------
Net income, pro forma $472,211 $1,229,429
======== ==========
Basic net income per common share, as reported $0.10 $0.30
Diluted net income per common share, as reported $0.09 $0.27
Basic net income per common share, pro forma $0.09 $0.23
Diluted net income per common share, pro forma $0.08 $0.20
Cash received from stock option exercises for
the nine months ended September 30, 2006 and
2005 was $19,050 and $47,591, respectively. The
income tax benefit from stock option exercises
totaled $4,600 and $73,000 for the nine months
ended September 30, 2006 and 2005,
respectively.
9
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
3. 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, 2006
---------------------------------------
U.S.
Government Commercial Total
----------- ----------- -----------
Costs incurred on uncompleted
contracts $44,486,743 $15,251,819 $59,738,562
Estimated earnings 26,665,989 6,639,980 33,305,969
----------- ----------- -----------
71,152,732 21,891,799 93,044,531
Less billings to date 47,132,716 19,639,306 66,772,022
----------- ----------- -----------
COSTS AND ESTIMATED EARNINGS
IN EXCESS OF BILLINGS ON
UNCOMPLETED CONTRACTS $24,020,016 $ 2,252,493 $26,272,509
=========== =========== ===========
December 31, 2005
---------------------------------------
U.S.
Government Commercial Total
----------- ----------- -----------
Costs incurred on uncompleted
contracts $41,075,851 $14,400,603 $55,476,454
Estimated earnings 25,430,030 6,273,397 31,703,427
----------- ----------- -----------
66,505,881 20,674,000 87,179,881
Less billings to date 39,878,934 18,911,745 58,790,679
----------- ----------- -----------
COSTS AND ESTIMATED EARNINGS
IN EXCESS OF BILLINGS ON
UNCOMPLETED CONTRACTS $26,626,947 $ 1,762,255 $28,389,202
=========== =========== ===========
10
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
4. INCOME PER COMMON SHARE: Basic income per common share is computed using
the weighted average number of shares
outstanding. Diluted income per common share
for the three month and nine month periods
ended September 30, 2005 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 648,388 and
640,186 were not included in the diluted
earnings per share calculations for the three
month and nine month periods ended September
30, 2005, respectively, as their exercise price
was in excess of the Company's average stock
price for the 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 1,407,085 were not
included in the diluted earnings per share
calculation at September 30, 2006 because of
the reported net loss, and accordingly their
effect would be anti-dilutive.
5. CREDIT FACILITY: In September 2003, the Company entered into a
three year, $5.0 million revolving credit
facility with JP Morgan Chase Bank ("Chase
Facility"), secured by the assets of the
Company. The facility specified interest rates
ranging between the Prime Rate and 225 basis
points over LIBOR, depending on certain terms
and conditions.
In October 2006, the Chase Facility was amended
and restated to provide for a $1.0 million
revolving credit facility, secured by the
assets of the Company. The facility specifies
an interest rate equal to the greater of (a)
the prime rate and (b) the federal funds rate ,
plus 0.5%. The facility expires on December 31,
2006.
As of September 30, 2006, the Company had
borrowed $350,000 under the Chase Facility.
11
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
The operations of CPI Aerostructures, Inc. 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 business in this sector. Our strategy for growth includes
de-emphasizing our commercial operations and concentrating on sales to the
government and to prime contractors.
We compete with other prime contractors to win contracts through a process
of competitive bidding. Notwithstanding defense budget increases and the
Department of Defense's commitment to maintaining support for aging aircraft, as
affirmed in the DoD's 2006 Quadrennial Defense Review, there has been a
significant slowdown in government contract awards as well as releases under
previously awarded contracts. Faced with the uncertainties of appropriations and
time of contract awards and releases under previously awarded contracts, a key
element of our strategy has been to expand our activities to include operating
as a subcontractor to leading aerospace prime contractors. While the slowdown in
government contract awards also has affected these prime contractors, because
they are able to bid on and receive contract awards for different programs than
we are, we believe that pursuing such opportunities will enable us to access
programs that we would not otherwise be able to given our smaller size and
resources. By increasing our customer base, we are positioned to take advantage
of additional market opportunities and reduce the impact of the slowdown in
government contract awards and releases. These subcontracting opportunities have
begun to materialize, and we have been awarded some subcontracts. We currently
have proposals submitted to multiple prime contractors, and while we cannot
predict the timing of awards, our outstanding proposals are significant.
After winning a contract, the length of the contract varies but is
typically between one and two years for U.S. government contracts (although our
T-38 contract and our C-5 TOP contract are for periods of 10 years and 7 years,
respectively), and up to 10 years for commercial contracts. Our one commercial
contract has an indefinite life. 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
periods in which (a) costs are expended, (b) revenue and earnings are recorded
and (c) cash is received.
12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
CRITICAL ACCOUNTING POLICIES
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. When the current estimates
of total contract revenue and contract costs indicate a loss, a provision for
the entire estimated loss on the contract is recorded. 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 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.
SHARE-BASED PAYMENT
Effective January 1, 2006, the Company adopted SFAS No. 123 R, "Share-Based
Payment" for employee options, using the modified prospective transition method.
SFAS 123 R revised SFAS 123 to eliminate the option to use the intrinsic value
method and required the Company to expense the fair value of all employee
stock-based compensation over the vesting period. Under the modified prospective
transition method, the Company recognized compensation cost for the nine months
ended September 30, 2006, which includes (1) period compensation cost related to
share-based payments granted prior to, but not yet vested as of, January 1,
2006, based on the grant date fair value estimated in accordance with the
original provisions of SFAS 123 and (2) compensation cost related to share-based
payments granted within the period, which vested fully upon grant. In accordance
with the modified prospective method, the Company has not restated prior period
results.
13
ITEM2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS
REVENUE
Revenue for the three months ended September 30, 2006 was $4,412,931 compared to
$6,452,246 for the same period last year, representing a decrease of $2,039,315
or 32%. For the nine months ended September 30, 2006, revenue decreased
$7,110,639, or 37% to $11,900,141, compared to $19,010,780 for the same period
last year. The decrease was due to fewer contract awards and releases in 2006 as
compared to 2005, which resulted from the overall slowdown in the government
contract award process and smaller than anticipated releases on our multiyear
contracts during the 18 month period from February 2005 through August 2006.
We generate revenue primarily from government contracts and to a lesser extent
from one commercial contract. Revenue from government contracts for the nine
months ended September 30, 2006 was $10,682,342 compared to $18,526,114 for the
nine months ended September 30, 2005, a decrease of $7,843,772 or 42%.
During the nine months ended September 30, 2006, we received new contract awards
of $21,270,306. Included in this amount is approximately $6.7 million related to
the C-5 TOP contract. Although the contract is valued at up to $215 million over
the seven-year life of the program, orders under this program, including the
$6.7 million award, have totaled only $13.5 million as of September 30, 2006. As
of September 30, 2006, we had over $290 million in bids outstanding,
representing approximately 25% of the 2005 solicitations and approximately 70%
of the 2006 solicitations. We continue to make bids on contracts on a weekly
basis.
Although we are not actively pursuing commercial contract work, our one
remaining commercial contract accounted for revenue of $1,217,799 for the nine
months ended September 30, 2006 compared to $484,666 for the nine months ended
September 30, 2005.
14
ITEM2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
GROSS PROFIT
Gross profit for the three months ended September 30, 2006 was $761,546 compared
to $1,682,990 for the three months ended September 30, 2005, a decrease of
$921,444. As a percentage of revenue, gross profit for the three months ended
September 30, 2006 was 17% compared to gross profit of 26% for the same period
last year. For the nine months ended September 30, 2006, gross profit was
$822,248, or 7% of revenue, compared with $5,247,740, or 28% of revenue for the
first nine months of last year. The decrease in gross profit percentage was due
to overtime and rework costs incurred to correct poor supplier workmanship and
delays in deliveries by some of our suppliers.
Additionally, as previously reported, we had maintained our overhead levels
through June 2006 in anticipation of new awards and releases on contracts we had
already been awarded. Since these awards and releases have not materialized to
increase profitability, at the end of the second quarter, we reduced our staff
by approximately 12%. These staff reductions, along with tighter control over
other overhead costs, reduced factory overhead by approximately $60,000 in the
three month period ended September 30, 2006 as compared to the three month
period ended June 30, 2006.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended
September 30, 2006 were $774,123 compared to $803,492 for the three months ended
September 30, 2005, a decrease of $29,369, or 4%. This decrease was the result
of tighter control over expenses during the three month period ended September
30, 2006. For the nine months ended September 30, 2006, selling, general and
administrative expenses were $2,756,265 compared to $2,570,393 for the same
period last year, an increase of $185,872, or 7%. This increase was primarily
due to recording non-cash compensation of approximately $252,000 related to
stock options as required pursuant to SFAS 123R as described in Note 2 of the
Condensed Financial Statements, offset by decreases in officers' bonuses of
approximately $44,000 and travel and entertainment of approximately $20,000.
INCOME (LOSS) BEFORE PROVISION FOR (BENEFIT FROM) INCOME TAXES
Loss before benefit from income taxes for the three months ended September 30,
2006 was $12,577 compared to income before provision for income taxes of
$879,498 for the same period last year For the nine months ended September 30,
2006, loss before benefit from income taxes was $1,934,017 compared to income
before provision for income taxes of $2,677,347 for the same period last year.
The decrease was primarily due to the decrease in gross profit described above.
PROVISION FOR (BENEFIT FROM) INCOME TAXES
There was a benefit from income taxes of $657,000 for the nine months ended
September 30, 2006, which was the result of a recovery of federal taxes paid in
2005 which are refundable through the filing of a net operating loss carryback
claim. This compares to a provision for income taxes of $331,000 and $1,041,000
for the three and nine months ended September 30, 2005, respectively.
15
ITEM2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
NET INCOME (LOSS)
As a result, basic net loss for the three months ended September 30, 2006 was
$12,577, or $0 per basic share, compared to net income of $548,498, or $0.10 per
basic share, for the same period last year. For the nine months ended September
30, 2006, basic net loss was $1,277,017, or $0.23 per basic share, compared with
net income of $1,636,347, or $0.30 per basic share for the same period last
year. Diluted earnings per share for the three months ended September 30, 2005
was $0.09, calculated utilizing 6,115,014 diluted average shares outstanding.
Diluted income per share for the nine months ended September 30, 2005 was $0.27,
calculated utilizing 6,120,977 diluted average shares outstanding. Incremental
shares of 850,678 were not included in the diluted earnings per share
calculation at September 30, 2006 because of the reported net loss, and
accordingly their effect would be anti-dilutive
LIQUIDITY AND CAPITAL RESOURCES
General
At September 30, 2006, we had working capital of $25,091,579 compared to
$26,029,916 at December 31, 2005, a decrease of $938,337, or 4%.
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. Additionally, contracts that permit us to bill on a progress
basis must be classified as "on time" for us to apply for progress payments. Due
to delays in deliveries from some of our suppliers, we are presently late on two
of our contracts for which progress payments are available. Accordingly, we are
precluded from applying for progress payments on these contracts. During the
year ended December 31, 2005, we incurred approximately $2,358,000 of costs
related to contracts in excess of the amounts that we were permitted to bill on
such contracts. 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 into actual cash receipts.
16
ITEM2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
JP MORGAN CHASE CREDIT FACILITY
In September 2003, we entered into a three year, $5.0 million revolving credit
facility with JP Morgan Chase Bank ("Chase Facility"), secured by our assets.
The facility specified interest rates ranging between the Prime Rate and 225
basis points over LIBOR, depending on certain terms and conditions.
In October 2006, the Chase Facility was amended and restated to provide for a
$1.0 million revolving credit facility, secured by our assets. The facility
specifies an interest rate equal to the greater of (a) the prime rate and (b)
the federal funds rate , plus 0.5%. The facility expires on December 31, 2006.
As of September 30, 2006, we had borrowed $350,000 under the Chase Facility.
We anticipate either extending the line or securing a new line of credit prior
to its expiration. Although we are currently in the process of negotiating an
extension to the line of credit, there is no assurance that an extension, or a
new line of credit, can be secured on terms acceptable to us.
We believe that our existing resources, together with the availability under our
credit facility, will be sufficient to meet our current working capital needs
for at least the next 12 months.
CONTRACTUAL OBLIGATIONS
The table below summarizes information about our contractual obligations as of
September 30, 2006 and the effects these obligations are expected to have on our
liquidity and cash flow in the future years.
PAYMENTS DUE BY PERIOD ($)
-------------------------------------------------------------
LESS THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
----------------------------------- --------- --------- --------- --------- -------------
Short-Term Debt 350,000 350,000 -0- -0- -0-
Long-Term Obligations 60,042 57,568 2,474 -0- -0-
Operating Leases 3,634,267 394,941 825,781 876,071 1,537,474
Employment Agreement Compensation * 657,118 548,830 108,288 -0- -0-
Total Contractual Cash Obligations 4,701,427 1,351,339 936,543 876,071 1,537,474
* The employment agreements provide for bonus payments that are excluded from
these amounts.
17
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, 2006 under the supervision and with the
participation of our management, including our chief executive officer and chief
financial officer. During the first quarter of 2006, we remediated the material
weakness identified by our independent registered public accounting firm and
discussed in detail in our Annual Report on Form 10-K for the year ended
December 31, 2005. This material weakness related to our internal failure to
detect that (i) costs incurred, revenue recognized and billing to the customer
on certain contracts during the year ended December 31, 2005 were not recognized
properly due to an error made during our conversion from a manual accounting
system to MAPICS, an enterprise-wide electronic processing system, and that (ii)
there had been a misapplication of percentage of completion accounting with
respect to our commercial contract. To remediate the material weakness, our
senior management implemented a new procedure and began monitoring all costs and
control total amounts generated through the MAPICS system and related to
billings and expenses and cross checked such amounts to the general ledger and
the applicable master job cost sheet. Senior management is continually
monitoring the effectiveness of the remedial measures to ensure the
effectiveness of our disclosure controls and procedures for future periods. With
these remedial actions in place, our chief executive officer and chief financial
officer have concluded that our disclosure controls and procedures were
effective as of September 30, 2006 in recording, processing, summarizing and
reporting, on a timely basis, information required to be disclosed by us in
reports that we file or submit under the Securities Exchange Act of 1934.
During the most recently completed fiscal quarter, except as described
above, 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.
18
PART II: OTHER INFORMATION
ITEM 1A: RISK FACTORS
There are no material changes from the risk factors set forth in Item 1A, "Risk
Factors," of our Annual Report on Form 10-K for the year ended December 31,
2005. Please refer to that section for disclosures regarding the risks and
uncertainties to our business.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES
None
ITEM 6 - EXHIBITS
Exhibit 10.23 Amended and Restated Revolving Credit Agreement
between the Company and JPMorgan Chase Bank N.A.
Exhibit 10.24 Amended and Restated Revolving Credit Note made by
the Company and payable to JPMorgan Chase Bank, N.A.
Exhibit 10.25 Amended and Restated Security Agreement between the
Company and JPMorgan Chase Bank, N.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
19
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, 2006 By /S/ Edward J. Fred
-------------------------------------
Edward J. Fred
Chief Executive Officer, President,
and Secretary
Dated: November 14, 2006 By: /S/ Vincent Palazzolo
------------------------------------
Vincent Palazzolo
Chief Financial Officer
20
EXHIBIT 31.1
SECTION 302 CERTIFICATION PURSUANT TO
RULE 13a-14 AND 15d-14 UNDER
THE SECURITIES ACT OF 1934, AS AMENDED
I, Edward J. Fred, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of CPI
Aerostructures, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the issuer as of, and for, the periods presented in this report;
4. The issuer's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the issuer
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
issuer, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this report is being prepared;
(b) [intentionally omitted];
(c) Evaluated the effectiveness of the issuer's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the issuer's internal
control over financial reporting that occurred during the
issuer's most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the issuer's
internal control over financial reporting; and
5. The issuer's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the issuer's auditors and to the audit committee of the
issuer's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the issuer's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the issuer's
internal control over financial reporting.
Date: November 14, 2006
By: /S/ Edward J. Fred
------------------------------------
Name: Edward J. Fred
Title: Chief Executive Officer,
President and Secretary
21
EXHIBIT 31.2
SECTION 302 CERTIFICATION PURSUANT TO
RULE 13a-14 AND 15d-14 UNDER
THE SECURITIES ACT OF 1934, AS AMENDED
I, Vincent Palazzolo, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of CPI
Aerostructures, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the issuer as of, and for, the periods presented in this report;
4. The issuer's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the issuer
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
issuer, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this report is being prepared;
(b) [intentionally omitted];
(c) Evaluated the effectiveness of the issuer's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the issuer's internal
control over financial reporting that occurred during the
issuer's most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the issuer's
internal control over financial reporting; and
5. The issuer's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the issuer's auditors and to the audit committee of the
issuer's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the issuer's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the issuer's
internal control over financial reporting.
Date: November 14, 2006
By: /S/ Vincent Palazzolo
------------------------------------
Name: Vincent Palazzolo
Title: Chief Financial Officer
22
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CPI Aerostructures, Inc.
(the "Company") on Form 10-Q for the period ended September 30, 2006 as filed
with the Securities and Exchange Commission (the "Report"), the undersigned, in
the capacities and on the date indicated below, hereby certifies pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
1. the Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operation of the Company.
Dated: November 14, 2006 /S/ Edward J. Fred
----------------------------------------
Edward J. Fred
Chief Executive Officer, President and
Secretary
Dated: November 14, 2006 /S/ Vincent Palazzolo
----------------------------------------
Vincent Palazzolo
Chief Financial Officer
23
