U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
1934 (Fee required)
For the fiscal year ended December 31, 1998
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[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No fee required)
For the transition period from ______________ to _________________
Commission file number 1-11398
CPI AEROSTRUCTURES, INC.
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(Name of Small Business Issuer in Its Charter)
New York 11-2520310
- --------------------------------- -------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
200A Executive Drive, Edgewood, New York 11717
- ---------------------------------------- -----------
(Address of Principal Executive Offices) (Zip Code)
(516) 586-5200
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange on Which
Title of Each Class Each Class is Registered
------------------- ------------------------------
None None
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Securities registered under Section 12(g) of the Act:
Common Stock, $.001 par value per share
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(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 past 90 days. Yes |X| No |_|
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |X|
The issuer's revenues for its most recent fiscal year were $19,810,471.
The aggregate market value of the 6,761,342 shares of voting stock held by
non-affiliates computed by reference to the closing price at which the stock was
sold on April 1, 1999, was $4,435,441.
As of April 1, 1999, the Issuer had 7,945,342 shares of Common Stock,
$.001 par value, outstanding.
Transitional Small Business Disclosure Format: Yes |_| No |X|
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CPI AEROSTRUCTURES, INC.
FORM 10-KSB ANNUAL REPORT-1998
TABLE OF CONTENTS
PART I PAGE
Item 1. Description of Business ................................... 3
Item 2. Description of Property ................................... 10
Item 3. Legal Proceedings ......................................... 10
Item 4. Submission of Matters to a Vote of Security Holders........ 10
PART II
Item 5. Market for Common Equity and Related Stockholder Matters... 11
Item 6. Management's Discussion and Analysis....................... 12
Item 7. Financial Statements....................................... 14
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 14
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act....... 15
Item 10. Executive Compensation....................................... 16
Item 11. Security Ownership of Certain Beneficial Owners and Management 20
Item 12. Certain Relationships and Related Transactions................ 21
Item 13. Exhibits, List and Reports on Form 8-K........................ 22
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Item 1. DESCRIPTION OF BUSINESS
(a) Business Development
CPI Aerostructures, Inc. (the "Company") is comprised of two distinct
corporations: CPI Aerostructures, Inc. ("CPI") and Kolar, Inc. ("Kolar;"
together with CPI, the "Company"). CPI is engaged in contract production of
structural aircraft parts and sub-assemblies for the commercial and military
sectors of the aircraft industry. In connection with its commercial assembly
operations, CPI provides engineering, technical and program management services
to its customers. Kolar manufactures precision machine parts and sub-assemblies
for the electronics industry, including computer and microwave device
manufacturers, as well as the materials handling, aerospace and banking
industries.
CPI was incorporated under the laws of the State of New York in January
1980 under the name Composite Products International, Inc. The Company changed
its name to Consortium of Precision Industries, Inc. in April 1989 and to CPI
Aerostructures, Inc. in July 1992. In September 1992, the Company completed its
initial public offering with the Company receiving net proceeds of approximately
$4,600,000.
Kolar was incorporated under the laws of the State of Delaware in July
1997 to acquire Kolar Machine, Inc., a precision machining and assembly
manufacturer located in Ithaca, New York. On October 9, 1997, Kolar purchased
substantially all of the assets of Kolar Machine, Inc. and the related real
property for approximately $14.5 million. The deal was accomplished using cash
and debt financing which was provided by the Chase Manhattan Bank and a
"seller's note."
Certain 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, the timing of commercial and
government funding approvals, and the other risks detailed from time to time in
the Company's SEC reports.
(b) Business of Issuer
CPI is engaged in contract production of structural aircraft parts and
sub-assemblies for the commercial and military sectors of the aircraft industry.
The following table sets forth information relating to the approximate dollar
amounts and percentages of CPI's revenues from the commercial and military
sectors of the aircraft industry:
Years Ended
December 31, December 31,
1997 1998
------------ ------------
(Dollar amounts in thousands)
Commercial $4,171 42.5% $5,102 60.1%
Military 5,654 57.5 3,391 39.9
------ ----- ------ -----
Total $9,825 100.0% $8,493 100.0%
====== ===== ====== =====
Kolar manufactures precision parts and sub-assemblies for a variety of
different markets. Kolar accounted for approximately $11,300,000 of revenue
(57%) in 1998 and $3,190,000 (25%) in 1997, respectively, of the Company's total
revenue for such year.
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Products
CPI
CPI's products are sub-assemblies (a series of parts fitted together to
form a complex aerodynamic structure). These products are incorporated into jet
engine housings (nacelles) by CPI's customers or aircraft manufacturers to form
final aircraft assemblies. CPI's products are custom designed and developed to
fit precise certification standards imposed by CPI's customers and applicable
regulatory bodies. Due to the critical functions served by CPI's products,
sub-assemblies are often manufactured using durable, heat-resistant, and/or
light-weight metals, including titanium, inconel and various metal alloys
containing similar properties.
CPI's principal commercial aircraft products include aprons and engine
mounts, which are structures used to attach jet engine housings to aircraft.
Apron assemblies are panels that function as the aerodynamic surface between
pylons (structures which attach nacelles to the wing or fuselage) and nacelles.
Aft fairing assemblies are the exterior portion of a pylon.
CPI also assembles structural replacement parts for military aircraft,
including spoilers, flaps, ducts, skins and doors. Spoilers and flaps are
aerodynamic panels attached to the wings of an aircraft that enable an aircraft
to ascend and brake during takeoff and landing. Ducts are open panels to enable
free airflow within an aircraft. Skins are the outer layer of an aircraft. CPI
has the capabilities to produce additional aircraft products for both commercial
and military applications.
Kolar
Kolar's principal products include detail parts and major
sub-assemblies for high speed machines that route printed circuit boards through
a series of operations while inserting and bonding components to the board. The
eventual printed circuit boards are used in ATM machines, computers, and a
variety of other electronic devices.
In the materials handling market, Kolar's customer produces high speed
equipment used for the weighing and measuring of cartons and containers.
Customers and Contracts
CPI
Commercial
Pursuant to long-term agreements with Rohr Industries, Inc. (owned by
B. F. Goodrich), a leading commercial aircraft supplier of nacelles, CPI
operates as a subcontractor under Rohr's production programs with The Boeing
Company. In June 1994, Rohr sold its corporate jet business to the Nordam
Corporation ("Nordam") and CPI's agreement with Rohr concerning the Hawker 1000
Executive Jet, an eight to ten seat aircraft was transferred to Nordam. CPI
provides Nordam with pylons, engine mounts and all related sub-assemblies and
components for use in connection with production of the Hawker 1000 Executive
Jet. For the years ended December 31, 1997 and 1998, sales of CPI's products to
Rohr accounted for approximately 30% and 53%, respectively, of CPI's revenues.
For the years ended December 31, 1997 and 1998, sales derived from Nordam were
approximately 11% and 7%, respectively. The original agreement obligated CPI
to deliver a total of 300 pylons to Nordam at a fixed aggregate base price (in
1988 unescalated dollars) of $10,300,000.
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CPI's commercial agreements generally provide that the price for
products is subject to annual adjustment calculated in accordance with an
escalation formula (based on statistics published by the United States
Department of Labor), which account primarily for industry costs for labor and
materials. In addition, the agreements contain repricing provisions which adjust
the price under certain circumstances as a result of changes in the scope,
design, quantity or delivery schedule provisions.
CPI's agreements with Rohr and Nordam contain provisions that allow
termination of such contracts at will, in whole or in part, at the convenience
of the customer and generally provide that the customer must reasonably
compensate CPI for work performed through the termination date which has
happened and may occur again.
As of December 31, 1996, CPI provided Rohr with spars for use in
connection with the Boeing 757 aricraft for an aggregate purchase price of
$2,263,000. No revenues were recorded for this program in 1997 and in December
of that year CPI recognized a termination of its agreement with Rohr for such
products, recording a non-cash charge to cost of sales of approximately
$605,000.
In March 1991, CPI entered into an agreement with Rohr, pursuant to
which CPI agreed to provide Rohr with apron assemblies and related components in
connection with production of the McDonnell Douglas MD-90 jet aircraft. CPI
delivered 76 and 60 production units during 1997 and 1998, respectively. As of
December 31, 1998, CPI had delivered an aggregate of two engineering prototypes,
three development units, six flight testing units and 238 production units.
During the years ended December 31, 1997 and 1998, approximately 37% and 53%,
respectively, of CPI's revenues were derived from this program. In December
1998, based on information received from Rohr, CPI recognized a termination of
this contract. This termination resulted in the Company writing off
approximately $11,850,000 of previously recorded revenue. The effect of this
termination is included in cost of sales in 1998.
In May 1992, CPI commenced production of aft fairing assemblies for
Shin-Meiwa Industry Co., Ltd. ("Shin-Meiwa"), a Japanese aerospace firm. On
December 10, 1992, CPI executed an agreement with Mitsui & Co. (U.S.A.), Inc.,
as agent for Shin-Meiwa to produce aft fairing assemblies in connection with the
production program for the McDonnell Douglas MD-11. CPI's current arrangement
with Shin-Meiwa provides for CPI to assemble products using tooling and
component parts provided by Shin-Meiwa. The contract provides for the delivery
of 251 pieces for an aggregate of approximately $1,590,000. As of December 31,
1997 and 1998, CPI had delivered 167 and 178 fairing assemblies, respectively,
pursuant to purchase orders. In November 1998, Shin-Meiwa informed the Company
that it would not require any further deliveries of aft fairing assemblies under
this agreement.
Military
CPI supplies structural aircraft parts and sub-assemblies to the
military under prime contracts with several branches of the United States
Government. For the years ended December 31, 1997 and 1998, 58% and 40%,
respectively, of CPI's revenues were derived from military contracts. The
increased level of revenues from the military sector resulted primarily from the
following two contracts:
On September 19, 1995, CPI was awarded a contract by the United States
Air Force for the A-10 Aircraft program. CPI will produce leading edge panels
for such aircraft. The total award amount is approximately $3,354,000, of which
$2,955,000 has been recognized as of December 31, 1998 with all deliveries
expected to be completed by the end of the third quarter of 1999.
On September 22, 1995, CPI was awarded a contract by the United States
Air Force for the C-5 Aircraft program. CPI is producing structural supports,
plates and brackets, mount assemblies, air deflectors, mounting blocks, hinge
brackets, plate assemblies, fairings, landing gear door assemblies and panel
assemblies for such aircraft. As of March 15, 1999, the total contract value was
$4,878,000 of which $3,657,000 has been recognized as of December 31, 1998 with
additional orders anticipated, although no assurances can be given as to any
additional orders.
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As of December 31, 1997 and 1998, CPI had thirteen and thirty-nine
military contracts, respectively, in various stages of completion. Additionally,
the Company has added twenty-eight new military contracts since December 31,
1998. Contract terms are generally one to two years. Product prices under these
contracts are fixed. Each contract obligates CPI to deliver a specific quantity
of units according to specified delivery schedules. Each contract contains
repricing clauses which adjust the fixed price for each product delivered in the
event that the government requests design, quantity or schedule changes for
products. CPI generally provides its own tooling to produce products under
military contracts. CPI typically recovers all of its tooling costs under a
contract following the delivery of the first unit produced. For contracts with
an aggregate dollar amount in excess of $100,000 CPI is generally entitled to
receive progress payments to cover approximately 90% of CPI's total costs at the
time of the request.
Pursuant to military contracts, CPI provides a warranty which covers
defects in materials and workmanship for products delivered to the government.
The warranty provides for the replacement or repair of defective products. CPI
is not required under its contracts to carry liability insurance. Such contracts
incorporate by reference the Federal Acquisition Regulations (FAR) which provide
that the government generally acts as a self-insurer for loss of or damage to
property that occurs after acceptance of delivered products and results from
defects or deficiencies of the products.
Kolar
Kolar operates almost exclusively on a purchase order basis with its
current customers. The one exception is the Purchase Agreement described below
entered into between Universal Instrument Corporation ("Universal") and Kolar in
November 1997. Kolar has long-standing relationships with its two major
customers, including Universal, which together comprise over 83% of Kolar's
revenues.
Universal has been Kolar's customer for approximately twelve years, and
accounted for more than 69% and 60% of Kolar's revenues in 1998 and 1997,
respectively, as Kolar's largest customer. Kolar manufactures detail parts and a
major sub-assembly for Universal's high speed machines that route printed
circuit boards through a series of operations while inserting and bonding
components to the board. Kolar also produces numerous other detail parts for
various applications in Universal machinery. In November 1997, Universal entered
into a Purchase Agreement with Kolar setting forth the terms and conditions
under which Universal is purchasing products from Kolar. The agreement is for
four years, unless earlier terminated, however, it does not provide for any
fixed quantities of sales and is subject to Kolar's receipt of purchase orders
thereunder.
Hi Speed Checkweigher ("Hi Speed") is Kolar's second largest customer
and has been a customer of Kolar for approximately 40 years. Hi Speed accounted
for approximately 17% and 12% of Kolar's revenues in 1998 and 1997,
respectively. Hi Speed produces high speed equipment used for the weighing and
measuring of cartons and containers.
Production and Assembly
CPI
CPI's assembly operations consist primarily of incorporating component
aircraft parts supplied by third parties into complex sub-assemblies to satisfy
specific customer requirements and precision certification standards. CPI
subcontracts production of component parts in its assembly operations, which are
shaped, formed, welded and/or machined to specified configurations. This allows
CPI to avoid additional costs of extensive manufacturing and production
facilities, parts fabrication and expensive capital equipment. CPI's employees
process component parts to add drilling, routing, boring and other processes
prior to assembly. Components are placed, attached and incorporated into final
assemblies by CPI-trained personnel. CPI's operations are generally conducted on
a five-day basis with single shifts. CPI packages its products in accordance
with specifications for shipment to its customers. CPI's customers are generally
responsible for arranging product shipment by common carrier.
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Kolar
Kolar's production operations consist primarily of machining raw
materials such as aluminum and steel into component parts to satisfy specific
customer requirements and precision standards. In the assembly operations, Kolar
incorporates machined parts, which it manufactures, with components purchased
from subcontractors, to produce assemblies used in high speed, automated
equipment. Kolar packages its products in accordance with specifications for
shipment to its customers. Kolar is generally responsible for arranging product
shipment, usually using its own vehicles.
Marketing
To date, substantially all of CPI's and Kolar's marketing activities
have been conducted by members of management. Such activities have consisted
primarily of personal contact with potential customers.
CPI's sales cycle, which generally commences at the time a prospective
customer issues a request for proposal and ends upon execution of a contract
with the customer, typically ranges from six months to one year. A portion of
CPI's commercial marketing efforts involves responding to requests from
potential contractors. CPI obtains military contracts for its products and
services through the process of competitive bidding.
Additionally, both CPI and Kolar have signed agreements with a number
of sales representatives to market the Company's products to a broader base of
customers.
Backlog
CPI produces custom sub-assemblies pursuant to long-term contracts and
customer purchase orders. Backlog consists of aggregate contract values under
basic ordering agreements or for production orders, excluding the portion
previously included in operating revenues on the basis of percentage of
completion accounting, and including estimates of future contract price
escalation. All of CPI's backlog is subject to termination at will and
rescheduling, without significant penalty. As of December 31, 1998 and 1997,
CPI's backlog was approximately $4 million and $26 million, respectively. This
decrease is primarily attributable to the termination of the MD-90 program.
Of CPI's backlog at December 31, 1998, approximately 4% and 96% is
attributable to commercial and military contracts, respectively. Approximately
$3 million (75%) of CPI's current backlog at December 31, 1998 is scheduled for
delivery during the year ending December 31, 1999.
Raw Materials, Suppliers and Manufacturers
The Company makes extensive use of metals, including, titanium,
inconel, steel, aluminum and alloys as raw materials in the production of its
products. Rod, bar tubing and extrusions made of aluminum, steel and titanium
and other materials such as rubber and adhesives are also utilized. The
Company's decision to purchase certain raw materials is generally based on
required specifications of its customers. The Company purchases all of its
supply of metals and other raw materials pursuant to purchase orders from third
party distributors who purchase raw materials from original manufacturers
located throughout the United States. While the Company attempts to maintain
alternative sources of supply for the Company's raw materials and believes that
alternative sources are currently available for most of such materials.
CPI subcontracts production of substantially all component parts
incorporated into its products to third party manufacturers under firm fixed
price orders. CPI's decision to purchase certain components is generally based
upon whether such components are available to meet required specifications and
at a cost and delivery consistent with customer requirements. CPI, from time to
time, is required to purchase custom made parts from sole suppliers and
manufacturers in order to meet specific customer requirements. To date, CPI has
not experienced material delays in connection with obtaining custom parts.
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The Company generally does not maintain supply agreements with its
suppliers or manufacturers and purchases raw materials and component parts
pursuant to purchase orders in the ordinary course of business. The Company
believes that the supplies of materials through the end of 1999 will be
adequate.
Competition
The markets for CPI's products are highly competitive. CPI competes
with numerous well-established foreign and domestic subcontractors engaged in
the supply of aircraft parts and assemblies to the commercial sector of the
aircraft industry, including Northrop Grumman Corporation, Aeronca, Inc.,
Shin-Meiwa and other subcontractors throughout the world. CPI also faces
competition from foreign and domestic prime contractors, including Nordam, all
of whom possess greater resources than CPI, thereby permitting such companies to
implement extensive production programs in response to orders from aircraft
manufacturers. The market for large commercial jet aircraft is dominated by The
Boeing Company and Airbus Industries, which typically contract production of
assemblies to a limited number of large commercial contractors. Consequently,
CPI's ability to increase market penetration in the commercial sector may be
limited by the relatively limited number of prime contractors in this market.
CPI competes on the basis of price, development and production
capabilities and service. To the extent possible, CPI seeks to limit its
operations to the assembly of complex sub-assemblies while subcontracting
production of component parts, which allows CPI to avoid the significant costs
associated with maintaining capital equipment.
CPI also faces competition from numerous military subcontractors. CPI
competes for military contracts on the basis of price. CPI is able to obtain
military contracts that are "set-aside" for small businesses.
While the markets for Kolar's products are also highly competitive, its
track record of superior performance with its mature customer base has given
Kolar a slight advantage over new entrants into the precision machining
business, and specifically in the Upstate New York area.
Kolar's two most significant competitors are DFF Corporation of
Massachusetts and Arlington Machine of New York State. DFF Corporation has a
large facility and assembly capability. Arlington Machine has excellent
machining capabilities. Both competitors have a price structure similar to
Kolar.
Government Regulation
The Company is subject to regulations administered by the United States
Environmental Protection Agency, the Occupational Safety and Health
Administration, various state agencies and county and local authorities acting
in cooperation with Federal and state authorities. Among other things, these
regulatory bodies impose restrictions to control air, soil and water pollution,
to protect against occupational exposure to chemicals, including health and
safety risks, and to require notification or reporting of the storage, use and
release of certain hazardous chemicals and substances. The extensive regulatory
framework imposes compliance burdens and risks on the Company. Governmental
authorities have the power to enforce compliance with these regulations and to
obtain injunctions or impose civil and criminal fines in the case of violations.
The Comprehensive Environmental Response, Compensation and Liability
Act of 1980 ("CERCLA") imposes strict, joint and several liability on the
present and former owners and operators of facilities which release hazardous
substances into the environment. The Resource Conservation and Recovery Act of
1976 ("RCRA"), regulates the generation, transportation, treatment, storage and
disposal of hazardous waste. In New York, the handling, storage and disposal of
hazardous substances is governed by the Environmental Conservation Law, which
contains the New York counterparts of CERCLA and RCRA. In addition, the
Occupational Safety and Health Act, which requires employers to provide a place
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of employment that is free from recognized and preventable hazards that are
likely to cause serious physical harm to employees, obligates employers to
provide notice to employees regarding the presence of hazardous chemicals and to
train employees in the use of such substances.
CPI's operations require the use of a limited amount of chemicals and
other materials for painting and cleaning, including solvents and thinners, that
are classified under applicable laws as hazardous chemicals and substances. CPI
has obtained a permit from the Town of Islip, New York, Building Division in
order to maintain a paint booth containing flammable liquids.
The Company believes that it is in substantial compliance with all
federal, state and local laws and regulations governing its operations and has
obtained all material licenses and permits required for the operations of its
business.
Warranty
Pursuant to all of CPI's commercial contracts, CPI warrants that
products will strictly conform to all specifications provided by the customer
and will be free from defects in material and workmanship for a specified period
(ranging from one to four years). CPI's liability is limited to repair or
replacement of defective products. Notwithstanding such limitation, CPI agreed
to indemnify the customers for any costs, damages, expenses or other loss or
liability incurred or paid (including reasonable attorneys' fees) arising out of
asserted claims for property damage, personal injury or death, or any other
damages, including claims of consequential loss and breach of contract as a
result of, among other things, the performance of work, products or workmanship,
provided that such claims do not arise as a result of the sole fault of the
customers.
Pursuant to military contracts, CPI provides a warranty which covers
defects in materials and workmanship for products delivered to the government.
The warranty provides for the replacement or repair of defective products. CPI
is not required under its contracts to carry liability insurance. Such contracts
incorporate by reference the Federal Acquisition Regulations (FAR) which provide
that the government generally acts as a self-insurer for loss of or damage to
property that occurs after acceptance of delivered products and results from
defects or deficiencies of the products.
Kolar generally warrants its products to be free from defects in
materials, workmanship and manufacturing processes for a specified period,
ranging from one to four years from the date of shipment.
Insurance
CPI maintains a $2 million general liability insurance policy, a $10
million products liability insurance policy, and a $5 million umbrella liability
insurance policy. Kolar maintains a $1 million general and products liability
insurance policy, and a $10 million umbrella liability insurance policy. The
Company believes this coverage is adequate for the types of products presently
marketed.
Proprietary Information
None of CPI's current assembly processes or products are protected by
patents. CPI relies on proprietary know-how and confidential information and
employs various methods to protect the processes, concepts, ideas and
documentation associated with its products. However, such methods may not afford
complete protection and there can be no assurance that others will not
independently develop such processes, concepts, ideas and documentation. CPI has
registered the name CPI Aerostructures and its logo as trademarks.
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Employees
As of April 1, 1999, CPI employed 23 full-time employees including its
two executive officers. As of April 1, 1999, Kolar employed 93 full-time
employees including one executive officer, and one part-time employee.
The Company also employs temporary personnel with specialized
disciplines on an as-needed basis. None of the Company's employees are members
of unions. The Company believes that its relations with its employees are good.
Item 2. DESCRIPTION OF PROPERTY
CPI Aerostructures' executive offices and production facilities are
situated in an approximate 25,000 square foot building located at 200A Executive
Drive, Edgewood, New York 11717. CPI Aerostructures occupies this facility under
a lease with an unaffiliated landlord, which commenced on December 1, 1995 and
ends on March 31, 2000. The current monthly base rental is $13,451, plus common
area costs, over the term of the lease. The Company believes that its facilities
are adequate for its current needs.
Kolar's executive offices and production facilities are situated in
approximately 46,000 square feet in a total of four buildings that the Company
owns. The buildings are located in Ithaca, New York at 407 Cliff Street, 618
West Buffalo Street, 604 Elmira Road and 612 Elmira Road.
Item 3. LEGAL PROCEEDINGS
On or about November 22, 1995, CPI commenced an action in the Supreme
Court of the State of New York, County of Nassau, against VTX Electronics Corp.
alleging breach of a contract signed between the parties on August 24, 1995. The
Company seeks damages in the amount of $400,000. Defendant VTX answered and
counterclaimed for $150,000. The matter was in the discovery phase before VTX
filed for bankruptcy protection in January, 1997 under Chapter 11 of the
Bankruptcy Code. On or about December 1, 1997, the Company agreed to settle any
and all claims against VTX and VTX agreed to settle any and all claims and
counterclaims against the Company. The parties filed a Stipulation of Dismissal
with prejudice in the matter in March 1998.
In July, 1996 Rickel & Associates, Inc. ("Rickel"), former consultants
to the Company, commenced an action in the Supreme Court of the State of New
York, County of New York against the Company. Rickel alleged breach of a
Consulting Agreement dated January 26, 1995 pursuant to which Rickel alleged it
is owed $70,000 and is entitled to 120,000 stock options which the Company has
canceled. The Company denied the allegations, claiming that Rickel did not
perform as required under the Consulting Agreement, and that Rickel fraudulently
induced the Company to enter into the Consulting Agreement.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None
PART II
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Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's securities are traded in the over-the-counter market and
listed on the National Association of Securities Dealers Automated Quotation
SmallCap Market ("Nasdaq").
The following tables set forth for the last two fiscal years, the range
of high and low last sales prices of CPI's Common Stock for the periods
indicated, as reported by Nasdaq. Nasdaq prices represent inter-dealer
quotations, without retail mark-up, mark-down or commission, and may not
necessarily represent actual transactions.
Period High Low
------ ---- ----
1997
----
Quarter Ended March 31, 1997 $2 3/4 $2 3/8
Quarter Ended June 30, 1997 $2 13/16 $1 3/8
Quarter Ended September 30, 1997 $3 $1 5/16
Quarter Ended December 31, 1997 $6 $2 13/16
1998
----
Quarter Ended March 31, 1998 $2 5/8 $2 3/8
Quarter Ended June 30, 1998 $3 1/8 $2 1/16
Quarter Ended September 30, 1998 $2 3/16 $ 13/16
Quarter Ended December 31, 1998 $2 $ 13/16
On April 1, 1999, the closing sale price for the Company's Common
Stock on the Nasdaq was $0.656.
Holders
On April 1, 1999, there were 171 holders of record of the Company's
Common Stock. The Company reasonably believes that there are in excess of 2,500
beneficial holders of its Common Stock.
Dividend Policy
To date, the Company has not paid any dividends on its Common Stock.
The payment of dividends, if any, in the future is within the discretion of the
Board of Directors and will depend on the Company's earnings, if any, its
capital requirements and financial condition and other relevant factors. The
Board of Directors does not intend to declare any cash or other dividends in the
foreseeable future, but instead intends to retain earnings, if any, for use in
the Company's business operations.
In addition, the Company's Credit Agreement with its several lenders
provides that the Company may not declare or pay any dividend on its Common
Stock so long as any amounts are owing to the several lenders. See "Item 6.
Management's Discussion and Analysis - Financing Arrangements."
RECENT SALES OF UNREGISTERED SECURITIES, USE OF PROCEEDS FROM REGISTERED
SECURITIES
None
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Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis should be read in conjunction
with the Financial Statements and Notes thereto appearing under Item 7 of this
Report.
General
Consistent with industry practice, CPI uses the percentage of
completion method of accounting for its business. Under this method, CPI
recognizes revenues as costs are incurred under its contracts, measured by the
percentage of actual costs incurred to date against estimated total costs. Under
CPI's commercial contracts, CPI does not receive cash payments until products
are shipped. Accordingly, revenues may be recognized by CPI even though
associated cash payments have not been received. Provisions for estimated losses
on uncompleted contracts are made in the period in which such losses are
determined. Changes in contract performance may result in revisions to costs and
income, which are recognized in the period in which revisions are determined to
be required. CPI's recorded revenues may be written-off in later periods in the
event CPI's cost estimates prove to be inaccurate or a contract is terminated.
For Kolar, revenue is recognized when goods are shipped to customers.
Results of Operations
Year Ended December 31, 1998 as Compared to the Year Ended December 31, 1997
The Company's revenue for the year ended December 31, 1998 ("1998") was
$19,810,000 compared to $13,015,000 for the year ended December 31, 1997
("1997"), representing an increase of $6,795,000, or 52%. This increase reflects
an increase in sales by Kolar. Sales by CPI decreased by approximately
$1,333,000 from 1997 to 1998 due to a temporary slowdown in military contract
awards during the year, and the completion and termination of various commercial
programs.
Gross loss for 1998 was $4,953,000 compared to gross profit of
$3,807,000 for 1997, representing a decrease of $8,760,000. Gross profit as a
percentage of revenues for 1998 was negative, compared to 29% for 1997. This
decrease in gross profit percentage was attributable to the termination of the
MD-90 program in 1998 resulting in a write-off of approximately $11,850,000.
Selling, general and administrative expenses for 1998 were $4,423,000
compared to $2,016,000 for 1997, representing an increase of $2,407,000, or
119%. This increase is primarily attributable to a full year of charges related
to the acquisition of Kolar, such as amortization of goodwill and loan
commitment fees. Selling, general and administrative expenses as a percentage of
revenue for 1998 and 1997 were 22% and 15%, respectively. Interest expense for
1998 was $1,264,000, compared to $306,000 for 1997, representing an increase of
$958,000 or 313%. The increase is attributable to a full year of interest
payments, related to the substantial increase of debt during 1997, primarily
from the Company's purchase of Kolar, Inc.
The net loss for 1998 was $6,796,000 compared to net income of $949,000
for 1997, representing a decrease of $7,745,000. Basic loss per share was $0.86
on 7,941,773 average shares outstanding, compared to basic earnings per share of
$0.14 on 6,582,479 average shares outstanding for fiscal 1997, and diluted
earnings per share of $0.12 in 1997 on 7,645,603 weighted average shares
outstanding.
Liquidity and Capital Resources
General
The Company has financed its working capital requirements during the
past two years through proceeds received from the exercise of warrants and from
operations. A large portion of the Company's cash has been used for costs
incurred on various commercial contracts that are in process. These costs are
components of "Costs and estimated earnings in excess of billings on uncompleted
contracts" and represents 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. CPI's continued requirement to incur
significant costs, in advance of receipt of associated cash for commercial
contracts has caused an increase in the gap between aggregate costs and earnings
and the related billings to date.
PAGE 12
<PAGE>
Net cash provided by operating activities for 1998 was $8,000, as
compared to net cash used in operating activities of $1,386,000 for 1997. This
increase in cash was primarily attributable to depreciation and amortization of
$1,395,000, an increase in non-cash consulting fees of $35,000, a decrease in
accounts receivable of $131,000, and a decrease in costs and estimated earnings
in excess of billings of $9,818,000, offset by net loss of $6,796,000, a
decrease in deferred income taxes of $1,454,000, an increase in tax refund
receivable of $516,000, an increase in inventory of $121,000, an increase in
other assets of $30,000, a decrease in accounts payable and accrued expenses of
$200,000, and a decrease in income taxes payable of $543,000.
Net cash used in financing activities was $1,377,000 in 1998, as
compared to net cash provided by financing activities of $12,772,000 in 1997.
The Company repaid long term debt of $1,798,000 in 1998, as compared to $10,000
in 1997. The Company received $45,000 from the exercise of stock options and
warrants in 1998, as compared to the receipt of $2,414,000 in 1997. Net cash
used in investing activities of $79,000 for 1998 and $10,254,000 for 1997
resulted from the Company's purchase of property and equipment in 1998, and the
purchase of Kolar in 1997.
As a result of the foregoing, the Company's cash at December
31, 1998 decreased by $1,448,000 from the prior year to $584,000. The Company
believes it will have sufficient cash flow for 1999 to satisfy its cash
requirements.
Financing Arrangements
The Company has an agreement with The Chase Manhattan Bank and Mellon
Bank providing a line of credit through June 30, 1999, which will be used for
working capital and other corporate purposes as needed. The Company has
available up to $1,000,000 under the line of credit, subject to limits based on
amounts of accounts receivable and inventory, as defined. Interest is at the
bank's prime rate plus 1%. The line of credit is secured by substantially all
assets of the Company. As of December 31, 1998, there was an outstanding balance
of $375,000 on this line of credit.
On October 9, 1997, the Company incurred significant indebtedness in
connection with the acquisition of Kolar Machine, Inc. The Company entered into
a term loan agreement with The Chase Manhattan Bank and Mellon Bank in the
amount of $9,400,000. This loan was payable in quarterly installments of
$587,000, plus monthly interest at the Bank's published prime rate plus 1.5%,
maturing December 31, 2001. This loan is collateralized by all of the assets of
the Company and its subsidiary. The Company also entered into a mortgage loan
agreement with The Chase Manhattan Bank in the amount of $975,000. This loan is
payable in monthly installments of $9,487, including interest at 8.3%, maturing
October 31, 2007. This loan is collateralized by Kolar's land and building.
Additionally, the Company entered into a subordinated note agreement with the
seller of Kolar in the amount of $4,000,000. Interest only is payable monthly at
8%, maturing December 31, 2001. This note is currently convertible into
1,000,000 shares of CPI common stock.
In December 1998 the Company re-structured its term loan agreement with
the Chase and Mellon banks. Under the new arrangement, the principal payment due
in December 1998 was deferred and will be amortized evenly through December 31,
2001. Loan payments are now payable monthly, at the rate of $120,000 per month
through December 31, 1999. Commencing January 2000, the amortization will
increase to $200,000 per month, and will increase to $317,000 per month
commencing January 2001. Additionally, the seller of Kolar has deferred the
Company's payment of interest to him for thirteen months, beginning with the
December 1998 payment. This deferred interest will accrue and become payable
upon maturity of the seller's note. Interest payments will begin again in
January 2000.
PAGE 13
<PAGE>
Year 2000 Problem
The Company has been evaluating the potential impact of the situation
commonly referred to as the "Year 2000" ("Y2K") issue. The Y2K issue results
from the problem with older computer software programs that only recognize the
last two digits of the year in any date (e.g., "98"for "1998"). These programs
were designed and developed without considering the impact of the upcoming
change in the century. If the software is not reprogrammed or replaced, many
computer appliations could fail or create erroneous results at the Year 2000.
Since much of the Company's internal information technology has been fairly
recently developed, the Company does not anticipate it will face significant
issues of non-compliance.
Potential impacts of Y2K non-compliance to the Company may arise from
software, computer hardware, and other equipment outside the Company's ownership
yet with which the Company interfaces either electronically or operationally.
The Company has contacted its major suppliers and customers to determine the
state of their assessment and remediation of any Y2K issues they face. The
Company has been advised by substantially all of such third parties that they
believe they are Y2K compliant. Notwithstanding the foregoing, approximately 50%
of the Company's revenues are derived from contracts with agencies or
instrumentalities of the United States government ("Government Agencies"). The
Company has not been able to determine whether these Government Agencies are Y2K
compliant. If these Government Agencies do not become Y2K compliant, the
financial condition and operation of the Company would be materially and
adversely impacted. The Company has not yet developed a contingency plan in the
event of such non-compliance.
Inflation
Inflation has historically not had a material effect on the Company's
operations.
Impact of Accounting Standards Adopted by the Company
The impact of recently adopted accounting standards is discussed in
Note 1 of Notes to Financial Statements.
Item 7. FINANCIAL STATEMENTS
This information appears following Item 13 of this Report and is
incorporated herein by reference.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PAGE 14
<PAGE>
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The directors and executive officers of the Company are as follows:
Name Age Position
Arthur August 64 Chairman of the Board of Directors,
President, Chief Executive
Officer and Director
Edward J. Fred (1)(2)(3) 40 Vice President,
Chief Financial Officer,
Secretary and Director
Walter Paulick (1)(2) 52 Director
Kenneth McSweeney (1)(2) 67 Director
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
(3) Named as Director in December 1998 to replace Theodore J. Martines, who
retired on December 31, 1998.
Arthur August, a founder of the Company, has been the Chairman of the
Board, President, Chief Executive Officer and a director since January 1980.
From 1956 to 1979, Mr. August was employed by Northrop Grumman Corporation
("Grumman"), an aerospace products manufacturer, where he last held the position
of Deputy Director. Mr. August holds a degree in Aeronautical Engineering from
the Academy of Aeronautics (1956), a B.S. degree in Industrial Management from
C. W. Post College (1963), a Masters degree in Engineering from New York
University (1965) and is a graduate of the Program for Management Development at
the Harvard Graduate School of Business (1977).
Edward J. Fred was appointed to be Secretary and a director of the
Company effective December 31, 1998. Mr. Fred was appointed to the position of
Vice President on December 15, 1998. He was Controller of the Company from
February 1995 to April 1998, when he was appointed as Chief Financial Officer.
For approximately ten years prior to joining the Company, Mr. Fred served in
various positions for the international division of Grumman, where he last held
the position of Controller.
Walter Paulick has been a director of the Company since April 1992. Mr.
Paulick is currently a self employed financial consultant. From 1982 to November
1992, Mr. Paulick was a Vice President of Parr Development Company, Inc., a real
estate development company. From 1980 to 1982, Mr. Paulick was employed by Key
Bank, where he last held the position of Vice President. From 1971 to 1980,
Mr. Paulick was a Vice President of National Westminster U.S.A.
Kenneth McSweeney has been a director of the Company since February
1998. He has provided various consulting services for the Company since January
1995. Mr. McSweeney is currently an independent consultant to various aerospace
corporations. From 1961 to 1995, Mr. McSweeney served in various management
positions for the Grumman Corporation, most recently as the Vice President of
their Aerostructures Division and a Director of Business Development for the
Mideast and gulf coast region. Mr. McSweeney has extensive experience in
PAGE 15
<PAGE>
aerostructures and logistics support products and is a licensed professional
engineer in New York State. He holds a Bachelor and Master of Science Degree in
Electrical Engineering from the Polytechnic Institute of Brooklyn and a Masters
in Business Management from CW Post College. He also completed the Executive
Development Program at the Cornell School of Business and Public Administration.
All directors hold office until the next annual meeting of shareholders
and the election and qualification of their successors. Directors currently
receive no cash compensation for serving on the Board of Directors. Directors
are reimbursed for reasonable expenses incurred in attending meetings. Officers
are elected annually by the Board of Directors and serve at the discretion of
the Board subject to the terms of their respective employment agreements.
Compliance with 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's Officers, Directors and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, Directors and ten percent stockholders are required by regulation to
furnish the Company with copies of all Section 16(a) forms they file. Based
solely on the Company's copies of such forms received or written representations
from certain reporting persons that no Form 5's were required for those persons,
the Company believes that, during the fiscal year ended December 31, 1998, all
filing requirements applicable to its Officers, Directors and greater than ten
percent beneficial owners were complied with.
Item 10. EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by,
or paid for all services rendered to the Company, during the fiscal years ended
December 31, 1998, 1997 and 1996, by the Company's Chief Executive Officer and
the Company's other executive officers whose total compensation exceeded
$100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------
Annual Compensation Long Term Compensation
------------------- ----------------------
Securities
Name and Underlying
Principal Position Year Salary($) Bonus($) Options (#)
- --------------------- ------- ---------- -------- ------------
<S> <C> <C> <C> <C>
Arthur August, 1998 $321,102 -0- 100,000
Chief Executive 1997 $294,730 $22,500 200,000
Officer and President 1996 $271,148 $12,611 -0-
Theodore J. Martines, 1998 $185,807 -0- 75,000
Executive Vice 1997 $172,145 $ 9,000 115,000
President and Director 1996 $164,211 $ 5,044 -0-
Daniel Ligouri 1998 $160,470 -0- -0-
President - Kolar 1997 (1) $31,375 -0- -0-
1996 -0- -0- -0-
</TABLE>
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<PAGE>
(1) Compensation is for the period subsequent to the October 9, 1997
closing of the Company's acquisition Kolar, Machine, Inc. pursuant to
his employment contract. See Executive compensation - Employment
Agreements.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number of Percent of
Securities Options
Underlying Granted to Exercise
Options Employees in Price Expiration
Granted(#)(1) Fiscal Year(2) ($/SH) Date
------------- --------------- -------------- ----------
<S> <C> <C> <C> <C>
Arthur August 100,000 28.2% $2.30 6/05/03
Theodore J. Martines 75,000 21.1% $2.09 6/05/08
</TABLE>
(1) Stock options granted under the Company's 1992 Employee Stock Option Plan
(the "1992 Plan"), 1995 Employee Stock Option Plan (the "1995 Plan") and
the 1998 Performance Equity Plan (the "1998 Plan") are intended to
qualify as incentive stock options ("ISO's") under Section 422 of the
Internal Revenue Code of 1986, as amended. Under the terms of the 1992
Plan, the 1995 Plan and the 1998 Plan, ISO's may be granted to officers and
other key employees of the Company for a maximum term of 10 years. The
price per share of an ISO may not be less than the fair market value of the
Company's shares on the date the ISO is granted. However, ISO's granted to
persons owning more than 10% of the Company's Common Stock may not have a
term in excess of five years and may not have an option price of less than
110% of the fair market value per share of the Company's shares on the date
the ISO is granted. The maximum number of ISO's is limited to such number
so that the aggregate fair market value, determined as of the date the
ISO's are granted, of the shares of Common Stock with respect to which
ISO's are exercisable for the first time during any calendar year shall not
exceed $100,000. Any options granted in excess of the $100,000 limitation
would not qualify as ISO's under the Internal Revenue Code.
(2) The Company granted a total of 355,000 options to employees in the
fiscal year ended December 31, 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FYE OPTION VALUES
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options at FYE(#) In-The-Money Options at FYE
Shares Acquired Value Exercisable/ ($)Exercisable/
Name on Exercise (#) Realized Unexercisable (1) Unexercisable
- ---------------- --------------- -------- ----------------- -------------
<S> <C> <C> <C> <C>
Arthur August -0- -0- 250,000/100,000 -0-
Theodore J. Martines -0- -0- 163,500/66,500 -0-
</TABLE>
On December 31, 1998, the last reported sales price of the Company's Common
Stock on the Nasdaq SmallCap Market was $1.188.
The Company has no long-term incentive plan awards.
PAGE 17
<PAGE>
Directors' Compensation
Currently, Directors are not compensated for serving on the Board of Directors
although they are reimbursed reasonable expenses they incur in attending
meetings. The Company's two non-officer directors have each received stock
options from the Company. Mr. Paulick received options to purchase 5,000 shares
of Common Stock in each of 1996, 1997 and 1998. Mr. McSweeney received options
to purchase 5,000 shares of Common Stock in 1998. See "Stock Options" below.
Employment Agreements
Messrs. August and Fred are employed by the Company as Chairman of the Board,
President and Chief Executive Officer, and Vice President, Chief Financial
Officer and Secretary, respectively, pursuant to employment agreements which
expire on December 31, 2001. The employment agreements provide Messrs. August
and Fred with annual base salaries of $300,000, and $100,000, respectively,
during the term of their contracts. Pursuant to his employment agreement, Mr.
August is entitled to receive an annual bonus equal to 4% of the Company's net
income for the years ending December 31, 1999, 2000 and 2001.
The agreements with Messrs. August and Fred provide that during the term of
employment with the Company, and for a period of one-year thereafter, the
employees will not compete with the Company or engage in any activities that
would interfere with the performance of their duties as employees of the
Company. The agreements provide that the Company will maintain hospital and
health insurance benefits for the employee following retirement.
The Company employed Mr. Theodore Martines as its Executive Vice president from
December 1984 through his retirement in December 1998. Pursuant to his agreement
with the Company, Mr. Martines received an annual base salary of $185,807 and
$172,145 in 1998 and 1997, respectively.
Daniel Liguori is employed as President of Kolar pursuant to an employment
agreement which expires on October 9, 2000 unless extended, at Mr. Ligouri's
election, for an additional three years. The employment agreement provides Mr.
Liguori with an annual base salary of $168,000 and provides that during the term
of employment with Kolar, and for a period of five years thereafter, Mr. Liguori
will not compete with Kolar.
Employee Benefit Plans
On February 1, 1991, the Company adopted a Qualified Sick Pay Plan (the "QSP
Plan") which covers full-time executive officers and managers. The QSP Plan
provides covered employees with income during periods of disability due to
sickness or injury and is funded through the purchase of disability income
insurance policies.
On September 11, 1996, the Company instituted a fully-qualified 401(k) Employees
Savings Plan. The plan is totally voluntary and employee contributions to the
plan commenced on October 1, 1996. The Company has the option to make voluntary
matching and profit-sharing contributions to the account of its employees.
Stock Options
1998 Performance Equity Plan
The 1998 Performance Equity Plan ("1998 Plan") authorizes the grant of
1,000,000 options, of which options to purchase an aggregate of 180,000 shares
of Common Stock have been granted, at exercise prices ranging from $2.09 to
$2.30 per share, to certain employees and executive officers of the Company.
These include five year options to purchase 100,000 shares of Common Stock
granted to Arthur August, Chairman of the Board of Directors, Chief Executive
Officer and President at an exercise price of $2.30 per share; ten-year options
to purchase 40,000 shares of Common Stock to Edward J. Fred, Vice President,
Chief Financial Officer, and Secretary at an exercise price of
PAGE 18
<PAGE>
$2.09 per share, and ten-year options to one non-executive officer to purchase
40,000 shares of Common Stock. As of April 1, 1999, options to purchase 820,000
additional shares remain eligible for the grant of options.
1995 Employee Stock Option Plan
The 1995 Employee Stock Option Plan (the "1995 Option Plan"), authorizes the
grant of 600,000 options, of which options to purchase 493,400 shares of Common
Stock have been granted at exercise prices ranging from $1.06 to $3.00 per
share, to certain employees, executive officers, and directors of the Company
including: five-year options to purchase an aggregate of 250,000 shares of
Common Stock granted to Arthur August, Chairman of the Board of Directors, Chief
Executive Officer and President at exercise prices ranging from $1.44 to $2.27
per share; five year options to purchase 10,000 shares of Common Stock to Edward
J. Fred, Chief Financial Officer; five-year options to purchase an aggregate of
159,000 shares of Common Stock to Stanley Wunderlich, a former Director; five
year options to purchase 15,000 shares of Common Stock to Walter Paulick, a
Director, five year options to purchase 5,000 shares of Common Stock to Kenneth
McSweeney, a Director, and five-year options to fourteen non-executive officer
employees to purchase an aggregate of 153,400 shares of Common Stock. As of
April 1, 1999, options to purchase 40,000 additional shares remain eligible for
the grant of options.
1992 Employee Stock Option Plan
The 1992 Employee Stock Option Plan (the "1992 Plan") authorizes the grant of
250,000 options, of which options to purchase 79,000 shares have been granted at
exercise prices ranging from $1.31 to $3.00 per share to certain employees,
executive officers and directors ofo ther Company including: 10,000 shares held
by Walter Paulick, a director, exercisable at $1.00 per share, and 5,000 shares
exercisable at $2.00 per share.; 10,000 shares held by Edward Fred, Chief
Financial Officer and director, exercisable at $1.31 per share. As of April 1,
1999, options to purchase 122,836 shares remain eligible for the grant of
options.
Other Options
In October 1994, the Company granted an option to purchase 10,000 shares at
$3.00 per share (as amended) to a consultant. On January 26, 1995, the Company
granted an option to purchase 120,000 shares of Common Stock at $3.00 per share
to Rickel and Associates, in consideration of business consulting services to be
performed for the Company. This option was canceled in April 1996, because of
Rickel & Associates' non-performance and is the subject of a lawsuit. See "Item
3. Legal Proceedings." An option to purchase 20,000 shares of Common Stock was
issued to the Company's former counsel in April 1995 exercisable at $2.00 per
share.
In April 1998, the Company issued 100,000 warrants to Gaines, Berland Inc. as
compensation for acting as the Company's investment banker, pursuant to a
consulting agreement. These warrants entitle the investment banker to purchase
100,000 shares of common stock at an exercise price of $2.50 during the
five-year period commencing April 1, 1998.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the date hereof, certain information
concerning those persons known to the Company, based on information obtained
from such persons, with respect to the beneficial ownership (as such term is
defined in Rule 13d-3 under the Securities Exchange Act of 1934) of Common Stock
PAGE 19
<PAGE>
by (i) each person known by the Company to be the owner of more than 5% of the
outstanding shares of Common Stock, (ii) each director, (iii) the Chief
Executive Officer and the Company's other executive officers whose total
compensation exceeded $100,000 and (iv) all directors and executive officers as
a group:
Name and Address Shares Percent of
of Beneficial Owner Beneficially Owned(1) Common Stock(2)
- -------------------- --------------------- -----------------
Arthur August (3) 1,170,000 (5) 14.3%
Edward J. Fred(3) 70,000 (6) *
Walter Paulick(3) 30,000 (7) *
Kenneth McSweeney(3) 5,000 (8) *
Daniel Liguori (4) 1,000,000 (9) 11.2%
All Directors and 2,275,000 (10) 24.4%
Executive Officers
as a group (five persons)
* Less than 1% of the outstanding Common Stock of the Company.
(1) Unless otherwise noted, the Company believes that all persons named in
the table have sole voting and investment power with respect to all
shares of Common Stock beneficially owned by them, subject to community
property laws, where applicable. A person is deemed to be the
beneficial owner of securities that can be acquired by such person
within 60 days from the date hereof upon the exercise of warrants or
options.
(2) Based on 7,945,342 shares issued and outstanding. Each beneficial
owner's percentage ownership is determined by assuming that options or
warrants that are held by such person (but not those held by any other
person) and which are exercisable within 60 days from the date hereof
have been exercised.
(3) The business address of such person is care of the Company, 200A
Executive Drive, Edgewood, New York 11717.
(4) The business address of such person is care of Kolar, Inc., 407 Cliff
Street, Ithaca, New York 14850.
(5) Includes 250,000 shares of Common Stock which Mr. August has the right
to acquire upon exercise of options granted pursuant to
the 1995 Plan and 1998 Plan. Excludes an aggregate of 120,000 shares
of Common Stock owned by Mr. August's children or held in trust for
Mr. August's grandchildren, and 9,000 shares of Common Stock owned by
Mr. August's wife, all of which shares Mr. August disclaims beneficial
ownership, and 100,000 shares of Common Stock underlying options not
currently exercisable.
(6) Represents 70,000 shares of Common Stock which Mr. Fred has the right
to acquire upon exercise of options granted pursuant to the 1995 and
1998 Plan.
(7) Represents 30,000 shares of Common Stock which Mr. Paulick has the
right to acquire within 60 days upon exercise of options granted
pursuant to the Company's 1992 Employee Stock Option Plan and 1995
Employee Stock Option Plan.
PAGE 20
<PAGE>
(8) Includes 5,000 shares of Common Stock which Mr. McSweeney has the
right to acquire upon exercise of stock options granted pursuant to
the 1995 Plan.
(9) Includes 1,000,000 shares of Common Stock which Mr. Liguori has
the right to acquire by converting the promissory note he received in
connection with the Company's purchase of Kolar Machine, Inc.
(10) Includes an aggregate of 1,355,000 shares of Common Stock which Messrs.
August, Fred, Paulick, McSweeney and Liguori have the right to
acquire upon exercise of outstanding options and conversion rights.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning employment agreements with, compensation of, and
stock options granted to the Company's executive officers and directors, see
"Item 10. Executive Compensation -- Employment Agreements; and Stock Options."
On January 1, 1996, the Company entered into a consulting agreement with Stanley
Wunderlich. Mr. Wunderlich was a director of the Company from November 1995
until February 1, 1998, when he resigned from the Board of Directors. The
agreement terminated by its own terms on December 31, 1997. The Company and Mr.
Wunderlich entered into a new consulting agreement on January 1, 1998. This
agreement terminates on December 31, 1999, unless sooner terminated on sixty
days notice of either party. Pursuant to the agreement, Mr. Wunderlich provides
the Company with financial advisory consulting services including, but not
limited to, assisting with financial public relations, arranging meetings with
securities analysts and money managers, rendering advice with regard to changes
in the capitalization or corporate structure of the Company, and advising the
Company in connection with potential mergers or acquisitions. In consideration
for these services, Mr. Wunderlich is compensated at the rate of $1,000 per
month, including reasonable expenses. In addition, in January 1998, as further
compensation for these consulting services, Mr. Wunderlich was granted 75,000
non-qualified stock options exercisable at a price of $2.50 per share for a
period of five years.
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<PAGE>
Item 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation of the Registrant, as amended.(1)
*3.1(a) Certificate of Amendment of Certificate of Incorporation filed
on July 14, 1998.
3.2 Amended and Restated By-Laws of the Registrant.(1)
4.1 Form of Underwriter's Warrants issued to the Underwriter.(1)
4.2 Form of Registration Rights Agreement dated June 17, 1996. (9)
4.3 Form of Subscription Agreement. (9)
4.4 Form of Placement Agent Warrants dated June 17, 1996 (9)
4.5 Form of Consultant's Warrants dated April 3, 1996 (9)
4.6 Form of Redeemable Common Share Purchase Warrant dated June 17, 1996. (9)
10.1 Employment Agreement between Registrant and Arthur August dated September
15, 1995. (8)
10.2 Employment Agreement between Registrant and Theodore J. Martines dated
September 15, 1995. (8)
10.3 1992 Stock Option Plan. (1)
10.4 1995 Employee Stock Option Plan (12).
10.5 Rohr Basic Purchase Agreement dated March 12, 1991 for Apron Assembly on
McDonnell Douglas MD-90.(1)
10.6 Rohr Basic Purchase Agreement dated May 8, 1990 for Boeing 757 Lower Pan
Assembly.(1)
10.7 Form of military contract.(1)
10.8 Registrant's Sick Pay Plan.(1)
10.9 Basic Agreement for Sub-Assembly dated December 10, 1992 by and between
the Registrant and Mitsui & Co. (U.S.A.), Inc.(2)
10.10 Lock-Up/Modification Agreement dated September 24, 1994 by and between the
Company and Whale Securities Co., L.P. (6)
10.11 First Amendment to BPA MD-90-AP-91-the Company by and between the Company
and Rohr, Inc. for MD90 V2500 Apron Assembly. (6)
PAGE 22
<PAGE>
10.12 Lease dated November 15, 1995 by and between the Company and Heartland
Rental Properties Partnership for the Company's facilities in Edgewood,
New York. (8)
10.13 Solicitation Contract dated September 19, 1995 from the Department of the
Air Force. (8)
10.14 Solicitation Contract dated September 22, 1995 from the Department of the
Air Force. (8)
10.15 Placement Agent Agreement dated May 10, 1996 between the Company and the
Placement Agent. (9)
10.16 Financial Consulting Agreement dated April 3, 1996 between the Company and
the Placement Agent. (9)
10.17 Financial Consulting Agreement dated September 11, 1996 between the
Company and Andreas Zigouras.(10)
10.18 Line of Credit Agreement dated September 15, 1996 between the Company and
The Chase Manhattan Bank.(10)
10.19 Asset Purchase Agreement, dated September 9, 1997 by and among Kolar
Machine, Inc., a New York corporation, Daniel Liguori, Registrant and
Kolar, Inc., a Delaware corporation and wholly-owned subsidiary of
Registrant. (11)
10.20 Consulting Agreement dated January 1, 1998 between the Company and Stanley
Wunderlich.
10.21 Credit Agreement dated as of October 9, 1997 among CPI Aerostructures,
Inc., Kolar, Inc., as Borrower, the Several Lenders from Time to Time
Parties Hereto and The Chase Manhattan Bank, as Administrative Agent
("Credit Agreement").
10.22 Employment Agreement between Kolar, Inc. and Daniel Liguori dated October
9, 1997.
10.23 Purchase Agreement dated as of November 10, 1997 between Kolar and
Universal Instruments Corporation.
*10.24 First Amendment to the Credit Agreement dated February 12, 1999.
*10.25 Second Amendment to the Credit Agreement dated as of December 31, 1998.
*10.26 Employment Agreement between the Company and Arthur August dated December
16, 1998.
*10.27 Employment Agreement between the Company and Edward Fred dated December
16, 1998.
*10.28 1998 Performance Equity Plan.
11.1 Statement regarding computation of per share earnings.(2)
16.1 Letter on change in certifying accountant. (7)
21.1 Subsidiaries of the Registrant.
*23.1 Consent of Goldstein Golub Kessler & Company, LLP
*27.1 Financial Data Schedule
*Filed with this Annual Report on Form 10-KSB.
PAGE 23
<PAGE>
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1
(No. 33-49270) declared effective on September 16, 1992 and incorporated
herein by reference.
(2) Filed as an exhibit to the Company's Annual Report on Form 10-K for
December 31, 1992 and incorporated herein by reference.
(3) Filed as an exhibit to Post-Effective Amendment No. 2 to the Company's
Registration Statement on Form S-1 (No. 33-49270) declared effective on
October 26, 1993 and incorporated herein by reference. (4) Filed as an
exhibit to the Company's Annual Report on Form 10-K for December 31, 1993
and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Registration Statement on Form SB-2
(No. 33-83150) declared effective October 7, 1994 and incorporated herein
by reference.
(6) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
December 31, 1994 and incorporated herein by reference.
(7) Filed as an exhibit to the Company's Current Report on Form 8-K for April
29, 1994, as amended, and incorporated herein by reference.
(8) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
December 31, 1996, as amended, and incorporated herein by reference.
(9) Filed as an exhibit to the Company's Current Report of Form 8-K for June
19, 1996 and incorporated herein by reference.
(10) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
December 31, 1996 and incorporated herein by reference.
(11) Filed as an exhibit to CPI's Current Report on Form 8-K for September 9,
1997 and incorporated herein by reference.
(12) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
December 31, 1995 and incorporated herein by reference.
(b) Reports on Form 8-K
None.
<PAGE>
CPI AEROSTRUCTURES, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Independent Auditor's Report F-1
Consolidated Financial Statements:
Balance Sheet as of December 31, 1998 F-2
Statement of Operations for the Years Ended December 31, 1998
and 1997 F-3
Statement of Shareholders' Equity for the Years Ended
December 31, 1998 and 1997 F-4
Statement of Cash Flows for the Years Ended December 31, 1998
and 1997 F-5
Notes to Consolidated Financial Statements F-6 - F-17
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
CPI Aerostructures, Inc.
We have audited the accompanying consolidated balance sheet of CPI
Aerostructures, Inc. and Subsidiary as of December 31, 1998 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the two years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CPI Aerostructures,
Inc. and Subsidiary as of December 31, 1998, and the results of their operations
and their cash flows for each of the two years in the period ended December 31,
1998 in conformity with generally accepted accounting principles.
/s/ Goldstein Golub Kessler LLP
- ---------------------------------
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
February 5, 1999
F-1
<PAGE>
CPI AEROSTRUCTURES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
December 31, 1998
ASSETS (Notes 7 and 10)
<TABLE>
<S> <C>
Current Assets:
Cash and cash equivalents $ 584,296
Accounts receivable 1,689,207
Income tax receivable 516,000
Costs and estimated earnings in excess of billings on uncompleted contracts 3,105,924
Inventory 2,438,415
Deferred income taxes, net of valuation allowance of $2,304,000 919,000
Prepaid expenses and other current assets 102,001
- ----------------------------------------------------------------------------------------------------------------------
Total current assets 9,354,843
Property, Plant and Equipment, net 5,064,840
Goodwill 7,098,917
Other Assets 417,286
- ----------------------------------------------------------------------------------------------------------------------
Total Assets $21,935,886
======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,272,149
Deferred income taxes 260,000
Accrued expenses 351,104
Line of credit 375,000
Current portion of long-term debt 1,475,075
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 4,733,328
Long-term Debt 11,092,239
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 15,825,567
- ----------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Shareholders' Equity:
Common stock - $.001 par value; authorized 50,000,000 shares,
issued and outstanding 7,945,342 shares 7,945
Additional paid-in capital 11,926,226
Accumulated deficit (5,823,852)
- ----------------------------------------------------------------------------------------------------------------------
Shareholders' equity 6,110,319
- ----------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $21,935,886
======================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-2
<PAGE>
CPI AEROSTRUCTURES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
Year ended December 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue $ 19,810,471 $13,015,393
Cost of sales 24,763,293 9,208,745
- ----------------------------------------------------------------------------------------------------------------------
Gross profit (loss) (4,952,822) 3,806,648
Selling, general and administrative expenses 4,422,786 2,016,490
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) from operations (9,375,608) 1,790,158
- ----------------------------------------------------------------------------------------------------------------------
Other (income) expense:
Interest income (11,344) (42,090)
Interest expense 1,263,868 306,446
Other expense (income), net (122,207) 15,075
- ----------------------------------------------------------------------------------------------------------------------
Total other expenses, net 1,130,317 279,431
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before provision (benefit) for income taxes (10,505,925) 1,510,727
Provision (benefit) for income taxes (1,940,000) 562,000
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (8,565,925) $ 948,727
======================================================================================================================
Earnings (loss) per common share - basic $ (1.08) $ .14
======================================================================================================================
Earnings per common share - diluted - $ .12
======================================================================================================================
Shares used in computing earnings per common share:
Basic 7,941,773 6,582,479
Diluted - 7,645,603
======================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
CPI AEROSTRUCTURES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31, 1997 and 1998
- ----------------------------------------------------------------------------------------------------------------------
Retained
Additional Earnings Total
Common Paid-in (Accumulated Shareholders'
Shares Amount Capital Deficit) Equity
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 5,876,710 $5,877 $ 9,146,628 $ 1,793,346 $10,945,851
Net income - - - 948,727 948,727
Shares issued upon exercise
of stock options 69,100 69 120,647 - 120,716
Shares issued in conjunction
with acquisition 100,000 100 287,400 - 287,500
Shares issued upon exercise of
stock warrants 1,856,845 1,857 2,291,290 - 2,293,147
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 7,902,655 7,903 11,845,965 2,742,073 14,595,941
Net loss - - - (8,565,925) (8,565,925)
Warrants issued in conjunction
with consulting agreement - - 35,066 - 35,066
Shares issued upon exercise
of stock warrants 42,687 42 45,195 - 45,237
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 7,945,342 $7,945 $11,926,226 $(5,823,852) $ 6,110,319
======================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
CPI AEROSTRUCTURES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(8,565,925) $ 948,727
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,394,923 400,602
Noncash consulting fees 35,066 -
Deferred income taxes (1,454,000) 19,000
Loss on sale of fixed assets - 38,473
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 131,071 (295,944)
Increase in tax refund receivable (516,000) -
(Increase) decrease in costs and estimated earnings in excess of billings
on uncompleted contracts 9,817,845 (1,217,508)
Increase in inventory (121,284) (261,662)
Decrease in prepaid expenses and other current assets - 11,715
(Increase) decrease in other assets 29,752 (75,183)
Decrease in accounts payable and accrued expenses (200,105) (1,497,393)
Increase (decrease) in income taxes payable (543,000) 543,000
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 8,343 (1,386,173)
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property, plant and equipment (78,892) (89,878)
Proceeds from sale of fixed assets - 6,295
Cash paid for acquisition, net of cash acquired - (10,170,064)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (78,892) (10,253,647)
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from line of credit 375,000 -
Proceeds from issuance of notes payable 10,375,000
Repayment of long-term debt (1,797,575) (10,111)
Principal payments under capital lease obligations (6,547)
Proceeds from exercise of stock warrants 45,237 2,293,147
Proceeds from exercise of stock options - 120,716
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (1,377,338) 12,772,205
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (1,447,887) 1,132,385
Cash and cash equivalents at beginning of year 2,032,183 899,798
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 584,296 $ 2,032,183
======================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 1,237,201 $ 306,000
======================================================================================================================
Income taxes $ 560,819 $ 40,000
======================================================================================================================
Supplemental schedule of noncash investing and financing activities:
Stock issued in connection with acquisition - $ 287,500
======================================================================================================================
Notes payable issued in connection with acquisition - $ 4,000,000
======================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
CPI AEROSTRUCTURES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. PRINCIPAL BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company consists of CPI Aerostructures, Inc. ("CPI") and Kolar, Inc.
("Kolar"), a wholly owned subsidiary formed in October 1997 (see Note 3),
collectively the "Company."
CPI's operations consist of the design and production of complex aerospace
structural subassemblies under U.S. government and commercial contracts.
The length of the Company's contracts varies but is typically between one
and two years for U.S. government contracts and up to 10 years for
commercial contracts.
Kolar's principal business is the precision computer numerical control
machining of metal products on a contract-order basis. The Company operates
in and distributes from New York State.
CPI's revenue is recognized based on the percentage of completion method of
accounting for long-term contracts, measured by the percentage of total
costs incurred to date to estimated total costs at completion for each
contract. Contract costs include all direct material, labor costs, tooling
and those indirect costs related to contract performance, such as indirect
labor, supplies, tools, repairs and depreciation costs. Selling, general
and administrative costs are charged to expense as incurred. Estimated
losses on uncompleted contracts are recognized in the period in which such
losses are determined. Changes in job performance may result in revisions
to costs and income and are recognized in the period in which revisions are
determined to be required. In accordance with industry practice, costs and
estimated earnings in excess of billings on uncompleted contracts, included
in the accompanying consolidated balance sheet, contain amounts relating to
contracts and programs with long production cycles, a portion of which will
not be realized within one year. CPI's recorded revenue may be adjusted in
later periods in the event that CPI's cost estimates prove to be inaccurate
or a contract is terminated.
Kolar's revenue is recognized when goods are shipped to customers.
Inventory is stated at the lower of cost (first-in, first-out method) or
market.
In December 1998, based on information received from Rohr Industries, Inc.
("Rohr"), CPI recognized a termination of its contract to produce apron
assemblies for the MD-90, and recorded a noncash charge to cost of sales
amounting to approximately $11,850,000.
In December 1997, based on information received from Rohr, CPI recognized a
termination of its agreement to produce pan assemblies and spars for the
Boeing 757, and recorded a noncash charge to cost of sales amounting to
approximately $605,000.
The Company maintains cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses
in such accounts. The Company believes it is not exposed to any significant
credit risk on cash.
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
F-6
<PAGE>
Depreciation and amortization of property, plant and equipment is provided
for by the straight-line method over the estimated useful lives of the
respective assets or the life of the lease, for leasehold improvements.
The Company has incurred approximately $549,000 of costs of obtaining debt,
and has deferred such costs. These costs will be amortized over the life of
the debt. The unamortized portion of these deferred financing costs,
approximately $388,000 at December 31, 1998, are included in other assets.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates by management.
Actual results could differ from these estimates.
In accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, the
Company has elected to apply APB Opinion No. 25 and related interpretations
in accounting for its stock options issued to employees and, accordingly,
does not recognize additional compensation cost as required by SFAS No.
123. The Company, however, has provided the pro forma disclosures as if the
Company had adopted the cost recognition requirements.
In 1997, the Company adopted SFAS No. 128, Earnings per Share. Basic
earnings per common share is computed using the weighted average number of
shares outstanding. Diluted earnings per common share is computed using the
weighted average number of shares outstanding adjusted for the incremental
shares attributed to outstanding options and warrants to purchase common
stock. Incremental shares of 1,063,124 were used in the calculation of
diluted earnings per common share in 1997. In 1998, diluted earnings per
share is not presented as the result is antidilutive.
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. In February 1998,
the FASB issued SFAS No. 132, Employer's Disclosures about Pensions and
Other Postretirement Benefits. The Company adopted these statements in
1998. SFAS No. 130 establishes new standards for reporting and displaying
comprehensive income and its components. SFAS No. 131 requires disclosure
of certain information regarding operating segments, products and services,
geographic areas of operation and major customers. SFAS No. 132 revises
employer's disclosures about pensions and other postretirement benefit
plans. Adoption of these statements has had no impact on the Company's
consolidated financial position, results of operations or cash flows.
2. PRIVATE PLACEMENT:
On June 27, 1997, the Company announced it had increased the number of
shares issuable upon exercise of the Company's Class B common stock
purchase warrants issued in the Company's 1996 private placement (the "1996
Private Placement") from 1 to 1.33336 common shares effective as of June
27, 1997 through August 4, 1997. Seventy-nine of the eighty-two warrant
holders exercised their warrants. The three warrant holders who did not
exercise their warrants had the warrants redeemed for $.05 per warrant. The
majority of the proceeds from these warrant exercises was used by the
Company to help facilitate the acquisition of substantially all of the
assets of Kolar Machine, Inc. ("KMI").
F-7
<PAGE>
3. ACQUISITION:
On October 9, 1997, the Company acquired substantially all of the assets
and assumed substantially all of the liabilities of KMI, a privately owned
precision machine and assembly manufacturer which services the electronics
industry, including computer and microwave device manufacturers, as well as
the materials handling, aerospace and banking industries for approximately
$10,000,000 cash and a $4,000,000 note payable. Additionally, the Company
incurred approximately $465,000 of costs in connection with this
acquisition, which includes the land and buildings described in the next
paragraph.
Additionally, the Company acquired land and buildings owned by the sole
shareholder (the "Seller") of KMI.
This acquisition has been accounted for as a purchase. The fair values of
assets acquired and liabilities assumed amounted to approximately
$9,636,000 and $2,916,000, respectively, which resulted in an excess of
cost over the fair value of the net assets acquired (goodwill), of
approximately $7,745,000 which is being amortized over 15 years. The
acquisition was financed through a $10,375,000 term loan payable jointly to
The Chase Manhattan Bank and Mellon Bank, and a $4,000,000 note payable
issued to the Seller. The operations of KMI are included in the
consolidated financial statements from October 9, 1997, the date of
acquisition. All intercompany accounts have been eliminated in
consolidation.
The Seller's note is convertible into 1,000,000 shares of the Company's
common stock at the option of the Seller. The note may be converted at any
time prior to the maturity date of the note. The conversion of this note
has not been included in computing diluted earnings per share in 1997 as
such conversion would be antidilutive.
Additionally, the Company entered into a three-year employment agreement
with the Seller to become the president of Kolar.
F-8
<PAGE>
CPI AEROSTRUCTURES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following pro forma information assumes that this acquisition occurred
on January 1, 1997:
Pro forma information (unaudited):
Year ended December 31, 1997
- -------------------------------------------------------------------------------
Net sales $25,303,451
===============================================================================
Net income $ 1,688,376
===============================================================================
Earnings per common share - basic $ .25
===============================================================================
Earnings per common share - diluted $ .22
===============================================================================
Shares used in computing earnings per common share:
Basic 6,657,479
===============================================================================
Diluted 7,720,603
===============================================================================
4. COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED
CONTRACTS:
At December 31, 1998, costs and estimated earnings in excess of billings on
uncompleted contracts consist of:
U.S.
Government Commercial Total
- -------------------------------------------------------------------------------
Costs incurred on uncompleted
contracts $6,887,016 $20,566,914 $27,453,930
Estimated earnings 1,578,270 4,954,810 6,533,080
- -------------------------------------------------------------------------------
8,465,286 25,521,724 33,987,010
Less billings to date 6,703,398 24,177,688 30,881,086
- -------------------------------------------------------------------------------
Costs and estimated earnings
in excess of billings on
uncompleted contracts $1,761,888 $ 1,344,036 $ 3,105,924
===============================================================================
Unbilled costs and estimated earnings are billed in accordance with
applicable contract terms. As of December 31, 1998, approximately $433,000
of the balances above are not expected to be collected within one year.
5. INVENTORY: Inventory consists of the following:
Raw materials $ 716,977
Work-in-progress 525,459
Finished goods 1,195,979
- -------------------------------------------------------------------------------
$2,438,415
===============================================================================
F-9
<PAGE>
6. PROPERTY, PLANT AND EQUIPMENT, plant and equipment, at cost, consists of
the following:
Estimated
December 31, 1998 Useful Life
- -------------------------------------------------------------------------------
Land $ 412,200
Machinery and equipment 4,807,275 5 to 10 years
Building 887,800 39 years
Furniture and fixtures 41,686 7 years
Automobiles and trucks 93,015 5 years
Leasehold improvements 66,791 3 years
- -------------------------------------------------------------------------------
6,308,767
Less accumulated depreciation and amortization 1,243,927
- -------------------------------------------------------------------------------
$5,064,840
===============================================================================
7. LONG-TERM DEBT: Long-term debt consists of the following:
Note payable - bank (a) $ 7,637,500
Note payable - bank (b) 929,814
Note payable - seller (c) 4,000,000
- -------------------------------------------------------------------------------
12,567,314
Less current maturities 1,475,075
- -------------------------------------------------------------------------------
$11,092,239
===============================================================================
(a) The note, as amended in December 1998, is payable to a commercial bank in
monthly installments of $120,000 through December 31, 1999, $200,000 from
January 2000 through December 2000, and $317,000 from January 2001 through
December 2001, plus monthly interest at the bank's published prime rate
(7.75% at December 31, 1998) plus 1.5%. This note is collateralized by all
of the assets of the Company. The amended note provides that if certain
conditions are not met by March 31, 1999, the Company will be subject to an
additional $300,000 fee on this note.
(b) The note is payable to a commercial bank in monthly installments of $9,487,
including interest at 8.3%, maturing October 31, 2007. This note is
collateralized by Kolar's land and building.
(c) Note payable to the Seller bears interest at 8% per annum. The Seller has
deferred the Company's payment of interest on this note until January 2000.
The accrued interest through December 1999 will be payable upon maturity of
the seller's note. Monthly interest payments will begin again in January
2000. This note matures December 31, 2001.
F-10
<PAGE>
Maturities of long-term debt are as follows:
Year ending December 31,
1999 $ 1,475,075
2000 2,441,385
2001 7,842,455
2002 48,031
2003 52,011
Thereafter 708,357
- ----------------------------------------------------------------------------
$12,567,314
============================================================================
At December 31, 1998, the carrying value of the Company's long-term debt
approximated its estimated fair value based upon current borrowing rates
for similar issues.
8. COMMITMENTS:
The Company leases office and warehouse facilities under a noncancelable
operating lease expiring in March 2000.
The aggregate future minimum rental commitment under this lease is as
follows:
Year ending December 31,
1999 $161,412
2000 40,353
- ----------------------------------------------------------------------------
$201,765
============================================================================
Total rental expense for the years ended December 31, 1998 and 1997
amounted to $164,578 and $157,280, respectively.
The Company is required to pay additional expenses, as defined.
The Company has employment agreements with three employees. The aggregate
future commitment under these agreements are as follows:
Year ending December 31,
1999 $ 568,000
2000 526,000
2001 400,000
- ----------------------------------------------------------------------------
$1,494,000
============================================================================
These agreements include additional amounts based on bonuses that are
calculated, as defined.
F-11
<PAGE>
The provision (benefit) for income taxes consists of the following:
Year ended December 31, 1998 1997
---------------------------------------------------------------------------
Current:
Federal $ (497,000) $501,000
State and local 11,000 42,000
- -------------------------------------------------------------------------------
(486,000) 543,000
- -------------------------------------------------------------------------------
Deferred:
Federal (1,309,000) 17,000
State and local (145,000) 2,000
- -------------------------------------------------------------------------------
(1,454,000) 19,000
- -------------------------------------------------------------------------------
$(1,940,000) $562,000
===============================================================================
The difference between the income tax provision (benefit) computed at the
federal statutory rate and the actual tax provision (benefit) is accounted
for as follows:
1998 1997
- -------------------------------------------------------------------------------
Taxes (benefit) computed at the federal
statutory rate $(3,572,000) $514,000
State income taxes (benefit), including
deferred, net of federal benefit (686,000) 30,000
Other, including officers' life insurance and
various permanent differences 14,000 18,000
Nonutilization of net operating loss
carryforward 2,304,000 -
- -------------------------------------------------------------------------------
$(1,940,000) $562,000
===============================================================================
The components of deferred income tax assets (liabilities) are as follows:
Current Noncurrent
- -------------------------------------------------------------------------------
Long-term contracts $ 47,000 -
Property, plant and equipment - $(260,000)
Inventory 113,000 -
Net operating loss carryforwards 3,063,000 -
Valuation allowance (2,304,000) -
- -------------------------------------------------------------------------------
$ 919,000 $(260,000)
===============================================================================
F-12
<PAGE>
As of December 31, 1998, the Company had net operating loss carryforwards
of approximately $7,715,000 for federal income tax purposes expiring in
2013.
10. LINE OF CREDIT:
The Company has a $1,000,000 line of credit agreement, expiring June 30,
1999, with The Chase Manhattan Bank and Mellon Bank for working capital and
other corporate purposes as needed. Borrowings are subject to limits based
on amounts of accounts receivable and inventory, as defined. Interest is at
the banks' prime rate (7.75% at December 31, 1998) plus 1%. The line of
credit is collateralized by substantially all assets of the Company.
11. EMPLOYEE STOCK OPTION PLANS
In April 1992, the Company adopted the 1992 Stock Option Plan (the "1992
Plan"). The 1992 Plan, for which 250,000 common shares are reserved
for issuance, provides for the issuance of either incentive stock options
or nonqualified stock options to employees, consultants or others who
provide services to the Company. The initial options granted to employees
and directors with three or more years of service became exercisable as to
one-third of the shares each year beginning on September 16, 1992. The
initial options granted to those with less than three years of service
became exercisable as to one-third of the shares each year beginning on
September 16, 1993. The options may not be exercised more than five years
from the date of issuance. In 1995, the option price for all outstanding
employees' and director's stock options was lowered to $3.00.
In 1995, the Company adopted the 1995 Stock Option Plan (the "1995 Plan"),
as amended, for which 600,000 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 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 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 Stock Option Plan (the "1998 Plan"),
for which 1,000,000 common shares are reserved for issuance. The 1998 Plan
provides for the issuance of either incentive stock options or nonqualified
stock options to employees, consultants 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 president, which are exercisable at 110%
of the closing price of the Company's shares on the date of issuance.
The Company has 7,836 options available for future grant under the 1992
Plan, no options available for grant under the 1995 Plan, and 745,000
options available for grant under the 1998 Plan.
F-13
<PAGE>
If the Company had elected to recognize compensation cost based on the fair
value of the options granted at grant date as prescribed by SFAS No. 123,
net income and earnings per share would have been adjusted to the pro forma
amounts indicated in the table below:
As Reported Pro Forma
1998 1997 1998 1997
- ------------------------------------------------------------------------------
Net income (loss) $(8,565,925) $948,727 $(8,733,702) $803,019
===============================================================================
Earnings (loss) per share:
Basic $ (1.08) $ .14 $ (1.10) $ .12
Diluted - .12 - .10
===============================================================================
A summary of the status of the Company's three stock option plans as of
December 31, 1998 and 1997 and changes during those years are as follows:
1998 1997
- -------------------------------------------------------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Fixed Options Options Price Options Price
- -------------------------------------------------------------------------------
Outstanding at beginning
of year 627,400 $1.84 333,835 $2.07
Granted during year 355,000 2.24 487,500 1.97
Exercised - - (69,100) 1.75
Forfeited - - (124,835) 3.00
- -------------------------------------------------------------------------------
Outstanding at end of year 982,400 $1.99 627,400 $1.84
===============================================================================
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1998:
Weighted-
Number Average
Outstanding Remaining
Range of and Contractual Exercise
Exercise Price Exercisable Life Price
- ------------------------------------------------------------------------------
$1.00 - $3.00 982,400 3.85 years $1.99
==============================================================================
The Company's assumptions used to calculate the fair values of options
issued were (i) risk-free interest rate of 5.25%, (ii) expected life of
five years, (iii) expected volatility of 174.71% and (iv) expected
dividends of zero.
F-14
<PAGE>
12. WARRANTS AND OPTIONS:
The Company sold 100,000 warrants to the Company's Underwriter
("Underwriter's Warrants") in September 1992 for an aggregate of $100. The
Underwriter's Warrants, as adjusted, entitle the Underwriter, or its
assignees, to purchase up to 566,038 shares of common stock at an exercise
price of $1.06 and an aggregate of 100,000 warrants exercisable at $2.50.
All of the Underwriter's Warrants expire on September 24, 1999. In 1997,
206,141 of the Underwriter's Warrants were exercised.
In February 1995, the Company issued stock options to a consultant to
purchase 120,000 common shares at $3.00 per share, which options and
accompanying consulting agreement were terminated by the Company and are
the subject of a lawsuit. In April 1995, the Company also granted options
to purchase 20,000 shares at $2.00 per share to its counsel. All of these
options are outside the employee stock option plans and expire in April
2000. In January 1996, the Company issued stock options to purchase 18,500
shares at $1.06 per share to a director.
In March 1996, the Company issued 300,000 warrants to Barber and Bronson,
Inc. as partial compensation for acting as the Company's Placement Agent
for its private placement of equity. These warrants entitle the Placement
Agent to purchase 300,000 shares of common stock at an exercise price of $1
during the five-year period commencing June 19, 1996. In 1997, 30,000 of
these warrants were exercised.
The Company's Placement Agent also received a warrant ("Placement Agent's
Warrant") in June 1996. The Placement Agent's Warrant entitles the
Placement Agent to purchase up to 8.2 units, each consisting of 25,000
shares of common stock and warrants to purchase 12,500 common shares, at an
exercise price of $1.00 during the five-year period commencing June 19,
1996. The Placement Agent, pursuant to a consulting agreement, provided
financial consulting services for two years, starting March 5, 1996 at a
rate of $3,000 per month. In August 1997, the Placement Agent exercised all
of its Placement Agent's Warrants to help facilitate the acquisition
described in Note 3.
In September 1996, the Company issued options to purchase 10,000 shares of
common stock to two directors at an exercise price of $2.00 per share of
common stock. These options expire in 2001.
In February 1997, the Company issued options to purchase 10,000 shares of
common stock to two directors at an exercise price of $2.06 per share of
common stock. These options expire in 2002.
In January 1998, the Company issued options to purchase 75,000 shares of
common stock to a consultant, who was also a director, at an exercise price
of $2.50 per share of common stock. In February 1998, the Company issued
options to purchase 10,000 shares of common stock to two directors at an
exercise price of $2.31 per share of common stock. These options expire in
2003.
F-15
<PAGE>
In March 1998, the Company issued 100,000 warrants to Gaines Berland, Inc.
as compensation for acting as the Company's investment banker, pursuant to
a consulting agreement. These warrants entitle the investment banker to
purchase 100,000 shares of common stock at an exercise price of $2.50
during the five-year period commencing April 1, 1998.
13. MD-90 CONTRACT:
In March 1991, CPI entered into an agreement with Rohr, pursuant to which
the Company agreed to provide Rohr with apron assemblies and related
components in connection with production of the then proposed McDonnell
Douglas MD-90 jet aircraft. During the year ended December 31, 1998,
approximately 23% of the Company's revenue was derived from this program,
as compared with 24% in 1997.
In 1997, the Boeing Company acquired the McDonnell Douglas Corporation.
Boeing announced that it planned to terminate the MD-90 program unless it
received sufficient additional orders for such aircraft.
In December 1998, based on information received from Rohr, the Company
recognized a termination of this contract. This termination resulted in the
Company writing off approximately $11,850,000 of previously recorded
revenue. The effect of this write-off is included in cost of sales in 1998.
14. EMPLOYEE BENEFIT PLANS:
On September 11, 1996, CPI's board of directors instituted a defined
contribution plan under Section 401(k) of the Internal Revenue Code (the
"Code"). On October 1, 1998, the Company amended and standardized both the
CPI and Kolar plans as required by the Code. Pursuant to the amended plan,
qualified employees may contribute a percentage of their pre-tax eligible
compensation to the Plan and the Company will match a percentage of each
employee's contribution. Additionally, the Company has a profit-sharing
plan covering all eligible employees. Contributions by the Company are at
the discretion of management. The amount of contributions recorded by the
Company in 1998 and 1997 amounted to $116,355 and $49,252, respectively.
15. CONTINGENCIES:
From time to time the Company is subject to routine litigation incidental
to its business. The Company believes that the settlement of any pending
legal proceedings will not have a material adverse effect on the Company's
financial condition.
16. SEGMENT INFORMATION:
The Company's operations are classified into two business segments:
production of complex aerospace structural subassemblies ("Aerospace") and
computer numerical control machining of metal products ("Machining").
F-16
<PAGE>
Summarized financial information by business segment for 1998 and 1997 are
as follows:
December 31, 1998 1997
- -------------------------------------------------------------------------------
Net sales:
Aerospace $ 8,492,753 $ 9,825,309
Machining 11,317,718 3,190,084
- -------------------------------------------------------------------------------
$ 19,810,471 $13,015,393
===============================================================================
Operating income (loss):
Aerospace $(10,174,230) $ 1,453,103
Machining 798,622 337,055
- -------------------------------------------------------------------------------
$ (9,375,608) $ 1,790,158
===============================================================================
Total assets:
Aerospace $ 5,897,982 -
Machining 16,037,904 -
- -------------------------------------------------------------------------------
$ 21,935,886 -
===============================================================================
December 31, 1998 1997
- -------------------------------------------------------------------------------
Depreciation and amortization:
Aerospace $664,879 $ 69,069
Machining 83,746 331,533
- -------------------------------------------------------------------------------
$748,625 $400,602
===============================================================================
Capital expenditures:
Aerospace $ 42,512 $ 77,537
Machining 36,380 12,341
- -------------------------------------------------------------------------------
$ 78,892 $ 89,878
===============================================================================
17. MAJOR CUSTOMERS:
Approximately 23% of the Company's sales in 1998 and 1997 were to Rohr.
Approximately 17% and 43% of the Company's sales in 1998 and 1997,
respectively, were to the U.S. Government. Approximately 40% and 19% of the
Company's sales in 1998 and 1997, respectively, were to Universal
Instruments Inc. ("Universal").
At December 31, 1998, approximately 21% and 49% of accounts receivable were
due from Universal and Rohr, respectively.
F-17
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: April 15, 1999 CPI AEROSTRUCTURES, INC.
By: /s/ Arthur August
------------------------
Arthur August,
President
In accordance with the Exchange Act, this Report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated:
Signature Title Date
/S/ Arthur August Chairman of the Board, April 15, 1999
- ------------------ President (Principal
Arthur August Executive Officer)
and Director
/S/ Edward J. Fred Vice President April 15, 1999
- ------------------ (Principal
Edward J.Fred Accounting and Financial
Officer) and Director
/S/ Walter Paulick Director April 15, 1999
- ------------------
Walter Paulick
/S/ Kenneth McSweeney Director April 15, 1999
- ----------------------
Kenneth McSweeney
PAGE 24
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
CPI AEROSTRUCTURES, INC.
-----------------------------------------------------------
Under Section 805 of the
Business Corporation Law of New York
------------------------------------------------------------
The undersigned, being the President and Secretary of CPI Aerostructures,
Inc. (the "Corporation"), hereby certify as follows:
FIRST: The name of the Corporation is CPI Aerostructures, Inc. The name
under which the Corporation was formed is Composite Products International, Inc.
SECOND: The Certificate of Incorporation was filed with the Department of
State on January 11, 1980.
THIRD: The amendments to the Certificate of Incorporation of the
Corporation effected by this Certificate of Amendment are as follows:
1. To increase the number of shares of Common Stock authorized for
issuance thereunder from 15,000,000 shares to 50,000,000;
2. To authorize the issuance by the Corporation of up to 5,000,000 shares
of preferred stock which will have such designations, preferences,
dividend conversion, cumulative, relative, participating, optional or
other rights, including voting rights, qualifications, limitations, or
restrictions thereof as are determined by the Board of Directors;
<PAGE>
3. To prohibit the taking of action by shareholders by written consent of
less than all of the holders; and
4. To create a staggered Board of Directors with three classes.
FOURTH: To accomplish the foregoing amendments, Article 4 of the
Certificate of Incorporation of the Corporation, relating to the aggregate
number of shares which the Corporation is authorized to issue and Article 7,
relating to shareholder action by written consent of less than the holders of
all of the outstanding shares, are hereby amended to read as set forth below;
and the following new Article 9, relating to the creation of a staggered board,
is added to the Certificate of Incorporation of the Corporation as follows:
"4. The aggregate number of shares that the Corporation shall
have authority to issue is fifty million (50,000,000) Common Shares,
each of which shall have par value of $.001 and 5,000,000 shares of
Preferred Stock, each of which shall have par value of $.001.
(a) Preferred Stock. The Board of Directors is
expressly granted authority to provide for the issuance of all
or any shares of the Preferred Stock, in one or more series,
and to fix for each such series such designations,
preferences, dividend, conversion, cumulative, relative,
participating, optional or other rights, including voting
rights, qualifications, limitations or restrictions thereof as
are determined by the Board of Directors and as may be
permitted by the Business Corporation Law of the State of New
York. The number of authorized shares of Preferred Stock may
be increased or decreased (but not below the number of shares
then outstanding) by the affirmative vote of the holders of a
majority of the voting power of all of the then outstanding
shares of capital stock of the Corporation entitled to vote
generally in the election of directors, voting together as a
single class, without a separate vote of the holders of the
Preferred Stock, or any series thereof, unless a vote of any
such holders is required pursuant to any Preferred Stock
Designation.
(b) Common Stock. Except as otherwise required by law
and except as otherwise provided in any designation of the
Preferred Stock, the holders of the Common Stock shall
exclusively possess all voting power of the Corporation.
Each share of Common Stock shall have one vote."
"7. Pursuant to Section 615(a) of the Business Corporation Law
of the State of New York, whenever the shareholders of the Corporation
are required or permitted to take any action by vote, such action may
be taken without a meeting on written consent, which written consent
shall set forth the action to be taken, signed by the holders of all
outstanding shares of the Corporation entitled to vote thereon."
2
<PAGE>
"9. (a) The Board of Directors of the Corporation shall be
comprised of three classes of directors. The number of
directors in each class shall be as nearly equal as possible.
At the first election, the term of the directors comprising
Class I shall expire at the next annual meeting of
shareholders, the term of the directors comprising Class II
shall expire at the second succeeding annual meeting of
shareholders and the term of the directors comprising Class
III shall expire at the third succeeding annual meeting of
shareholders.
(b) At each annual meeting of shareholders
thereafter, directors elected to replace those whose terms
expire at such annual meeting shall be elected to hold office
until the third succeeding annual meeting.
(c) Any newly created directorships or any decrease
in directorships shall be so apportioned among the classes as
to make all classes as nearly equal in number as possible.
When the number of directors is increased by the Board of
Directors and any newly created directorships are filled by
the Board of Directors, there shall be no classification of
the additional directors until the next annual meeting of
shareholders."
FIFTH: The foregoing amendment of the certificate of incorporation of the
Corporation was duly authorized by the unanimous written consent of all the
members of the Board of Directors of the Corporation, and subsequently was
approved by the affirmative vote of a majority of the holders of all the
outstanding shares of the Corporation entitled to vote on said amendment of the
Certificate of Incorporation at a meeting of shareholders.
IN WITNESS WHEREOF, we have signed this document on this 16th day of June
1998, and do hereby affirm, under the penalties of perjury, that the statements
contained herein have been examined by us and are true and correct.
/s/ Arthur August
-------------------------
ARTHUR AUGUST, President
/s/ Theodore Martines
--------------------------
THEODORE MARTINES, Secretary
3
<PAGE>
EXHIBIT 10.24
FIRST AMENDMENT, dated as of February 12, 1999 (this "Amendment") to the
Credit Agreement, dated as of October 9, 1997 (as amended by this Amendment, and
as the same may be further amended, supplemented or otherwise modified from time
to time, the ("Credit Agreement"), among CPI AEROSTRUCTURES, INC., a New York
corporation ("Holdings"), KOLAR, INC., a Delaware corporation (the "Borrower"),
the several banks and other financial institutions from time to time parties
thereto (collectively, the "Lenders"), and THE CHASE MANHATTAN BANK, a New York
banking corporation, as administrative agent for the Lenders (in such capacity,
the "Administrative Agent").
W I T N E S S E T H :
WHEREAS, Holdings, the Borrower, the Lenders and the Administrative Agent
are parties to the Credit Agreement; and
WHEREAS, Holdings and the Borrower have requested that the Lenders amend
certain terms in the Credit Agreement and in the manner provided for herein; and
WHEREAS, the Administrative Agent and the Lenders are willing to agree to
the requested amendments;
NOW, THEREFORE, in consideration of the premises contained herein, the
parties hereto agree as follows:
1. Defined Terms. Unless otherwise defined herein, terms which are defined
in the Credit Agreement and used herein (and in the recitals hereto) as defined
terms are so used as so defined.
2. Amendment of Subsection 2.3(a). Subsection 2.3(a) of the Credit
Agreement is hereby amended by deleting such subsection in its entirety and
substituting in lieu thereof the following:
(a) The Tranche A Term Loans shall mature on December 31, 2001, to be
paid in (i) 3 consecutive quarterly installments payable on the last Business
Day of each March, June and September, commencing on March 31, 1998 and ending
on September 30, 1998, each of which shall be in an aggregate amount equal to
$587,500; (ii) 12 consecutive monthly installments payable on the last Business
Day of each month commencing on January 31, 1999 and ending on December 31,
1999, each of which shall be in an aggregate amount equal to $120,000; (iii) 12
consecutive monthly installments payable on the last Business Day of each month
commencing on January 31, 2000 and ending on December 31, 2000, each of which
shall be in an aggregate amount equal to $200,000; and (iv) 12 consecutive
monthly installments payable on the last Business Day of each month commencing
on January 31, 2001 and ending on December 31, 2001, each of which shall be in
an aggregate amount equal to $317,000.
<PAGE>
3. Amendment to Subsection 2.4(b). Subsection 2.4(b) of the Credit
Agreement is hereby amended by deleting such subsection in its entirety and
substituting in lieu thereof the following:
(b) The Borrower agrees that in the event that the outstanding
principal amount of the Loans is not reduced to $3,500,000 or less by March 31,
1999, then the Borrower shall pay to the Administrative Agent, for the ratable
benefit of the Lenders, an additional fee in the aggregate amount of $300,000,
to be paid in quarterly installments payable on the last Business Day of each
March, June, September and December, commencing on December 31, 1999 and ending
on March 31, 2001, each of which shall be in an aggregate amount equal to
$50,000.
4. Representations and Warranties. On and as of the date hereof, Holdings
and the Borrower hereby jointly and severally confirm, reaffirm and restate the
representations and warranties set forth in Section 3 of the Credit Agreement
mutatis mutandis, except to the extent that the disclosures made by Holdings in
its pro forma financial statements prepared by its management and presented to
the Lenders in December 1998 and January 1999 (the "Pro Forma Financial
Statements") related to subsections 3.2 and 3.7 of the Credit Agreement. To the
extent that any of the representations and warranties set forth in Section 3 of
the Credit Agreement expressly relate to a specific earlier date, Holdings and
the Borrower jointly and severally hereby confirm, reaffirm and restate such
representations and warranties as of such earlier date. Holdings further
represents and warrants that its Pro Forma Financial Statements will not vary in
any significant respect from the audited consolidated balance sheet of Holdings
and its consolidated Subsidiaries as at December 31, 1998 and the related
audited consolidated and consolidating statements of income and of cash flows
for the fiscal year ending on such date, prepared by Goldstein, Golub, Kessler &
Company, P.C.
5. Effectiveness. This Amendment shall become effective as of the date
first written above upon (a) receipt by the Administrative Agent of counterparts
of this Amendment duly executed by Holdings, the Borrower and all the Lenders
and (b) such certificates and opinions as the Administrative Agent may
reasonably require in connection with this Amendment; provided that, as a
condition to effectiveness, the Administrative Agent and the Lenders shall have
approved any amendments, supplements or modifications (including, but not
limited to, the Amendment to Agreements, dated February __, 1999, by and among
Ralok, Inc. (formerly known as Kolar Machine, Inc.), Daniel Liguori, Holdings
and the Borrower) to (i) the $4,000,000 Promissory Note, dated October 9, 1997,
made by Kolar Inc. in favor of Kolar Machine, Inc. (it being understood that
such Note shall be required to be amended as a condition to effectiveness of
this Amendment to defer interest payments in respect thereof in a manner
satisfactory to the Lenders), (ii) the Employment Agreement, dated as of October
9, 1997, by and between and the Borrower and Daniel Liguori and (iii) the
Intercreditor and Subordination Agreement, dated as of October 9, 1997, among
Kolar Machine, Inc., Holdings, the Borrower and the Administrative Agent.
6. Continuing Effect; No Other Amendments, Waivers or Consents. Except as
expressly provided herein, all of the terms and provisions of the Credit
2
<PAGE>
Agreement are and shall remain in full force and effect. The amendments provided
for herein are limited to the specific subsections of the Credit Agreement
specified herein and shall not constitute a consent, waiver or amendment of, or
an indication of the Administrative Agent's or the Lenders' willingness to
consent to any action requiring consent under any other provisions of the Credit
Agreement or the same subsection for any other date or time period.
7. Expenses. Holdings and the Borrower agree to pay and reimburse the
Administrative Agent for all its reasonable costs and out-of-pocket expenses
incurred in connection with the preparation and delivery of this Amendment,
including, without limitation, the reasonable fees and disbursements of counsel
to the Administrative Agent.
8. Counterparts. This Amendment may be executed in any number of
counterparts by the parties hereto (including by facsimile transmission), each
of which counterparts when so executed shall be an original, but all the
counterparts shall together constitute one and the same instrument.
9. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
3
<PAGE>
IN WITNESS WHEREOF, the parties herto have caused this Amendment to be
executed and delivered by their respective duly authorized officers as of the
date first above written.
CPI AEROSTRUCTURES, INC.
/s/ Arthur August
By: ---------------------------
Name: Arthur Agust
Title:President
KOLAR, INC.
/s/ Arthur August
By: ---------------------------
Name: Arthur Agust
Title:Chairman of the Board
THE CHASE MANHATTAN BANK,
as Administrative Agent and as a Lender
/s/ Gerald P. Brennan
By: ------------------------------
Name:Gerald P. Brennan
Title:Vice President
MELLON BANK, N.A.,
as a Lender
/s/ Christine G. Dekajlo
By: -------------------------------
Name:Christine G. Dekajlo
Title:First Vice President
Mellon Financial Services Corporation,
Attorney in Fact for Mellon Bank, N.A.
4
<PAGE>
EXHIBIT 10.25
SECOND AMENDMENT, effective as of December 31, 1998 (entered
into on April 15, 1999) (this "Amendment"), to the Credit Agreement, dated as of
October 9, 1997 (as amended by the First Amendment, dated as of February 12,
1999, this Amendment, and as the same may be further amended, supplemented or
otherwise modified from time to time, the "Credit Agreement"), among CPI
AEROSTRUCTURES, INC., a New York corporation ("Holdings"), KOLAR, INC., a
Delaware corporation (the "Borrower"), the several banks and other financial
institutions from time to time parties thereto (collectively, the "Lenders"),
and THE CHASE MANHATTAN BANK, a New York banking corporation, as administrative
agent for the Lenders (in such capacity, the "Administrative Agent").
W I T N E S S E T H :
WHEREAS, Holdings, the Borrower, the Lenders and the Administrative Agent
are parties to the Credit Agreement; and
WHEREAS, Holdings and the Borrower have requested that the Lenders amend
certain terms in the Credit Agreement and in the manner provided for herein; and
WHEREAS, the Administrative Agent and the Lenders are willing to agree to
the requested amendments;
NOW, THEREFORE, in consideration of the premises contained herein, the
parties hereto agree as follows:
1. Defined Terms. Unless otherwise defined herein, terms which are
defined in the Credit Agreement and used herein (and in the recitals hereto) as
defined terms are so used as so defined.
2. Amendment of Subsection 6.1(a). Subsection 6.1(a) of the Credit
Agreement is hereby amended by deleting such subsection in its entirety and
substituting in lieu thereof the following:
(a) Consolidated Leverage Ratio. Permit the Consolidated
Leverage Ratio at any time during any period set forth below to exceed
the ratio set forth below opposite such period:
Consolidated
Period Leverage Ratio
------ --------------
12/31/98 - 3/30/99 18.60:1.00
3/31/99 - 6/29/99 18.60:1.00
6/30/99 - 9/29/99 18.60:1.00
9/30/99 - 12/30/99 9.00:1.00
12/31/99 - 3/30/00 5.50:1.00
3/31/00 - 6/29/00 4.60:1.00
6/30/00 - 9/29/00 3.65:1.00
9/30/00 - 12/30/00 2.75:1.00
12/31/00 - 12/30/01 1.85:1.00
12/31/01 and thereafter 0.75:1.00
<PAGE>
3. Amendment to Subsection 6.1(b). Subsection 6.1(b) of the Credit
Agreement is hereby amended by deleting such subsection in its entirety and
substituting in lieu thereof the following:
(b) Liquidity Ratio. Permit the Liquidity Ratio at any time
during any period set forth below to be less than the ratio set forth
below opposite such period:
Period Liquidity Ratio
------------------- ---------------
12/31/98 - 12/30/99 1.00:1.00
12/31/99 - 12/30/00 1.60:1.00
12/31/00 and thereafter 1.50:1.00
4. Amendment to Subsection 6.1(c). Subsection 6.1(c) of the Credit
Agreement is hereby amended by deleting such subsection in its entirety and
substituting in lieu thereof the following:
(c) Consolidated Tangible Net Worth. Permit Consolidated
Tangible Net Worth as at any time during any period set forth below to
be less than the amount set forth below opposite such period:
Consolidated
Period Tangible Net Worth
------------------- ------------------
12/31/98 - 12/30/99 -$3,370,000
12/31/99 - 12/30/00 -$2,300,000
12/31/00 - 12/30/01 $500,000
12/31/01 and thereafter $4,000,000
5. Amendment to Subsection 6.1(d). Subsection 6.1(d) of the Credit
Agreement is hereby amended by deleting such subsection in its entirety and
substituting in lieu thereof the following:
(d) Consolidated Debt Service Ratio. Permit the Consolidated
Debt Service Ratio for any period of four consecutive fiscal quarters
of Holdings ending during any period set forth below to be less than
the ratio set forth below opposite such period:
Consolidated Debt
Period Service Ratio
------------------- ------------------
12/31/98 - 12/30-99 1.00:1:00
12/31/99 - 12/30/00 1.00:1.00
12/31/00 - 12/30/01 1.15:1.00
12/31/01 and thereafter 1.25:1:00
2
<PAGE>
6. Amendment to Subsection 6.1(e). Subsection 6.1(e) of the Credit
Agreement is hereby amended by deleting such subsection in its entirety and
substituting in lieu thereof the following:
(e) Consolidated Senior Funded Indebtedness Ratio. Permit the
ratio of Consolidated Senior Funded Indebtedness to Consolidated Cash
Flow as at the last day of any period of four consecutive fiscal
quarters of Holdings ending during any period with any fiscal quarter
set forth below to exceed the ratio set forth below opposite such
period:
Consolidated
Period Senior Funded Indebtedness Ratio
------ --------------------------------
12/31/98 - 3/30/99 2.21:1.00
3/31/99 - 6/29/99 2.21:1.00
6/30/99 - 9/29/99 2.21:1.00
9/30/99 - 12/30/99 2.17:1.00
12/31/99 - 3/30/00 2.15:1.00
3/31/00 - 6/29/00 1.90:1.00
6/30/00 - 9/29/00 1.60:1.00
9/30/00 - 12/30/00 1.30:1.00
12/31/00 - 12/30/01 1.00:1.00
12/31/01 and thereafter 0.75:1.00
7. Amendment to Subsection 5.1(a). Subsection 5.1(a) of the Credit
Agreement is hereby amended by deleting such subsection in its entirety and
substituting in lieu thereof the following:
5.1 Financial Statements. Furnish to the Administrative
Agent and each Lender:
(a) (i) as soon as available, but in any event within 90 days
after the end of each fiscal year of Holdings, a copy of the audited
consolidated and consolidating balance sheet of Holdings and its
consolidated Subsidiaries as at the end of such year and the related
audited consolidated and consolidating statements of income and of cash
flows for such year, setting forth in each case in comparative form the
figures for the previous year, reported on without a "going concern" or
like qualification or exception, or qualification arising out of the
scope of the audit, by Goldstein, Golub, Kessler & Company, P.C. or
other independent certified public accountants of nationally recognized
standing and (ii) a copy of any management letter prepared by Holdings'
or the Borrower's accountants; provided that, in the case of such
financial statements for the fiscal year ended December 31, 1998, such
financial statements shall be delivered on or before April 30, 1999;
and
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<PAGE>
8. Representations and Warranties. On and as of the date hereof, Holdings
and the Borrower hereby jointly and severally confirm, reaffirm and restate the
representations and warranties set forth in Section 3 of the Credit Agreement
mutatis mutandis. To the extent that any of the representations and warranties
set forth in Section 3 of the Credit Agreement expressly relate to a specific
earlier date, Holdings and the Borrower jointly and severally hereby confirm,
reaffirm and restate such representations and warranties as of such earlier
date.
9. Effectiveness. Upon receipt by the Administrative Agent of
counterparts of this Amendment duly executed by Holdings, the Borrower and all
the Lenders, this Amendment shall be effective as of December 31, 1998.
10. Continuing Effect; No Other Amendments, Waivers or Consents. Except
as expressly provided herein, all of the terms and provisions of the Credit
Agreement are and shall remain in full force and effect. The amendments provided
for herein are limited to the specific subsections of the Credit Agreement
specified herein and shall not constitute a consent, waiver or amendment of, or
an indication of the Administrative Agent's or the Lenders' willingness to
consent to any action requiring consent under any other provisions of the Credit
Agreement or the same subsection for any other date or time period.
11. Expenses. Holdings and the Borrower agree to pay and reimburse the
Administrative Agent for all its reasonable costs and out-of-pocket expenses
incurred in connection with the preparation and delivery of this Amendment,
including, without limitation, the reasonable fees and disbursements of counsel
to the Administrative Agent.
12. Counterparts. This Amendment may be executed in any number of
counterparts by the parties hereto (including by facsimile transmission), each
of which counterparts when so executed shall be an original, but all the
counterparts shall together constitute one and the same instrument.
13. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed and delivered
CPI AEROSTRUCTURES, INC.
/s/ Arthur August
By: ---------------------------
Name: Arthur Agust
Title:President
KOLAR, INC.
/s/ Arthur August
By: ---------------------------
Name: Arthur Agust
Title:Chairman of the Board
THE CHASE MANHATTAN BANK,
as Administrative Agent and as a Lender
/s/ Emelia K. Teige
By: ------------------------------
Name: Emelia K. Teige
Title:Vice President
MELLON BANK, N.A.,
as a Lender
/s/ Christine G. Dekajlo
By: -------------------------------
Name:Christine G. Dekajlo
Title:First Vice President
Mellon Financial Services Corporation,
Attorney in Fact for Mellon Bank, N.A.
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<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT dated December 16, 1998 between ARTHUR AUGUST,
residing at 6 Troy Court, Woodbury, New York 11797 ("Executive"), and CPI
AEROSTRUCTURES, INC., a New York corporation having its principal office at 200A
Executive Drive, Edgewood, New York 11717, ("Company");
WHEREAS, in July 1998, the Company and Executive agreed that
the Employment Agreement dated September 15, 1995 between the parties would
remain in full force and effect at least until December 31, 1998 and that, in
the interim, the parties would attempt to negotiate a new agreement for a
three-year term commencing January 1, 1999; and
WHEREAS, the Company desires to continue the employment of
Executive and Executive desires to continue his present employment with the
Company, pursuant to the terms and conditions herein set forth, superseding all
prior agreements between the Company, its subsidiaries and/or predecessors and
Executive;
IT IS AGREED:
1. Employment, Duties and Acceptance.
1.1 General. The Company shall continue to employ Executive as
its Chairman of the Board ("Chairman"), President and Chief Executive Officer
("CEO") under the terms hereof. All of Executive's powers and authority in any
capacity shall at all times be subject to the direction and control of the
Company's Board of Directors. The Board may assign to Executive such management
and supervisory responsibilities and executive duties for the Company or any
subsidiary of the Company, including serving as an executive officer and/or
director of any subsidiary, as are consistent with Executive's status as
Chairman, President and CEO. The Company and Executive acknowledge that
Executive's functions and duties as Chairman, President and CEO include
establishing policies and strategies for the Company's overall business and
operations, including plans for growth and strategic alliances.
<PAGE>
1.2 Full-Time Position. Executive accepts such employment and
agrees to devote substantially all of his business time, energies and attention
to the performance of his duties hereunder. Nothing herein shall be construed as
preventing Executive from making and supervising personal investments, provided
they will not interfere with the performance of Executive's duties hereunder or
violate the provisions of Section 6.4 hereof.
1.3 Location. Executive may, in his sole discretion, perform
his obligations under this Agreement off the premises of the Company. The
Company shall provide Executive with such computer and other equipment required
for such purposes and shall reimburse Executive for any reasonable expenses
related to his being off premises.
1.4 Board of Directors Position. If, during the term hereof,
Executive is nominated to serve as a director of the Company but fails to be
elected, he shall nonetheless be invited to attend each meeting of the Board of
Directors of the Company through the remainder of the term hereof.
2. Compensation and Benefits.
2.1 Salary. The Company shall pay to Executive a salary ("Base
Salary") at the annual rate of $300,000 per annum. Executive's compensation
shall be paid in equal, periodic installments in accordance with the Company's
normal payroll procedures.
2.2 Bonus. In addition to Base Salary, Executive shall be paid
a bonus ("Bonus") equal to 4% of the Company's consolidated net income for each
year during the Employment Term, as determined by reference to the Company's
audited financial statements for such year. The Bonus with respect to any year
shall be paid on or prior to April 15 of the following year.
2.3 Benefits. Executive shall be entitled to such medical,
life, disability and other benefits as are generally afforded to other senior
executives of the Company, subject to applicable waiting periods and other
conditions.
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2.4 Vacation. Executive shall be entitled to such paid
vacation days in each year during the Employment Term and to a reasonable number
of other days off for religious and personal reasons in accordance with
customary Company policy.
2.5 Automobile. The Company shall continue to lease a luxury
class automobile (reasonably satisfactory to Executive) for Executive during the
term of this Agreement to be used in connection with the business of the
Company.
2.6 Expenses. The Company shall pay or reimburse Executive for
all transportation, hotel and other expenses reasonably incurred by Executive on
business trips and for all other ordinary and reasonable out-of-pocket expenses
actually incurred by him in the conduct of the business of the Company against
itemized vouchers submitted with respect to any such expenses and approved in
accordance with customary procedures.
2.7 Life Insurance. During the Employment Term, as defined
below, the Company shall continue to maintain the insurance policy on the life
of Executive in favor of his named beneficiary or his estate in a minimum amount
of $500,000.
3. Term. The term of Executive's employment hereunder shall commence as
of January 1, 1999 and shall continue until December 31, 2001 (as it may be
extended, the "Employment Term"), unless sooner terminated as herein provided.
The Employment Term shall be automatically renewed for successive one year
periods unless terminated by the Company or Executive by written notice to the
other party at least thirty (30) days before the end of the Employment Term or
any renewal thereof.
4. Termination.
4.1 Death. If Executive dies during the term of this
Agreement, Executive's employment hereunder shall terminate and the Company
shall pay to Executive's estate the amount set forth in Section 4.7.
3
<PAGE>
4.2 Disability. The Company, by written notice to Executive,
may terminate Executive's employment hereunder if Executive shall fail because
of illness or incapacity to render, for six consecutive months, services of the
character contemplated by this Agreement. Upon such termination, the Company
shall pay to Executive the amount set forth in Section 4.7.
4.3 By Company for "Cause". The Company, by written notice to
Executive, may terminate Executive's employment hereunder for "Cause". As used
herein, "Cause" shall mean: (a) the refusal or failure by Executive to carry out
specific directions of the Board which are of a material nature and consistent
with his status as Chairman, President and CEO, or the refusal or failure by
Executive to perform a material part of Executive's duties hereunder; (b) the
commission by Executive of a material breach of any of the provisions of this
Agreement; (c) fraud or dishonest action by Executive in his relations with the
Company or any of its subsidiaries or affiliates ("dishonest" for these purposes
shall mean Executive's knowingly or recklessly making of a material misstatement
or omission for his personal benefit); or (d) the conviction of Executive of a
felony under federal or state law. Notwithstanding the foregoing, no "Cause" for
termination shall be deemed to exist with respect to Executive's acts described
in clauses (a) or (b) above, unless the Company shall have given written notice
to Executive specifying the "Cause" with reasonable particularity and, within
thirty calendar days after such notice, Executive shall not have cured or
eliminated the problem or thing giving rise to such "Cause;" provided, however,
no more than two cure periods need be provided during any twelve-month period.
Upon such termination, the Company shall pay to Executive the amount set forth
in Section 4.7.
4.4 By Company Without "Cause". The Company may terminate
Executive's employment hereunder without "Cause" by giving at least 30 days
written notice to Executive. Upon such termination, the Company shall pay to
Executive the amount set forth in Section 4.7.
4.5 By Executive for "Good Reason". The Executive, by written
notice to the Company, may terminate Executive's employment hereunder if a "Good
Reason" exists. For purposes of this Agreement, "Good Reason" shall mean the
occurrence of any of the following circumstances without the Executive's prior
written consent: (a) a substantial and material
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<PAGE>
adverse change in the nature of Executive's title, duties or responsibilities
with the Company that represents a demotion from his title, duties or
responsibilities as in effect immediately prior to such change; (b) Executive is
removed from service as a director of the Company; (c) material breach of this
Agreement by the Company; (d) a failure by the Company to make any payment to
Executive when due, unless the payment is not material and is being contested by
the Company, in good faith; (e) (i) any person or entity other than the Company
and/or any officers or directors of the Company as of the date of this Agreement
acquires securities of the Company (in one or more transactions) having 30% or
more of the total voting power of all the Company's securities then outstanding
and (ii) the Board of Directors of the Company does not authorize or otherwise
approve such acquisition; or (f) a liquidation, bankruptcy or receivership of
the Company. Notwithstanding the foregoing, no Good Reason shall be deemed to
exist with respect to the Company's acts described in clauses (a), (c) or (d)
above, unless Executive shall have given written notice to the Company
specifying the Good Reason with reasonable particularity and, within thirty
calendar days after such notice, the Company shall not have cured or eliminated
the problem or thing giving rise to such Good Reason; provided, however, that no
more than two cure periods shall be provided during any twelve-month period of a
breach of clauses (a), (c) or (d) above. Upon such termination the Company shall
pay to Executive the amount set forth in Section 4.7
4.6 By Executive Without Reason. The Executive may terminate
his employment hereunder by giving at least 75 days written notice to the
Company. Upon such termination, the Company shall pay to Executive the amount
set forth in Section 4.7.
4.7 Compensation Upon Termination. In the event that
Executive's employment hereunder is terminated, the Company shall pay to
Executive the following compensation:
(a) Payment Upon Death or Disability or by
Executive Without Reason. In the event that Executive's employment is terminated
pursuant to Sections 4.1, 4.2 or 4.6, the Company shall pay to Executive (or his
executor, administrator or personal representative), (i) the Base Salary due
Executive pursuant to Section 2.1 hereof through the date of termination; (ii)
any Bonus which would have become payable under Section 2.2 for the year in
which the
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<PAGE>
employment was terminated prorated by multiplying the full amount of the Bonus
by a fraction, the numerator of which is the number of "full calendar months"
worked by Executive during the year of termination and the denominator of which
is 12 (a "full calendar month" is a month in which the Executive worked at least
two weeks); (iii) all earned and previously approved but unpaid Bonuses for any
year prior to the year of termination; (iv) all valid expense reimbursements,
and (v) all accrued but unused vacation pay.
(b) Payment Upon Termination by the Company For
"Cause". In the event that the Company terminates Executive's employment
hereunder pursuant to Section 4.3, the Company shall pay to Executive his Base
Salary, all valid expense reimbursements and all unused vacation pay required by
law through the date of termination.
(c) Payment Upon Termination by Company Without
Cause or Executive for Good Reason or Failure by Company to Renew Agreement. In
the event that Executive's employment is terminated, pursuant to Sections 4.4 or
4.5, or the Company shall (i) continue to pay to Executive (or in the case of
his death, the legal representative of Executive's estate or such other person
or persons as Executive shall have designated by written notice to the Company),
all payments, compensation and benefits required under Section 2 hereof through
December 31, 2001, and (ii) continue to maintain and pay for the same medical
insurance then covering Executive through June 30, 2003. Notwithstanding the
foregoing, if a "change of control" of the Company (as described in Section
4.5(e)(i)) occurs prior to a termination of Executive's employment pursuant to
Sections 4.4 or 4.5, or if the Company fails to renew the Employment Term for at
least one annual period after any such "change of control", then at the option
of Executive, in lieu of the above compensation and benefits, the Company shall
pay to Executive a lump sum payment on the date of termination equal to the
maximum amount allowable under Section 280G(b) of the Internal Revenue Code of
1986 without being considered an "excess parachute payment" thereunder.
4.8 Resignation as Member of Board. If Executive's employment
hereunder is terminated for any reason, then Executive shall, at the Company's
request, resign as a director of the Company and all of its subsidiaries,
effective upon the occurrence of such termination.
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<PAGE>
5. Executive Indemnity. The Company agrees to indemnify Executive and
hold Executive harmless against all costs, expenses (including, without
limitation, reasonable attorneys' fees) and liabilities (other than settlements
to which the Company does not consent, which consent shall not be unreasonably
withheld) (collectively, "Losses") reasonably incurred by Executive in
connection with any claim, action, proceeding or investigation brought against
or involving Executive with respect to, arising out of or in any way relating to
Executive's employment with the Company or any subsidiary or Executive's service
as a director of the Company or any subsidiary; provided, however, that the
Company shall not be required to indemnify Executive for Losses incurred as a
result of Executive's intentional misconduct or gross negligence (other than
matters where Executive acted in good faith and in a manner he reasonably
believed to be in and not opposed to the Company's best interests). Executive
shall promptly notify the Company of any claim, action, proceeding or
investigation under this paragraph and the Company shall be entitled to
participate in the defense of any such claim, action, proceeding or
investigation and, if it so chooses, to assume the defense with counsel selected
by the Company; provided that Executive shall have the right to employ counsel
to represent him (at the Company's expense) if the Company's counsel would have
a "conflict of interest" in representing both the Company and Executive. The
Company shall not settle or compromise any claim, action, proceeding or
investigation without Executive's consent, which consent shall not be
unreasonably withheld; provided, however, that such consent shall not be
required if the settlement entails only the payment of money and the Company
fully indemnifies Executive in connection therewith. The Company further agrees
to advance any and all expenses (including, without limitation, the reasonable
fees and expenses of counsel) incurred by the Executive (in accordance with the
foregoing) in connection with any such claim, action, proceeding or
investigation, provided, however, that Executive shall repay such advances if
indemnification is found not to have been available hereunder. This Section
shall survive the termination of this Agreement for any reason.
7
<PAGE>
6. Protection of Confidential Information; Non-Competition.
6.1 Acknowledgment. Executive acknowledges that:
(a) As a result of his current and prior
employment with the Company, Executive has obtained and will obtain secret and
confidential information concerning the business of the Company and its
subsidiaries (referred to collectively in this Section 6 as the "Company"),
including, without limitation, financial information, proprietary rights, trade
secrets and "know-how," customers and sources ("Confidential Information").
(b) The Company will suffer substantial damage which
will be difficult to compute if, during the period of his employment with the
Company or thereafter, Executive should enter a business competitive with the
Company or divulge Confidential Information.
(c) The provisions of this Agreement are
reasonable and necessary for the protection of the business of the Company.
6.2 Confidentiality. Executive agrees that he will not at any
time, during the Employment Term and for a period of one year thereafter,
divulge to any person or entity any Confidential Information obtained or learned
by him as a result of his employment with the Company, except (i) in the course
of performing his duties hereunder, (ii) with the Company's prior written
consent; (iii) to the extent that any such information is in the public domain
other than as a result of Executive's breach of any of his obligations
hereunder; or (iv) where required to be disclosed by court order, subpoena or
other government process. If Executive shall be required to make disclosure
pursuant to the provisions of clause (iv) of the preceding sentence, Executive
promptly, but in no event more than 48 hours after learning of such subpoena,
court order, or other government process, shall notify, the Company and, at the
Company's expense, Executive shall: (a) take all reasonably necessary and lawful
steps required by the Company to defend against the enforcement of such
subpoena, court order or other government process, and (b) permit the Company to
intervene and participate with counsel of its choice in any proceeding relating
to the enforcement thereof.
8
<PAGE>
6.3 Documents. Upon termination of his employment with the
Company, Executive will promptly deliver to the Company all memoranda, notes,
records, reports, manuals, drawings, blueprints and other documents (and all
copies thereof) relating to the business of the Company and all property
associated therewith, which he may then possess or have under his control;
provided, however, that Executive shall be entitled to retain copies of such
documents reasonably necessary to document his financial relationship with the
Company.
6.4 Non-competition. During the Employment Term and for a
period of one year thereafter, Executive, without the prior written permission
of the Company, shall not, anywhere in the world, (i) be employed by, or render
any services to, any person, firm or corporation engaged in any business
("Competitive Business") which is directly in competition with any "material"
business conducted by the Company or any of its subsidiaries at the time of
termination (as used herein "material" means the business generated at least 10%
of the Company's consolidated revenues for the last full fiscal year for which
audited financial statements are available); (ii) engage in any Competitive
Business for his or its own account; (iii) be associated with or interested in
any Competitive Business as an individual, partner, shareholder, creditor,
director, officer, principal, agent, employee, trustee, consultant, advisor or
in any other relationship or capacity; (iv) employ or retain, or have or cause
any other person or entity to employ or retain, any person who was employed or
retained by the Company while Executive was employed by the Company; or (v)
solicit, interfere with, or endeavor to entice away from the Company, for the
benefit of a Competitive Business, any of its customers or other persons with
whom the Company has a contractual relationship. Notwithstanding the foregoing,
nothing in this Agreement shall preclude Executive from investing his personal
assets in any manner he chooses, provided, however, that Executive may not,
during the period referred to in this Section 6.4, own more than 4.9% of the
equity securities of any Competitive Business.
6.5 Injunctive Relief. If Executive commits a breach, or
threatens to commit a breach, of any of the provisions of Sections 6.2 or 6.4,
the Company shall have the right and remedy to seek to have the provisions of
this Agreement specifically enforced by any court having equity jurisdiction, it
being acknowledged and agreed by Executive that the services being rendered
hereunder to the Company are of a special, unique and extraordinary character
and that
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<PAGE>
any such breach or threatened breach will cause irreparable injury to the
Company and that money damages will not provide an adequate remedy to the
Company. The rights and remedies enumerated in this Section 6.5 shall be in
addition to, and not in lieu of, any other rights and remedies available to the
Company under law or equity. In connection with any legal action or proceeding
arising out of or relating to this Agreement, the prevailing party in such
action or proceeding shall be entitled to be reimbursed by the other party for
the reasonable attorneys' fees and costs incurred by the prevailing party.
6.6 Modification. If any provision of Sections 6.2 or 6.4 is
held to be unenforceable because of the scope, duration or area of its
applicability, the tribunal making such determination shall have the power to
modify such scope, duration, or area, or all of them, and such provision or
provisions shall then be applicable in such modified form.
6.7 Survival. The provisions of this Section 6 shall survive
the termination of this Agreement for any reason, except in the event Executive
is terminated by the Company without "Cause, " or if Executive terminates this
Agreement with "Good Reason," in either of which events, this Section 6.4 shall
be null and void and of no further force or effect.
7. Miscellaneous Provisions.
7.1 Notices. All notices provided for in this Agreement shall
be in writing, and shall be deemed to have been duly given when (i) delivered
personally to the party to receive the same, or (ii) when mailed first class
postage prepaid, by certified mail, return receipt requested, addressed to the
party to receive the same at his or its address set forth below, or such other
address as the party to receive the same shall have specified by written notice
given in the manner provided for in this Section 7.1. All notices shall be
deemed to have been given as of the date of personal delivery or mailing
thereof.
If to Executive:
Arthur August
6 Troy Court
Woodbury, New York 11797
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If to the Company:
CPI Aerostructures, Inc.
200A Executive Drive
Edgewood, New York 11717
Attn: Chief Financial Officer
With a copy in either case to:
Graubard Mollen & Miller
600 Third Avenue
New York, New York 10016
Attn: David Alan Miller, Esq.
7.2 Entire Agreement; Waiver. This Agreement sets forth the
entire agreement of the parties relating to the employment of Executive and is
intended to supersede all prior negotiations, understandings and agreements. No
provisions of this Agreement, may be waived or changed except by a writing by
the party against whom such waiver or change is sought to be enforced. The
failure of any party to require performance of any provision hereof or thereof
shall in no manner affect the right at a later time to enforce such provision.
7.3 Governing Law. All questions with respect to the
construction of this Agreement, and the rights and obligations of the parties
hereunder, shall be determined in accordance with the law of the State of New
York applicable to agreements made and to be performed entirely in New York.
7.4 Binding Effect; Nonassignability. This Agreement shall
inure to the benefit of and be binding upon the successors and assigns of the
Company. This Agreement shall not be assignable by Executive, but shall inure to
the benefit of and be binding upon Executive's heirs and legal representatives.
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7.5 Severability. Should any provision of this Agreement
become legally unenforceable, no other provision of this Agreement shall be
affected, and this Agreement shall continue as if the Agreement had been
executed absent the unenforceable provision.
IN WITNESS WHEREOF, the parties have executed this Agreement
on the date first above written.
CPI AEROSTRUCTURES, INC.
/s/ Edward J. Fred
---------------------------------------
By: Edward J. Fred, Vice President and
Chief Financial Officer
/s/ Arthur August
---------------------------------------
ARTHUR AUGUST
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<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT dated December 16, 1998 between EDWARD J. FRED,
residing at 126 Brentwood Parkway, Brentwood, New York 11717 ("Executive"), and
CPI AEROSTRUCTURES, INC., a New York corporation having its principal office at
200A Executive Drive, Edgewood, New York 11717, ("Company");
WHEREAS, in July 1998, the Company and Executive agreed that
the parties would negotiate an employment agreement for a three-year term
commencing January 1, 1999; and
WHEREAS, the Company desires to continue the employment of
Executive and Executive desires to continue his present employment with the
Company, pursuant to the terms and conditions herein set forth, superseding all
prior agreements between the Company, its subsidiaries and/or predecessors and
Executive;
IT IS AGREED:
1. Employment, Duties and Acceptance.
1.1 General. The Company shall continue to employ Executive as
its Chief Financial Officer ("CFO") and Vice President under the terms hereof.
All of Executive's powers and authority in any capacity shall at all times be
subject to the direction and control of the Company's Board of Directors. The
Board may assign to Executive such management and supervisory responsibilities
and executive duties for the Company or any subsidiary of the Company, including
serving as an executive officer and/or director of any subsidiary, as are
consistent with Executive's status as CFO and Vice President.
1.2 Full-Time Position. Executive accepts such employment and
agrees to devote substantially all of his business time, energies and attention
to the performance of his duties hereunder. Nothing herein shall be construed as
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preventing Executive from making and supervising personal investments, provided
they will not interfere with the performance of Executive's duties hereunder or
violate the provisions of Section 6.4 hereof.
1.3 Location. Executive shall be based in the New York Long
Island area, and shall undertake such occasional travel, within or without the
United States, as is reasonably necessary in the interests of the Company.
1.4 Board of Directors Position. If, during the term hereof,
Executive is nominated to serve as a director of the Company but fails to be
elected, he shall nonetheless be invited to attend each meeting of the Board of
Directors of the Company through the remainder of the term hereof.
2. Compensation and Benefits.
2.1 Salary. The Company shall pay to Executive a salary ("Base
Salary") at the annual rate of $100,000 per annum. Executive's compensation
shall be paid in equal, periodic installments in accordance with the Company's
normal payroll procedures.
2.2 Bonus. In addition to Base Salary, the Board of Directors
may, in its sole discretion, award Executive a bonus from time to time
("Bonus").
2.3 Benefits. Executive shall be entitled to such medical,
life, disability and other benefits as are generally afforded to other senior
executives of the Company, subject to applicable waiting periods and other
conditions.
2.4 Vacation. Executive shall be entitled to such paid
vacation days in each year during the Employment Term and to a reasonable number
of other days off for religious and personal reasons in accordance with
customary Company policy.
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2.5 Automobile. The Company shall continue to lease a luxury
class automobile (reasonably satisfactory to Executive) for Executive during the
term of this Agreement to be used in connection with the business of the
Company.
2.6 Expenses. The Company shall pay or reimburse Executive for
all transportation, hotel and other expenses reasonably incurred by Executive on
business trips and for all other ordinary and reasonable out-of-pocket expenses
actually incurred by him in the conduct of the business of the Company against
itemized vouchers submitted with respect to any such expenses and approved in
accordance with customary procedures.
3. Term. The term of Executive's employment hereunder shall commence as
of January 1, 1999 and shall continue until December 31, 2001 (as it may be
extended, the "Employment Term"), unless sooner terminated as herein provided.
The Employment Term shall be automatically renewed for successive one year
periods unless terminated by the Company or Executive by written notice to the
other party at least thirty (30) days before the end of the Employment Term or
any renewal thereof.
4. Termination.
4.1 Death. If Executive dies during the term of this
Agreement, Executive's employment hereunder shall terminate and the Company
shall pay to Executive's estate the amount set forth in Section 4.6.
4.2 Disability. The Company, by written notice to Executive,
may terminate Executive's employment hereunder if Executive shall fail because
of illness or incapacity to render, for six consecutive months, services of the
character contemplated by this Agreement. Upon such termination, the Company
shall pay to Executive the amount set forth in Section 4.6.
4.3 By Company for "Cause". The Company, by written notice to
Executive, may terminate Executive's employment hereunder for "Cause". As used
herein, "Cause" shall mean: (a) the refusal or failure by Executive to carry out
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<PAGE>
specific directions of the Board which are of a material nature and consistent
with his status as CFO and Vice President, or the refusal or failure by
Executive to perform a material part of Executive's duties hereunder; (b) the
commission by Executive of a material breach of any of the provisions of this
Agreement; (c) fraud or dishonest action by Executive in his relations with the
Company or any of its subsidiaries or affiliates ("dishonest" for these purposes
shall mean Executive's knowingly or recklessly making of a material misstatement
or omission for his personal benefit); or (d) the conviction of Executive of a
felony under federal or state law. Notwithstanding the foregoing, no "Cause" for
termination shall be deemed to exist with respect to Executive's acts described
in clauses (a) or (b) above, unless the Company shall have given written notice
to Executive specifying the "Cause" with reasonable particularity and, within
thirty calendar days after such notice, Executive shall not have cured or
eliminated the problem or thing giving rise to such "Cause;" provided, however,
no more than two cure periods need be provided during any twelve-month period.
Upon such termination, the Company shall pay to Executive the amount set forth
in Section 4.6.
4.4 By Company Without "Cause". The Company may terminate
Executive's employment hereunder without "Cause" by giving at least 30 days
written notice to Executive. Upon such termination, the Company shall pay to
Executive the amount as set forth in Section 4.6.
4.5 By Executive for "Good Reason". The Executive, by written
notice to the Company, may terminate Executive's employment hereunder if a "Good
Reason" exists. For purposes of this Agreement, "Good Reason" shall mean the
occurrence of any of the following circumstances without the Executive's prior
written consent: (a) a substantial and material adverse change in the nature of
Executive's title, duties or responsibilities with the Company that represents a
demotion from his title, duties or responsibilities as in effect immediately
prior to such change; (b) material breach of this Agreement by the Company; (c)
a failure by the Company to make any payment to Executive when due, unless the
payment is not material and is being contested by the Company, in good faith;
(d) (i) any person or entity other than the Company and/or any officers or
directors of the Company as of the date of this Agreement acquires securities of
the Company (in one or more transactions) having 30% or more of the total
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voting power of all the Company's securities then outstanding and (ii) the Board
of Directors of the Company does not authorize or otherwise approve such
acquisition; or (e) a liquidation, bankruptcy or receivership of the Company.
Notwithstanding the foregoing, no Good Reason shall be deemed to exist with
respect to the Company's acts described in clauses (a), (b) or (c) above, unless
Executive shall have given written notice to the Company specifying the Good
Reason with reasonable particularity and, within thirty calendar days after such
notice, the Company shall not have cured or eliminated the problem or thing
giving rise to such Good Reason; provided, however, that no more than two cure
periods shall be provided during any twelve-month period of a breach of clauses
(a), (b) or (c) above. Upon such termination, the Company shall pay to Executive
the amount set forth in Section 4.6.
4.6 Compensation Upon Termination. In the event that
Executive's employment hereunder is terminated, the Company shall pay to
Executive the following compensation:
(a) Payment Upon Death or Disability. In the
event that Executive's employment is terminated pursuant to Sections 4.1 or 4.2,
the Company shall pay to Executive (or his executor, administrator or personal
representative), (i) the Base Salary due Executive pursuant to Section 2.1
hereof through the date of termination; (ii) the Bonus, if any, which would have
become payable under Section 2.2 for the year in which the employment was
terminated prorated by multiplying the full amount of the Bonus by a fraction,
the numerator of which is the number of "full calendar months" worked by
Executive during the year of termination and the denominator of which is 12 (a
"full calendar month" is a month in which the Executive worked at least two
weeks); (iii) all earned and previously approved but unpaid Bonuses for any year
prior to the year of termination; (iv) all valid expense reimbursements, and (v)
all accrued but unused vacation pay.
(b) Payment Upon Termination by the Company For
"Cause". In the event that the Company terminates Executive's employment
hereunder pursuant to Section 4.3, the Company shall pay to Executive his Base
Salary, all valid expense reimbursements and all unused vacation pay required by
law through the date of termination.
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(c) Payment Upon Termination by Company Without
Cause or Executive for Good Reason or Failure by Company to Renew Agreement. In
the event that Executive's employment is terminated, pursuant to Sections 4.4 or
4.5, or the Company shall (i) continue to pay to Executive (or in the case of
his death, the legal representative of Executive's estate or such other person
or persons as Executive shall have designated by written notice to the Company),
all payments, compensation and benefits required under Section 2 hereof through
December 31, 2001, and (ii) continue to maintain and pay for the same medical
insurance then covering Executive through June 30, 2003. Notwithstanding the
foregoing, if a "change of control" of the Company (as described in Section
4.5(e)(i)) occurs prior to a termination of Executive's employment pursuant to
Sections 4.4 or 4.5, or if the Company fails to renew the Employment Term for at
least one annual period after any such "change of control", then at the option
of Executive, in lieu of the above compensation and benefits, the Company shall
pay to Executive a lump sum payment on the date of termination equal to the
maximum amount allowable under Section 280G(b) of the Internal Revenue Code of
1986 without being considered an "excess parachute payment" thereunder.
4.7 Resignation as Member of Board. If Executive's employment
hereunder is terminated for any reason, then Executive shall, at the Company's
request, resign as a director of the Company and all of its subsidiaries,
effective upon the occurrence of such termination.
5. Executive Indemnity. The Company agrees to indemnify Executive and
hold Executive harmless against all costs, expenses (including, without
limitation, reasonable attorneys' fees) and liabilities (other than settlements
to which the Company does not consent, which consent shall not be unreasonably
withheld) (collectively, "Losses") reasonably incurred by Executive in
connection with any claim, action, proceeding or investigation brought against
or involving Executive with respect to, arising out of or in any way relating to
Executive's employment with the Company or any subsidiary; or Executive's
service as a director of the Company or any subsidiary; provided, however, that
the Company shall not be required to indemnify Executive for Losses incurred as
a result of Executive's intentional misconduct or gross negligence (other than
matters where Executive acted in good faith and in a manner he reasonably
believed to be in and not opposed to the Company's best interests). Executive
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shall promptly notify the Company of any claim, action, proceeding or
investigation under this paragraph and the Company shall be entitled to
participate in the defense of any such claim, action, proceeding or
investigation and, if it so chooses, to assume the defense with counsel selected
by the Company; provided that Executive shall have the right to employ counsel
to represent him (at the Company's expense) if the Company's counsel would have
a "conflict of interest" in representing both the Company and Executive. The
Company shall not settle or compromise any claim, action, proceeding or
investigation without Executive's consent, which consent shall not be
unreasonably withheld; provided, however, that such consent shall not be
required if the settlement entails only the payment of money and the Company
fully indemnifies Executive in connection therewith. The Company further agrees
to advance any and all expenses (including, without limitation, the reasonable
fees and expenses of counsel) incurred by the Executive (in accordance with the
foregoing) in connection with any such claim, action, proceeding or
investigation, provided, however, that Executive shall repay such advances if
indemnification is found not to have been available hereunder. This Section
shall survive the termination of this Agreement for any reason.
6. Protection of Confidential Information; Non-Competition.
6.1 Acknowledgment. Executive acknowledges that:
(a) As a result of his current and prior
employment with the Company, Executive has obtained and will obtain secret and
confidential information concerning the business of the Company and its
subsidiaries (referred to collectively in this Section 6 as the "Company"),
including, without limitation, financial information, proprietary rights, trade
secrets and "know-how," customers and sources ("Confidential Information").
(b) The Company will suffer substantial damage which
will be difficult to compute if, during the period of his employment with the
Company or thereafter, Executive should enter a business competitive with the
Company or divulge Confidential Information.
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(c) The provisions of this Agreement are
reasonable and necessary for the protection of the business of the Company.
6.2 Confidentiality. Executive agrees that he will not at any
time, either during the term of this Agreement or for a period of one year
thereafter, divulge to any person or entity any Confidential Information
obtained or learned by him as a result of his employment with the Company,
except (i) in the course of performing his duties hereunder, (ii) with the
Company's prior written consent; (iii) to the extent that any such information
is in the public domain other than as a result of Executive's breach of any of
his obligations hereunder; or (iv) where required to be disclosed by court
order, subpoena or other government process. If Executive shall be required to
make disclosure pursuant to the provisions of clause (iv) of the preceding
sentence, Executive promptly, but in no event more than 48 hours after learning
of such subpoena, court order, or other government process, shall notify,
confirmed by mail, the Company and, at the Company's expense, Executive shall:
(a) take all reasonably necessary and lawful steps required by the Company to
defend against the enforcement of such subpoena, court order or other government
process, and (b) permit the Company to intervene and participate with counsel of
its choice in any proceeding relating to the enforcement thereof.
6.3 Documents. Upon termination of his employment with the
Company, Executive will promptly deliver to the Company all memoranda, notes,
records, reports, manuals, drawings, blueprints and other documents (and all
copies thereof) relating to the business of the Company and all property
associated therewith, which he may then possess or have under his control;
provided, however, that Executive shall be entitled to retain copies of such
documents reasonably necessary to document his financial relationship with the
Company.
6.4 Non-competition. During the Employment Term, Executive
shall not, anywhere in the world, (i) be employed by, or render any services to,
any person, firm or corporation engaged in any business ("Competitive Business")
which is directly in competition with any "material" business conducted by the
Company or any of its subsidiaries at the time of termination (as used herein
"material" means the business generated at least 10% of the Company's
consolidated revenues for the last full fiscal year for which audited financial
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statements are available); (ii) engage in any Competitive Business for his or
its own account; (iii) be associated with or interested in any Competitive
Business as an individual, partner, shareholder, creditor, director, officer,
principal, agent, employee, trustee, consultant, advisor or in any other
relationship or capacity; (iv) employ or retain, or have or cause any other
person or entity to employ or retain, any person who was employed or retained by
the Company while Executive was employed by the Company; or (v) solicit,
interfere with, or endeavor to entice away from the Company, for the benefit of
a Competitive Business, any of its customers or other persons with whom the
Company has a contractual relationship. Notwithstanding the foregoing, nothing
in this Agreement shall preclude Executive from investing his personal assets in
any manner he chooses, provided, however, that Executive may not, during the
period referred to in this Section 6.4, own more than 4.9% of the equity
securities of any Competitive Business.
6.5 Injunctive Relief. If Executive commits a breach, or
threatens to commit a breach, of any of the provisions of Sections 6.2 or 6.4,
the Company shall have the right and remedy to seek to have the provisions of
this Agreement specifically enforced by any court having equity jurisdiction, it
being acknowledged and agreed by Executive that the services being rendered
hereunder to the Company are of a special, unique and extraordinary character
and that any such breach or threatened breach will cause irreparable injury to
the Company and that money damages will not provide an adequate remedy to the
Company. The rights and remedies enumerated in this Section 6.5 shall be in
addition to, and not in lieu of, any other rights and remedies available to the
Company under law or equity. In connection with any legal action or proceeding
arising out of or relating to this Agreement, the prevailing party in such
action or proceeding shall be entitled to be reimbursed by the other party for
the reasonable attorneys' fees and costs incurred by the prevailing party.
6.6 Modification. If any provision of Sections 6.2 or 6.4 is
held to be unenforceable because of the scope, duration or area of its
applicability, the tribunal making such determination shall have the power to
modify such scope, duration, or area, or all of them, and such provision or
provisions shall then be applicable in such modified form.
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6.7 Survival. The provisions of this Section 6 shall survive
the termination of this Agreement for any reason, except in the event Executive
is terminated by the Company without "Cause, " or if Executive terminates this
Agreement with "Good Reason," in either of which events, this Section 6.4 shall
be null and void and of no further force or effect.
7. Miscellaneous Provisions.
7.1 Notices. All notices provided for in this Agreement shall
be in writing, and shall be deemed to have been duly given when (i) delivered
personally to the party to receive the same, or (ii) when mailed first class
postage prepaid, by certified mail, return receipt requested, addressed to the
party to receive the same at his or its address set forth below, or such other
address as the party to receive the same shall have specified by written notice
given in the manner provided for in this Section 7.1. All notices shall be
deemed to have been given as of the date of personal delivery or mailing
thereof.
If to Executive:
Edward J. Fred
126 Brentwood Parkway
Brentwood, New York 11717
If to the Company:
CPI Aerostructures, Inc.
200A Executive Drive
Edgewood, New York 11717
Attn: President
With a copy in either case to:
Graubard Mollen & Miller
600 Third Avenue
New York, New York 10016
Attn: David Alan Miller, Esq.
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7.2 Entire Agreement; Waiver. This Agreement sets forth the
entire agreement of the parties relating to the employment of Executive and is
intended to supersede all prior negotiations, understandings and agreements. No
provisions of this Agreement, may be waived or changed except by a writing by
the party against whom such waiver or change is sought to be enforced. The
failure of any party to require performance of any provision hereof or thereof
shall in no manner affect the right at a later time to enforce such provision.
7.3 Governing Law. All questions with respect to the
construction of this Agreement, and the rights and obligations of the parties
hereunder, shall be determined in accordance with the law of the State of New
York applicable to agreements made and to be performed entirely in New York.
7.4 Binding Effect; Nonassignability. This Agreement shall
inure to the benefit of and be binding upon the successors and assigns of the
Company. This Agreement shall not be assignable by Executive, but shall inure to
the benefit of and be binding upon Executive's heirs and legal representatives.
7.5 Severability. Should any provision of this Agreement
become legally unenforceable, no other provision of this Agreement shall be
affected, and this Agreement shall continue as if the Agreement had been
executed absent the unenforceable provision.
IN WITNESS WHEREOF, the parties have executed this Agreement
on the date first above written.
CPI AEROSTRUCTURES, INC.
/s/ Arthur August
---------------------------------------
By: Arthur August, President and Chief
Executive Officer
/s/ Edward J. Fred
---------------------------------------
EDWARD J. FRED
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ANNEX I
Approved by Board of Directors
on April 27, 1998
CPI AEROSTRUCTURES, INC.
1998 Performance Equity Plan
Section 1. Purpose; Definitions.
1.1 Purpose. The purpose of the CPI Aerostructures, Inc. ("Company")
1998 Performance Equity Plan ("Plan") is to enable the Company to offer to its
key employees, officers, directors and consultants whose past, present and/or
potential contributions to the Company and its Subsidiaries have been, are or
will be important to the success of the Company, an opportunity to acquire a
proprietary interest in the Company. The various types of long-term incentive
awards which may be provided under the Plan will enable the Company to respond
to changes in compensation practices, tax laws, accounting regulations and the
size and diversity of its businesses.
1.2 Definitions. For purposes of the Plan, the following terms
shall be defined as set forth below:
(a) "Agreement" means the agreement between the Company and
the Holder setting forth the terms and conditions of an award under the Plan.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended
from time to time, and any successor thereto and the regulations promulgated
thereunder.
(d) "Committee" means the Stock Option Committee of the Board
or any other committee of the Board, which the Board may designate to administer
the Plan or any portion thereof. If no Committee is so designated, then all
references in this Plan to "Committee" shall mean the Board.
(e) "Common Stock" means the Common Stock of the Company, par
value $.001 per share.
(f) "Company" means CPI Aerostructures, Inc., a corporation
organized under the laws of the State of New York.
(g) "Deferred Stock" means Stock to be received, under an
award made pursuant to Section 9, below, at the end of a specified deferral
period.
(h) "Disability" means disability as determined under
procedures established by the Committee for purposes of the Plan.
(i) "Effective Date" means the date set forth in Section 13.1,
below.
(j) "Fair Market Value", unless otherwise required by any
applicable provision of the Code or any regulations issued thereunder, means, as
of any given date: (i) if the Common Stock is listed on a national securities
exchange or quoted on the Nasdaq National Market or Nasdaq SmallCap Market, the
last sale price of the Common Stock in the principal trading market for the
Common Stock on the last trading day preceding the date of grant of an award
hereunder, as reported by the exchange or Nasdaq, as the case may be; (ii) if
the Common Stock is not listed on a national securities exchange or quoted on
the Nasdaq National Market or Nasdaq SmallCap Market, but is traded in the
over-the-counter market, the closing bid price for the Common Stock on the last
trading day preceding the date of grant of an award hereunder for which such
quotations are reported by the OTC Bulletin Board or the National Quotation
<PAGE>
Bureau, Incorporated or similar publisher of such quotations; and (iii) if the
fair market value of the Common Stock cannot be determined pursuant to clause
(i) or (ii) above, such price as the Committee shall determine, in good faith.
(k) "Holder" means a person who has received an award under
the Plan.
(l) "Incentive Stock Option" means any Stock Option intended
to be and designated as an "incentive stock option" within the meaning of
Section 422 of the Code.
(m) "Nonqualified Stock Option" means any Stock Option that is
not an Incentive Stock Option.
(n) "Normal Retirement" means retirement from active
employment with the Company or any Subsidiary on or after age 65.
(o) "Other Stock-Based Award" means an award under Section 10,
below, that is valued in whole or in part by reference to, or is otherwise based
upon, Stock.
(p) "Parent" means any present or future parent corporation of
the Company, as such term is defined in Section 424(e) of the Code.
(q) "Plan" means the CPI Aerostructures, Inc. 1998 Performance
Equity Plan, as hereinafter amended from time to time.
(r) "Restricted Stock" means Stock, received under an award
made pursuant to Section 8, below, that is subject to restrictions under said
Section 8.
(s) "SAR Value" means the excess of the Fair Market Value (on
the exercise date) of the number of shares for which the Stock Appreciation
Right is exercised over the exercise price that the participant would have
otherwise had to pay to exercise the related Stock Option and purchase the
relevant shares.
(t) "Stock" means the Common Stock of the Company, par value
$.001 per share.
(u) "Stock Appreciation Right" means the right to receive from
the Company, on surrender of all or part of the related Stock Option, without a
cash payment to the Company, a number of shares of Common Stock equal to the SAR
Value divided by the exercise price of the Stock Option.
(v) "Stock Option" or "Option" means any option to purchase
shares of Stock which is granted pursuant to the Plan.
(w) "Stock Reload Option" means any option granted under
Section 6.3, below, as a result of the payment of the exercise price of a Stock
Option and/or the withholding tax related thereto in the form of Stock owned by
the Holder or the withholding of Stock by the Company.
(x) "Subsidiary" means any present or future subsidiary
corporation of the Company, as such term is defined in Section 424(f) of the
Code.
Section 2. Administration.
2.1 Committee Membership. The Plan shall be administered by the Board
or a Committee. Committee members shall serve for such term as the Board may in
each case determine, and shall be subject to removal at any time by the Board.
The Committee members, to the extent possible, shall be "non-employee" as
defined in Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as
amended ("Exchange Act").
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2.2 Powers of Committee. The Committee shall have full authority to
award, pursuant to the terms of the Plan: (i) Stock Options, (ii) Stock
Appreciation Rights, (iii) Restricted Stock, (iv) Deferred Stock, (v) Stock
Reload Options and/or (vi) Other Stock-Based Awards. For purposes of
illustration and not of limitation, the Committee shall have the authority
(subject to the express provisions of this Plan):
(a) to select the officers, key employees, directors and
consultants of the Company or any Subsidiary to whom Stock Options, Stock
Appreciation Rights, Restricted Stock, Deferred Stock, Reload Stock Options
and/or Other Stock-Based Awards may from time to time be awarded hereunder.
(b) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder (including, but not
limited to, number of shares, share price or other consideration, such as other
securities of the Company or other property, any restrictions or limitations,
and any vesting, exchange, surrender, cancellation, acceleration, termination,
exercise or forfeiture provisions, as the Committee shall determine);
(c) to determine any specified performance goals or such other
factors or criteria which need to be attained for the vesting of an award
granted hereunder;
(d) to determine the terms and conditions under which awards
granted hereunder are to operate on a tandem basis and/or in conjunction with or
apart from other equity awarded under this Plan and cash awards made by the
Company or any Subsidiary outside of this Plan;
(e) to permit a Holder to elect to defer a payment under the
Plan under such rules and procedures as the Committee may establish, including
the crediting of interest on deferred amounts denominated in cash and of
dividend equivalents on deferred amounts denominated in Stock;
(f) to determine the extent and circumstances under which
Stock and other amounts payable with respect to an award hereunder shall be
deferred which may be either automatic or at the election of the Holder; and
(g) to substitute (i) new Stock Options for previously granted
Stock Options, which previously granted Stock Options have higher option
exercise prices and/or contain other less favorable terms, and (ii) new awards
of any other type for previously granted awards of the same type, which
previously granted awards are upon less favorable terms.
2.3 Interpretation of Plan.
(a) Committee Authority. Subject to Section 12, below, the
Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall,
from time to time, deem advisable, to interpret the terms and provisions of the
Plan and any award issued under the Plan (and to determine the form and
substance of all Agreements relating thereto), and to otherwise supervise the
administration of the Plan. Subject to Section 12, below, all decisions made by
the Committee pursuant to the provisions of the Plan shall be made in the
Committee's sole discretion and shall be final and binding upon all persons,
including the Company, its Subsidiaries and Holders.
(b) Incentive Stock Options. Anything in the Plan to the
contrary notwithstanding, no term or provision of the Plan relating to Incentive
Stock Options (including but limited to Stock Reload Options or Stock
Appreciation rights granted in conjunction with an Incentive Stock Option) or
any Agreement providing for Incentive Stock Options shall be interpreted,
amended or altered, nor shall any discretion or authority granted under the Plan
be so exercised, so as to disqualify the Plan under Section 422 of the Code, or,
without the consent of the Holder(s) affected, to disqualify any Incentive Stock
Option under such Section 422.
Section 3. Stock Subject to Plan.
3.1 Number of Shares. The total number of shares of Common Stock
reserved and available for distribution under the Plan shall be 1,000,000
shares. Shares of Stock under the Plan may consist, in whole or in part, of
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authorized and unissued shares or treasury shares. If any shares of Stock that
have been granted pursuant to a Stock Option cease to be subject to a Stock
Option, or if any shares of Stock that are subject to any Stock Appreciation
Right, Restricted Stock, Deferred Stock award, Reload Stock Option or Other
Stock-Based Award granted hereunder are forfeited or any such award otherwise
terminates without a payment being made to the Holder in the form of Stock, such
shares shall again be available for distribution in connection with future
grants and awards under the Plan. Only net shares issued upon a stock-for-stock
exercise (including stock used for withholding taxes) shall be counted against
the number of shares available under the Plan.
3.2 Adjustment Upon Changes in Capitalization, Etc. In the event of any
change in the shares of Common Stock of the Company occurring as the result of a
stock split, reverse stock split, stock dividend payable in shares of Common
Stock, recapitalization, merger, consolidation, reorganization, combination or
exchange of shares, or other extraordinary or unusual event occurring after the
grant of an Award, the Committee shall determine, in its sole discretion,
whether such change equitably requires an adjustment in the terms of any Award
or the aggregate number of shares reserved for issuance under the Plan. Any such
adjustments will be made by the Committee, whose determination will be final,
binding and conclusive.
Section 4. Eligibility.
Awards may be made or granted to key employees, officers,
directors and consultants who are deemed to have rendered or to be able to
render significant services to the Company or its Subsidiaries and who are
deemed to have contributed or to have the potential to contribute to the success
of the Company. No Incentive Stock Option shall be granted to any person who is
not an employee of the Company or a Subsidiary at the time of grant.
Section 5. Required Six-Month Holding Period.
A period of not less than six months must elapse from the date of grant
of an award under the Plan, (i) before any disposition by a Holder of a
derivative security (as defined in Rule 16a-1 promulgated under the Exchange
Act) issued under this Plan or (ii) before any disposition by a Holder of any
Stock purchased or granted pursuant to an award under this Plan.
Section 6. Stock Options.
6.1 Grant and Exercise. Stock Options granted under the Plan may be of
two types: (i) Incentive Stock Options and (ii) Nonqualified Stock Options. Any
Stock Option granted under the Plan shall contain such terms, not inconsistent
with this Plan, or with respect to Incentive Stock Options, not inconsistent
with the Plan and the Code, as the Committee may from time to time approve. The
Committee shall have the authority to grant Incentive Stock Options,
Non-Qualified Stock Options, or both types of Stock Options and which may be
granted alone or in addition to other awards granted under the Plan. To the
extent that any Stock Option intended to qualify as an Incentive Stock Option
does not so qualify, it shall constitute a separate Nonqualified Stock Option.
An Incentive Stock Option may be granted only within the ten-year period
commencing from the Effective Date and may only be exercised within ten years of
the date of grant (or five years in the case of an Incentive Stock Option
granted to an optionee ("10% Shareholder") who, at the time of grant, owns Stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company.
6.2 Terms and Conditions. Stock Options granted under the Plan shall be
subject to the following terms and conditions:
(a) Exercise Price. The exercise price per share of Stock
purchasable under a Stock Option shall be determined by the Committee at the
time of grant and may not be less than 100% of the Fair Market Value of the
Stock as defined above; provided, however, that the exercise price of an
Incentive Stock Option granted to a 10% Shareholder shall not be less than 110%
of the Fair Market Value of the Stock.
(b) Option Term. Subject to the limitations in Section 6.1,
above, the term of each Stock Option shall be fixed by the Committee.
(c) Exercisability. Stock Options shall be exercisable at such
time or times and subject to such terms and conditions as shall be determined by
the Committee and as set forth in Section 11, below. If the Committee provides,
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<PAGE>
in its discretion, that any Stock Option is exercisable only in installments,
i.e., that it vests over time, the Committee may waive such installment exercise
provisions at any time at or after the time of grant in whole or in part, based
upon such factors as the Committee shall determine.
(d) Method of Exercise. Subject to whatever installment,
exercise and waiting period provisions are applicable in a particular case,
Stock Options may be exercised in whole or in part at any time during the term
of the Option, by giving written notice of exercise to the Company specifying
the number of shares of Stock to be purchased. Such notice shall be accompanied
by payment in full of the purchase price, which shall be in cash or, unless
otherwise provided in the Agreement, in shares of Stock (including Restricted
Stock and other contingent awards under this Plan) or, partly in cash and partly
in such Stock, or such other means which the Committee determines are consistent
with the Plan's purpose and applicable law. Cash payments shall be made by wire
transfer, certified or bank check or personal check, in each case payable to the
order of the Company; provided, however, that the Company shall not be required
to deliver certificates for shares of Stock with respect to which an Option is
exercised until the Company has confirmed the receipt of good and available
funds in payment of the purchase price thereof. Payments in the form of Stock
shall be valued at the Fair Market Value of a share of Stock on the date prior
to the date of exercise. Such payments shall be made by delivery of stock
certificates in negotiable form which are effective to transfer good and valid
title thereto to the Company, free of any liens or encumbrances. Subject to the
terms of the Agreement, the Committee may, in its sole discretion, at the
request of the Holder, deliver upon the exercise of a Nonqualified Stock Option
a combination of shares of Deferred Stock and Common Stock; provided that,
notwithstanding the provisions of Section 9 of the Plan, such Deferred Stock
shall be fully vested and not subject to forfeiture. A Holder shall have none of
the rights of a Shareholder with respect to the shares subject to the Option
until such shares shall be transferred to the Holder upon the exercise of the
Option.
(e) Transferability. Except as may be set forth in the
Agreement, no Stock Option shall be transferable by the Holder other than by
will or by the laws of descent and distribution, and all Stock Options shall be
exercisable, during the Holder's lifetime, only by the Holder.
(f) Termination by Reason of Death. If a Holder's employment
by the Company or a Subsidiary terminates by reason of death, any Stock Option
held by such Holder, unless otherwise determined by the Committee at the time of
grant and set forth in the Agreement, shall be fully vested and may thereafter
be exercised by the legal representative of the estate or by the legatee of the
Holder under the will of the Holder, for a period of one year (or such other
greater or lesser period as the Committee may specify at grant) from the date of
such death or until the expiration of the stated term of such Stock Option,
whichever period is the shorter.
(g) Termination by Reason of Disability. If a Holder's
employment by the Company or any Subsidiary terminates by reason of Disability,
any Stock Option held by such Holder, unless otherwise determined by the
Committee at the time of grant and set forth in the Agreement, shall be fully
vested and may thereafter be exercised by the Holder for a period of one year
(or such other greater or lesser period as the Committee may specify at the time
of grant) from the date of such termination of employment or until the
expiration of the stated term of such Stock Option, whichever period is the
shorter.
(h) Other Termination. Subject to the provisions of Section
14.3, below, and unless otherwise determined by the Committee at the time of
grant and set forth in the Agreement, if a Holder is an employee of the Company
or a Subsidiary at the time of grant and if such Holder's employment by the
Company or any Subsidiary terminates for any reason other than death or
Disability, the Stock Option shall thereupon automatically terminate, except
that if the Holder's employment is terminated by the Company or a Subsidiary
without cause or due to Normal Retirement, then the portion of such Stock Option
which has vested on the date of termination of employment may be exercised for
the lesser of three months after termination of employment or the balance of
such Stock Option's term.
(i) Additional Incentive Stock Option Limitation. In the case
of an Incentive Stock Option, the aggregate Fair Market Value of Stock
(determined at the time of grant of the Option) with respect to which Incentive
Stock Options become exercisable by a Holder during any calendar year (under all
such plans of the Company and its Parent and Subsidiary) shall not exceed
$100,000.
5
<PAGE>
(j) Buyout and Settlement Provisions. The Committee may at any
time, in its sole discretion, offer to buy out a Stock Option previously
granted, based upon such terms and conditions as the Committee shall establish
and communicate to the Holder at the time that such offer is made.
(k) Stock Option Agreement. Each grant of a Stock Option shall
be confirmed by, and shall be subject to the terms of, the Agreement executed by
the Company and the Holder.
6.3 Stock Reload Option. The Committee may also grant to the Holder
(concurrently with the grant of an Incentive Stock Option and at or after the
time of grant in the case of a Nonqualified Stock Option) a Stock Reload Option
up to the amount of shares of Stock held by the Holder for at least six months
and used to pay all or part of the exercise price of an Option and, if any,
withheld by the Company as payment for withholding taxes. Such Stock Reload
Option shall have an exercise price equal to the Fair Market Value as of the
date of the Stock Reload Option grant. Unless the Committee determines
otherwise, a Stock Reload Option may be exercised commencing one year after it
is granted and shall expire on the date of expiration of the Option to which the
Reload Option is related.
Section 7. Stock Appreciation Rights.
7.1 Grant and Exercise. The Committee may grant Stock Appreciation
Rights to participants who have been, or are being granted, Options under the
Plan as a means of allowing such participants to exercise their Options without
the need to pay the exercise price in cash. In the case of a Nonqualified Stock
Option, a Stock Appreciation Right may be granted either at or after the time of
the grant of such Nonqualified Stock Option. In the case of an Incentive Stock
Option, a Stock Appreciation Right may be granted only at the time of the grant
of such Incentive Stock Option.
7.2 Terms and Conditions. Stock Appreciation Rights shall be subject to
the following terms and conditions:
(a) Exercisability. Stock Appreciation Rights shall be
exercisable as shall be determined by the Committee and set forth in the
Agreement, subject to the limitations, if any, imposed by the Code, with respect
to related Incentive Stock Options.
(b) Termination. A Stock Appreciation Right shall terminate
and shall no longer be exercisable upon the termination or exercise of the
related Stock Option.
(c) Method of Exercise. Stock Appreciation Rights shall be
exercisable upon such terms and conditions as shall be determined by the
Committee and set forth in the Agreement and by surrendering the applicable
portion of the related Stock Option. Upon such exercise and surrender, the
Holder shall be entitled to receive a number of Option Shares equal to the SAR
Value divided by the exercise price of the Option.
(d) Shares Affected Upon Plan. The granting of a Stock
Appreciation Right shall not affect the number of shares of Stock available
under for awards under the Plan. The number of shares available for awards under
the Plan will, however, be reduced by the number of shares of Stock acquirable
upon exercise of the Stock Option to which such Stock Appreciation Right
relates.
Section 8. Restricted Stock.
8.1 Grant. Shares of Restricted Stock may be awarded either alone or in
addition to other awards granted under the Plan. The Committee shall determine
the eligible persons to whom, and the time or times at which, grants of
Restricted Stock will be awarded, the number of shares to be awarded, the price
(if any) to be paid by the Holder, the time or times within which such awards
may be subject to forfeiture ("Restriction Period"), the vesting schedule and
rights to acceleration thereof, and all other terms and conditions of the
awards.
6
<PAGE>
8.2 Terms and Conditions. Each Restricted Stock award shall be
subject to the following terms and conditions:
(a) Certificates. Restricted Stock, when issued, will be
represented by a stock certificate or certificates registered in the name of the
Holder to whom such Restricted Stock shall have been awarded. During the
Restriction Period, certificates representing the Restricted Stock and any
securities constituting Retained Distributions (as defined below) shall bear a
legend to the effect that ownership of the Restricted Stock (and such Retained
Distributions), and the enjoyment of all rights appurtenant thereto, are subject
to the restrictions, terms and conditions provided in the Plan and the
Agreement. Such certificates shall be deposited by the Holder with the Company,
together with stock powers or other instruments of assignment, each endorsed in
blank, which will permit transfer to the Company of all or any portion of the
Restricted Stock and any securities constituting Retained Distributions that
shall be forfeited or that shall not become vested in accordance with the Plan
and the Agreement.
(b) Rights of Holder. Restricted Stock shall constitute issued
and outstanding shares of Common Stock for all corporate purposes. The Holder
will have the right to vote such Restricted Stock, to receive and retain all
regular cash dividends and other cash equivalent distributions as the Board may
in its sole discretion designate, pay or distribute on such Restricted Stock and
to exercise all other rights, powers and privileges of a holder of Common Stock
with respect to such Restricted Stock, with the exceptions that (i) the Holder
will not be entitled to delivery of the stock certificate or certificates
representing such Restricted Stock until the Restriction Period shall have
expired and unless all other vesting requirements with respect thereto shall
have been fulfilled; (ii) the Company will retain custody of the stock
certificate or certificates representing the Restricted Stock during the
Restriction Period; (iii) other than regular cash dividends and other cash
equivalent distributions as the Board may in its sole discretion designate, pay
or distribute, the Company will retain custody of all distributions ("Retained
Distributions") made or declared with respect to the Restricted Stock (and such
Retained Distributions will be subject to the same restrictions, terms and
conditions as are applicable to the Restricted Stock) until such time, if ever,
as the Restricted Stock with respect to which such Retained Distributions shall
have been made, paid or declared shall have become vested and with respect to
which the Restriction Period shall have expired; (iv) a breach of any of the
restrictions, terms or conditions contained in this Plan or the Agreement or
otherwise established by the Committee with respect to any Restricted Stock or
Retained Distributions will cause a forfeiture of such Restricted Stock and any
Retained Distributions with respect thereto.
(c) Vesting; Forfeiture. Upon the expiration of the
Restriction Period with respect to each award of Restricted Stock and the
satisfaction of any other applicable restrictions, terms and conditions (i) all
or part of such Restricted Stock shall become vested in accordance with the
terms of the Agreement, subject to Section 11, below, and (ii) any Retained
Distributions with respect to such Restricted Stock shall become vested to the
extent that the Restricted Stock related thereto shall have become vested,
subject to Section 11, below. Any such Restricted Stock and Retained
Distributions that do not vest shall be forfeited to the Company and the Holder
shall not thereafter have any rights with respect to such Restricted Stock and
Retained Distributions that shall have been so forfeited.
Section 9. Deferred Stock.
9.1 Grant. Shares of Deferred Stock may be awarded either alone or in
addition to other awards granted under the Plan. The Committee shall determine
the eligible persons to whom and the time or times at which grants of Deferred
Stock will be awarded, the number of shares of Deferred Stock to be awarded to
any person, the duration of the period ("Deferral Period") during which, and the
conditions under which, receipt of the shares will be deferred, and all the
other terms and conditions of the awards.
9.2 Terms and Conditions. Each Deferred Stock award shall be
subject to the following terms and conditions:
(a) Certificates. At the expiration of the Deferral Period (or
the Additional Deferral Period referred to in Section 9.2 (d) below, where
applicable), share certificates shall be issued and delivered to the Holder, or
his legal representative, representing the number equal to the shares covered by
the Deferred Stock award.
(b) Rights of Holder. A person entitled to receive Deferred
Stock shall not have any rights of a Shareholder by virtue of such award until
the expiration of the applicable Deferral Period and the issuance and delivery
of the certificates representing such Stock. The shares of Stock issuable upon
7
<PAGE>
expiration of the Deferral Period shall not be deemed outstanding by the Company
until the expiration of such Deferral Period and the issuance and delivery of
such Stock to the Holder.
(c) Vesting; Forfeiture. Upon the expiration of the DeferralPeriod with respect
to each award of Deferred Stock and the satisfaction of any other applicable
restrictions, terms and conditions all or part of such Deferred Stock shall
become vested in accordance with the terms of the Agreement, subject to Section
11, below. Any such Deferred Stock that does not vest shall be forfeited to the
Company and the Holder shall not thereafter have any rights with respect to such
Deferred Stock.
(d) Additional Deferral Period. A Holder may request to, and
the Committee may at any time, defer the receipt of an award (or an installment
of an award) for an additional specified period or until a specified event
("Additional Deferral Period"). Subject to any exceptions adopted by the
Committee, such request must generally be made at least one year prior to
expiration of the Deferral Period for such Deferred Stock award (or such
installment).
Section 10. Other Stock-Based Awards.
10.1 Grant and Exercise. Other Stock-Based Awards may be awarded,
subject to limitations under applicable law, that are denominated or payable in,
valued in whole or in part by reference to, or otherwise based on, or related
to, shares of Common Stock, as deemed by the Committee to be consistent with the
purposes of the Plan, including, without limitation, purchase rights, shares of
Common Stock awarded which are not subject to any restrictions or conditions,
convertible or exchangeable debentures, or other rights convertible into shares
of Common Stock and awards valued by reference to the value of securities of or
the performance of specified Subsidiaries. Other Stock-Based Awards may be
awarded either alone or in addition to or in tandem with any other awards under
this Plan or any other plan of the Company.
10.2 Eligibility for Other Stock-Based Awards. The Committee shall
determine the eligible persons to whom and the time or times at which grants of
such other stock-based awards shall be made, the number of shares of Common
Stock to be awarded pursuant to such awards, and all other terms and conditions
of the awards.
10.3 Terms and Conditions. Each Other Stock-Based Award shall be
subject to such terms and conditions as may be determined by the Committee and
to Section 11, below.
Section 11. Accelerated Vesting and Exercisability.
If any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), is or becomes the "beneficial owner" (as referred in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing 25% or more of the combined voting power of the Company's
then outstanding securities in one or more transactions, and the Board does not
authorize or otherwise approve such acquisition, then, the vesting periods of
any and all Options and other Awards granted and outstanding under the Plan
shall be accelerated and all such Options and Awards will immediately and
entirely vest, and the respective holders thereof will have the immediate right
to purchase and/or receive any and all Common Stock subject to such Options and
awards on the terms set forth in this Plan and the respective agreements
respecting such Options and Awards.
Section 12. Amendment and Termination.
The Board may at any time, and from time to time, amend alter, suspend
or discontinue any of the provisions of the Plan, but no amendment, alteration,
suspension or discontinuance shall be made which would impair the rights of a
Holder under any Agreement theretofore entered into hereunder, without the
Holder's consent.
Section 13. Term of Plan.
13.1 Effective Date. The Plan shall be effective as of April 27, 1998
("Effective Date"), subject to the approval of the Plan by the Company's
shareholders within one year after the Effective Date. Any awards granted under
the Plan prior to such approval shall be effective when made (unless otherwise
specified by the Committee at the time of grant), but shall be conditioned upon,
and subject to, such approval of the Plan by the Company's shareholders and no
awards shall vest or otherwise become free of restrictions prior to such
approval.
8
<PAGE>
13.2 Termination Date. Unless terminated by the Board, this Plan shall
continue to remain effective until such time no further awards may be granted
and all awards granted under the Plan are no longer outstanding. Notwithstanding
the foregoing, grants of Incentive Stock Options may only be made during the ten
year period following the Effective Date.
Section 14. General Provisions.
14.1 Written Agreements. Each award granted under the Plan shall be
confirmed by, and shall be subject to the terms of the Agreement executed by the
Company and the Holder. The Committee may terminate any award made under the
Plan if the Agreement relating thereto is not executed and returned to the
Company within 10 days after the Agreement has been delivered to the Holder for
his or her execution.
14.2 Unfunded Status of Plan. The Plan is intended to constitute an
"unfunded" plan for incentive and deferred compensation. With respect to any
payments not yet made to a Holder by the Company, nothing contained herein shall
give any such Holder any rights that are greater than those of a general
creditor of the Company.
14.3 Employees.
(a) Engaging in Competition With the Company. In the event a
Holder's employment with the Company or a Subsidiary is terminated for any
reason whatsoever, and within eighteen months after the date thereof such Holder
accepts employment with any competitor of, or otherwise engages in competition
with, the Company, the Committee, in its sole discretion, may require such
Holder to return to the Company the economic value of any award which was
realized or obtained by such Holder at any time during the period beginning on
that date which is six months prior to the date of such Holder's termination of
employment with the Company.
(b) Termination for Cause. The Committee may, in the event a
Holder's employment with the Company or a Subsidiary is terminated for cause,
annul any award granted under this Plan to such employee and, in such event, the
Committee, in its sole discretion, may require such Holder to return to the
Company the economic value of any award which was realized or obtained by such
Holder at any time during the period beginning on that date which is six months
prior to the date of such Holder's termination of employment with the Company.
(c) No Right of Employment. Nothing contained in the Plan or
in any award hereunder shall be deemed to confer upon any Holder who is an
employee of the Company or any Subsidiary any right to continued employment with
the Company or any Subsidiary, nor shall it interfere in any way with the right
of the Company or any Subsidiary to terminate the employment of any Holder who
is an employee at any time.
14.4 Investment Representations. The Committee may require each person
acquiring shares of Stock pursuant to a Stock Option or other award under the
Plan to represent to and agree with the Company in writing that the Holder is
acquiring the shares for investment without a view to distribution thereof.
14.5 Additional Incentive Arrangements. Nothing contained in the Plan
shall prevent the Board from adopting such other or additional incentive
arrangements as it may deem desirable, including, but not limited to, the
granting of Stock Options and the awarding of stock and cash otherwise than
under the Plan; and such arrangements may be either generally applicable or
applicable only in specific cases.
9
<PAGE>
14.6 Withholding Taxes. Not later than the date as of which an amount
must first be included in the gross income of the Holder for Federal income tax
purposes with respect to any option or other award under the Plan, the Holder
shall pay to the Company, or make arrangements satisfactory to the Committee
regarding the payment of, any Federal, state and local taxes of any kind
required by law to be withheld or paid with respect to such amount. If permitted
by the Committee, tax withholding or payment obligations may be settled with
Common Stock, including Common Stock that is part of the award that gives rise
to the withholding requirement. The obligations of the Company under the Plan
shall be conditioned upon such payment or arrangements and the Company or the
Holder's employer (if not the Company) shall, to the extent permitted by law,
have the right to deduct any such taxes from any payment of any kind otherwise
due to the Holder from the Company or any Subsidiary.
14.7 Governing Law. The Plan and all awards made and actions taken
thereunder shall be governed by and construed in accordance with the laws of the
State of New York (without regard to choice of law provisions).
14.8 Other Benefit Plans. Any award granted under the Plan shall not be
deemed compensation for purposes of computing benefits under any retirement plan
of the Company or any Subsidiary and shall not affect any benefits under any
other benefit plan now or subsequently in effect under which the availability or
amount of benefits is related to the level of compensation (unless required by
specific reference in any such other plan to awards under this Plan).
14.9 Non-Transferability. Except as otherwise expressly provided in the
Plan or the Agreement, no right or benefit under the Plan may be alienated,
sold, assigned, hypothecated, pledged, exchanged, transferred, encumbranced or
charged, and any attempt to alienate, sell, assign, hypothecate, pledge,
exchange, transfer, encumber or charge the same shall be void.
14.10 Applicable Laws. The obligations of the Company with respect to
all Stock Options and awards under the Plan shall be subject to (i) all
applicable laws, rules and regulations and such approvals by any governmental
agencies as may be required, including, without limitation, the Securities Act
of 1933, as amended, and (ii) the rules and regulations of any securities
exchange on which the Stock may be listed.
14.11 Conflicts. If any of the terms or provisions of the Plan or an
Agreement (with respect to Incentive Stock Options) conflict with the
requirements of Section 422 of the Code, then such terms or provisions shall be
deemed inoperative to the extent they so conflict with the requirements of said
Section 422 of the Code. Additionally, if this Plan or any Agreement does not
contain any provision required to be included herein under Section 422 of the
Code, such provision shall be deemed to be incorporated herein and therein with
the same force and effect as if such provision had been set out at length herein
and therein. If any of the terms or provisions of any Agreement conflict with
any terms or provision of the Plan, then such terms or provisions shall be
deemed inoperative to the extent they so conflict with the requirements of the
Plan. Additionally, if any Agreement does not contain any provision required to
be included therein under the Plan, such provision shall be deemed to be
incorporated therein with the same force and effect as if such provision had
been set out at length therein.
14.12 Non-Registered Stock. The shares of Stock to be distributed under
this Plan have not been, as of the Effective Date, registered under the
Securities Act of 1933, as amended, or any applicable state or foreign
securities laws and the Company has no obligation to any Holder to register the
Stock or to assist the Holder in obtaining an exemption from the various
registration requirements, or to list the Stock on a national securities
exchange.
10
<PAGE>
INDEPENDENT AUDITOR'S CONSENT
To the Board of Directors
CPI Aerostructures, Inc.
We hereby consent to incorporation by reference in the Registration Statements
(Nos. 333-11669 and 333-42403) on Form S-8 and Registration Statements (Nos.
333-08391 and 333-08216) on Form S-3 of CPI Aerostructures, Inc. of our report
dated February 5, 1999 related to the consolidated balance sheet of CPI
Aerostructures, Inc. and Subsidiary as of December 31, 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the two years in the period ended December 1, 1998, which report appears
in the December 31, 1998 annual report on Form 10-KSB of CPI Aerostructures,
Inc.
/s/ Goldstein Golub Kessler LLP
- -----------------------------------
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
April 15, 1999
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of CPI Aerostructures, Inc. and subsidiaries as of December
31, 1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 584,296
<SECURITIES> 0
<RECEIVABLES> 2,205,207
<ALLOWANCES> 0
<INVENTORY> 5,544,334
<CURRENT-ASSETS> 1,021,001
<PP&E> 6,308,767
<DEPRECIATION> 1,243,927
<TOTAL-ASSETS> 21,935,886
<CURRENT-LIABILITIES> 4,733,328
<BONDS> 0
<COMMON> 7,945
0
0
<OTHER-SE> 6,102,374
<TOTAL-LIABILITY-AND-EQUITY> 21,935,886
<SALES> 19,810,471
<TOTAL-REVENUES> 19,810,471
<CGS> 24,763,293
<TOTAL-COSTS> 24,763,293
<OTHER-EXPENSES> 4,422,786
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,263,868
<INCOME-PRETAX> (10,505,925)
<INCOME-TAX> (1,940,000)
<INCOME-CONTINUING> (8,565,925)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,565,925)
<EPS-PRIMARY> (1.08)
<EPS-DILUTED> 0
</TABLE>
