SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|X| Preliminary Proxy Statement |_| Confidential, for use of the
|_| Definitive Proxy Statement Commission Only (as permitted by
|_| Definitive Additional Materials Rule 14a-6(e)(2))
|_| Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 14a-12
CPI AEROSTRUCTURES, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|X| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11:*
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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|_| Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, Schedule or Registration Statement No.:
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(4) Date Filed:
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* Set forth the amount on which the filing fee is calculated and state how it
was determined.
<PAGE>
CPI AEROSTRUCTURES, INC.
200A Executive Drive
Edgewood, New York 11717
(516) 586-5200
Notice of Annual Meeting of Shareholders
To Be Held On June 22, 1999
To the Shareholders of CPI Aerostructures, Inc.:
You are cordially invited to attend the Annual Meeting of Shareholders
of CPI Aerostructures, Inc. ("Company") to be held at the executive offices of
the Company, on Tuesday, June 22, 1999, at 10:00 a.m., for the following
purposes, to consider and act upon the following matters:
1. To elect one Class I Director to serve for the ensuing three-year
period until his respective successor is elected and qualified;
2. To authorize an amendment to the Company's Certificate of
Incorporation to implement a reverse stock split of the Company's
Common Stock of between one-for-two and one-for-four with the exact
ratio to be determined in the sole discretion of the Board of
Directors;
3. To approve an amendment to the Company's 1998 Performance Equity Plan
to increase the number of shares issuable under such plan by 390,000
shares on a pre-split basis; and
4. To transact such other business as may properly come before the
Meeting and any and all adjournments thereof.
Only shareholders of record at the close of business on May 3, 1999 will
be entitled to notice of, and to vote at, the Meeting or any adjournments
thereof.
You are earnestly requested to date, sign and return the accompanying
form of proxy in the envelope enclosed for that purpose (to which no postage
need be affixed if mailed in the United States) whether or not you expect to
attend the Meeting in person. The proxy is revocable by you at any time prior to
its exercise and will not affect your right to vote in person in the event you
attend the Meeting or any adjournment thereof. The prompt return of the proxy
will be of assistance in preparing for the Meeting and your cooperation in this
respect will be appreciated.
By Order of the Board of Directors
Edward J. Fred, Secretary
Edgewood, New York
May 17, 1999
<PAGE>
PRELIMINARY COPY
CPI AEROSTRUCTURES, INC.
--------------------------
Proxy Statement
--------------------------
Annual Meeting of Shareholders
to Be Held on June 22, 1999
----------------
This Proxy Statement and the accompanying form of proxy is
furnished to shareholders of CPI Aerostructures, Inc. ("Company") in connection
with the solicitation of proxies by the Board of Directors of the Company for
use in voting at the Annual Meeting of Shareholders ("Meeting") to be held at
the executive offices of the Company, 200A Executive Drive, Edgewood, New York
11717, on Tuesday, June 22, 1999, at 10:00 a.m., and at any and all adjournments
thereof for the purposes set forth in the accompanying Notice of Annual Meeting.
Any proxy given pursuant to this solicitation may be revoked by the shareholder
at any time before it is exercised by written notification delivered to the
Secretary of the Company, by voting in person at the Meeting, or by delivering
another proxy bearing a later date. Attendance by a shareholder at the Meeting
does not alone serve to revoke his or her proxy. Unless otherwise specified in
the form of proxy, shares represented by proxies will be voted "FOR" the
election of the nominee described below under Proposal 1, "FOR" the approval of
the amendment to the Company's Certificate of Incorporation to implement a
reverse stock split of Common Stock, as described below under Proposal 2
("Reverse Split"), "FOR" the approval of the increase to the number of shares
authorized under the Company's 1998 Performance Equity Plan by 390,000 shares on
a pre-split basis, as described under Proposal 3, and, in the discretion of the
proxies named on the proxy card, with respect to any other matters properly
brought before the Meeting and any adjournments thereof. In such unanticipated
event that any other matters are properly presented at the Meeting for action,
the persons named in the proxy will vote the proxies in accordance with their
best judgment.
This Proxy Statement, the accompanying Notice of Meeting of
Shareholders, the Proxy and the Annual Report to Shareholders for the year ended
December 31, 1998 are expected to be mailed commencing on or about May 17, 1999
to shareholders of record on May 3, 1999 ("Record Date"). All costs of this
solicitation are to be borne by the Company.
VOTING SECURITIES
The Board of Directors has fixed the close of business on May 3,
1999, as the Record Date for the determination of shareholders of the Company
who are entitled to receive notice of, and to vote at, the Meeting. Only
shareholders of record at the close of business on that date will be entitled to
vote at the Meeting or any and all adjournments thereof. As of the Record Date,
the Company had issued and outstanding 7,945,342 shares of Common Stock, the
Company's only class of voting securities outstanding. Each shareholder of the
Company will be entitled to one vote for each share of Common Stock registered
in his or her name on the Record Date. The presence, in person or by proxy, of a
majority of all of the outstanding shares of Common Stock will constitute a
quorum at the Meeting. Proxies that are marked "abstain" and proxies relating to
"street name" shares that are returned to the Company but marked by brokers as
"not voted" ("broker non-votes") will be treated as shares present for purposes
of determining the presence of a quorum on all matters unless authority to vote
is completely withheld on the proxy. The election of directors requires a
plurality of votes cast at the Meeting with respect to the election of
directors. "Plurality" means that the nominee who receives the largest number of
votes cast "FOR" will be elected as director. Accordingly, abstentions and
broker non-votes will not affect the outcome of the election of directors. The
proposal to amend the Company's Certificate of Incorporation to implement the
Reverse Split requires the affirmative vote of a majority of all of the
outstanding shares of Common Stock. Accordingly, abstentions and broker
non-votes will have the same effect as a vote against the proposal. Any other
matters to be voted on, including the increase in the number of shares
authorized under the 1998 Performance Equity Plan, will be decided by the
affirmative vote of a majority of the votes cast by the holders of shares
1
<PAGE>
entitled to vote thereon. On any such matter, abstentions and broker non-votes
will not be counted in determining the number of votes required for a majority
and will therefore have no effect on the outcome.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of the
Record Date with respect to (i) those persons or groups known to the Company to
beneficially own more than 5% of the Company's Common Stock, (ii) each director
and nominee, (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. The information is determined in accordance with
Rule 13d-3 promulgated under the Securities Exchange Act of 1934 based upon
information furnished by the persons listed or contained in filings made by them
with the Securities and Exchange Commission.
Beneficial Shares Percent of
Name and Address of Beneficial Owner (1) Owned(2) Class
- --------------------------------------- ----------------- --------
Arthur August 1,170,000(3) 14.3%
Edward J. Fred 70,000(4) *
Walter Paulick 30,000(5) *
Kenneth McSweeney 5,000(6) *
Daniel Liguori 1,000,000(7) 11.2%
All Directors and Executive Officers 2,275,000(8) 24.4%
as a group (five persons)
- ---------------------------------
* Less than 1%
(1) Unless otherwise noted, the address of each person is j CPI
Aerostructures, Inc., 200A Executive Drive, Edgewood, New York 11717.
(2) Unless otherwise noted, the Company believes that all persons named in
the table have sole voting and investment power with respect to all of
the 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 Record Date upon the exercise of warrants or
options.
(3) Includes 250,000 shares of Common Stock which Mr. August has the right
to acquire upon exercise of options. Excludes (i) 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.
(4) Represents 70,000 shares of Common Stock which Mr. Fred has the right to
acquire upon the exercise of options.
(5) Represents 30,000 shares of Common Stock which Mr. Paulick has the right
to acquire upon the exercise of options.
(6) Represents 5,000 shares of Common Stock which Mr. McSweeney has the
right to acquire upon the exercise of options.
(7) Represents the aggregate number of shares 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. The
business address of such person is care of Kolar, Inc., 407 Cliff
Street, Ithaca, New York, New York 14850.
(8) Includes those shares of Common Stock deemed to be included in Messrs.
August, Fred, Paulick, McSweeney and Liguori respective beneficial
ownership as disclosed in notes 3, 4, 5, 6 and 7.
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<PAGE>
PROPOSAL 1:
ELECTION OF DIRECTOR
The Board of Directors is divided into three Classes with only one Class
of directors being elected in each year. The term of office of the first class
of directors (Class I), presently consisting of Kenneth McSweeney, will expire
at the Meeting. The terms of office of the second class of directors (Class II),
presently consisting of Walter Paulick, will expire in 2000, and the term of
office of the third class of directors (Class III), presently consisting of
Edward J. Fred and Arthur August, will expire in 2001. If elected, Mr. McSweeney
will serve for a term of three years. To be elected, Mr. McSweeney must receive
a plurality of the votes cast at the Meeting.
Unless authority is withheld, the proxies solicited by the Board of
Directors will be voted "FOR" the election of Mr. McSweeney. Management has no
reason to believe that Mr. McSweeney will not be a candidate or will be unable
to serve. However, in the event he should become unable or unwilling to serve as
a director, the proxy will be voted for the election of such person as shall be
designated by the Board of Directors.
Information About Directors and Executive Officers
Set forth below is certain information concerning each director,
director-nominee and executive officers of the Company:
Name Age Position
- ---------------- ---- ------------
Arthur August 64 Chairman of the Board of Directors, President,
Chief Executive Officer and Director
Edward J. Fred* 40 Vice President, Chief Financial Officer,
Secretary and Director
Walter Paulick* 52 Director
Kenneth McSweeney* 67 Director and Nominee
- --------------
* Member of both the Compensation Committee and the Audit Committee.
Arthur August, a founder of the Company, has been the Chairman of the
Board, President and Chief Executive Officer of the Company 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.
3
<PAGE>
Kenneth McSweeney has been a director of the Company since February
1998. He has also provided various consulting services to the Company on a per
diem basis 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 Grumman, most recently as the Vice
President of their Aerostructures Division and a Director of Business
Development for the Middle East. Mr. McSweeney has extensive experience in
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 C.W. Post College. He also completed the Executive
Development Program at the Cornell School of Business and Public Administration.
The Board of Directors unanimously recommends that shareholders vote
"FOR" the election of the nominee named above.
Board of Directors Compensation
Currently, Directors who are not employed by the Company receive $750
for attending each meeting and are reimbursed for the 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 for the year ended December 31, 1998. Mr.
McSweeney received options to purchase 5,000 shares of Common Stock for the year
ended December 31, 1998. See "Stock Options" below.
Executive Officers and Board of Directors Meetings and Committees
Officers are appointed by and serve at the discretion of the Board of
Directors. The Company held two meetings of the Board of Directors 1998 and took
action by unanimous written consent in lieu of a meeting on one occasion.
Messrs. Fred, Paulick and McSweeney serve on the Company's Compensation
Committee, which reviews and approves the compensation to be paid to certain
officers of the Company. Messrs. Paulick (Chairman), Fred and McSweeney also
serve on the Company's Audit Committee. The Compensation Committee and the Audit
Committee each held one meeting during 1998. No member of the Board of Directors
attended fewer than 75% of the total number of meetings of the Board and
committees thereof upon which he served during 1998.
4
<PAGE>
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 only other executive officer whose total compensation exceeded
$100,000.
<TABLE>
<CAPTION>
===================================================================================================================================
SUMMARY COMPENSATION TABLE
===================================================================================================================================
Long-Term
Annual Compensation Compensation
----------------------------------------------------------------
Name and Principal Position Year Salary Bonus Securities Underlying
($) ($) Options(#)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Arthur August, 1998 321,102 0 100,000
President and Chief Executive 1997 294,730 22,500 200,000
Officer 1996 271,148 12,611 0
- -----------------------------------------------------------------------------------------------------------------------------------
Theodore J. Martines, 1998 185,807 0 75,000
Executive Vice President(1) 1997 172,145 9,000 115,000
1996 164,211 5,044 0
- ------------------------------------------------------------------------------------------------------------------------------------
Daniel Liguori, 1998 160,470 0 0
President-Kolar(2) 1997 31,375 0 0
1996 0 0 0
===================================================================================================================================
</TABLE>
(1) Retired in December 1998.
(2) Compensation is for the period subsequent to the October 9, 1997 closing
date of the acquisition of Kolar Machine, Inc.
===============================================================================
OPTION GRANTS IN LAST FISCAL YEAR
===============================================================================
Percent of Exercise
Total Options or Base
Granted to Price Expiration
Options Employees in o Date
Fiscal Year (1)
- --------------------------------------------------------------------------------
Arthur August 100,000 28.2% 2.30 6/05/03
- -------------------------------------------------------------------------------
Theodore J. Martines 75,000 21.1% 2.09 6/05/08
- -------------------------------------------------------------------------------
(1) The Company granted a total of 355,000 options to employees in the fiscal
year ended December 31, 1998.
5
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY END OPTION VALUES
===========================================================================================================
Number of Value of
Securities Underlying Unexercised
Unexercised In-The-Money
Options at Options
Shares FYE(#) at FYE at
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized Unexercisable 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>
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. 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.
Liguori's election, for an additional three years. The employment agreement
provides Mr. Liguori with an annual base salary of $168,000 and also provides
that Mr. Liguori will not compete with Kolar during the term of employment and
for a period of five years thereafter.
Employee Benefit Plans
On February 1, 1991, the Company adopted a Qualified Sick Pay Plan
("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
On April 27, 1998, the Board of Directors adopted the 1998 Performance
Equity Plan ("1998 Plan") which was subsequently approved by the shareholders of
the Company on June 16, 1998. See discussion under Proposal 3 for details of the
1998 Plan.
6
<PAGE>
1995 Employee Stock Option Plan
The 1995 Employee Stock Option Plan ("1995 Option Plan"), authorizes
the grant of 600,000 options, of which options to purchase 493,400 shares of
Common Stock are outstanding, 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 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, Vice President, Chief Financial Officer, Secretary and a director;
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 ("1992 Plan") authorizes the grant
of 250,000 options, of which options to purchase 79,000 shares are outstanding
at exercise prices ranging from $1.31 to $3.00 per share to certain employees,
executive officers and directors of the Company, including: 10,000 shares to
Walter Paulick, a director, exercisable at $1.00 per share, and 5,000 shares
exercisable at $2.00 per share; and 10,000 shares to Edward J. Fred, Vice
President, Chief Financial Officer, Secretary and a director, exercisable at
$1.31 per share. As of April 1, 1999, options to purchase 122,836 additional
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. 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, at an exercise price
of $1.50 per share.
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 "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, which 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.
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.
7
<PAGE>
Officers, directors and ten percent shareholders 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
the Company requirements applicable to its officers, directors and greater than
ten percent beneficial owners were complied with.
PROPOSAL 2
AMENDMENT TO THE COMPANY'S CERTIFICATE OF
INCORPORATION TO IMPLEMENT A REVERSE STOCK SPLIT
General
The Board of Directors has unanimously approved a proposal to amend the
Company's Certificate of Incorporation to implement a reverse stock split of the
Company's Common Stock of between one-for-two and one-for-four with the exact
ratio to be determined in the sole discretion of the Board of Directors. This
means that as few as two shares or as many as four shares of Common Stock would
be combined into one New Share (defined below).
Assuming the Reverse Split is approved by the Company's shareholders,
the Reverse Split will be effective after the filing of an amendment to the
Certificate of Incorporation ("Amendment") with the New York Secretary of State
("Effective Date"). Each certificate representing a certain number of shares of
Common Stock outstanding immediately prior to the date of such filing ("Old
Shares") will be deemed automatically, without any action on the part of the
shareholders, to represent a fraction of such number of shares of Common Stock
after the Reverse Split ("New Shares"); provided, however, that no fractional
New Shares will be issued as a result of a Reverse Split. In lieu thereof, each
shareholder whose Old Shares are not evenly divisible will receive one
additional New Share for the fractional New Share that such shareholder would
otherwise be entitled to receive as a result of a Reverse Split. After the
Reverse Split becomes effective, shareholders will be asked to surrender
certificates representing Old Shares in accordance with the procedures set forth
in a letter of transmittal to be sent by the Company. Upon such surrender, a
certificate representing the New Shares will be issued and forwarded to the
shareholders; however, each certificate representing Old Shares will continue to
be valid and represent New Shares equal to a fraction of the number of Old
Shares (plus one additional New Share where such Old Shares are not evenly
divisible).
The number of shares of capital stock authorized by the Certificate of
Incorporation will not change as a result of the proposed Reverse Split. The
Common Stock issued pursuant to the Reverse Split will be fully paid and
nonassessable. The voting and other rights that presently characterize the
Common Stock will not be altered by the Reverse Split.
Purposes of a Reverse Split
The Board of Directors believes that the Reverse Split is desirable for
several reasons. The Board of Directors expects a Reverse Split to help the
Company satisfy the maintenance requirements established by the Nasdaq SmallCap
Market ("Nasdaq") necessary for continued listing, which among other things,
requires that the Company's Common Stock maintain a bid price of at least $1.00
per share. Over the past several months, the bid price of the Company's shares
of Common Stock has fallen below $1.00. The Company received a letter from
Nasdaq stating that the Company must demonstrate compliance with the Nasdaq
minimum $1.00 bid price before July 13, 1999. Management believes that if the
Reverse Split is approved by the shareholders, then the Company's shares of
Common Stock will have a minimum bid price in excess of $1.00 per share and,
therefore continue to be listed and traded on Nasdaq. A range for the Reverse
Split is being proposed instead of a specific ratio since the price at which the
Common Stock trades may fluctuate between now and the time the Reverse Split is
implemented. If the Reverse Split is not approved by the shareholders, then it
is highly likely that the Company's shares of Common Stock will cease to be
listed and traded on Nasdaq. In such event, the shares of Common Stock will
likely be quoted on the OTC Bulletin Board.
In addition, a Reverse Split should enhance the acceptability of the
Common Stock by the financial community and investing public. A variety of
brokerage house policies and practices tend to discourage individual brokers
within those firms from dealing with lower priced stocks. Some of those policies
8
<PAGE>
and practices pertain to time-consuming procedures that function to make the
handling of lower priced stocks economically unattractive to brokers. In
addition, the structure of trading commissions also tends to have an adverse
impact upon holders of lower priced stock because the brokerage commission on a
sale of lower priced stock generally represents a higher percentage of the sales
price than the commission on a relatively higher priced issue. A Reverse Split
should result in a price level for the Common Stock that will reduce, to some
extent, the effect of the above-referenced policies and practices of brokerage
firms and diminish the adverse impact of trading commissions on the market for
the Common Stock. The expected increased price level also may encourage interest
and trading in the Common Stock and possibly promote greater liquidity for the
Company's shareholders, although such liquidity could be adversely affected by
the reduced number of shares of Common Stock outstanding after the Effective
Date.
There can be no assurance that any or all of these results will occur.
If, for example, a one-for-four Reverse Split is implemented, there can be no
assurance that the market price per New Share after the Reverse Split will be
four times the market price per Old Share before the Reverse Split, or that such
price will either exceed or remain in excess of the current market price.
Shareholders should note that the Board of Directors cannot predict what effect
a Reverse Split will have on the market price of the Common Stock.
The Board of Directors will determine the exact ratio for the Reverse
Split based upon the market price of the Common Stock at the time of
implementation. It can be anticipated that management will select a ratio that
will result in a new market price that is sufficiently in excess of the $1.00
minimum bid price required by Nasdaq, so that a decrease in the bid price for
the Common Stock would not cause the Common Stock to be delisted from the Nasdaq
SmallCap Market.
Effect on Market for Common Stock. On May 10, 1999, the closing sale
price of the Common Stock on the Nasdaq SmallCap Market was $0.__ per share. By
decreasing the number of shares of Common Stock outstanding without altering the
aggregate economic interest in the Company represented by such shares, the Board
of Directors believes that the trading price will be increased to a price more
appropriate for a publicly-traded security. The following table illustrates the
principal effect of the proposed Reverse Split (assuming a whole number is
chosen for the ratio split) and the decrease in outstanding shares of Common
Stock assuming no additional shares are issued prior to the Effective Date as a
result of the exercise of any options or warrants.
<TABLE>
<CAPTION>
Shares of Prior to After
Reverse Split Common Stock Reverse Split Reverse Split
---------------- ------------ -------------- ------------------
<S> <C> <C> <C>
One-for-two Authorized 50,000,000 50,000,000
Outstanding 7,945,342 3,972,671*
One-for-three Authorized 50,000,000 50,000,000
Outstanding 7,945,342 2,648,447*
One-for-four Authorized 50,000,000 50,000,000
Outstanding 7,945,342 1,986,335*
</TABLE>
- --------------------------------
* Does not include New Shares to be issued in lieu of fractional shares.
Effect on Outstanding Options, Warrants and Preferred Stock. As of
December 31, 1998, the Company had outstanding options to purchase 1,122,400
shares of Common Stock with per-share exercise prices ranging from $1.00 to
$3.00. In addition, as of December 31, 1998, the Company had outstanding 702,304
warrants ("Warrants") with per-share exercise prices ranging from $1.00 to $2.50
per share. Upon the effectiveness of the Reverse Split, the 1992 Plan, the 1995
9
<PAGE>
Plan, the 1998 Plan and the Warrants will provide for a proportional downward
adjustment to the number of shares subject to outstanding options and warrants
and a corresponding upward adjustment in the per-share exercise prices to
reflect the Reverse Split. In addition, under the 1992 Plan, the 1995 Plan and
the 1998 Plan, the number of shares reserved for issuance under future awards
will be proportionally decreased.
Exchange of Stock Certificates
As soon as practicable after the Effective Date of a Reverse Split, the
Company will send a letter of transmittal to each holder of record of Old Shares
outstanding on the Effective Date. The letter of transmittal will contain
instructions for the surrender of certificate(s) representing such Old Shares to
North American Transfer Co., the Company's exchange agent ("Exchange Agent").
Upon proper completion and execution of the letter of transmittal and return
thereof to the Exchange Agent, together with the certificate(s) representing Old
Shares, a shareholder will be entitled to receive a certificate representing the
number of New Shares into which his Old Shares have been reclassified and
changed as a result of the Reverse Split.
Shareholders should not submit any certificates until requested to do
so. No new certificate will be issued to a shareholder until he has surrendered
his outstanding certificate(s) together with the properly completed and executed
letter of transmittal to the Exchange Agent.
Federal Income Tax Consequences
The following summary of the federal income tax consequences of a
Reverse Split is not, and should not be relied on as, a comprehensive analysis
of the tax issues arising from or relating to the proposed Reverse Split.
ACCORDINGLY, SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS FOR AN
ANALYSIS OF THE EFFECT OF THE TRANSACTION CONTEMPLATED BY THE PROPOSED AMENDMENT
ON THEIR RESPECTIVE TAX SITUATIONS.
The exchange of Old Shares for New Shares will not result in
recognition of gain or loss. The holding period of the New Shares will include
the shareholders' holding period for the Old Shares exchanged therefor, provided
that the Old Shares were held as a capital asset. The shares of Common Stock to
be issued to each shareholder will have an aggregate basis, for computing gain
or loss, equal to the aggregate basis of the Old Shares.
The Board of Directors recommends voting "FOR" Proposal 2.
PROPOSAL 3
APPROVAL OF AN AMENDMENT TO THE
1998 PERFORMANCE EQUITY PLAN TO INCREASE
THE NUMBER OF SHARES ISSUABLE UPON EXERCISE OF OPTIONS
The Company's has reserved 1,000,000 (pre-split) shares of Common Stock
for issuance upon exercise of options and other stock-based awards which may be
granted under the 1998 Plan. On March 30, 1999, the Board approved an amendment
to the 1998 Plan, pursuant to which the number of shares available for issuance
pursuant to grants thereunder was increased, subject to approval by the
Company's shareholders at the Meeting, by 390,000 shares, on a pre-split basis
(or 4.9% of the Company's outstanding Common Stock). If the shareholders approve
the Reverse Split described in Proposal 2 above, the proposed increase to the
number of shares reserved under the 1998 Plan would be proportionally adjusted
downward. For example, if the Board of Directors approves a one-for-three
Reverse Split, the shares subject to the 1998 Plan would be increased by 130,000
shares if Proposal 3 is approved by the shareholders.
The 1998 Plan is intended to assist the Company and its subsidiaries in
attracting, retaining and motivating employees, officers, directors and
consultants of particular merit. Management of the Company is actively pursuing
acquisition opportunities and does not believe that the amounts remaining under
the 1998 Plan combined with the 1992 Plan and 1995 Plan are sufficient to carry
10
<PAGE>
out its acquisition strategy and compensation policy designed to attract and
retain employees, directors and consultants who contribute to the Company's
success. The cost of retaining employees acquired in connection with an
acquisition could be significantly less if the Company had the flexibility to
issue options and other types of awards which may be granted under the 1998
Plan.
As of the date hereof, options to purchase an aggregate of 180,000
shares of Common Stock are outstanding under the 1998 Plan, 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, Secretary and a director, at
an exercise price of $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 (on a pre-split basis) remain eligible for
the grant of options
If the 1998 Plan, as summarized below under "Summary of the 1998 Plan,"
is amended as proposed, then, if all the shares reserved thereunder were issued,
upon the exercise of options and other awards, such shares would be equal to
approximately 17.5% of the total shares that would then be outstanding (assuming
no exercise of other outstanding options and convertible securities).
The Board of Directors recommends voting "FOR" Proposal 3.
Summary of the 1998 Plan
Administration
The 1998 Plan is administered by the Board of Directors or by a
committee ("Committee") appointed by the Board of Directors, whose members will
serve at the pleasure of the Board of Directors. If no Committee is so
designated, then the 1998 Plan will be administered by the Board of Directors.
The Board of Directors or, if appointed, Committee, has full authority, subject
to the provisions of the 1998 Plan, to award (i) Stock Options, (ii) Stock
Appreciation Rights, (iii) Restricted Stock, (iv) Deferred Stock, (v) Stock
Reload Options and/or (vi) other stock-based awards (collectively, "Awards").
Subject to the provisions of the 1998 Plan, the Board of Directors or
the Committee determines, among other things, the persons to whom from time to
time Awards may be granted ("Holders"), the specific type of Awards to be
granted (e.g., Stock Option, Restricted Stock, etc.), the number of shares
subject to each Award, share prices, any restrictions or limitations on such
Awards and any vesting, exchange, deferral, surrender, cancellation,
acceleration, termination, exercise or forfeiture provisions related to such
Awards. The interpretation and construction by the Board of Directors or the
Committee of any provisions of, and the determination of any questions arising
under, the 1998 Plan or any rule or regulation established by the Board of
Directors or the Committee pursuant to the 1998 Plan will be final, conclusive
and binding on all persons interested in the 1998 Plan.
Shares Subject to the Plan; General Terms
The 1998 Plan authorizes the granting of Awards the exercise of which
would allow up to an aggregate of 1,000,000 shares of Common Stock of the
Company to be acquired by the Holders of said Awards. In order to prevent the
dilution or enlargement of the rights of Holders under the 1998 Plan, the number
of shares of Common Stock authorized by the 1998 Plan is subject to adjustment
by the Board in the event of any increase or decrease in the number of shares of
outstanding shares of Common Stock resulting from a stock dividend, stock split,
reverse stock split and certain other changes affecting all the shares of Common
Stock of the Company, as a whole. If any Award granted under the 1998 Plan is
forfeited or terminated, the shares of Common Stock of the Company that were
available pursuant to such Award will again be available for distribution in
connection with Awards subsequently granted under the 1998 Plan.
Any equity security granted pursuant to the 1998 Plan must be held for
six months from the date of grant or in the case of an option, at least six
months must elapse from the date of acquisition of the option to the date of
disposition of the option (other than upon exercise or conversion) or its
underlying equity security.
11
<PAGE>
Eligibility
Subject to the provisions of the 1998 Plan, Awards may be granted to
key employees, officers, directors, consultants and other persons who are deemed
to have rendered or to be able to render significant services to the Company or
its subsidiaries and are deemed to have contributed or to have the potential to
contribute to the success of the Company. Incentive Options (as hereinafter
defined) may be awarded only to persons who, at the time of such awards, are
employees of the Company or its subsidiaries.
Types of Awards
Options. The 1998 Plan provides both for "incentive stock options"
("Incentive Options") as defined in Section 422 of the Code, and for options not
qualifying as Incentive Options ("Non-qualified Options"), both of which may be
granted with any other stock-based award under the 1998 Plan. The Board or the
Committee will determine the exercise price per share of Common Stock
purchasable under an Incentive or Non-qualified Option (collectively,
"Options"). The exercise price of an Option may not be less than 100% of the
fair market value on the last trading day before the date of the grant (or in
the case of an Incentive Option granted to a person possessing at the time of
grant more than 10% of the total combined voting power of all classes of stock
of the Company, not less than 110% of such fair market value).
The Board or the Committee determines when Options are to be granted
and when they may be exercised. However, an Incentive Option may be granted only
within a ten-year period commencing on April 27, 1998 and may be exercised only
within ten years of the date of the grant (or within five years in the case of
an Incentive Option granted to a person who, at the time of the grant, owns
stock possessing more than 10% of the total combined voting power of all classes
of stock of the Company or of its parent or any subsidiary). Subject to any
limitations or conditions of the 1998 Plan and the Board or the Committee may
impose, Options may be exercised, in whole or in part, during the term of the
Option by giving written notice of exercise to the Company specifying the number
of shares of Common Stock of the Company to be purchased. Such notice must be
accompanied by payment in full of the purchase price in cash, or at the
Company's discretion, in securities of the Company, or any combination thereof.
Options granted under the 1998 Plan are exercisable only by the Holder during
his or her lifetime. The Options granted under the 1998 Plan may not be
transferred other than by will or by the laws of descent and distribution.
Generally, if the Holder received an option as an employee of the
Company or a subsidiary, no Option, or any portion thereof, granted under the
1998 Plan may be exercised by the Holder unless he or she is employed by the
Company or a subsidiary at the time of the exercise and has been so employed
continuously from the time the Option was granted. However, in the event the
Holder's employment with the Company is terminated due to disability, the Option
will be fully vested and the Holder may still exercise his or her Option for a
period of one year (or such other lesser period as the Board or the Committee
may specify at the time of grant) from the date of such termination or until the
expiration of the stated term of the Option, whichever period if shorter.
Similarly, should a Holder die while in the employment of the Company or a
subsidiary, the Option will be fully vested on the date of death and his or her
legal representative or legatee under his or her will may exercise the decedent
Holder's Option for a period of one year from death (or such other greater or
lesser period as the Board or the Committee specifies at the time of grant) or
until the expiration of the stated term of the Option, whichever is shorter.
Further, if the Holder's employment is terminated without cause or due to normal
retirement (upon attaining the age of 65), then the portion of any Option that
has vested by the date of such retirement or termination may be exercised for
the lesser of three months after retirement or the balance of the Option's term.
Stock Appreciation Rights. The Board or the Committee may grant Stock
Appreciation Rights ("SARs" or singularly "SAR") in conjunction with all or part
of any Option granted under the 1998 Plan or may grant SARs on a free-standing
basis. In conjunction with Non-qualified Options, SARs may be granted either at
or after the time of the grant of such Non-qualified Options. In conjunction
with Incentive Options, SARs may be granted only at the time of the grant of
such Incentive Options. An SAR entitles the Holder thereof to receive an amount
(payable in cash and/or shares of Common Stock of the Company, as determined by
the Board or the Committee) equal to the excess fair market value of one share
of Common Stock of the Company over the SAR price or the exercise price of the
related Option, multiplied by the number of shares subject to the SAR.
12
<PAGE>
Restricted Stock Awards. The Board or the Committee may award shares of
restricted stock ("Restricted Stock") either alone or in addition to other
Awards granted under the 1998 Plan. The Board or the Committee shall determine
the restricted period during which the shares of stock may be forfeited if, for
example, the Holder's employment with the Company is terminated. In order to
enforce the forfeiture provisions, the 1998 Plan requires that all shares of
Restricted Stock awarded to the Holder remain in the physical custody of the
Company until the restrictions on such shares have terminated.
Deferred Stock. The Board or the Committee may award shares of deferred
stock ("Deferred Stock") either alone or in addition to other Awards granted
under the 1998 Plan. The Board or the Committee shall determine the deferral
period during which time the receipt of the stock is deferred. The Award may
specify, for example, that the Holder must remain employed by the Company during
the entire deferral period in order to be issued the stock.
Stock Reload Options. A Stock Reload Option permits a Holder who
exercises an Option by delivering already owned stock (i.e., the stock-for-stock
method) to receive back from the Company a new Option (at the current market
price) for the same number of shares delivered to exercise the Option, which new
Option may not be exercised until one year after it was granted and expires on
the date the original Option would have expired (had it not been previously
exercised). The Board or the Committee may grant Stock Reload Options in
conjunction with any Option granted under the 1998 Plan. In conjunction with
Incentive Options, Stock Reload Options may be granted only at the time of the
grant of such Incentive Option. In conjunction with Non-qualified Options, Stock
Reload Options may be granted either at or after the time of the grant of such
Non-qualified Options.
Other Stock-Based Awards. The Board or the Committee may grant
performance shares and shares of stock valued with reference to the performance
of the Company, either alone or in addition to or in tandem with Stock Options,
Restricted Stock or Deferred Stock. Subject to the terms of the 1998 Plan, the
Board or the Committee has complete discretion to determine the terms and
conditions applicable to any such stock-based awards. Such terms and conditions
may require, among other things, continued employment and/or the attainment of
specified performance objectives.
Withholding Taxes
Upon the exercise of any Award granted under the 1998 Plan, the Holder
may be required to remit to the Company an amount sufficient to satisfy all
Federal, state and local withholding tax requirements prior to delivery of any
certificate or certificates for shares of Common Stock of the Company. Subject
to certain stringent limitations under the 1998 Plan and at the discretion of
the Board, the Holder may satisfy these requirements by electing to have the
Company withhold a portion of the shares to be received upon the exercise of the
Award having a value equal to the amount of the withholding tax due under
applicable federal, state and local laws.
Acceleration in Vesting
If any "person" (as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934 ("Exchange Act")), is or becomes the
"beneficial owner" (as defined 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 1998 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
the 1998 Plan and the respective agreements respecting such Options and Awards.
Agreements
Options, Restricted Stock, Deferred Stock, and SARs and other
stock-based awards granted under the 1998 Plan will be evidenced by agreements
consistent with the 1998 Plan in such form as the Board or the Committee may
prescribe. Neither the 1998 Plan nor agreements thereunder confer any right to
continued employment upon any Holder.
13
<PAGE>
Term and Termination of the 1998 Plan
The 1998 Plan was effective as of April 27, 1998 ("Effective Date").
Unless terminated by the Board, the 1998 Plan shall continue to remain effective
until such time as no further Awards may be granted and all Awards granted under
the 1998 Plan are no longer outstanding. Notwithstanding the foregoing, grants
of Incentive Options may only be made during the ten-year period following the
Effective Date.
Amendments to the Plan
The Board may at any time, and from time to time, amend, alter, suspend
or discontinue any of the provisions of the 1998 Plan, but no amendment,
alteration, suspension or discontinuance shall be made that would impair the
rights of a Holder of any Award theretofore granted, without his or her consent.
Federal Income Tax Consequences
The following discussion of the federal income tax consequences of
participation in the 1998 Plan is only a summary of the general rules applicable
to the grant and exercise of stock options and does not purport to give specific
details on every variable and does not cover, among other things, state, local
and foreign tax treatment of participation in the 1998 Plan. The information is
based on present law and regulations, which are subject to being changed
prospectively or retroactively.
Incentive Options. The Holder will recognize no taxable income and the
Company will not qualify for any deduction upon the grant or exercise of an
Incentive Option. Upon a disposition of the shares underlying the Option after
the later of two years from the date of grant or one year after the issuance of
the shares to the Holder, the Holder will recognize the difference, if any,
between the amount realized and the exercise price as long-term capital gain or
long-term capital loss (as the case may be) if the shares are capital assets.
The excess, if any, of the fair market value of the shares on the date of
exercise of an Incentive Option over the exercise price will be treated as an
item of adjustment in computing the alternative minimum tax for a Holder's
taxable year in which the exercise occurs and may result in an alternative
minimum tax liability for the Holder. If the Common Stock of the Company
acquired upon the exercise of an Incentive Option are disposed of before
expiration of the necessary holding period of two years from the date of the
grant of the Option and one year after the exercise of the Option, (i) the
Holder will recognize ordinary compensation income in the taxable year of
disposition in an amount equal to the excess, if any, of the lesser of the fair
market value of the shares on the date of exercise or the amount realized on the
disposition of the shares, over the exercise price paid for such shares; and
(ii) the Company will qualify for a deduction equal to any such amount
recognized, subject to the limitation that the compensation be reasonable. The
Holder will recognize the excess, if any, of the amount realized over the fair
market value of the shares on the date of exercise, if the shares are capital
assets, as short-term or long-term capital gain, depending on the length of time
that the Holder held the shares, and the Company will not qualify for a
deduction with respect to such excess. In the case of a disposition of shares in
the same taxable year as the exercise of the Option, where the amount realized
on the disposition is less than the fair market value of the shares on the date
of exercise, there will be no adjustment since the amount treated as an item of
adjustment, for alternative minimum tax purposes, is limited to the excess of
the amount realized on such disposition over the exercise price, which is the
same amount included in regular taxable income.
Non-qualified Options. With respect to Non-qualified Options (i) upon
grant of the Option, the Holder will recognize no income; (ii) upon exercise of
the Option (if the Common Stock of the Company is not subject to a substantial
risk of forfeiture), the Holder will recognize ordinary compensation income in
an amount equal to the excess, if any, of the fair market value of the shares on
the date of exercise over the exercise price, and the Company will qualify for a
deduction in the same amount, subject to the requirement that the compensation
be reasonable; and (iii) the Company will be required to comply with applicable
Federal income tax withholding requirements with respect to the amount of
ordinary compensation income recognized by the Holder. On a disposition of the
shares, the Holder will recognize gain or loss equal to the difference between
the amount realized and the sum of the exercise price and the ordinary
compensation income recognized. Such gain or loss will be treated as capital
gain or loss if the shares are capital assets and as short-term or long-term
capital gain or loss, depending upon the length of time that the Holder held the
shares.
14
<PAGE>
If the shares acquired upon exercise of a Non-qualified Option are
subject to a substantial risk of forfeiture, the Holder will recognize income at
the time when the substantial risk of forfeiture is removed and the Company will
qualify for a corresponding deduction at such time.
Stock Appreciation Rights. Upon the grant of a SAR, the Holder
recognizes no taxable income and the Company receives no deduction. The Holder
recognizes ordinary income and the Company receives a deduction at the time of
exercise equal to the cash and fair market value of Common Stock payable upon
such exercise.
Restricted Stock. A Holder who receives Restricted Stock will recognize
no income on the grant of the Restricted Stock and the Company will not qualify
for any deduction. At the time the Restricted Stock is no longer subject to a
substantial risk of forfeiture, a Holder will recognize ordinary compensation
income in an amount equal to the excess, if any, of the fair market value of the
Restricted Stock at the time the restriction lapses over the consideration paid
for the Restricted Stock. A Holder's shares are treated as being subject to a
substantial risk of forfeiture so long as his or her sale of the shares at a
profit could subject him or her to a suit under Section 16 (b) of the Exchange
Act. The holding period to determine whether the Holder has long-term or
short-term capital gain or loss begins when the Restriction Period expires, and
the tax basis for the shares will generally be the fair market value of the
shares on such date.
A Holder may elect, under Section 83(b) of the Code, within 30 days of
the transfer of the Restricted Stock, to recognize ordinary compensation income
on the date of transfer in an amount equal to the excess, if any, of the fair
market value on the date of such transfer of the shares of Restricted Stock
(determined without regard to the restrictions) over the consideration paid for
the Restricted Stock. If a Holder makes such election and thereafter forfeits
the shares, no ordinary loss deduction will be allowed. Such forfeiture will be
treated as a sale or exchange upon which there is realized loss equal to the
excess, if any, of the consideration paid for the shares over the amount
realized on such forfeiture. Such loss will be a capital loss if the shares are
capital assets. If a Holder makes an election under Section 83(b), the holding
period will commence on the day after the date of transfer and the tax basis
will equal the fair market value of shares (determined without regard to the
restrictions) on the date of transfer.
On a disposition of the shares, a Holder will recognize gain or loss
equal to the difference between the amount realized and the tax basis for the
shares.
Whether or not the Holder makes an election under Section 83(b), the
Company generally will qualify for a deduction (subject to the reasonableness of
compensation limitation) equal to the amount that is taxable as ordinary income
to the Holder, in its taxable year in which such income is included in the
Holder's gross income. The income recognized by the Holder will be subject to
applicable withholding tax requirements.
Dividends paid on Restricted Stock which is subject to a substantial
risk of forfeiture generally will be treated as compensation that is taxable as
ordinary compensation income to the Holder and will be deductible by the Company
subject to the reasonableness limitation. If, however, the Holder makes a
Section 83(b) election, the dividends will be treated as dividends and taxable
as ordinary income to the Holder, but will not be deductible by the Company.
Deferred Stock. A Holder who receives an award of Deferred Stock will
recognize no income on the grant of such award. However, he or she will
recognize ordinary compensation income on the transfer of the Deferred Stock (or
the later lapse of a substantial risk of forfeiture to which the Deferred Stock
is subject, if the Holder does not make a Section 83(b) election), in accordance
with the same rules as discussed above under the caption "Restricted Stock."
Other Stock-Based Awards. The federal income tax treatment of Other
Stock-Based Awards will depend on the nature of any such award and the
restrictions applicable to such award.
INDEPENDENT ACCOUNTANTS
The Board of Directors has selected the independent accounting
firm of Goldstein Golub Kessler & Company, P.C. as the auditors of the Company
for the year ending December 31, 1999. A representative of Goldstein Golub
Kessler & Company, P.C., the auditors of the Company for the year ended December
15
<PAGE>
31, 1998, is expected to be present at the Meeting. The representative will have
the opportunity to make a statement and will be available to respond to
appropriate questions from shareholders.
1999 SHAREHOLDER PROPOSALS
The Company's By-laws provide that no shareholder nomination
for the Board of Directors or proposal on any other matter may be brought before
the shareholders without the giving of at least 120 days prior written notice to
the Secretary of the Company (based upon the day and the month of the last
annual meeting). Therefore, in order for shareholder proposals for the Annual
Meeting of Shareholders to be held during 2000 to be eligible for inclusion in
the Company's Proxy Statement, they must be received by the Company at its
principal office in Edgewood, New York not later than February 22, 2000.
SOLICITATION OF PROXIES
The solicitation of proxies in the enclosed form is made on
behalf of the Company and the cost of this solicitation is being paid by the
Company. In addition to the use of the mails, proxies may be solicited
personally or by telephone or telephone using the services of directors,
officers and regular employees of the Company at nominal cost. The Company has
engaged the services of Shareholder Communications Corporation ("SCC"), an
independent proxy solicitation firm, to help solicit proxies for this Meeting.
SCC anticipates that approximately 20 of its employees will participate in such
solicitation. Banks, brokerage firms and other custodians, nominees and
fiduciaries will be reimbursed by the Company for expenses incurred in sending
proxy material to beneficial owners of the Company's stock.
OTHER MATTERS
The Board of Directors knows of no matter which will be
presented for consideration at the Meeting other than the matters referred to in
this Proxy Statement. Should any other matter properly come before the Meeting,
it is the intention of the persons named in the accompanying proxy to vote such
proxy in accordance with their best judgment.
Edward J. Fred, Secretary
Edgewood, New York
May 17, 1999
<PAGE>
FRONT OF CARD:
CPI AEROSTRUCTURES, INC. - PROXY - Solicited By The Board Of Directors
for Annual Meeting of Shareholders To Be Held on June 22, 1999
P The undersigned shareholder(s) of CPI AEROSTRUCTURES, INC., a New York
corporation ("Company"), hereby appoints Arthur August and Edward J. Fred,
R or either of them, with full power of substitution and to act without the
other, as the agents, attorneys and proxies of the undersigned, to vote the
O shares standing in the name of the undersigned at the Annual Meeting to be
held on June 22, 1999 and at all adjournments thereof. This proxy will be
X voted in accordance with the instructions given below. If no instructions
are given, this proxy will be voted FOR all of the following proposals:
Y
1. Election of the following Director: Kenneth McSweeney
FOR the nominee listed |_| WITHHOLD AUTHORITY |_|to vote for the nominee.
2. To approve an amendment to the Company's Certificate of Incorporation
to implement a reverse stock split of between one-for-two and
one-for-four:
FOR |_| AGAINST |_| ABSTAIN |_|
BACK OF CARD:
3. To approve an amendment to the Company's 1998 Performance Equity Plan
to increase the number of shares issuable under such plan by 390,000:
FOR |_| AGAINST |_| ABSTAIN |_|
4. In their discretion, the proxies are authorized to vote upon such other
business as may come before the meeting or any adjournment thereof.
Date _____________________, 1999
________________________________
Signature
________________________________
Signature if held jointly
Please sign exactly as name
appears to the left. When
shares are held by joint
tenants, both must sign. When
signing as attorney, executor,
administrator, trustee or
guardian, give full title. If a
corporation or partnership,
please sign corporate or
partnership name by authorized
person, indicating position.
