-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EvFJY8JpIgUq+QU9YE8bcFziMMm3JCbIp+NSeEu1RrHupcZ4F368qPSn0IPlHLZp z0l9rOBcUeZZ8GKbW65Q0w== 0001094891-01-500361.txt : 20020410 0001094891-01-500361.hdr.sgml : 20020410 ACCESSION NUMBER: 0001094891-01-500361 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CPI AEROSTRUCTURES INC CENTRAL INDEX KEY: 0000889348 STANDARD INDUSTRIAL CLASSIFICATION: AIRCRAFT PART & AUXILIARY EQUIPMENT, NEC [3728] IRS NUMBER: 112520310 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-11398 FILM NUMBER: 1786899 BUSINESS ADDRESS: STREET 1: 200A EXECUTIVE DR CITY: EDGEWOOD STATE: NY ZIP: 11717 BUSINESS PHONE: 5165865200 10QSB 1 cpi_10qsb-93001.txt 10QSB FOR 9-30-01 CPI AEROSTRUCTURES, INC. - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period Commission File Number 1-11398 Ended September 30, 2001 CPI AEROSTRUCTURES, INC. (Exact Name of Small Business Issuer as Specified in its Character) New York 11-2520310 ---------------------------------- ------------------------------------ (State or Other Jurisdiction (IRS Employer Identification Number) of Incorporation or Organization) 200A EXECUTIVE DRIVE, EDGEWOOD, NY 11717 (Address of Principal Executive Offices) Telephone number (631) 586-5200 (Issuer's Telephone Number Including Area Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ The number of shares of common stock, par value $.001 per share, outstanding was 2,657,046 as of September 30, 2001. CPI AEROSTRUCTURES, INC. INDEX - ------------------------------------------------------------------------------- Part I Financial Information: Item 1 - Consolidated Financial Statements: Independent Accountant's Review Report 3 Balance Sheets as of September 30, 2001 (Unaudited) and 4 December 31, 2000 (Audited) Statements of Operations for the Three Months and Nine Months 5 ended September 30, 2001 (Unaudited) and 2000 (Unaudited) Statements of Cash Flows for the Nine Months ended 6 September 30, 2001 (Unaudited) and 2000 (Unaudited) Notes to Financial Statements (Unaudited) 7 Item 2 - Management's Discussion and Analysis of Financial Condition 10 and Results of Operations Part II. Other Information Item 2 - Changes in Securities and Use of Proceeds 11 Item 4 - Submission of Matters to a Vote of Security Holders 11 Item 6 - Exhibits and Reports on Form 8-K 12 Signatures 13 2 PART I Financial Information ITEM 1. Consolidated Financial Statements ACCOUNTANT'S REVIEW REPORT To the Board of Directors CPI Aerostructures, Inc. We have reviewed the accompanying condensed consolidated balance sheet of CPI Aerostructures, Inc. and Subsidiary as of September 30, 2001 and the related condensed consolidated statements of operations for the nine and three month periods ended September 30, 2001 and 2000 and the consolidated statements of cash flows for the nine month periods ended September 30, 2001 and 2000. These financial statements are responsibility of the company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the condensed financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. /s/ Goldstein Golub Kessler LLP GOLDSTEIN GOLUB KESSLER LLP New York, New York November 2, 2001 3
CPI AEROSTRUCTURES, INC. CONSOLIDATED BALANCE SHEETS - ------------------------------------------------------------------------------------------------------------- September 30, December 31, 2001 2000 (Unaudited) (Audited) - ------------------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 275,352 $ 172,184 Accounts receivable 1,624,498 2,107,555 Costs and estimated earnings in excess of billings on uncompleted contracts 6,664,340 4,403,779 Inventory 2,945,122 4,984,682 Deferred income taxes net of valuation allowance of $1,146,000 1,214,000 1,214,000 Prepaid expenses and other current assets 164,182 114,333 - ------------------------------------------------------------------------------------------------------------- Total current assets 12,887,494 12,996,533 Property, Plant and Equipment, net 5,483,004 6,142,330 Goodwill 5,679,011 6,066,258 Other Assets 212,564 308,579 - ------------------------------------------------------------------------------------------------------------- Total Assets $24,262,073 $25,513,700 ============================================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 2,792,282 $ 2,663,300 Accrued expenses 400,662 560,444 Line of credit 1,700,000 1,700,000 Current portion of long term debt 3,145,118 6,043,239 Income taxes payable --- 34,000 Interest payable 596,010 10,720 - ------------------------------------------------------------------------------------------------------------- Total current liabilities 8,634,072 11,011,703 Long term debt 6,084,106 4,460,003 Deferred income taxes 431,000 431,000 Interest payable --- 374,400 - ------------------------------------------------------------------------------------------------------------- Total liabilities 15,149,178 16,277,106 - ------------------------------------------------------------------------------------------------------------- Commitments Shareholders' Equity: Common stock - $.001 par value; authorized 50,000,000 shares, 2,657,046 and 2,648,509, respectively, issued and outstanding 2,657 2,649 Additional paid - in capital 12,367,020 12,319,674 Accumulated deficit (3,256,782) (3,085,729) - ------------------------------------------------------------------------------------------------------------- Shareholders' equity 9,112,895 9,236,594 - ------------------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $24,262,073 $25,513,700 ============================================================================================================= See Notes to Consolidated Financial Statements 4
CPI AEROSTRUCTURES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS - -------------------------------------------------------------------------------------------------------------------- For the Three Months Ended Sept. 30, For the Nine Months Ended Sept. 30, 2001 2000 2001 2000 (Unaudited) (Unaudited) - ------------------------------------------------------------------------------------------------------------------- Revenue $ 7,149,818 $ 7,976,254 $ 17,447,446 $22,275,083 Cost of sales 5,417,850 5,891,425 14,045,381 16,630,570 - ------------------------------------------------------------------------------------------------------------------- Gross profit 1,713,968 2,084,829 3,402,065 5,644,513 Selling, general and administrative expenses 889,842 1,120,468 2,762,352 3,066,691 - ------------------------------------------------------------------------------------------------------------------ Income (loss) from operations 842,126 964,361 639,713 2,577,822 - ------------------------------------------------------------------------------------------------------------------ Other (income) expense: Interest/other (income) expense 31,196 (39,849) 10,114 90,773 Interest expense 258,796 285,466 800,652 829,487 - ------------------------------------------------------------------------------------------------------------------ Total other expenses, net 289,992 245,617 810,766 920,260 - ------------------------------------------------------------------------------------------------------------------ Income (loss) before provision for income taxes 552,134 718,744 (171,053) 1,657,562 Provision for income taxes -0- 287,000 -0- 663,000 - ------------------------------------------------------------------------------------------------------------------ Net income (loss) $ 552,134 $ 431,744 $ (171,053) $ 994,562 - ------------------------------------------------------------------------------------------------------------------ Earnings (loss) per common share - Basic $ .21 $ .16 $ (.06) $ .38 - ------------------------------------------------------------------------------------------------------------------ Earnings (loss) per common share - Diluted $ .21 $ .16 $ (.06) $ .36 - ------------------------------------------------------------------------------------------------------------------- Shares used in computing earnings per Common share: Basic 2,657,046 2,648,509 2,652,356 2,648,509 Diluted 2,690,380 2,765,223 2,738,467 2,753,467 =================================================================================================================== See Notes to Consolidated Financial Statements 5
CPI AEROSTRUCTURES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS - ---------------------------------------------------------------------------------------------------------------------- For the Nine Months Ended September 30, 2001 2000 (Unaudited) - ---------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income (loss) $ (171,053) $ 994,562 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 1,364,382 1,232,256 Loss (gain) on disposal of fixed assets 7,875 481 Changes in operating assets and liabilities: Decrease in accounts receivable 483,057 55,588 (Increase) decrease in prepaid expenses and other current assets (49,849) 102,923 Decrease in other assets (1,000) 79,741 Increase in costs and estimated earnings in excess of billings on uncompleted contracts (2,260,561) (734,182) (Increase) decrease in inventory 2,039,560 (1,202,862) (Decrease) increase in accounts payable 128,982 (24,297) (Decrease) increase in accrued expenses 51,108 (42,982) (Decrease) increase in income taxes payable (34,000) 657,100 - ---------------------------------------------------------------------------------------------------------------------- Net cash provided by in operating activities 1,558,501 1,118,328 - ---------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchase of property and equipment (40,957) (252,592) Proceeds from sale of fixed assets 3,550 9,098 - ---------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (37,407) (243,494) - ---------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Repayment of long-term debt (1,417,926) (2,082,675) Proceeds from line of credit ------ 1,325,000 - ---------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (1,417,926) (757,675) - ---------------------------------------------------------------------------------------------------------------------- Net increase in cash 103,168 117,159 Cash at beginning of period 172,184 295,698 - ---------------------------------------------------------------------------------------------------------------------- Cash at end of period 275,352 $ 412,857 ====================================================================================================================== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest 589,762 $ 829,487 ====================================================================================================================== Income taxes $ 36,050 $ 12,645 ====================================================================================================================== Supplemental schedule of non-cash financing activity: Financing obligation incurred in connection with the acquisition of equipment $ 143,908 $ 530,938 ====================================================================================================================== See Notes to Consolidated Financial Statements 6
CPI AEROSTRUCTURES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- 1. INTERIM The financial statements as of September 30, 2001 and FINANCIAL for the nine months ended September 30, 2001 and 2000 are STATEMENTS unaudited, however, in the opinion of the management of the Company, these financial statements reflect all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the financial position of the Company and the results of operations for such interim periods and are not necessarily indicative of the results to be obtained for a full year. In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, "Business Combinations" (SFAS No. 141) and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). SFAS No. 141 addresses financial accounting and reporting for business combinations. This statement requires the purchase method of accounting to be used for all business combinations, and prohibits the pooling-of-interests method of accounting. This statement is effective for all business combinations initiated after June 30, 2001 and supercedes APB Opinion No. 16, "Business Combinations" as well as FASB Statement of Financial Accounting Standards No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises". SFAS No. 142 addresses how intangible assets that are acquired individually or with a group of other assets should be accounted for in financial statements upon their acquisition. This statement requires goodwill to be periodically reviewed for impairment rather than amortized, beginning on January 1, 2002. SFAS No. 142 supercedes APB Opinion No. 17, "Intangible Assets". The Company is assessing the impact of adopting these standards on the consolidated financial statements. 7
CPI AEROSTRUCTURES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - ----------------------------------------------------------------------------------------------------------------------- 2. COSTS AND Costs and estimated earnings in excess of billings on uncompleted contracts consist of: ESTIMATED EARNINGS IN September 30, 2001 EXCESS OF ----------------------------------------------------------------------------------------- BILLINGS ON UNCOMPLETED U.S. CONTRACTS: Government Commercial Total ----------------------------------------------------------------------------------------- Costs incurred on uncompleted contracts $5,076,743 $12,346,327 $17,423,070 Estimated earnings 1,871,938 7,227,530 9,099,468 ----------------------------------------------------------------------------------------- 6,948,681 19,573,857 26,522,538 Less billings to date 3,698,907 16,159,291 19,858,198 ---------------------------------------------------------------------------------------- Costs and estimated earnings in excess of billings on uncompleted contracts $3,249,774 $3,414,566 $6,664,340 ======================================================================================== December 31, 2000 ---------------------------------------------------------------------------------------- U.S. Government Commercial Total ---------------------------------------------------------------------------------------- Costs incurred on uncompleted contracts $2,920,896 $11,718,432 $14,639,328 Estimated earnings 909,009 6,227,850 7,136,859 ---------------------------------------------------------------------------------------- 3,829,905 17,946,282 21,776,187 Less billings to date 2,156,866 15,215,542 17,372,408 ---------------------------------------------------------------------------------------- Costs and estimated earnings in excess of billings on uncompleted contracts $1,673,039 $ 2,730,740 $ 4,403,779 ======================================================================================== 8
CPI AEROSTRUCTURES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - --------------------------------------------------------------------------------------------------------------------- 3. EARNINGS PER COMMON Basic earnings per share is computed by dividing net income, by the weighted average SHARE: number of common shares outstanding. Diluted earnings per share is computed by dividing net income, increased by proforma reductions in interest expense (net of tax) resulting from the assumed exercise of stock options and warrants and the resulting assumed reduction of outstanding indebtedness, by the weighted average number of common and common equivalent shares outstanding. The convertible securities attributable to a note payable have been excluded from the fully diluted computation as their effect would be antidilutive. 4. INVENTORY: Inventory consists of the following: Sept. 30, 2001 Dec. 31, 2000 -------------- ------------- Raw Materials $ 787,301 $ 1,665,275 Work-in-Progress 1,386,890 672,979 Finished Goods 770,931 2,646,428 ---------------------------------------------------------------------------------------- $ 2,945,122 $ 4,984,682 ======================================================================================== 5. SEGMENT The Company's operations are classified into two business segments: Production of INFORMATION: complex aerospace structural sub-assemblies ("Aerospace") and computer numerical control machining of metal products ("Machining"). Summarized financial information by business segment for 2000 and 1999 are as follows: For the nine months ended September 30, 2001 2000 ---------------------------------------------------------------------------------------- Net sales: Aerospace $ 10,631,958 $ 5,705,100 Machining 6,815,488 16,569,983 ---------------------------------------------------------------------------------------- $17,447,446 $22,275,083 ======================================================================================== Operating income (loss): Aerospace $ 2,470,358 $ 530,185 Machining (1,830,645) 2,047,637 ---------------------------------------------------------------------------------------- $ 639,713 $ 2,577,822 ======================================================================================== Total assets: Aerospace $ 9,508,376 $ 6,402,782 Machining 14,753,697 17,735,812 ---------------------------------------------------------------------------------------- $ 24,262,073 $ 24,138,594 ======================================================================================== 9
CPI AEROSTRUCTURES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Forward Looking Statements The statements discussed in this Report include forward looking statements that involve risks and uncertainties, including the timely delivery and acceptance of the Company's products and the other risks detailed from time to time in the Company's reports filed with the Securities and Exchange Commission. Material Changes in Results of Operations The Company's revenue for the nine months ended September 30, 2001 was $17,447,446 compared to $22,275,083 for the same period last year, representing a decrease of $4,827,637 or 22%. This decrease is largely attributable to the decrease in the demand for board handlers produced by Kolar. Gross profit decreased by $2,242,448 or 40%, from the nine months ended September 30, 2000 compared to the nine months ended September 30, 2001. Gross profit as a percentage of revenue for the nine months ended September 30, 2001 was 20% compared to 25% for the same period last year. The reduction in gross profit percentage is due primarily to a less profitable sales mix. Selling, general, and administrative expenses decreased by $304,339, or 10%, from the nine months ended September 30, 2000 compared to the nine months ended September 30, 2001. Interest expense decreased by $28,835 for the nine months ended September 30, 2001, compared to the same period last year. Other expense decreased by $80,659 over last year's other expense. The resulting net loss for the nine months ended September 30, 2001 was $171,053 compared to net income of $994,562 for the same period last year. Basic loss per share was $.06 on 2,652,356 average shares outstanding, compared to $.38 earnings per share on 2,648,509 average shares outstanding for fiscal 2000. Diluted loss per share was to $.06 per share compared to earnings of $.36 per share in 2000 on 2,738,467 and 2,753,467 weighted average shares outstanding, respectively. Material Changes in Financial Condition At September 30, 2001 and December 31, 2000, the Company had working capital of $4,253,422 and $1,948,830 respectively, an increase of $2,268,592. This increase is primarily attributable to the classification of approximately $1,819,000 of long-term debt as current as of December 31, 2000. A large portion of the Company's cash has been used for costs incurred on commercial and the numerous government contracts which do not allow progress payments for contracts that are in process. These costs are components of "costs and estimated earnings in excess of billings on uncompleted contracts" and represent the aggregate costs and related earnings for uncompleted contracts for which the customer has not yet been billed. These costs and earnings are recovered upon shipment of products and presentation of billings in accordance with contract terms. The Company's continued requirement to incur significant costs, in advance of receipt of associated cash for commercial and government aircraft contracts, has caused an increase in the gap between aggregate costs and earnings and the related billings to date. 10 CPI AEROSTRUCTURES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Net cash provided by operating activities for the nine months ended September 30, 2001 was $1,558,501 as compared to $1,118,328 for the nine months ended September 30, 2000. This increase in cash was primarily the result of depreciation and amortization of $1,364,382, a decrease in accounts receivable of $483,057, an increase in accounts payable of $128,982, an increase in accrued expenses of $51,108, and a decrease in inventory of $2,039,560, offset by an increase in costs and estimated earnings in excess of billings on uncompleted contracts of $2,260,561, an increase in prepaid expenses and other current assets of $49,849, and a decrease in income taxes payable of $34,000. PART II. Other Information. ITEM 2. Changes In Securities and Use of Proceeds (c) Recent Sales of Unregistered Securities During the three months ended September 30, 2001, the Company made the following sales of unregistered securities:
------------------ --------------------- --------------- --------------------- ------------------ ------------------ Consideration Received and Description of If Option, Underwriting or Warrant or Other Discounts to Convertible Market Price Exemption from Security, Terms Number Sold Afforded to Registration of Exercise or Date of Sale Title of Security Or Forfeited Purchasers Claimed Conversions ------------------ --------------------- --------------- --------------------- ------------------ ------------------ 08/14/01 Common Stock 200,000 Option to purchase 4(2) Fully exercisable common stock issued upon the date of pursuant to the grant Performance Equity Plan 2000; no cash consideration received by the Company ------------------ --------------------- --------------- --------------------- ------------------ ------------------
ITEM 4. Submission of Matters to a Vote of Security Holders a) An Annual Meeting of Shareholders was held on September 18, 2001 ("Annual Meeting") b) Two matters were voted upon at the Annual Meeting, as follows: 1) Arthur August and Edward J. Fred were re-elected to serve as directors for the ensuing three years and until their successors are elected and qualified with 2,122,148 votes cast for each and 225,192 votes withholding authority for their re-election. 2) The shareholders' voted for an increase in the number of shares available for issuance under the Performance Equity Plan 2000 from 700,000 to 830,000. The votes were 2,011,766 shares voted "For" the increase, 326,978 shares voted "Against" the increase and 8,596 shares "Abstained" from the vote. 11 CPI AEROSTRUCTURES, INC. - -------------------------------------------------------------------------------- ITEM 6. Exhibits and Reports on Form 8-K a) Exhibits 10.35 Stock Option Agreement, between the Company and Edward J. Fred, dated August 14, 2001 (1). 10.36 Stock Option Agreement, between the Company and Arthur August, dated August 14, 2001 (2). 10.37 Employment Agreement, between the Company and Edward J. Fred, dated August 14, 2001 (Filed Herewith). 10.38 Employment Agreement, between the Company and Arthur August, dated August 14, 2001 (Filed Herewith). (1) Filed as an exhibit to the Schedule 13D of Edward J. Fred, filed with the Commission on October 19, 2001. (2) Filed as an exhibit to the Schedule 13D of Arthur August, filed with the Commission on October 19, 2001. b) No reports on Form 8-K were filed with the Securities and Exchange Commission during the nine months ended September 30, 2001. 12 - ------------------------------------------------------------------------------- SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CPI AEROSTRUCTURES, INC. Dated: November 14, 2001 By: /S/ Arthur August ----------------- Arthur August President (Principal Executive Officer) Dated: November 14, 2001 By: /S/ Edward J. Fred ------------------ Edward J. Fred Chief Financial Officer 13 EX-10.37 3 cpi_10qsb-exhib1037.txt EMPLOYMENT AGREEMENT FOR EDWARD J. FRED Exhibit 10.37 EMPLOYMENT AGREEMENT AGREEMENT dated August 14, 2001, 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, 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 from August 14, 2001 until December 31, 2001 as its Chief Financial Officer ("CFO") and Executive Vice President and, from January 1, 2002 until December 31, 2004, as its President and CFO 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 President, CFO and Executive Vice President, as the case may be. 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. The Company will maintain its principal executive offices within a 30 mile radius of its current location in Edgewood, New York. Executive 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, at any time during the term hereof, that Executive is not serving as a director of the Company, he shall nonetheless be invited to attend each meeting of the Board of Directors of the Company. 2. Compensation and Benefits. ------------------------- 2.1 Salary. The Company shall pay to Executive a salary ("Base Salary") at the annual rate of not less than $150,000 from August 14, 2001 until December 31, 2001; at the annual rate of $200,000 from January 1, 2002 until December 31, 2002; at the annual rate of not less than $216,000 from January 1, 2003 until December 31, 2003; and at the annual rate of $233,280 from January 1, 2004 until December 31, 2004. 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 2% of the Company's consolidated net income for the year ending December 31, 2001 and 2002; equal to 3% of the Company's consolidated net income for the year ending December 31, 2003; and equal to 4% of the Company's consolidated net income for the year ending December 31, 2004, as determined by reference to the Company's audited financial statements for such year. The amount of the Bonus shall be pro-rated to the date of termination of Executive's employment. The Bonus with respect to any year shall be paid on or prior to April 15 of the following year. 2.3 Additional Compensation. As additional compensation for Executive entering into this Agreement and agreeing to be bound by its terms (including Article 6 hereof) and for the services to be rendered by Executive hereunder, the Company hereby issues to Executive options to purchase 100,000 shares of Common Stock under the Company's Performance Equity Plan 2000. These options ("Agreement Options") shall be evidenced by one or more Stock Option Agreements of even date herewith between the Company and Executive. The 2 Agreement Options will have an exercise price of $1.20 per share and will vest immediately. The Compensation Committee may, in its discretion, grant additional options to Executive during the term of this Agreement. 2.4 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. 2.5 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. 2.6 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. The Company shall reimburse Executive for all costs associated with the use of a vehicle, including lease and insurance costs, repairs and maintenance. 2.7 Expenses. The Company shall pay or reimburse Executive for all transportation, hotel and other expenses reasonably incurred by Executive on business trips (including business class air travel if the scheduled flight is more than two (2) consecutive hours) 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 August 14, 2001 and shall continue until December 31, 2004 (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. 3 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. 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 President, CFO and Executive Vice President (or whichever positions Executive holds at such time), 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. In the event of a dispute as to the existence of suitable "Cause" for termination pursuant this Section 4.3, Executive shall be entitled to file for arbitration of such dispute in accordance with the rules of the American Arbitration Association with one arbitrator to be selected by the Company and one arbitrator to be selected by the Executive, and pending final 4 determination of such arbitration proceedings, Executive shall continue to be compensated in accordance with the terms of this Agreement and shall be reimbursed for his expenses including his legal costs. 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 4.6. 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) Executive is not nominated or 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) 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; 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. 5 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 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. In the event that Executive's employment is terminated pursuant to Sections 4.4 or 4.5, 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, 2004, and (ii) continue to maintain and pay for the same medical insurance then covering Executive through June 30, 2006. Notwithstanding the foregoing, if a "change of control" of the Company (as described in Section 4.5(e)) occurs prior to a termination of Executive's employment pursuant to Sections 4.4 or 4.5, 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 6 equal to three times (3X) the total compensation (including salary and bonus) earned by Executive during the last full calendar year of his employment. (d) Executive shall have no duty to mitigate awards paid or payable to him pursuant to this Agreement, and any compensation paid or payable to Executive from sources other than the Company will not offset or terminate the Company's obligation to pay to Executive the full amounts pursuant to this Agreement. 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. 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 7 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. To the extent that the Company obtains director and officers' insurance coverage for any period in which Executive was an officer, director or consultant to the Company, Executive shall be a named insured and shall be entitled to coverage thereunder. 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 dis closed by court order, subpoena or 8 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 con trol; 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 (other than Executive's personal secretary and assistant); 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 9 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. 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 10 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: Chairman With a copy in either case to: Graubard 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 negotia tions, 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. 11 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, Chairman, President and Chief Executive Officer /s/ Edward J. Fred --------------------------------------- EDWARD J. FRED 12 EX-10.38 4 cpi_10qsb-exh1038.txt EMPLOYMENT AGREEMENT FOR ARTHUR AUGUST Exhibit 10.38 EMPLOYMENT AGREEMENT AGREEMENT dated August 14, 2001 between ARTHUR AUGUST ("Executive"), and CPI AEROSTRUCTURES, INC. ("Company"); 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 employ Executive from August 14, 2001 until December 31, 2001 as its Chairman of the Board ("Chairman"), President and Chief Executive Officer ("CEO") and from January 1, 2002 until December 31, 2004, as its Chairman and 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, as the case may be. The Company and Executive acknowledge that Executive's functions and duties as Chairman, President and CEO, as the case may be, include establishing policies and strategies for the Company's overall business and operations, including plans for growth and strategic alliances. 1.2 Full-Time Position Through 12/31/02. Executive accepts such employment and agrees to devote substantially all of his business time, energies and attention to the performance of his duties hereunder through December 31, 2002 and thereafter, to devote such time as he, in his sole discretion, deems to be necessary. 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. The Company will maintain its principal executive offices within a 30 mile radius of its current location in Edgewood, New York. Notwithstanding the foregoing, Executive may, in his sole discretion, perform his obligations under this Agreement off the premises of the Company. Additionally, Executive may maintain an office in, adjacent to, or within the vicinity of his residence, and the Company shall reimburse him for all costs reasonably related thereto (including secretarial assistance, telephone, fax, computer and other communications equipment). 1.4 Board of Directors Position. At any time during the term hereof that Executive is not serving as a director of the Company, he shall nonetheless be invited to attend each meeting of the Board of Directors of the Company. 2. Compensation and Benefits. ------------------------- 2.1 Salary. The Company shall pay to Executive a salary ("Base Salary") at the annual rate of not less than $300,000 per annum from August 14, 2001 until December 31, 2002 and at the annual rate of not less than $100,000 from January 1, 2003 until December 31, 2004. 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 the year ending December 31, 2001 and 2002; equal to 3% of the Company's consolidated net income for the year ending December 31, 2003; and equal to 2% of the Company's consolidated net income for the year ending December 31, 2004, as determined by reference to the Company's audited financial statements for such year. The amount of the Bonus shall be pro-rated to the date of termination of Executive's employment. The Bonus with respect to any year shall be paid on or prior to April 15 of the following year. 2 2.3 Additional Compensation. As additional compensation for Executive entering into this Agreement and agreeing to be bound by its terms (including Article 6 hereof) and for the services to be rendered by Executive hereunder, the Company hereby issues to Executive options to purchase 100,000 shares of Common Stock under the Company's Performance Equity Plan 2000. These options ("Agreement Options") shall be evidenced by one or more Stock Option Agreements of even date herewith between the Company and Executive. The Agreement Options will have an exercise price of $1.20 per share and will vest immediately. The Compensation Committee may, in its discretion, grant additional options to Executive during the term of this Agreement. 2.4 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. 2.5 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. 2.6 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. The Company shall reimburse Executive for all costs associated with the use of a vehicle, including lease and insurance costs, repairs and maintenance. 2.7 Expenses. The Company shall pay or reimburse Executive for all transportation, hotel and other expenses reasonably incurred by Executive on business trips (including business class air travel if the scheduled flight is more than two (2) consecutive hours) 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 2.8 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 August 14, 2001 and shall continue until December 31, 2004 (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. 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 whichever positions Executive holds at such time), 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 4 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. In the event of a dispute as to the existence of suitable "Cause" for termination pursuant this Section 4.3, Executive shall be entitled to file for arbitration of such dispute in accordance with the rules of the American Arbitration Association with one arbitrator to be selected by the Company and one arbitrator to be selected by the Executive, and pending final determination of such arbitration proceedings, Executive shall continue to be compensated in accordance with the terms of this Agreement and shall be reimbursed for his expenses including his legal costs. 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 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 not nominated or 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) 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; or (f) a liquidation, bankruptcy or receivership of the Company. Notwithstanding 5 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 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, (v) all accrued but unused vacation pay, and (vi) the payments required by Section 4.7(d), below. (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 6 Salary, all valid expense reimbursements, all unused vacation pay required by law through the date of termination, and the payments required by Section 4.7(d), below. (c) Payment Upon Termination by Company Without "Cause" or Executive for "Good Reason". In the event that Executive's employment is terminated, pursuant to Sections 4.4 or 4.5, 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, 2004, (ii) continue to maintain and pay for the same medical insurance then covering Executive through June 30, 2006, and (iii) make the payments to Executive required by Section 4.7(d), below. Notwithstanding the foregoing, if a "change of control" of the Company (as described in Section 4.5(e)) occurs prior to a termination of Executive's employment pursuant to Sections 4.4 or 4.5, 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 three times (3X) the total compensation (including salary and bonus) earned by Executive during the last full calendar year of his employment. (d) Non-compete Payments. In consideration of Executive's agreement not to compete with the Company for an extended period of time pursuant to Section 6.4 hereof, the Company agrees to pay Executive the aggregate sum of $300,000 ("Non-compete Fee"). The Non-compete Fee shall be paid to Executive in the event that his employment is terminated for any reason, even if his employment is terminated in a manner which causes Section 6.4 hereof to become null and void pursuant to Section 6.7. The Non-compete Fee shall be paid to Executive (or his estate, in the event of his death) in five equal installments of $60,000 each, commencing on the date of termination of employment and continuing on each of the first four annual anniversaries thereof. The Non-compete Fee shall be in addition to any other payment required to be made to Executive hereunder. 7 (e) Executive shall have no duty to mitigate awards paid or payable to him pursuant to this Agreement, and any compensation paid or payable to Executive from sources other than the Company will not offset or terminate the Company's obligation to pay to Executive the full amounts pursuant to this Agreement. 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. 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. To the extent that the Company obtains director and officers' insurance coverage for any 8 period in which Executive was an officer, director or consultant to the Company, Executive shall be a named insured and shall be entitled to coverage thereunder. 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, 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 9 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 and for a period of five years 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 (other than Executive's personal secretary and assistant); or (v) solicit, interfere with, or endeavor to entice away from the Company, for the benefit of 10 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. 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, Section 6.4 shall be null and void and of no further force or effect. 11 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 c/o CPI Aerostructures, Inc. 200A Executive Drive Edgewood, New York 11717 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 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. 12 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/ Edward J. Fred --------------------------------------- By: Edward J. Fred, Vice President and Chief Financial Officer /s/ Arthur August --------------------------------------- ARTHUR AUGUST 13 -----END PRIVACY-ENHANCED MESSAGE-----