-----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, A072BliM1iCMxSDyB5BNeBpAb68ROWwJ43SNaeREMU0Qg78ds0SCUQkuRu937GsY ut/iZGiFZtubHhcAYSbNJg== 0001094891-03-000025.txt : 20030205 0001094891-03-000025.hdr.sgml : 20030205 20030205172638 ACCESSION NUMBER: 0001094891-03-000025 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 20030205 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: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-101902 FILM NUMBER: 03541314 BUSINESS ADDRESS: STREET 1: 200A EXECUTIVE DR CITY: EDGEWOOD STATE: NY ZIP: 11717 BUSINESS PHONE: 5165865200 SB-2/A 1 cpi_am2.txt FORM SB-2/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 5, 2003 Registration No. 333-101902 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (Amendment No. 2) CPI AEROSTRUCTURES, INC. (Name of Small Business Issuer in its Charter) New York 3728 11-2520310 - ---------- ------------------ ----------------- (State or other (Primary Standard Industrial (I.R.S. Employer jurisdiction of Industrial Classification Identification No.) incorporation or Code Number) organization) 200A Executive Drive, Edgewood, New York 11717 (631) 586-5200 (Address and telephone number of principal executive offices) Arthur August, Chairman and Chief Executive Officer CPI Aerostructures, Inc. 200A Executive Drive Edgewood, New York 11717 (631) 586-5200 (Name, Address and Telephone Number of Agent for Service) Copy to: David Alan Miller, Esq. Graubard Miller 600 Third Avenue New York, NY 10016 Telephone: (212) 818-8800 Facsimile (212) 682-2320 Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. - --------------------------------------------------------------------------- If any of the securities being registered on this form are to be offered on a delayed or continuous basis under Rule 415 under the Securities Act of 1933, as amended, check the following box: [X] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, as amended, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ]
CALCULATION OF REGISTRATION FEE - -------------------------------- ------------------ ------------------------------- --------------------------- -------------------- Title of Each Amount Class of Securities To Be Proposed Maximum Proposed Maximum Amount of To Be Registered Registered Offering Price Per Security(1) Aggregate Offering Price Registration Fee ---------------- ---------- -------------- ------------ ------------------------ ---------------- - -------------------------------- ------------------ ------------------------------- --------------------------- -------------------- Common Shares, $.001 2,300,000(2) $4.250 $9,775,000 $899.30 Par value Representative's Warrant 1 $100.000 $100 --(3) Common Shares Underlying 200,000(4) $4.675 $935,000 $86.02 Underwriter's Warrant - -------------------------------- ------------------ ------------------------------- --------------------------- -------------------- Total Amount Due $985.32(5) - -------------------------------- ------------------ ------------------------------- --------------------------- --------------------
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended. (2) Includes 300,000 common shares that the underwriter has the option to purchase to cover over-allotments, if any. (3) No fee pursuant to Rule 457(g). (4) Issuable upon the exercise of Underwriter's Warrant. Pursuant to Rule 416, there are also being registered additional securities as may be required for issuance pursuant to the anti-dilutive provisions of the warrant. (5) Previously paid. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. [LOGO] The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is permitted. SUBJECT TO COMPLETION, DATED FEBRUARY 5, 2003 PROSPECTUS 2,000,000 Common Shares CPI AEROSTRUCTURES, INC. We are offering for sale 2,000,000 of our common shares on a firm-commitment basis. We have granted an over-allotment option to the underwriter. Under this option, the underwriter may elect to purchase a maximum of 300,000 additional common shares from us within 45 days following the date of this prospectus to cover over-allotments, if any, under certain circumstances. Our common shares are listed on the American Stock Exchange under the symbol "CVU". The last reported sale price of our common shares on the AMEX on February ___, 2003, was $____ per share. ------------------ Investing in our common shares involves a high degree of risk. See "Risk Factors" beginning on page 7 of this prospectus. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ------------------ Underwriting Proceeds, Public discount and before offering price commissions expenses, to us -------------- ----------- --------------- Per common share........... $ $ $ Total............. $ $ $ EarlyBirdCapital, Inc. expects to deliver the shares to purchasers on or about February __, 2003. EarlyBirdCapital, Inc. February __, 2003 [ARTWORK - LOGO and Picture of the T-38 Aircraft, C-5 Wingtip Assemblies and the A-10 windshields.] Table of Contents Summary........................................................................3 Risk Factors...................................................................7 Use of Proceeds...............................................................12 Capitalization................................................................13 Management's Discussion and Analysis of Financial Condition and Results of Operations.....................14 Business......................................................................18 Management....................................................................24 Principal Shareholders........................................................29 Description of Our Capital Shares.............................................30 Underwriting..................................................................33 Legal Matters.................................................................34 Experts.......................................................................34 Disclosure of Commission Position on Indemnification for Securities Act Liabilities........................................34 Where You Can Find Additional Information.....................................35 Index to Financial Statements................................................F-1 -------------------- You should rely only on the information contained or incorporated by reference in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any jurisdiction where the offer is not permitted. You should not assume that the information in this prospectus is accurate as of any date other than the date on the front of this prospectus. 2 Summary This summary highlights certain information appearing elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before purchasing our common shares. Unless otherwise stated in this prospectus, references to "we," "us," "our" or "CPI" refer to CPI Aerostructures, Inc. Unless otherwise stated, all financial information contained in the prospectus does not include the discontinued operations of our subsidiary, Kolar, Inc., and assumes that the underwriter will not exercise its option to purchase an additional 300,000 shares. General CPI Aerostructures, Inc. is engaged in the contract production of structural aircraft parts principally for the United States Air Force and other branches of the U.S. armed forces. We also provide aircraft parts to the commercial sector of the aircraft industry but, due to the soft global economy, we believe that significantly weaker business prospects exist in this sector. Our strategy for growth includes de-emphasizing our commercial operations and concentrating on government and military sales. All of our revenues for 2002 and 92% of our revenues for 2001 were derived from government contract sales. CPI was awarded approximately $24.5 million in new contract awards in 2002, a 28% increase over 2001. This marks the sixth consecutive year in which CPI has shown double-digit growth in contract awards. We operate as a "mini-prime" contractor supplying structural aircraft parts under prime contracts with several branches of the U.S. Government. In that capacity, we deliver skin panels, leading edges, flight control surfaces, engine components, wing tips, cowl doors, nacelle assemblies and inlet assemblies for military aircraft such as the C-5A "Galaxy" cargo jet, the T-38 "Talon" jet trainer, the C-130 "Hercules" cargo jet, the A-10 "Thunderbolt" or "Warthog" attack jet and the E-3 "Sentry" AWACS jet. We also supply commercial aircraft products including aprons and engine mounts, which attach jet engine housings to aircraft such as the Lear 60 and Astra Galaxy business jets. Our products are sub-assemblies, a series of parts fixed together to form a larger unit that will comprise a part of a complex aerodynamic structure. In conjunction with our assembly operations, we provide engineering, technical and program management services to our customers. Due to budget constraints in the mid to late 1990's, the Clinton Administration closed several military installations and began outsourcing the assembly of component parts into subassemblies. Until then, the military had performed this function internally. The ability to manage the bidding process, subcontract production of components and assemble components into subassemblies is our core competency and the government's decision to outsource this function has resulted in increased business opportunities for us. Fueled by new defense contract awards, our revenue has grown significantly over the past few years. Our revenue growth has averaged 41% per annum since 1997. From 1997 through 2002, the dollar value of defense contracts awarded to us has increased at a compounded annual growth rate of 53%. CPI has 22 years of experience as a prime contractor, completing over 1,100 contracts to date. Most members of our management team have held management positions at large defense contractors, including Grumman, Lockheed and Fairchild. Our technical team possesses extensive technical expertise and program management and integration capabilities. Our competitive advantage lies in our ability to offer large contractor capabilities with the flexibility and responsiveness of a small company, while staying competitive in cost and delivering superior quality products. While the larger prime contractors compete for significant modification awards and subcontract components to other suppliers, they generally do not compete for awards for smaller modifications or spares and repair parts, even for planes for which they are the original manufacturer. We also qualify as a small business because we have less than 1,000 employees, and this allows us to compete on military awards set aside for companies with this small business status. While historically the majority of our contracts have been valued below $200,000, we have recently competed for, and were awarded, significantly larger contracts, including an estimated $61 million award for the T-38 "Talon" jet trainer. We intend to continue to bid on these larger contracts. We will use the proceeds of this offering to repay in full all of our indebtedness for borrowed funds. We believe that our improved financial condition as a result of this offering and our success with the T-38 program will allow us to compete more effectively for larger awards in the future. 3 Corporate Information CPI was incorporated under the laws of the State of New York in January 1980 under the name Composite Products International, Inc. CPI changed its name to Consortium of Precision Industries, Inc. in April 1989 and then to CPI Aerostructures, Inc. in July 1992. Our principal office is located at 200A Executive Drive, Edgewood, New York 11717 and our telephone number is (631) 586-5200. Discontinued Operations In 1997, in an effort to diversify our business, we acquired Kolar Machine, Inc., a manufacturer of precision machined parts for the electronics industry. As a result of the downturn in the electronic manufacturing sector, we terminated Kolar's operations in December 2001, closed its Ithaca facility and liquidated most of its assets through an auction in February 2002. As a result of our decision to close the Kolar facilities and liquidate its assets, Kolar's operations have been classified as "discontinued." The Offering Securities offered............... 2,000,000 common shares Shares outstanding at February _, 2003................. 2,805,668 Shares to be outstanding after the offering............... 4,805,668 Use of proceeds.................. We intend to use the net proceeds of this offering, expected to be approximately $7,141,000, for repayment of approximately $5.1 million of debt and for working capital and other general corporate purposes. American Stock Exchange Symbol... CVU Except as set forth in the financial statements or as otherwise specifically stated, all information in this prospectus assumes: o No exercise of the underwriter's over-allotment option to purchase up to 300,000 of our common shares; o No exercise of the underwriter's warrant to purchase up to 200,000 of our common shares; o No exercise of options granted under our stock option plans, under which there are an aggregate of 1,470,146 of our common shares reserved for issuance, and options to purchase 1,222,338 common shares outstanding at exercise prices from $1.20 to $8.46; o No exercise of warrants to purchase 37,088 of our common shares granted outside of our option plans, at exercise prices from $1.65 to $4.50 per share; and o No conversion of a $4.0 million principal amount promissory note, convertible into 333,334 common shares. Risks As part of your evaluation of us, you should take into account not only our business approach and strategy, but also the special risks we face in our business. Because our business is substantially dependent upon contracts with the U.S. government, we are subject to a number of risks. Some of these risks are: the government's ability to terminate their contracts with us at any time; the government's ability to reduce or modify its contracts if its requirements or budgetary constraints change; the government's right to suspend or debar us from doing business with them; and competition in the bidding process for government contracts. 4 Summary Financial Information The summary historical financial information presented below for the years ended December 31, 2000 and 2001, have been derived from our audited consolidated financial statements and notes included elsewhere in this prospectus, which have been reclassified to reflect the operations of Kolar, Inc., as discontinued operations. The summary historical financial information for the nine month periods ended September 30, 2001 and 2002, have been derived from our unaudited consolidated financial statements and notes included elsewhere in this prospectus, which have been reclassified to reflect the operations of Kolar as discontinued operations. In our opinion the unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, which consist of only normal recurring adjustments, necessary for a fair presentation of the results of operations for the periods presented. You should read this information in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements included elsewhere in this prospectus.
Fiscal Year Ended Nine Months Ended ---------------------------------------- ---------------------------------------- December 31, 2000 December 31, 2001 September 30, 2001 September 30, 2002 ----------------- ----------------- ------------------ ------------------ Statement of Operations Data: Revenues $8,261,351 $15,024,027 $10,631,958 $17,988,748 Cost of sales 5,676,229 10,955,264 7,015,993 12,549,892 ------------- ------------- -------------- ------------- Gross profit 2,585,122 4,068,763 3,615,965 5,438,856 G&A expenses 1,421,758 1,479,421 1,145,607 1,800,643 ------------- ------------- -------------- ------------- Income (loss) from operations 1,163,364 2,589,342 2,470,358 3,638,213 Other income (expense), net (233,428) (1,620) (9,223) 3,642 Interest expense (106,157) (155,825) (126,707) (331,765) ------------- ------------- -------------- ------------- Total other income (339,585) (157,445) (135,930) (328,123) Income (loss) before taxes 823,779 2,431,897 2,334,428 3,310,090 Provision (benefit) for income taxes (126,000) 0 934,000 (529,000) ------------- ------------- -------------- ------------- Net income (loss) from continuing operations 949,779 2,431,897 1,400,428 2,781,090 Net income (loss) from discontinued operations 979,427 (14,070,016) (1,571,481) 0 ------------- ------------- -------------- ------------- Net income (loss) $1,929,206 ($11,638,119) ($171,053) $2,781,090 ============= ============= ============== ============= Basic Income (loss) per Share: Income (loss) per share from continuing $0.36 $0.92 $0.53 $1.03 operations Income (loss) per share from 0.37 (5.31) (0.59) 0 discontinued operations ------------- ------------- -------------- ------------- Income (loss) per share outstanding $0.73 ($4.39) ($0.06) $1.03 ============= ============= =============== ============= Weighted average common share outstanding 2,648,509 2,653,538 2,652,355 2,704,082 ============= ============= =============== ============= Other Financial Data: Capital expenditures $70,838 $19,307 $14,507 $40,011 Depreciation and amortization 30,194 35,653 26,362 30,931
The information for September 30, 2002 includes income taxes computed at an effective tax rate of 15.9% because we estimate we will utilize $800,000 of our net operating loss carryforward. 5 The following table summarizes our balance sheet information as of December 31, 2001 and as of September 30, 2002. The pro forma information gives effect to reduction of the principal and interest owed under a $4.0 million principal amount convertible promissory note held by Ralok, Inc. which we have the right to purchase for $2.7 million. As of September 30, 2002, there was $996,650 of interest accrued on the note. Ralok is the entity from which we purchased the assets of Kolar Machine, Inc. The pro forma as adjusted information gives further effect to our receipt of estimated net proceeds of $7,141,000 from the sale of our common shares being offered pursuant to this prospectus and application of such proceeds to repay approximately $5.1 million of debt.
December 31, 2001 September 30, 2002 ----------------- ------------------------------------------------------ Pro Forma Actual Actual Pro Forma (as adjusted) ------ ------ --------- ------------- Balance Sheet Data: Working capital (deficit) (2,807,657) 266,304 2,562,954 9,703,954 Total assets 13,830,697 14,035,432 14,035,432 15,033,396 Total liabilities 16,184,868 13,479,562 11,182,912 5,039,876 Shareholders' equity (deficit) (2,354,171) 555,870 2,852,520 9,993,520
6 Risk Factors Before making an investment in our common shares, you should consider carefully the risk factors described below, as well as the other information appearing in this prospectus, including the financial statements and related notes. Risks related to our business We depend on government contracts for most of our revenues. We are a supplier, either directly or as a subcontractor, to the U.S. government and its agencies, principally the U.S. Air Force. All of our revenues for 2002 and 92% of our revenues for 2001 were derived from government contract sales. One of our contracts, for the T-38 "Talon", accounted for 29.5% of our revenue for 2002. We depend on these government contracts for most of our business. If we are suspended or debarred from contracting with the U.S. government, if our reputation or relationship with individual federal agencies were impaired, or if the government otherwise ceased doing business with us or significantly decreased the amount of business it does with us, our business, prospects, financial condition and operating results would be materially adversely affected. We face risks relating to government contracts. There are inherent risks in contracting with the U.S. government, including risks that are peculiar to the defense industry, which could have a material adverse effect on our business, prospects, financial condition and operating results. All contracts with the U.S. government contain provisions and are subject to laws and regulations that give the government rights and remedies not typically found in commercial contracts, including rights that allow the government to: o terminate contracts for convenience in whole or in part at any time; o reduce or modify contracts or subcontracts if its requirements or budgetary constraints change; o cancel multi-year contracts and related orders if funds for contract performance for any subsequent year become unavailable; o adjust contract costs and fees on the basis of audits completed by its agencies; o claim rights in products and systems produced by us; o suspend or debar us from doing business with U.S. government; and o control or prohibit the export of our products. If the U.S. government terminates a contract for convenience, we may recover only our incurred or committed costs, settlement expenses and profit on work completed prior to the termination. If the government terminates a contract for default, we may not recover even those amounts, and instead may be liable for excess costs incurred by the government in procuring undelivered items and services from another source. We have risks associated with competing in the bidding process for U.S. government contracts. We obtain many of our U.S. government contracts through a competitive bidding process. In the bid process, we face the following risks: o We must bid on programs in advance of their completion, which may result in unforeseen technological difficulties or cost overruns; o We must devote substantial time and effort to prepare bids and proposals for competitively awarded contracts that may not be awarded to us; and o Awarded contracts may not generate sales sufficient to result in profitability. 7 We are subject to strict governmental regulations relating to the environment which could result in fines and remediation expense in the event of non-compliance. We are required to comply with extensive and frequently changing environmental regulations at the federal, state and local levels. Among other things, these regulatory bodies impose restrictions to control air, soil and water pollution, to protect against occupational exposure to chemicals, including health and safety risks, and to require notification or reporting of the storage, use and release of certain hazardous substances into the environment. This extensive regulatory framework imposes significant compliance burdens and risks on us. In addition, these regulations may impose liability for the cost of removal or remediation of certain hazardous substances released on or in our facilities without regard to whether we knew of, or caused, the release of such substances. Furthermore, we are required to provide a place of employment that is free from recognized and preventable hazards that are likely to cause serious physical harm to employees, provide notice to employees regarding the presence of hazardous chemicals and to train employees in the use of such substances. Our operations require the use of a limited amount of chemicals and other materials for painting and cleaning that are classified under applicable laws as hazardous chemicals and substances. If we are found not to be in compliance with any of these rules, regulations or permits, we may be subject to fines, remediation expenses and the obligation to change our business practice, any of which could result in substantial costs that would adversely impact our business operations and financial condition. We may be subject to fines and disqualification for non-compliance with Federal Aviation Administration regulations. We are subject to regulation by the Federal Aviation Administration under the provisions of the Federal Aviation Act of 1958, as amended. The FAA prescribes standards and licensing requirements for aircraft and aircraft components. We are subject to inspections by the FAA and may be subjected to fines and other penalties (including orders to cease production) for noncompliance with FAA regulations. Our failure to comply with applicable regulations could result in the termination of or our disqualification from some of our contracts, which could have a material adverse effect on our operations. We had a shareholders' deficit and working capital deficit for December 31, 2001. At December 31, 2001, we had a shareholders' deficit (i.e., the amount by which liabilities exceed assets) of approximately $2.3 million. We also had negative working capital (the amount by which current liabilities exceed current assets) of $2,807,657 at December 31, 2001. These types of deficits indicate that we may not be able to pay our debts as they become due. There can be no assurance that we will not experience such deficits again in the future. We do not have sufficient resources available to repay our debt in full without the proceeds from this offering, and there can be no assurance that we will raise sufficient funds in this offering or find replacement capital, or that additional arrangements can be made to restructure the terms of the debt. We currently owe several banks approximately $2,413,089 in principal amount, payable monthly, with a final payment due on June 30, 2003, bearing interest at the prime rate plus 3.5% per annum. The debt is secured by all of CPI's and Kolar's assets. We also owe $4,000,000 in principal amount to Ralok plus accrued interest of $1,131,233 as of January 31, 2003, which is due on September 30, 2003, unless the maturity date of the bank loans is extended, in which case the Ralok note will mature 90 days after the extended maturity date of the bank loans, but not later than September 30, 2007. This note bears interest at the rate of 8% per annum. At September 30, 2002, our debt to equity ratio was 24.25 to 1. We intend to raise enough proceeds in this offering to repay the bank loans in full and purchase the Ralok note. There can be no assurance that we will raise enough proceeds in this offering to repay our debt, and if we do not, we may not be able to make additional arrangements to restructure the terms of the debt or to find replacement capital, to repay our debt. If we do not repay our debt when due, the banks will be entitled to foreclose on their security interest and sell our assets. 8 Our debt facilities contain restrictive covenants which may adversely affect us. The debt facilities contain restrictive covenants which, among other things, restrict us from: o incurring additional debt; o incurring liens; o paying dividends; o making certain other restricted payments or investments; o consummating certain asset sales; o entering into certain transactions with affiliates; and o merging or consolidating with another entity. The debt facilities also require us to maintain specified financial ratios and satisfy certain financial tests, including ratios and tests relating to consolidated tangible net worth, fixed charges coverage ratios, consolidated net income and earnings before interest, taxes, depreciation and amortization (EBITDA). Our ability to meet the financial ratios and tests may be affected by events beyond our control. A breach of any of these covenants could result in an event of default under the debt facilities. As of December 31, 2002, we were in compliance with all of our covenants. If an event of default occurs, the lenders are permitted to accelerate the debt and demand repayment in full. If we do not repay our debt when due, the banks will be entitled to foreclose on their security interest and sell our assets. In that event, our assets subject to the security interest could be sold, and we might have to curtail our operations. If the contracts associated with our backlog were terminated, our financial condition would be adversely affected. The maximum contract value specified under each government contract that we enter into is not necessarily indicative of the revenues that we will realize under that contract. Because we may not receive the full amount we expect under a contract, we may not accurately estimate our backlog because the actual accrual of revenues on programs included in backlog may never occur or may change. Cancellations of pending contracts or terminations or reductions of contracts in progress could have a material adverse effect on our business, prospects, financial condition or results of operations. As of December 31, 2002, our backlog was $70,735,023, of which 27% was funded and 73% was unfunded. We may be unable to retain personnel who are key to our operations. Our success, among other things, is dependent on our ability to attract and retain highly qualified senior officers and engineers. Competition for key personnel is intense. Our ability to attract and retain senior officers and experienced, top rate engineers is dependent on a number of factors, including prevailing market conditions and compensation packages offered by companies competing for the same talent. The inability to hire and retain these persons may adversely affect our production operations and other aspects of our business. Risks related to the offering The market price of our common shares is highly volatile. The market price of our common shares has been highly volatile and may continue to be volatile in the future. As a result of our share price volatility, it is difficult to determine the true market value of our company. Investors in this offering may experience dilution upon the exercise of options and warrants. We currently have outstanding options and warrants to purchase 1,194,004 of our common shares. There are 276,142 common shares available under our existing equity performance plans that may be subject to future awards. Upon consummation of this offering, the underwriter will be issued a warrant to purchase up to 200,000 common shares. On April 1, 2003, we will grant options to purchase an aggregate of 30,000 common shares to our non-employee directors. Investors in this offering may experience a reduction in percentage ownership of the company and dilution in the net tangible book value of their investment upon the exercise of these outstanding options and warrants and any we may issue in the future. 9 There could be substantial sales of our common shares after the expiration of lock-up periods, which could cause the price of our common shares to fall. After the offering, 4,805,668 of our common shares will be outstanding. Of the common shares outstanding after the offering, the resale of 311,618 shares will be restricted under lock-up agreements that restrict the holders' ability to transfer our shares for at least 13 months after the date of this prospectus, except that the underwriter has agreed that Mr. Arthur August may adopt a plan under Rule 10b5-1 of the Securities Exchange Act of 1934, pursuant to which he can sell up to 10,000 of his common shares per month during the lock-up period commencing three months after the date of this prospectus. Most of the remaining outstanding shares may be sold freely without restriction. Our underwriter may in its sole discretion waive or permit us to waive the lock-up at any time for any shareholder. Moreover, all of the shares underlying our outstanding options have been registered and may be sold freely immediately after they are exercised. Sales of a substantial number of our common shares could cause the price of our securities to fall. Additionally, these sales could impair our ability to raise capital by selling additional securities. A significant amount of the proceeds from this offering will not be used grow our business. Approximately 72% of the net proceeds to be received by us in connection with this offering will be allocated to debt repayment, with the balance allocated to working capital and other general corporate purposes. Accordingly, there will not be a significant amount of funds available to assist in the growth of our business. Provisions of our certificate of incorporation, by-laws and New York laws may prevent a change in control even if such change of control would result in an increase in our share price. New York law. We are subject to Section 912 of the New York Business Corporation Law. In general, Section 912 prohibits a publicly held New York corporation from engaging in a business combination with an interested shareholder (a person who owns, or within five years did own, 20% or more of the corporation's voting shares) for a period of five years after the date of the transaction in which the person became an interested shareholder unless, prior to such date, the corporation's board of directors approved either the business combination or the transaction which resulted in the shareholder becoming an interested shareholder. Certificate of incorporation and bylaws. Our certificate of incorporation provides for a board of directors divided into three classes, each of which generally serves for a term of three years, with only one class of directors being elected each year. A shareholder entitled to vote for the election of directors may nominate a person or persons for election as director only if written notice of such shareholder's intent to make such nomination is given to our secretary not later than 120 days in advance of the meeting. Our certificate of incorporation and by-laws do not provide for cumulative voting rights. This means that holders of a majority of our capital shares who vote in the election of directors can elect all of the directors and, in such event, the holders of the remaining shares will not be able to elect any of our directors. Our certificate of incorporation provides that shareholder actions by consent require the consent of all of our shareholders. This has the effect of delaying the ability of a majority shareholder to acquire control of our board of directors. We are authorized to issue up to 5,000,000 preferred shares. These shares may be issued in one or more series and our board of directors may determine the terms of any shares of newly issued preferred shares at the time of issuance, without further shareholder action. These terms may include voting rights (including the right to vote as a series on particular matters), preferences as to dividends and liquidation, conversion and redemption rights and sinking fund provisions. Any issuance of our preferred shares, depending upon the rights, preferences and designations of these shares, may delay, deter or prevent a change in control of our company, or could result in the dilution of the voting power of any of our common shares you purchase in the offering. We have no present plans to issue any preferred shares. Forward-Looking Statements This prospectus contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to 10 our financial condition, results of operations and business. The words "anticipate," "believe," "estimate," "expect," "plan," "intend" and similar expressions, as they relate to us, are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. We cannot assure you that any of our expectations will be realized. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, without limitation, our ability to service our debt or to obtain financing, our ability to win government contract awards and to attract and retain a sufficient revenue-generating customer base, and general economic conditions. 11 Use of Proceeds We expect the net proceeds of this offering to be approximately $7,141,000. If the underwriter exercises its right to purchase an additional 300,000 shares, the net proceeds will be approximately $8,275,750. These estimates assume that the public offering price is $4.25 per share. We compute net proceeds by deducting the underwriting discount and our estimated offering expenses from the total offering price. We intend to use the net proceeds of this offering as follows: o $2.7 million to purchase a note held by Ralok, Inc. in the principal amount of $4 million, which is currently accruing interest at the rate of 8% per annum and matures on September 30, 2003; o repayment of $2,413,089 million in principal amount of bank loans, which bears interest at the prime rate plus 3.5% per annum and matures on June 30, 2003; and o approximately $2 million for working capital. Our agreement with the banks obligates us to use the net proceeds of this offering to pay the bank loans in full. In November 2002, we entered into an agreement with Ralok that grants us the right to purchase the Ralok note, including all principal and accrued interest, for an aggregate purchase price of $2.7 million, at any time until April 30, 2003. We are obligated to purchase the Ralok note if the net proceeds of this offering are at least $4 million. Unforeseen events, unexpected expenses, delays and other matters may make it necessary to reallocate or revise the anticipated uses and amounts set forth above. Although there are no current plans to do so, our board of directors reserves the right, in the exercise of its business judgment, to alter the estimates and anticipated uses set forth herein. 12 Capitalization The following table sets forth our cash and capitalization: o on an actual basis as of September 30, 2002; o on a pro forma basis reflecting a gain of approximately $2.3 million as a result of the reduction of the principal and interest owed under a $4.0 million principal amount convertible promissory note held by Ralok, Inc., which we have the right to purchase for $2.7 million. As of September 30, 2002, there was $996,650 of interest accrued on the note; and o on an as adjusted basis reflecting the sale of common shares in this offering and application of such proceeds to repay approximately $5.1 million of debt. You should read this table in conjunction with the financial statements beginning on page F-1 of this prospectus.
September 30, 2002 ------------------------------------------------------------- Pro forma Actual Pro forma as adjusted ------ --------- ----------- Cash, cash equivalents and short-term investments $ 121,002 $ 121,002 1,118,966 Property and equipment, net 110,340 110,340 110,340 Total current assets 13,745,866 13,745,866 14,743,830 =========== ========== ========== Liabilities and shareholders' equity: Debt and capital lease obligations: Note payable-Seller 8,311,782 6,015,132 -0- Capital lease obligations (including current portion) 127,904 127,904 -0- ----------- ---------- ---------- Total debt and capital lease obligations 8,439,686 6,143,036 -0- ----------- ---------- ---------- Shareholders' equity (deficit): Common shares--$.001 par value, authorized 50,000,000 shares, issued and outstanding 2,755,670; preferred shares, authorized 5,000,000 shares, none issued and outstanding 2,756 2,756 4,756 Additional paid-in-capital 12,495,872 12,495,872 19,634,872 Accumulated deficit (11,942,758) (9,646,108) (9,646,108) ----------- ---------- ---------- Total shareholders' equity 555,870 2,852,520 9,993,520 ----------- ---------- ---------- Total capitalization 8,995,556 8,995,556 9,993,520 =========== ========== ==========
13 Management's Discussion and Analysis of Financial Condition and Results of Operations You should read the financial information set forth below in conjunction with our financial statements beginning on page F-1. Except as otherwise indicated, the following discussion does not include the results of operations of Kolar, Inc., which have been reclassified as discontinued operations. Critical Accounting Policies Revenue Recognition We recognize revenue from our contracts over the contractual period under the percentage-of-completion (POC) method of accounting. Under the POC method of accounting, sales and gross profit are recognized as work is performed based on the relationship between actual costs incurred and total estimated costs at the completion of the contract. Recognized revenues that will not be billed under the terms of the contract until a later date are recorded as an asset captioned "Costs and estimated earnings in excess of billings on uncompleted contracts." Contracts where billings to date have exceeded recognized revenues are recorded as a liability captioned "Billings in excess of costs and estimated earnings on uncompleted contracts." Changes to the original estimates may be required during the life of the contract. Estimates are reviewed monthly and the effect of any change in the estimated gross margin percentage for a contract is reflected in cost of sales in the period the change becomes known. The use of the POC method of accounting involves considerable use of estimates in determining revenues, costs and profits and in assigning the amounts to accounting periods. We continually evaluate all of the issues related to the assumptions, risks and uncertainties inherent with the application of the POC method of accounting. Income Taxes We account for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We record a valuation allowance that represents federal and state operating loss carryforwards for which utilization is uncertain. Management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and the valuation allowance recorded against our net deferred tax assets. The valuation allowance would need to be adjusted in the event future taxable income is materially different than amounts estimated. We have recorded valuation allowances of $4,487,000 and $2,074,000 against our deferred tax assets at September 30, 2002 and December 31, 2001, respectively. Results of Operations Nine Months Ended September 30, 2002 as Compared to the Nine Months Ended September 30, 2001 Revenue. Our revenue for the nine months ended September 30, 2002 was $17,988,748 compared to $10,631,958 for the same period last year, representing an increase of $7,356,790 or 69%, which was due to our receipt of more contract awards in 2002. Gross profit. Gross profit for the nine months ended September 30, 2002 was $5,438,856, compared to $3,615,965 for the same period last year, an increase of $1,822,891 or 50%. Gross profit as a percentage of revenue for the nine months ended September 30, 2002 was 30% compared to 34% for the same period last year due primarily to a less profitable sales mix. Selling, general and administrative expenses. Selling, general, and administrative expenses for the nine months ended September 30, 2002 were $1,800,643, compared to $1,145,607 for the same period last year, an increase of $655,036, or 57%. This increase is largely due to legal fees associated with the discontinuance of Kolar's operations and restructuring our existing debt. Interest expense for the nine months ended September 30, 2002 was $331,765, compared to $126,707 for the same period last year, an increase of $205,058, or 162%. The increase in interest expense results from the fact that interest for the previous year was included in Kolar's income (loss) from operations prior to discontinuance of Kolar's operations. Income from continuing operations. Income from continuing operations for the nine months ended September 30, 2002 was $2,781,090 compared to $1,400,428 from continuing operations for the same period last year, an increase of $1,380,662, or 99%. The 2002 results include income taxes computed at an effective tax rate of 15.9% because we estimate that we will utilize $800,000 of 14 our net operating loss carryforward. Basic income per share was $1.03 on an average of 2,704,082 shares outstanding, compared to $.53 per share from continuing operations on an average of 2,652,355 shares outstanding for the nine months ended September 30, 2001. Year Ended December 31, 2001 as Compared to the Year Ended December 31, 2000 Revenue. Our revenue for the year ended December 31, 2001 was $15,024,027 compared to $8,261,351 for the year ended December 31, 2000, representing an increase of $6,762,676, or 82%, which is due to our receipt of more contract awards in 2001. Gross profit. Gross profit for 2001 was $4,068,763 compared to $2,585,122 for 2000, representing an increase of $1,483,641. Gross profit as a percentage of revenue for 2001 was 27%, compared to 31% for 2000. The reduction in gross profit percentage is due primarily to a less profitable sales mix. Selling, general and administrative expenses. Selling, general and administrative expenses for 2001 were $1,479,421 compared to $1,421,758 for 2000, representing an increase of $57,663. This increase is primarily attributable to the increased level of sales. Selling, general and administrative expenses as a percentage of revenue for 2001 and 2000 were 10% and 17%, respectively. Interest expense for 2001 was $155,825, compared to $106,157 for 2000, representing an increase of $49,668, due to draw-downs on our line of credit. Income from continuing operations. Net income from continuing operations was $2,431,897 for 2001 compared to $949,779 for 2000, representing an increase of $1,482,118, or 156%, due to the increased level of revenue. Including the operations of our discontinued Kolar subsidiary, the net loss for 2001 was $11,638,119 compared to net income of $1,929,206 for 2000, representing a decrease in net income of $13,567,325, which was primarily due to the liquidation of Kolar. Basic loss per share was $4.39 on 2,653,538 average shares outstanding compared to net income of $0.73 on 2,648,509 average shares outstanding for fiscal 2000. Anticipated Results of Operations for Year Ended December 31, 2002 as Compared to Year Ended December 31, 2001 We expect that revenue will be approximately $24 million for the year ending December 31, 2002, compared to $15,024,027 for the year ended December 31, 2001, representing an increase of approximately $9.0 million, or approximately 60%. This is due to an increase in government contracts awarded to us in 2002, which trend we expect to continue into 2003. Because we expect to utilize approximately $1,600,000 million of our net operating loss carryforward, we expect basic earnings per share for the year to be in excess of $1.50. Liquidity and Capital Resources General At September 30, 2002 we had working capital of $266,304 compared to a deficiency of $2,807,657 at December 31, 2001, an increase of $3,073,961. This increase is primarily attributable to an increase in costs and estimated earnings in excess of billings on uncompleted contracts of approximately $3,250,000. Net cash used in operating activities for the nine months ended September 30, 2002 was $74,762. This decrease in cash was primarily the result of cash being used for new contracts of $3,247,461. On a rolling basis, there is a portion of our "costs and estimated earnings in excess of billings on uncompleted contracts" that we do not expect to be able to collect within the next year. The amount not expected to be collected within one year was approximately $1,203,000 at December 31, 2001 and approximately $1,137,000 at September 30, 2002. These amounts relate to the start up expenses incurred in 1989 and 1990, in the early stages of our one remaining commercial contract. As we near the completion of this contract, we will bill and collect more than our expenses. Thus, we anticipate that the amount not expected to be collected within one year will continue to decrease through the completion of this contract, now estimated to be late 2004 or early 2005. 15 Financing Arrangements At December 31, 2001, Kolar was in default under its debt facilities with JPMorgan Chase Bank (formerly known as Chase Manhattan Bank) and GE Capital CFE, Inc. (as assignee of Mellon Bank, N.A.) and its convertible note with Ralok, Inc. The debt was guaranteed by CPI and secured by all of CPI and Kolar's assets. In December 2001, we discontinued Kolar's operations and began the process of liquidating its assets. The proceeds from the auction of Kolar's machinery and equipment and the sale of its real estate, which are estimated to be an aggregate of $860,000, are being used to pay a portion of the debt owed to the bank lenders. The proceeds of the sales, however, are not sufficient to provide for payment in full of all of Kolar's bank debt. From April 2002 through January 2003, we issued an aggregate of 70,000 of our common shares to Chemical Investments, Inc. (as designee of JPMorgan Chase) and 20,000 common shares to GE Capital CFE, Inc. (as designee of Mellon Bank, N.A.) as consideration for their agreement to extend the due date of the loan and for their services in connection with amending the loan documents. In June 2002, CPI restructured the debt with the banks and Ralok. As restructured, we currently owe the banks approximately $2,413,089 in principal amount bearing interest at the prime rate plus 3.5% per annum, with a final payment due on June 30, 2003. Additionally, we agreed that if any portion of the loans currently held by GECapital CFE, Inc. in the principal amount of approximately $747,442 are not repaid or refinanced in their entirety by the dates set forth below, we would pay loan fees in the following amounts: o on or before September 30, 2002, a fee of $25,000; o on or before December 31, 2002, a fee of $50,000; o on or before March 31, 2003, a fee of $100,000; and o on or before June 30, 2003, a fee of $150,000. We paid the $25,000 fee due on September 30, 2002 and the $50,000 fee due on December 31, 2002. Our agreement with the banks also obligated us to use the net proceeds of this offering first to pay the bank loans in full. We also amended the $4,000,000 principal amount convertible promissory note held by Ralok, which bears interest at a rate of 8% per annum and which was originally due on June 30, 2002. As amended, the note will mature on September 30, 2003, unless the maturity date of the bank loans is extended, in which case the Ralok note will mature 90 days after the extended maturity date of the bank loans, but not later than September 30, 2007. The Ralok note is secured by a security interest in all of our assets that is subordinate to the security interest of the bank lenders. The principal amount of the note is currently convertible, at Ralok's option, into 333,334 of our common shares. Pursuant to the terms of the subordination agreement between the bank lenders and Ralok, Ralok is prohibited from receiving current payments of interest on its note. Until repaid, it will continue to accrue interest, which will be compounded monthly and paid at maturity together with the principal amount. As of January 31, 2003, there was $1,131,233 of accrued interest on the note. In November 2002, we entered into an agreement with Ralok which grants us the right to purchase the Ralok note, including all principal and accrued interest, at any time until April 30, 2003, for an aggregate purchase price of $2.7 million. If the net proceeds of this offering are at least $4 million, we are obligated to purchase the Ralok note. We intend to raise enough proceeds in this offering to repay the bank loans in full and purchase the Ralok note. We intend to obtain a credit line then for working capital on terms more favorable to us than our existing bank loans, although we have no agreements currently in place for such credit line. If we do not raise enough proceeds to repay our existing debt, we intend to extend or refinance it. We have had preliminary discussions with financing institutions which have led us to believe that, in such event, we should be able to extend or refinance our existing debt. However, we cannot assure you that we will be able to make additional arrangements to restructure the terms of the debt or to find replacement capital. 16 Upon successful completion of this offering and repayment of our outstanding debt, we believe our resources will be sufficient to meet our current working capital needs for at least the next 12 months. If we do not raise enough proceeds in this offering to repay our existing debt, we believe our current level of operations and existing net assets will be sufficient to fund our operations through June 30, 2003, the due date of substantially all of our bank debt. In September 2002, we engaged a broker/dealer to act as placement agent to raise money for us on a private placement basis. In October 2002, we, together with the placement agent, met with several investors to discuss the prospect of raising approximately $7.5 million through a private offering of our common shares. The proceeds of the private placement would have been used for the same purposes that we intend to use the proceeds of this offering. On October 25, 2002, we terminated our relationship with this broker/dealer and abandoned our private placement efforts. No offers to buy or indications of interest from investors were ever accepted. This prospectus supersedes any materials that may have been given to prospective investors in connection with the private placement. The table below summarizes information about our contractual obligations as of September 30, 2002 and the effects these obligations are expected to have on our liquidity and cash flow in the future years.
- --------------------------------------------- -------------------------------------------------------------------------------------- Contractual Obligations Payments Due By Period ($) - --------------------------------------------- ----------------- --------------------- ----------------- -------------- ------------- Total Less than 1 year 1-3 years 4-5 years After 5 years - --------------------------------------------- ----------------- --------------------- ----------------- -------------- ------------- Short-Term Debt 8,213,167 8,006,046 117,739 89,382 0 - --------------------------------------------- ----------------- --------------------- ----------------- -------------- ------------- Capital Lease Obligations 127,904 127,904 0 0 0 - --------------------------------------------- ----------------- --------------------- ----------------- -------------- ------------- Operating Leases 0 0 0 0 0 - --------------------------------------------- ----------------- --------------------- ----------------- -------------- ------------- Employment Agreement Compensation* 1,707,205 574,175 815,030 183,000 135,000 - --------------------------------------------- ----------------- --------------------- ----------------- -------------- ------------- Total Contractual Cash Obligations 10,048,276 8,708,125 932,769 272,382 135,000 - --------------------------------------------- ----------------- --------------------- ----------------- -------------- -------------
* The employment agreements provide for bonus payments that are excluded from these amounts. Inflation Inflation has historically not had a material effect on our operations. 17 Business General CPI Aerostructures, Inc. is engaged in the contract production of structural aircraft parts principally for the United States Air Force and other branches of the U.S. armed forces. We also provide aircraft parts to the commercial sector of the aircraft industry but, due to the soft global economy, we believe that significantly weaker business prospects exist in this sector. Our strategy for growth includes de-emphasizing our commercial operations and concentrating on government and military sales. All of our revenues for 2002 and 92% of our revenues for 2001 were derived from government contract sales. CPI was awarded approximately $24.5 million in new contract awards in 2002, a 28% increase over 2001. This marks the sixth consecutive year in which CPI has shown double-digit growth in contract awards. We operate as a "mini-prime" contractor supplying structural aircraft parts under prime contracts with several branches of the U.S. Government. In that capacity, we deliver skin panels, leading edges, flight control surfaces, engine components, wing tips, cowl doors, nacelle assemblies and inlet assemblies for military aircraft such as the C-5A "Galaxy" cargo jet, the T-38 "Talon" jet trainer, the C-130 "Hercules" cargo jet, the A-10 "Thunderbolt" or "Warthog" attack jet and the E-3 "Sentry" AWACS jet. We also supply commercial aircraft products including aprons and engine mounts, which attach jet engine housings to aircraft such as the Lear 60 and Astra Galaxy business jets. Our products are sub-assemblies, a series of parts fixed together to form a larger unit that will comprise a part of a complex aerodynamic structure. In conjunction with our assembly operations, we provide engineering, technical and program management services to our customers. Due to budget constraints in the mid to late 1990's, the Clinton Administration closed several military installations and as a result began outsourcing many functions, including the assembly of aircraft structural component parts into subassemblies. Until then, the military had performed this function internally. The ability to manage the bidding process, subcontract production of components and assemble components into subassemblies is our core competency and the government's decision to outsource this function has resulted in increased business opportunities for us. Fueled by new defense contract awards, our revenue has grown significantly over the past few years. Our revenue growth has averaged 41% per annum since 1997. From 1997 through 2002, the dollar value of defense contracts awarded to us has increased at a compounded annual growth rate of 53%. CPI has 22 years experience as a prime contractor, completing over 1,100 contracts to date. Most members of our management team have held management positions at large defense contractors, including Grumman, Lockheed and Fairchild. Our technical team possesses extensive technical expertise and program management, and integration capabilities. Our competitive advantage lies in our ability to offer large contractor capabilities with the flexibility and responsiveness of a small company, while staying competitive in cost and delivering superior quality products. While the larger prime contractors compete for significant modification awards and subcontract components to other suppliers, they generally do not compete for awards for smaller modifications or spares and repair parts, even for planes for which they are the original manufacturer. We also qualify as a small business because we have less than 1,000 employees, and this allows us to compete on military awards set aside for companies with this small business status. While historically the majority of our contracts are valued below $200,000 we have recently competed for, and were awarded, significantly larger contracts, including an estimated $61 million award for the T-38 "Talon" jet trainer. We intend to continue to bid on these larger contracts. We believe that our improved financial condition as a result of this offering and our success with the T-38 program will allow us to compete more effectively for larger awards in the future. Significant Contracts The ongoing maintenance of existing aircraft by the U.S. Air Force is the primary driver of our growth in both the number of contracts and the size of awards. Our contracts with the Air Force accounted for substantially all of our revenue for 2001 and 2002, respectively. In most cases the contracts relate to an aircraft that is no longer being manufactured and is required to be maintained for a number of years. CPI has been awarded contracts within these maintenance programs on the C-5A, T-38 and E-3 aircraft. The following are current Department of Defense (DOD) budget amounts for 2003 program spending on these aircraft: 18 Aircraft 2003 Program Spending * -------- ----------------------- C-5A $363,803,000 T-38 $168,112,000 E-3 $ 29,478,000 * Source: Department of Defense The C-5A "Galaxy" cargo jet is one of the largest aircraft in the world and can carry a maximum cargo load of 270,000 pounds. Lockheed delivered the first C-5A in 1970. The C-5A Galaxy carries fully equipped combat-ready military units to any point in the world on short notice and then provides field support to sustain the fighting force. The Air Force has created a comprehensive program to ensure the capabilities of its C-5A fleet until 2040. We are one of the leading suppliers of structural spare parts and assemblies for the C-5A aircraft. We assemble numerous C-5A parts, including panels, slats, spoilers and wing-tips and are the only supplier of C-5A wing-tips to the U.S. government. Like the C-5A itself, the wing-tip is a large structure and is expensive -- up to $750,000 for each replacement piece. Our first C-5A contract was $589,908 of structural spares and was awarded in 1995. Since then we have received awards aggregating approximately $36 million. C-5A contracts accounted for 50.3% of our revenues for 2002. The T-38 "Talon" is a twin-engine, high-altitude, supersonic jet primarily used for pilot training. The Talon first flew in 1959. More than 1,100 were delivered to the Air Force between 1961 and 1972, when production ended. There are approximately 500 T-38's in active service with the Air Force. The Air Force has a program designed to extend the structural life of the T-38 until 2020. In 2001, we were awarded a ten-year contract to build the structural inlets for the T-38 Propulsion Modification Program. The T-38 contract is the largest in our history, worth an estimated $61 million over the ten-year life of the program. The length and size of this program allow us to develop a long-term backlog and establish ourselves as a successful prime contractor for larger and longer term programs. The T-38 contract accounted for 29.5% of our revenues for 2002. The E-3 "Sentry" is an airborne warning and control systems (AWACS) aircraft that provides all-weather surveillance, command, control and communications to the U.S., NATO and other allied air defense forces. The E-3 is used primarily by the United States and NATO to detect, identify and track airborne enemy forces. It is the premier air battle command and control aircraft in the world today. Boeing delivered the first E-3 in 1977 and there are approximately 30 E-3 aircraft in active service with the Air Force. We currently have contract awards on the E-3 aggregating approximately $4.9 million. We make nose cowlings, skin panels and pan, rod, brace and seal assemblies for the E-3. E-3 contracts accounted for 6.4% of our revenues for 2002. Sales and Marketing We obtain all of our military contracts for our products and services through the process of competitive bidding. While historically the majority of our contracts have been valued below $200,000, we have successfully competed for and have been awarded significantly larger contracts. Our average sales cycle, which generally commences at the time a prospective customer issues a request for proposal and ends upon execution of a contract with the customer, typically ranges from six months to one year. Our military customers have included Defense Supply Center Richmond, Wright-Patterson Air Force Base (AFB), Warner Robins (AFB), Tinker (AFB), NAVICP, Hill (AFB), U.S. Army, and Redstone. Our commercial customers have included B.F. Goodrich (Rohr), Northrop Grumman, Lockheed Martin, Nordam, Shinmaywa, and Derco. We use third party service providers to help locate small government contracts that are regularly posted by the various defense logistic agencies. The service providers screen contracts according to the criteria set by us and forward matching contracts to us. We then view the relevant contracts directly on the government websites and choose the contracts on which we will bid. We generally bid on 40 to 50 contracts per week. Over the past three years, we have been awarded approximately 10% of the contracts on which we have bid. We qualify for small business status because we have less than 1,000 employees. The military's Fiscal Year 2002 program goals for small business prime contracting were 23%, with 40% for subcontracting. Approximately 20% of the value of our current contracts were awarded to us under this program. The U.S. Air Force operates three Air Logistics Centers (ALC) through which it purchases all structural replacement and modification parts. Each ALC is located on a domestic Air Force base and is responsible for the repair and modification of different aircraft. Parts worn out through the normal course of operation and discarded instead of repaired are ordered through the centralized Defense Supply Center Richmond (DSCR). We use on-site consultants at each ALC and the DSCR to help in the procurement process. They are important as relationship managers and typically have previous experience on the procurement side. The consultants provide feed back and keep us alerted to large contracts 19 that might be on the horizon. Additionally, we signed agreements with a number of sales representatives to market our products to a broader base of customers. The Market During most of the 1990's, defense spending was basically flat or experienced a slight decline. In contrast, the defense budget in the current decade has been increasing. The 2001 budget proposal for the Department of Defense was for $277.5 billion, with actual outlays of $296.3 billion. The 2002 proposal was for $310.5 billion, which was amended and increased by $18.4 billion to bring the total 2002 Department of Defense budget to $328.9 billion. The Bush Administration's 2003 budget proposal is $369 billion. Of the various branches of the military, the Air Force budget would rise the most in 2003, by 12.7%, to $107 billion. According to DoD budget documents, U.S. defense spending is projected to increase steadily in the next five years, eventually reaching $451.4 billion in 2007. The amount spent by the U.S. Air Force for aircraft procurement was approximately $9.9 billion in 2001 and $10.493 billion in 2002. The Air Force is estimating it will spend over $12.067 billion for aircraft procurement in 2003. Procurement includes the acquisition of new aircraft, aircraft modification programs, and spending on spare and repair parts. Extensive modification programs are being implemented to increase the service life of aircraft, as some are no longer being newly manufactured. As aging aircraft are being maintained, support for aging aircraft, including spare parts and assemblies, is also required. The chart below breaks down the $12.067 billion estimated to be spent by the U.S. Air Force in 2003 for aircraft modification programs, spare and repair parts, support and procurement of new aircraft. 2003 Air Force Procurement Budget ($ in Millions) Aircraft: 9267.4 Modification of Inservice Aircraft: 1776.6 Support: 747.4 Spare and Repair Parts: 276 *Source: Department of Defense Backlog We produce custom sub-assemblies pursuant to long-term contracts and customer purchase orders. Backlog consists of aggregate values under such contracts and purchase orders, excluding the portion previously included in operating revenues on the basis of percentage of completion accounting, and including estimates of future contract price escalation. Substantially all of our backlog is subject to termination at will and rescheduling, without significant penalty. Congress often appropriates funds for a particular program or contract on a yearly or quarterly basis, even though the contract may call for performance that is expected to take a number of years. Therefore, our funded backlog does not include the full value of our contracts because Congress often appropriates funds for a particular program or contract on a yearly or quarterly basis, even though the contract may call for performance that is expected to take a number of years. Our backlog as of December 31, 2001 and December 31, 2002, is as follows: 20 Backlog December 31, 2001 December 31, 2002 ------- ------------------------ --------------------- Funded 12,904,661 19,172,232 Unfunded 57,043,935 51,672,791 ---------- ---------- Total 69,948,596 70,735,023 Of the total amount of our backlog at December 31, 2001, approximately 95% was attributable to military contracts. Approximately $16.8 million (88%) of the funded backlog at December 31, 2002 is scheduled for delivery during 2003. Material and Parts We subcontract production of substantially all component parts incorporated into our products to third party manufacturers under firm fixed price orders. Our decision to purchase certain components generally is based upon whether the components are available to meet required specifications and at a cost and delivery consistent with customer requirements. From time to time, we are required to purchase custom made parts from sole suppliers and manufacturers in order to meet specific customer requirements. To date, we have not experienced material delays in connection with obtaining custom parts and we believe that the loss of any single supplier or manufacturer would not have a material adverse effect on our business. We obtain our raw materials from several commercial sources. Although certain items are only available from limited sources of supply, we believe that the loss of any single supplier would not have a materially adverse effect on our business. Competition The markets for our products are highly competitive. We compete with numerous larger, well-established prime contractors engaged in the supply of aircraft parts and assemblies to the military, including Grumman, Lockheed, Boeing, Nordam, and Vaught. All of these competitors possess significantly larger infrastructures, greater resources, and the capabilities to respond to much larger contracts. We also compete against smaller contractors such as Aerocomponents, Aerospace Engineering and Support, GSE Dynamics, Honeycomb Company of America, Alton Iron Works, B&B Devices, and Precision Manufacturing. CPI has 22 years experience as a prime contractor, completing over 1,100 contracts to date. Most members of our management team have held management positions at large defense contractors, including Grumman, Lockheed and Fairchild. Our technical team possesses extensive technical expertise and program management and integration capabilities. Our competitive advantage lies in our ability to offer large contractor capabilities with the flexibility and responsiveness of a small company, while staying competitive in cost and delivering superior quality products. While the larger prime contractors compete for significant modification awards and subcontract components to other suppliers, they generally do not compete for awards in smaller modifications, spares and repair parts, even for planes for which they are the original manufacturer. We believe we compete effectively against the smaller competitors because our smaller competitors generally do not have the expertise we have in responding to RFPs for government contracts. We qualify as a small business because we have less than 1,000 employees. The military's Fiscal Year 2002 program goal for small business prime contracting was 23%, with 40% for subcontracting. Approximately 20% of the value of our current contracts were awarded under this program. 21 Government Regulation Environmental Regulation We are subject to regulations administered by the United States Environmental Protection Agency, the Occupational Safety and Health Administration, various state agencies and county and local authorities acting in cooperation with Federal and state authorities. Among other things, these regulatory bodies impose restrictions to control air, soil and water pollution, to protect against occupational exposure to chemicals, including health and safety risks, and to require notification or reporting of the storage, use and release of certain hazardous chemicals and substances. The extensive regulatory framework imposes compliance burdens and risks on us. Governmental authorities have the power to enforce compliance with these regulations and to obtain injunctions or impose civil and criminal fines in the case of violations. The Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) imposes strict, joint and several liability on the present and former owners and operators of facilities that release hazardous substances into the environment. The Resource Conservation and Recovery Act of 1976 (RCRA) regulates the generation, transportation, treatment, storage and disposal of hazardous waste. In New York, the handling, storage and disposal of hazardous substances is governed by the Environmental Conservation Law, which contains the New York counterparts of CERCLA and RCRA. In addition, the Occupational Safety and Health Act, which requires employers to provide a place of employment that is free from recognized and preventable hazards that are likely to cause serious physical harm to employees, obligates employers to provide notice to employees regarding the presence of hazardous chemicals and to train employees in the use of such substances. Our operations require the use of a limited amount of chemicals and other materials for painting and cleaning, including solvents and thinners, that are classified under applicable laws as hazardous chemicals and substances. We have obtained a permit from the Town of Islip, New York, Building Division in order to maintain a paint booth containing flammable liquids. Federal Aviation Administration Regulation We are subject to regulation by the Federal Aviation Administration under the provisions of the Federal Aviation Act of 1958, as amended. The FAA prescribes standards and licensing requirements for aircraft and aircraft components. We are subject to inspections by the FAA and may be subjected to fines and other penalties (including orders to cease production) for noncompliance with FAA regulations. Our failure to comply with applicable regulations could result in the termination or our disqualification from some of our contracts, which could have a material adverse effect on our operations. Government Contract Compliance Our government contracts are subject to the procurement rules and regulations of the United States government. Many of the contract terms are dictated by these rules and regulations. During and after the fulfillment of a government contract, we may be audited in respect of the direct and allocated indirect costs attributed thereto. These audits may result in adjustments to our contract costs. Additionally, we may be subject to U.S. government inquires and investigations because of our participation in government procurement. Any inquiry or investigation can result in fines or limitations on our ability to continue to bid for government contracts and fulfill existing contracts. We believe that we are in substantial compliance with all federal, state and local laws and regulations governing our operations and have obtained all material licenses and permits required for the operations of our business. Insurance We maintain a $2 million general liability insurance policy, a $10 million products liability insurance policy, and a $5 million umbrella liability insurance policy. We believe this coverage is adequate for the types of products presently marketed because of the strict inspection standards imposed on us by our customers before they take possession of our products. Additionally, the Federal Acquisition Regulations generally provide that we will not be held liable for any loss of or damage to property of the government that occurs after the government accepts delivery of our products and that results from any defects or deficiencies in our products unless the liability results from willful misconduct or lack of good faith on the part of our managerial personnel. 22 Proprietary Information None of our current assembly processes or products are protected by patents. We rely on proprietary know-how and confidential information and employ various methods to protect the processes, concepts, ideas and documentation associated with our products. These methods, however, may not afford complete protection and there can be no assurance that others will not independently develop such processes, concepts, ideas and documentation. Property CPI Aerostructures' executive offices and production facilities are situated in an approximate 40,000 square foot building located at 200A Executive Drive, Edgewood, New York 11717. CPI Aerostructures occupies this facility under a five year lease which commenced in August 2002. The current monthly base rent is $19,144, plus common area costs. We believe that our facilities are adequate for our current needs. Kolar, Inc., closed all its facilities located in Ithaca, New York. Kolar has sold one of its properties and is currently in the process of selling the other property through a private sale. Employees As of February __, 2003, CPI had __ full-time employees. We employ temporary personnel with specialized disciplines on an as-needed basis. None of our employees is a member of a union. We believe that our relations with our employees are good. 23 Management Set forth below is certain information concerning each of our directors and executive officers: Name Age Position Arthur August.......... 67 Chairman of the Board of Directors Edward J. Fred......... 44 Chief Executive Officer, President, Acting Chief Financial Officer*, Secretary and Director Walter Paulick......... 56 Director Kenneth McSweeney...... 71 Director A. C. Providenti....... 65 Director** Key Employee - ------------ Frank Funicelli........ 60 Vice President of Business Development * We intend to seek a Chief Financial Officer immediately following consummation of this offering. ** Mr. Providenti's directorship will be effective upon consummation of the offering. Arthur August, one of our founders, has been the chairman of the board and a director since January 1980 and was our president until December 31, 2001 and our chief executive officer until December 31, 2002. From 1956 to 1979, Mr. August was employed by Grumman Corporation where he last held the position of deputy director. Mr. August holds a certificate in Aeronautical Design from the Academy of Aeronautics, a Bachelor of Science degree in Industrial Management from C. W. Post College, a Masters degree in Engineering from New York University and is a graduate of the Program for Management Development at the Harvard Graduate School of Business. Edward J. Fred has been an officer since February 1995. He was our controller from February 1995 to April 1998, when he was appointed chief financial officer. He was executive vice president from May 1, 2000 until December 31, 2001 and was appointed to the position of president on January 1, 2002 and to the position of Chief Executive Officer on January 1, 2003. He has also been our secretary and a director since January 1999. For approximately ten years prior to joining our company, Mr. Fred served in various positions for the international division of Grumman, where he last held the position of controller. Mr. Fred holds a Bachelor of Business Administration in Accounting from Dowling College and an Executive MBA from Hofstra University. Walter Paulick has been a director 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. Mr. Paulick holds an associate degree in Applied Science from Suffolk Community College and Bachelor of Business Administration from Dowling College. Kenneth McSweeney has been a director since February 1998. Mr. McSweeney has been an independent consultant to the aerospace industry since January 1995. From 1961 to 1995, Mr. McSweeney served in various management positions for Grumman, most recently as the vice president of its Aerostructures Division and a director of business development for the Mideast and gulf coast region. Mr. McSweeney has extensive experience in aerostructures and logistics support products and is a licensed professional engineer in New York State. He holds Bachelor and Master of Science Degrees in Electrical Engineering from the Polytechnic Institute of Brooklyn and a Masters Degree in Business Management from CW Post College. He also completed the Executive Development Program at the Cornell School of Business and Public Administration. A. C. Providenti will become a director upon consummation of the offering. Since 1984, Mr. Providenti has served as president of A.C. Providenti & Associates, Ltd., a consulting and strategic advisory firm. From 1977 to 1984, Mr. Providenti served as senior vice president for finance and administration and as an executive committee member for Northville Industries Corp., a 24 multinational petroleum storage, trading and distribution company. From 1970 to 1977, he served as chairman and president of Total Resources, Inc., a publicly traded company initially involved in the manufacture and distribution of "unit of use" and "unit of dose" systems for prescription drugs, which evolved into a regional petroleum storage and distribution company. Mr. Providenti holds a Bachelor's degree in Accounting from St. Francis College and a Masters of Business Administration from Fordham University. Frank Funicelli has been with us since March 1988 and became our Vice President of Business Development in August 2001. Prior to joining CPI, he spent 11 years at Fairchild Republic Company where he served as Chief Industrial Engineer, Manufacturing Engineering Manager and Director of Program Planning and Control. From 1966 to 1977 he was with Grumman Aerospace where he served as Industrial Engineer, Manager of Manufacturing Planning and Control and Program Planning and Resource Control Manager. Mr. Funicelli holds a Bachelor of Science degree in Industrial Engineering from Pratt Institute and a Master of Science in Management Engineering from C.W. Post College. Board of Directors Our board of directors is divided into three classes with only one class of directors being elected in each year and each class serving a three-year term. The term of office of the first class of directors (Class I), consisting of Kenneth McSweeney, will expire at our annual meeting in 2005. The term of office of the second class of directors (Class II), consisting of Walter Paulick, will expire at our annual meeting in 2003. The term of office of the third class of directors (Class III), consisting of Arthur August and Edward J. Fred, will expire at our annual meeting in 2004. We will propose that Mr. Providenti be placed in Class I at our Annual Meeting of Shareholders in 2003. We have created a compensation program for our non-employee directors which will take effect upon consummation of this offering. Under this program, each such director will receive an annual cash fee of $5,000 (payable quarterly) and be granted options to purchase 5,000 common shares (on April 1st of each year) under an existing option plan. Additionally, the chairman of the Audit Committee will be paid an additional annual cash fee of $20,000 (payable quarterly) and be granted an additional 15,000 options. Our directors will continue to be reimbursed for the reasonable expenses they incur in attending meetings. Employment Agreements Mr. August serves as the chairman of our board and Mr. Fred serves as our chief executive officer, president, chief financial officer and secretary. Mr. August's employment agreement expires on December 31, 2004 and Mr. Fred's expires on December 31, 2005. Mr. August's annual base salary is currently $100,000. Mr. August is required to devote only such time to our business as he, in his sole discretion, deems necessary. Mr. Fred's annual base salary is currently $216,000 and will increase by 8% each January 1st during the contract term. In addition to the base salary, Mr. August will receive a bonus equal to 4% of our net income for the year ending December 31, 2002; 3% for the year ending December 31, 2003; and 2% for the year ending December 31, 2004. Mr. Fred will receive a bonus equal to 2% of our net income for the year ending December 31, 2002; 3% for the year ending December 31, 2003; and 4% for the years ending December 31, 2004 and 2005. Mr. August agreed that he would not compete with us during the term of his employment with us and for a period of five years thereafter. As consideration for his agreement not to compete with us for an extended period of time, we agreed to pay Mr. August $300,000 in five, equal annual installments of $60,000 commencing on the date of termination. Mr. Fred agreed not to compete with us during the term of his employment and for two years thereafter. Timothy Stone was appointed president of Kolar on July 10, 2000. Pursuant to an employment agreement, which expires on April 30, 2003, Mr. Stone receives an annual salary of $132,300. Mr. Stone is now overseeing the liquidation of Kolar's assets. 25 Executive Compensation The following table sets forth all compensation awarded to, earned by, or paid for all services rendered to us during the fiscal years ended December 31, 2002, 2001 and 2000, by our chief executive officer and our other executive officers whose total compensation exceeded $100,000.
-------------------------- ---------------------- ------------------------ ----------------------- ------------------------- Long-Term Compensation Securities Underlying Name/Position Year Salary Bonus Options/SARs(#) ------------- ---- ------ ----- --------------- Arthur August 2002 $317,237 $180,660 85,000 Chairman 2001 $303,180 -0- 100,000 2000 $307,854 $82,000 200,000 Edward J. Fred Chief Executive Officer, 2002 $209,287 $90,330 100,000 President and acting Chief 2001 $139,256 -0- 100,000 Financial Officer 2000 149,728 $59,000 125,000 Timothy Stone(1) 2002 $140,971 -0- -0- 2001 $120,016 -0- -0- -------------------------- ---------------------- ------------------------ ----------------------- -------------------------
- -------------------------------- (1) Mr. Stone is now overseeing the liquidation of Kolar's assets and is no longer deemed an executive officer of our company. Option Grants in 2001
----------------------- -------------------------------- ------------------------------ ------------------- ---------------- Number of Securities Percent of Options Granted Underlying Options Granted(#) to Employees in Fiscal Year(1) Exercise Price Expiration Date ----------------------------- -------------------------- ------------------ ---------------- ($/SH) Arthur August 100,000 44.4% $1.20 08/11 Edward J. Fred 100,000 44.4% $1.20 08/11 ----------------------- -------------------------------- ------------------------------ ------------------- ----------------
- -------------------------- (1) We granted a total of 225,000 options to employees in the fiscal year ended December 31, 2001. Option Grants in 2002
----------------------- -------------------------------- ------------------------------ ------------------- ---------------- Number of Securities Percent of Options Granted Underlying Options Granted(#) to Employees in Fiscal Year(1) Exercise Price Expiration Date ----------------------------- -------------------------- ------------------ ---------------- ($/SH) Arthur August 85,000 27.9% $6.35 06/12 Edward J. Fred 100,000 32.8% $6.35 06/12 ----------------------- -------------------------------- ------------------------------ ------------------- ----------------
- -------------------------- (1) We granted a total of 305,000 options to employees in the fiscal year ended December 31, 2002. 26 Aggregated Option Exercises and Option Values
----------------------------------------------------------------------------------------------------------------------- Value of Unexercised Number of Unexercised In-The-Money Options Shares Acquired Value Options Exercisable/ ($)Exercisable/ Name on Exercise (#) Realized Unexercisable Unexercisable ---- --------------- -------- ------------------------------------- -------------------------------------- December 31, 2001 September 30, 2002 December 31, 2001 September 30, 2002 ----------------- ------------------ ----------------- ------------------ Arthur August -0- -0- 496,585/1,750 533,334/0 $38,000/0 $1,456,450/0 Edward J. Fred -0- -0- 305,002/0 401,668/0 $38,000/0 $1,063,150/0 Timothy Stone -0- -0- 30,000/0 0/0 -0- $0/0 -----------------------------------------------------------------------------------------------------------------------
Employee Benefit Plans In October 2000, we adopted the Greit Plan for the purpose of offering senior management a deferred compensation death benefit plan that would provide a tax-free benefit for senior management and which would be tax-neutral to us. Pursuant to the plan, we made a non-interest bearing loan to Arthur August in the amount of $150,000, which Mr. August used to purchase a Greit Plan. This plan has since been terminated and the surrender value of the Greit Plan has been returned to Mr. August. Mr. August has placed the proceeds from the surrender value in an annuity in our name, which will appreciate to at least $150,000 by September 2011 in order to repay the loan made to him. Mr. August also assigned to us an insurance policy on his life in the amount of $150,000 and agreed to maintain it until the date upon which the annuity matures. Accordingly, the loan to Mr. August will be repaid upon the maturity date of the annuity or upon the death of Mr. August, whichever occurs first. Stock Options Performance Equity Plan 2000 The Performance Equity Plan 2000 authorizes the grant of 830,000 stock options, stock appreciation rights, restricted stock, deferred stock, stock reload options, and other stock based awards of which options to purchase an aggregate of 715,000 common shares have been granted, at exercise prices ranging from $1.20 to $6.35 per share. As of February __, 2003, options to purchase 115,000 additional common shares remain available for grant. 1998 Performance Equity Plan The 1998 Performance Equity Plan authorizes the grant of 463,334 stock options, stock appreciation rights, restricted stock, deferred stock, stock reload options, and other stock based awards of which options to purchase an aggregate of 431,002 common shares have been granted, at exercise prices ranging from $2.53 to $6.90 per share. As of February __, 2003, options to purchase 2,332 additional common shares remain available for grant. 1995 Stock Option Plan The 1995 Employee Stock Option Plan authorizes the grant of 200,000 stock options and stock appreciation rights of which options to purchase an aggregate of 6,334 common shares have been granted, at exercise prices ranging from $2.53 to $6.27 per share. As of February __, 2003, options to purchase 158,810 additional common shares remain available for grant. 1992 Employee Stock Option Plan The 1992 Employee Stock Option Plan authorized the grant of 83,334 options, of which options to purchase 41,668 shares are outstanding at exercise prices ranging from $2.59 to $6.27 per share. No more shares may be granted under this plan. 27 Other Options In April 1998, we issued warrants to purchase 33,334 common shares to designees of Ladenburg Capital Management Inc. as compensation for certain consulting services. The remaining unexercised warrants entitle the holders to purchase 17,088 common shares at an exercise price of $4.50 through March 2003. On December 31, 1999 and February 1, 2002, we granted to John Aneralla, the stepson of Arthur August, five year non-plan options to purchase 15,000 and 5,000 common shares, respectively, as compensation for consulting services. The exercise prices of the options are $2.53 and $1.65, respectively, the fair market value of our common shares on the date of grant of the options. Equity Compensation Plan Information The following table sets forth certain information at December 31, 2002 with respect to our equity compensation plans that provide for the issuance of options, warrants or rights to purchase our securities.
- ------------------------------------------------------------------------------------------------------------------------------------ Number of Securities to be Issued upon Weighted-Average Number of Securities Remaining Exercise of Exercise Price of Available for Future Issuance under Outstanding Options, Outstanding Options, Equity Compensation Plans (excluding Plan Category Warrants and Rights Warrants and Rights securities reflected in the first column) - ------------- ------------------- ------------------- ----------------------------------------- Equity Compensation Plans Approved by Security Holders 1,197,338 $3.49 272,808 Equity Compensation Plans Not Approved by Security Holders(1) 37,088 $3.32 -0- - ------------------------------------------------------------------------------------------------------------------------------------
- ------------------- (1) See "Stock Options - Other Options" description above. 28 Principal Shareholders The table and accompanying footnotes set forth certain information as of February __, 2003, with respect to the ownership of our common shares by: o each person or group who beneficially owns more than 5% of our common shares; o each of our directors, o our chief executive officer and our other executive officers whose total compensation exceeded $100,000 during the fiscal year ended December 31, 2002, and o all of our directors and executive officers as a group. A person is deemed to be the beneficial owner of securities that can be acquired by the person within 60 days from the record date upon the exercise of warrants or options. Accordingly, common shares issuable upon exercise of options and warrants that are currently exercisable or exercisable within 60 days of February __, 2003 have been included in the table with respect to the beneficial ownership of the person owning the options or warrants, but not with respect to any other persons.
Percent of Common Shares Name and Address Shares ------------------------ Of Beneficial Owner Beneficially Owned(1) Prior to the Offering(2) After the Offering - ------------------- -------------------- ------------------------ ------------------ Arthur August(3) 841,518(4) 25.2% 15.8% Edward J. Fred(3) 398,434(5) 12.4% 7.7% Walter Paulick(3) 10,000(6) * * Kenneth McSweeney(3) 13,334(7) * * Daniel Liguori(8) 333,334(9) 10.6% * All directors and executive 1,263,286(10) 33.7% 21.9% officers as a group (four persons) - ---------------------------------------- * Less than 1%.
(1) Unless otherwise noted, we believe that all persons named in the table have sole voting and investment power with respect to all common shares beneficially owned by them, subject to community property laws, where applicable. (2) There are 2,805,668 shares currently issued and outstanding. Each person beneficially owns a percentage of our outstanding common shares equal to a fraction, the numerator of which is the number of common shares held by such person plus the number of common shares that he can acquire within 60 days of February _, 2003 upon the exercise or conversion of options, warrants or convertible securities and the denominator of which is 2,805,668 (the number of common shares currently outstanding) plus the number of shares he can so acquire during such 60-day period. (3) The business address of Messrs. August, Fred, Paulick and McSweeney is c/o CPI Aerostructures, Inc., 200A Executive Drive, Edgewood, New York 11717. (4) Includes 533,334 common shares that Mr. August has the right to acquire upon exercise of options. Excludes an aggregate of 38,134 common shares and options owned by Mr. August's adult children, all of which shares Mr. August disclaims beneficial ownership. Includes 3,000 common shares owned by Mr. August's wife. (5) Includes 398,334 common shares that Mr. Fred has the right to acquire upon exercise of options. (6) Represents common shares that Mr. Paulick has the right to acquire upon exercise of options. (7) Includes 10,000 common shares that Mr. McSweeney has the right to acquire upon exercise of options. (8) Mr. Liguori's address is 1001 Bay Road, #210C, Vero Beach, Florida 32963. (9) Represents 333,334 common shares that Ralok, Inc. has the right to acquire by converting the promissory note it received in connection with our purchase of Kolar Machine, Inc. Mr. Liguori is the President of Ralok. We intend to repurchase the note upon consummation of this offering. (10) Includes an aggregate of 951,668 common shares that Messrs. August, Fred, Paulick and McSweeney have the right to acquire upon exercise of outstanding options. 29 Description of Our Capital Shares Our certificate of incorporation authorizes us to issue 50,000,000 common shares, par value $.001 per share, and 5,000,000 preferred shares, par value $.001 per share. Immediately prior to this offering, 2,805,668 common shares were issued and outstanding. Immediately after this offering, there will be 2,000,000 more common shares outstanding. If the underwriter elects to exercise its over-allotment option, there will be an additional 300,000 shares outstanding. No preferred shares are issued and outstanding. Common Shares You will be entitled to one vote per common share held by you on all matters submitted to a vote of our shareholders. Holders of common shares have no preemptive rights and have no rights to convert their common shares into any other securities. In the event of our dissolution or liquidation or the winding-up of our business, you will be entitled to share ratably with our other common shareholders in all assets remaining after payment of all of our liabilities, and subject to any preferential payments to the holders of any preferred shares then outstanding. Although we are restricted from paying cash dividends under the terms of the agreements governing our debt, holders of common shares are entitled to receive ratably such dividends as may be declared by our board of directors out of funds legally available therefor. All of our outstanding common shares are, and when issued, the common shares offered hereby will be, fully paid and nonassessable. Preferred Shares Subject to the provisions of our certificate of incorporation and to the limitations prescribed by law, our board of directors has the authority, without further action by our shareholders, to issue up to 5,000,000 shares of our authorized but unissued preferred shares in or more series. Our board of directors has the power and authority to fix the designations, preferences, dividend, conversion, cumulative, relative, participating, optional or other rights, including voting rights, qualifications, limitations and restrictions any or all of which may be greater than the rights of our common shares. We have no present plans to issue any preferred shares. New York Law, Certificate of Incorporation and By-Law Provisions that May Have an Anti-Takeover Effect The following discussion concerns certain provisions of New York law and our certificate of incorporation and by-laws that may delay, deter or prevent a tender offer or takeover attempt that you might consider to be in your best interest, including offers or attempts that might result in a premium being paid to you over the market price of our securities. New York law. We are subject to Section 912 of the New York Business Corporation Law. In general, Section 912 prohibits a publicly held New York corporation from engaging in a business combination with an interested shareholder for a period of five years after the date of the transaction in which the person became an interested shareholder unless, prior to such date, the corporation's board of directors approved either the business combination or the transaction which resulted in the shareholder becoming an interested shareholder. A business combination includes a merger, asset sale or other transaction resulting in a financial benefit to the shareholder. An interested shareholder is a person who, together with affiliates and associates, owns (or within five years did own) 20% or more of the corporation's voting shares. Certificate of incorporation and bylaws. Our certificate of incorporation provides for a board of directors divided into three classes, each of which generally serves for a term of three years, with only one class of directors being elected each year. Nominations for our board of directors may be made by our board or by any shareholder entitled to vote for the election of directors. A shareholder entitled to vote for the election of directors may nominate a person or persons for election as director only if written notice of such shareholder's intent to make such nomination is given to our secretary not later than 120 days in advance of the meeting. Our certificate of incorporation and by-laws do not provide for cumulative voting rights. This means that holders of a majority of our capital shares who vote in the election of directors can elect all of the directors and, in such event, the holders of the remaining shares will not be able to elect any of our directors. New York Law provides that, unless otherwise provided in a corporation's certificate of incorporation, any action by the shareholders may be taken without a meeting, without prior notice and without a vote, upon the written consent of shareholders holding not less than the minimum number of votes that would be necessary to take action on the matter at a shareholder meeting. Our 30 certificate of incorporation provides that shareholder actions by consent require the consent of all of our shareholders. This has the effect of delaying the ability of a majority shareholder to acquire control of our board of directors. Undesignated preferred shares enable us to render more difficult or to discourage a third party's attempt to obtain control of us by means of a tender offer, proxy contest, merger, or otherwise, which protects the continuity of our management. A party may also be discouraged from making a bid for our common shares because the issuance of our preferred shares may adversely affect the rights of the holders of our common shares. For example, preferred shares that we issue may rank prior to our common shares as to dividend rights, liquidation preferences, or both, may have full or limited voting rights and may be convertible into common shares. Accordingly, the issuance by us of preferred shares may discourage or delay bids for our common shares or may otherwise adversely affect the market price of our common shares. Market for Common Equity and Related Shareholder Matters Market Information Our common shares are listed on the American Stock Exchange under the symbol CVU. The trading symbol changed from CPIA to CVU on September 5, 2000, when CPI ceased trading on The Nasdaq SmallCap Market, Inc. and began trading on the AMEX. The following tables set forth for 2001 and 2002, the high and low sales prices of our common shares for the periods indicated, as reported by AMEX. ----------------------------------------------------------------------------- Period High Low ------ ---- --- 2001 ---- Quarter Ended March 31, 2001 $3.930 $1.800 Quarter Ended June 30, 2001 $3.150 $1.650 Quarter Ended September 30, 2001 $1.700 $1.150 Quarter Ended December 31, 2001 $2.190 $1.200 2002 ---- Quarter Ended March 31, 2002 $1.850 $1.400 Quarter Ended June 30, 2002 $8.460 $1.450 Quarter Ended September 30, 2002 $7.750 $4.080 Quarter Ended December 31, 2002* $7.130 $4.400 ----------------------------------------------------------------------------- On February _, 2003, the closing sale price for our common shares on the AMEX was $____. Dividend Policy To date, we have not paid any dividends on our common shares. Any payment of dividends in the future is within the discretion of our board of directors and will depend on our earnings, if any, our capital requirements and financial condition and other relevant factors. Our board of directors does not intend to declare any cash or other dividends in the foreseeable future, but intends instead to retain earnings, if any, for use in our business operations. In addition, our bank and other lender credit agreements provide that we may not declare or pay any dividend on our common shares so long as any amounts are owing to the lenders. 31 Transfer Agent The transfer agent for our common shares is American Stock Transfer & Trust Company, 6201 15th Avenue, Brooklyn, New York 11219. Holders As of February __, 2003, there were ___ holders of record of our common shares. We believe there are in excess of 2,200 beneficial owners of our common shares. 32 Underwriting Our underwriter has agreed, subject to the terms and conditions contained in the underwriting agreement, to purchase from us on a firm commitment basis, a total of 2,000,000 common shares. Our underwriter has qualified its obligations under the underwriting agreement to the approval of legal matters by counsel and various other conditions. Subject to these conditions, our underwriter is obligated to purchase all of the common shares offered by this prospectus (other than the common shares covered by the over-allotment option described below). Our underwriter has advised us that it proposes to offer our securities to the public at the initial public offering price set forth on the cover page of this prospectus and to certain dealers at the same price, less a concession not in excess of $__ per share of our common shares. Our underwriter may allow, and such dealers may reallow, a concession not in excess of $__ per common share to certain other dealers. After the offering, our underwriter may change the offering price and other selling terms. We have agreed to indemnify our underwriter against certain liabilities, including liabilities under the Securities Act. We also have agreed to pay our underwriter an expense allowance on a non-accountable basis equal to 3% of the gross proceeds derived from the sale of the common shares offered by this prospectus (including the sale of any of our common shares subject to the underwriter's over-allotment option), $50,000 of which has been paid to date. We have agreed to pay all expenses in connection with qualifying our securities offered hereby for sale under the laws of such states as our underwriter may designate and the filing fees incurred in registering the offering with the National Association of Securities Dealers, Inc., or NASD. We have granted to our underwriter an option, exercisable within 45 business days from the date of this prospectus, to purchase at the offering price, less underwriting discounts and the non-accountable expense allowance, up to an aggregate of 300,000 additional common shares for the sole purpose of covering over allotments, if any. In connection with the offering, we have agreed to sell to our underwriter and/or its designees, for an aggregate of $100, a warrant to purchase up to an aggregate of 200,000 common shares. The underwriter's warrant is exercisable initially at a price of $___ per share (110% of the per share offering price to investors) for a period of four years commencing one year from the date of this prospectus. The warrant may not be transferred, sold, assigned, or hypothecated during the one-year period following the date of this prospectus except to the underwriter and the selected dealers and their officers or partners. The underwriter's warrant grants to the holders thereof certain demand rights for a period of five years and "piggyback" rights for a period of seven years from the date of this prospectus with respect to the registration under the Securities Act of the common shares issuable upon the exercise of the warrant. Pursuant to the underwriting agreement, all of our officers and directors have agreed not to sell any common shares for at least 13 months from the date of this prospectus without the consent of EarlyBirdCapital; except that the underwriter has agreed that Mr. Arthur August may adopt a plan under Rule 10b5-1 of the Securities Exchange Act of 1934, pursuant to which he can sell up to 10,000 of his common shares per month commencing three months after the date of this prospectus. In addition, the underwriting agreement provides that, for a period of five years from the date of this prospectus, EarlyBirdCapital will have the right to designate one person to serve on our board of directors or to send a representative (who need not be the same individual from meeting to meeting) to observe each meeting of our board of directors. Such designee or representative, as the case may be, shall receive the same compensation as the other non-management directors (excluding the chairman of the audit committee) and shall be entitled to receive reimbursement for all reasonable costs incurred in attending such meetings, including, but not limited to, food, lodging and transportation. Upon consummation of this offering, we will enter into a five-year Merger and Acquisition Agreement with EarlyBirdCapital pursuant to which we will compensate them if we enter into any transaction (including an acquisition or merger, joint venture, strategic alliance or other arrangements) with persons introduced to us by EarlyBirdCapital. 33 In connection with the offering, the underwriter may engage in stabilizing transactions, over-allotment transactions, syndicate coverage transactions and penalty bids in accordance with Regulation M under the Exchange Act: o Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. o Over-allotment involves sales by our underwriter of our securities in excess of the number of securities our underwriter is obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of our securities over-allotted by our underwriter is not greater than the number of our securities that it may purchase in the over-allotment option. In a naked short position, the number of our securities involved is greater than the number of securities in the over-allotment option. Our underwriter may close out any covered short position by either exercising its over-allotment option and/or purchasing our securities in the open market. o Syndicate covering transactions involve purchases of our securities in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of securities to close out the short position, our underwriter will consider, among other things, the price of securities available for purchase in the open market as compared to the price at which it may purchase securities through the over-allotment option. If our underwriter sells more securities than could be covered by the over-allotment option, a naked short position, the position can be closed out only by buying our securities in the open market. A naked short position is more likely to be created if our underwriter is concerned that there could be downward pressure on the price of our securities in the open market after pricing that could adversely affect investors who purchase in the offering. o Penalty bids permit our underwriter to reclaim a selling concession from a selling group member when the securities originally sold by the selling group member are purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our securities or preventing or retarding a decline in the market price of our securities. As a result, the price of our securities may be higher than the price that might otherwise exist in the open market. These transactions may be effected on The American Stock Exchange or otherwise and, if commenced, may be discontinued at any time. Legal Matters The validity of the issuance of the common shares offered hereby have been passed upon for CPI Aerostructures, Inc. by Graubard Miller. Davis & Gilbert LLP has served as counsel to the underwriter in connection with this offering. Experts The financial statements for the years ended December 31, 2000 and 2001 appearing in this prospectus and registration statement have been audited by Goldstein Golub Kessler LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein. Disclosure of Commission Position on Indemnification for Securities Act Liabilities Our by-laws and certificate of incorporation include provisions permitted under New York law by which our officers and directors are to be indemnified against various liabilities. We have also entered into indemnification agreements with our executive officers. We believe that these provisions and agreements will facilitate our ability to continue to attract and retain qualified individuals to serve as our directors and officers. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers and controlling persons, we have been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. 34 Where You Can Find Additional Information We intend to furnish our shareholders with annual reports, which will include financial statements audited by our independent accountants, and other periodic reports as we may determine to furnish or as may be required by law, including Sections 13(a) and 15(d) of the Exchange Act. As permitted by the rules and regulations of the Commission, this prospectus does not contain all of the information set forth in the Registration Statement and in the exhibits and schedules thereto. For further information with respect to CPI Aerostructures, Inc. and the common shares offered hereby, reference is made to the Registration Statement and the exhibits thereto. The Registration Statement, including the exhibits and schedules thereto, may be obtained at the address noted below. We file annual and other periodic reports pursuant to the requirements of the Securities Exchange Act of 1934, as amended. Such reports and other information filed by us may be inspected and copied at the public reference facilities of the Commission in Washington, D.C., and can be read or obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Commission maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Commission at HTTP://WWW.SEC.GOV. 35 CPI AEROSTRUCTURES, INC. AND SUBSIDIARY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Independent Auditor's Report F-2 Consolidated Financial Statements: Balance Sheet as of September 30, 2002 (unaudited) and December 31, 2001 F-3 Statement of Operations for the Nine Months Ended September 30, 2002 and 2001 (unaudited) and for the Years Ended December 31, 2001 and 2000 F-4 Statement of Shareholders' Equity/Deficiency for the period from January 1, 2000 through September 30, 2002 F-5 Statement of Cash Flows for the Nine Months Ended September 30, 2002 and 2001 (unaudited) and for the Years Ended December 31, 2001 and 2000 F-6 Notes to Consolidated Financial Statements F-7 - F-18 F-1 INDEPENDENT AUDITOR'S REPORT To the Board of Directors CPI Aerostructures, Inc. We have audited the accompanying consolidated balance sheet of CPI Aerostructures, Inc. and Subsidiary as of December 31, 2001 and the related consolidated statements of operations, shareholders' deficiency, and cash flows for each of the two years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CPI Aerostructures, Inc. and Subsidiary as of December 31, 2001, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. /s/ Goldstein Golub Kessler GOLDSTEIN GOLUB KESSLER LLP New York, New York March 29, 2002, except for the last paragraph of Note 5, as to which the date is April 12, 2002 and Note 6(a) and the first paragraph of Note 13, as to which the date is June 22, 2002 F-2 CPI AEROSTRUCTURES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET - -------------------------------------------------------------------------------- September 30, December 31, 2002 2001 - -------------------------------------------------------------------------------- (Unaudited) ASSETS Current Assets: Cash $ 121,002 $ 180,578 Accounts receivable 2,852,597 2,168,369 Costs and estimated earnings in excess of billings on uncompleted contracts 10,214,846 6,967,385 Deferred income taxes 253,000 758,000 Prepaid expenses and other current assets 23,745 84,895 Assets held for sale - discontinued operations 280,676 3,217,984 - ------------------------------------------------------------------------------- Total current assets 13,745,866 13,377,211 Property, Plant and Equipment, net 110,340 101,260 Deferred Income Taxes, net of valuation allowance of $2,074,000 - 172,000 Other Assets 179,226 180,226 - ------------------------------------------------------------------------------- Total Assets $ 14,035,432 $ 13,830,697 =============================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY) Current Liabilities: Accounts payable $ 4,985,799 $ 4,195,530 Accrued expenses 152,692 535,054 Line of credit - 1,700,000 Debt 8,341,071 9,607,284 Deferred income taxes - 147,000 - ------------------------------------------------------------------------------- Total current liabilities 13,479,562 16,184,868 - ------------------------------------------------------------------------------- Commitments and Contingencies Shareholders' Equity (Deficiency): Preferred shares - $.001 par value; authorized 3,000,000 shares, issued and outstanding 0 and 0, respectively; Common shares - $.001 par value; authorized 50,000,000 shares, issued and outstanding 2,755,670 and 2,657,046 shares, respectively 2,756 2,657 Additional paid-in capital 12,495,872 12,367,020 Accumulated deficit (11,942,758) (14,723,848) - ------------------------------------------------------------------------------- Shareholders' equity (deficiency) 555,870 (2,354,171) - ------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity (Deficiency) $ 14,035,432 $ 13,830,697 =============================================================================== See Notes to Consolidated Financial Statements F-3 CPI AEROSTRUCTURES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF OPERATIONS - --------------------------------------------------------------------------------
For the Nine Months For the Year Ended September 30, Ended December 31, 2002 2001 2001 2000 - ---------------------------------------------------------------------------------------------------------------------- (Unaudited) Revenue $17,988,748 $10,631,958 $ 15,024,027 $8,261,351 Cost of sales 12,549,892 7,015,993 10,955,264 5,676,229 - ---------------------------------------------------------------------------------------------------------------------- Gross profit 5,438,856 3,615,965 4,068,763 2,585,122 Selling, general and administrative expenses 1,800,643 1,145,607 1,479,421 1,421,758 - ---------------------------------------------------------------------------------------------------------------------- Income from operations 3,638,213 2,470,358 2,589,342 1,163,364 - ---------------------------------------------------------------------------------------------------------------------- Other (income) expense: Interest income (3,642) 9,223 (2,431) - Interest expense 331,765 126,707 155,825 106,157 Other (income) expense, net - - 4,051 233,428 - ---------------------------------------------------------------------------------------------------------------------- Total other expenses, net 328,123 135,930 157,445 339,585 - ---------------------------------------------------------------------------------------------------------------------- Income from continuing operations before benefit for income taxes 3,310,090 2,334,428 2,431,897 823,779 (Provision for) benefit from income taxes (529,000) 934,000 - (126,000) - ---------------------------------------------------------------------------------------------------------------------- Income before operations of discontinued segment 2,781,090 1,400,428 2,431,897 949,779 Income (loss) from operations of discontinued segment - (1,571,481) (3,647,200) 979,427 Loss on disposal of assets - discontinued segment - - (10,422,816) - - ---------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 2,781,090 $ (171,053) $(11,638,119) $1,929,206 ====================================================================================================================== Basic net income (loss) per common share: Income before discontinued operations $ 1.03 $ .53 $ .92 $ .36 Income (loss) from operations of discontinued segment - (.59) (1.37) .37 Loss on disposal of assets - discontinued segment - - (3.94) - - ---------------------------------------------------------------------------------------------------------------------- Earnings (loss) per common share - basic $ 1.03 $ (.06) $ (4.39) $ .73 ====================================================================================================================== Diluted net income per common share: Income before discontinued operations $ .89 - - $ .34 Income from operations of discontinued segment .36 - ---------------------------------------------------------------------------------------------------------------------- Earnings per common share - diluted $ .89 - - $ .70 ====================================================================================================================== Shares used in computing earnings per common share: Basic 2,704,082 2,652,355 2,653,538 2,648,509 Diluted 3,139,923 2,652,355 - 2,763,888 ======================================================================================================================
See Notes to Consolidated Financial Statements F-4 CPI AEROSTRUCTURES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY/DEFICIENCY - -------------------------------------------------------------------------------- Years ended December 31, 2000 and 2001
- ---------------------------------------------------------------------------------------------------------------------- Additional Total Common Paid-in Accumulated Shareholders' Shares Amount Capital Deficit Deficiency - ---------------------------------------------------------------------------------------------------------------------- Balance at January 1, 2000 2,648,509 $2,649 $12,206,024 $ (5,014,935) $ 7,193,738 Net income - - - 1,929,206 1,929,206 Amortization of fair value of warrants issued in conjunction with consulting agreement - - 113,650 - 113,650 - ---------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 2,648,509 2,649 12,319,674 (3,085,729) 9,236,594 Net loss - - - (11,638,119) (11,638,119) Amortization of fair value of warrants issued in conjunction with consulting agreement 8,537 8 47,346 - 47,354 - ---------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2001 2,657,046 2,657 12,367,020 (14,723,848) (2,354,171) (unaudited) Net income 2,781,090 2,781,090 Common stock issued for bank debt 70,000 70 38,997 - 39,067 Common stock issued for exercise of stock options and warrants 28,624 29 84,073 - 84,102 Warrants issued for consulting services - - 5,782 - 5,782 - ---------------------------------------------------------------------------------------------------------------------- Balance at September 30, 2002 2,755,670 $2,756 $12,495,872 $(11,942,758) $ 555,870 ======================================================================================================================
See Notes to Consolidated Financial Statements F-5 CPI AEROSTRUCTURES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------- For the Nine Months For the Year Ended September 30, Ended December 31, 2002 2001 2001 2000 - -------------------------------------------------------------------------------------------------------------------------- (Unaudited) (Audited) Cash flows from operating activities: Net income before operations of discontinued segment $ 2,781,090 $ 1,400,428 $ 2,431,897 $ 949,779 Adjustments to reconcile net income before operations of discontinued segment to net cash provided by (used in) operating activities: Depreciation and amortization 30,931 26,362 35,653 30,194 Warrants issued for consulting fees 5,782 47,346 47,354 113,650 Stock issued for bank debt 39,067 - - - Loss on disposal of fixed assets - 6,158 6,157 - Deferred portion of provision (benefit) for income taxes 530,000 - 92,000 (879,000) Bad debts - - 301,377 Changes in operating assets and liabilities: Increase in accounts receivable (684,228) (326,206) (1,336,061) (410,591) Decrease in income tax refund receivable - - - 29,597 Increase in costs and estimated earnings in excess of billings on uncompleted contracts (3,247,461) (2,260,561) (2,563,606) (465,250) (Increase) decrease in prepaid expenses and other current assets 61,150 9,969 (63,816) 761,672 (Increase) decrease in other assets 1,000 (1,000) (1,000) (70,259) Increase in accounts payable and accrued expenses 407,907 180,090 1,028,720 144,878 Decrease in income taxes payable - (34,000) (33,000) (13,383) - -------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities (74,762) (951,414) (355,702) 492,664 - -------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchase of property, plant and equipment (40,011) (14,507) (19,307) (70,838) Proceeds from sale of fixed assets - 1,800 1,800 - - -------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (40,011) (12,707) (17,507) (70,838) - -------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from line of credit - - - 1,325,000 Net repayment of long-term debt (2,966,213) (1,274,018) (895,958) (1,056,959) Proceeds from exercise of stock options 84,102 - - - - -------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (2,882,111) (1,274,018) (895,958) 268,041 - -------------------------------------------------------------------------------------------------------------------------- Net cash from continuing operations (2,996,884) (2,238,139) (1,269,167) 689,867 Net cash provided by (used in) discontinued operations 2,937,308 2,386,569 1,386,766 (814,534) - -------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash (59,576) 148,430 117,599 (124,667) Cash at beginning of period 180,578 62,979 62,979 187,646 - -------------------------------------------------------------------------------------------------------------------------- Cash at end of period $ 121,002 $ 211,409 $ 180,578 $ 62,979 ========================================================================================================================== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ - $ 167,015 $ 589,762 $ - ========================================================================================================================== Income taxes $ 13,355 $ 36,050 $ - $ - ========================================================================================================================== Supplemental schedule of noncash financing activity: Financing obligation incurred in connection with the acquisition of equipment $ - $ 143,908 $ - $ - ==========================================================================================================================
See Notes to Consolidated Financial Statements F-6 CPI AEROSTRUCTURES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. PRINCIPAL The Company consists of CPI Aerostructures, Inc.("CPI") and BUSINESS its wholly owned subsidiary, Kolar, Inc. ("Kolar"), ACTIVITY AND collectively, the "Company." SUMMARY OF SIGNIFICANT CPI's operations consist of the design and production of ACCOUNTING design and production of complex aerospace structural POLICIES: subassemblies under U.S. government and commercial contracts. The length of the Company's contracts varies but is typically between one and two years for U.S. government contracts and up to 10 years for commercial contracts. Kolar's principal business was the precision computer numerical control machining of metal products on a contract-order basis. CPI's revenue is recognized based on the percentage of completion method of accounting for long-term contracts measured by the percentage of total costs incurred to date to estimated total costs at completion for each contract. Contract costs include all direct material, labor costs, tooling and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. Selling, general and administrative costs are charged to expense as incurred. Estimated losses on uncompleted contracts are recognized in the period in which such losses are determined. Changes in job performance may result in revisions to costs and income and are recognized in the period in which revisions are determined to be required. In accordance with industry practice, costs and estimated earnings in excess of billings on uncompleted contracts, included in the accompanying consolidated balance sheet, contain amounts relating to contracts and programs with long production cycles, a portion of which will not be realized within one year. CPI's recorded revenue may be adjusted in later periods in the event that CPI's cost estimates prove to be inaccurate or a contract is terminated. Kolar's revenue was recognized when goods were shipped to customers. The Company maintains cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash. Depreciation and amortization of property, plant and equipment is provided for by the straight-line method over the estimated useful lives of the respective assets or the life of the lease, for leasehold improvements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates by management. Actual results could differ from these estimates. In accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, the Company has elected to apply APB Opinion ("APB") No. 25 and related interpretations in accounting for its stock options issued to employees and, accordingly, does not recognize additional compensation cost as required by SFAS No. 123. The Company, however, has provided the pro forma disclosures as if the Company had adopted the cost recognition requirements. F-7 CPI AEROSTRUCTURES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Basic earnings per common share is computed using the weighted-average number of shares outstanding. Diluted earnings per common share is computed using the weighted-average number of shares outstanding adjusted for the incremental shares attributed to outstanding options and warrants to purchase common stock. Incremental shares of 115,379 were used in the calculation of diluted earnings per common share in 2000. In 2001, diluted earnings per share is not presented as the result is antidilutive. In July 2001, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. 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 supersedes APB No. 16, Business Combinations, as well as 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 supersedes APB No. 17, Intangible Assets. The Company believes that SFAS No. 142 will not be applicable to its future financial statements because all goodwill has been entirely written down in conjunction with the sale of Kolar's assets (see Note 5). In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and amends the accounting and reporting provisions of APB No. 30, Reporting the Results of Operations, Reporting the Effect of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. The provisions of SFAS No. 144 will be effective for fiscal years beginning after December 15, 2001. Pursuant to the effective dates and transitions stated in SFAS No. 144, the Company is currently evaluating the implications of its adoption, and anticipates adopting the provisions for its fiscal year beginning January 1, 2002. F-8 CPI AEROSTRUCTURES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The financial statements as of September 30, 2002 and for the nine months ended September 30, 2002 and 2001 are unaudited; however, in the opinion of the management of the Company, these financial statements reflect all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the financial position of the Company and the results of operations for such interim periods and are not necessarily indicative of the results to be obtained for a full year. 2. COSTS AND Costs and estimated earnings in excess of billings on ESTIMATED uncompleted contracts consist of: EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS
September 30, 2002 December 31, 2001 ---------------------------------------------------------------------------------------------------------------- (unaudited) U.S. U.S. Government Commercial Total Government Commercial Total ---------------------------------------------------------------------------------------------------------------- Costs incurred on uncompleted contracts $18,413,197 $13,017,710 $31,430,907 $7,359,234 $12,485,185 $19,844,419 Estimated earnings 7,810,645 5,947,898 13,758,543 2,040,413 6,728,158 8,768,571 ---------------------------------------------------------------------------------------------------------------- 26,223,842 18,965,608 45,189,450 9,399,647 19,213,343 28,612,990 Less billings to date 18,063,324 16,911,280 34,974,604 5,425,681 16,219,924 21,645,605 ---------------------------------------------------------------------------------------------------------------- Costs and estimated earnings in excess of billings on uncompleted contracts $ 8,160,518 $ 2,054,328 $10,214,846 $3,973,966 $ 2,993,419 $ 6,967,385 ================================================================================================================
Unbilled costs and estimated earnings are billed in accordance with applicable contract terms. As of December 31, 2001 and September 30, 2002, approximately $1,203,000 and $1,137,000 (unaudited) of the balances above are not expected to be collected within one year, respectively. Amounts not paid or billed under retainage provisions are not material. 3. PROPERTY Property, plant and equipment, at cost, consists of the PLANT AND following: EQUIPMENT: Estimated December 31, 2001 Useful Life ------------------------------------------------------------ Machinery and equipment $304,306 5 to 10 years Computer equipment 134,019 9 years Furniture and fixtures 19,504 7 years Automobiles and trucks 23,488 5 years Leasehold improvements 71,591 3 years ------------------------------------------------------------ 552,908 Less accumulated depreciation and amortization 451,648 ------------------------------------------------------------ $101,260 ============================================================ F-9 CPI AEROSTRUCTURES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Depreciation and amortization expense for the years ended December 31, 2001 and 2000 was $35,653 and $30,194, respectively. 4. RELATED PARTY In October 2000, the Company adopted a Greit Plan for the TRANSACTIONS: purpose of offering senior management a deferred compensation death benefit plan (the "Plan") that provides a tax-free benefit and which is tax-neutral to the Company. Pursuant to the Plan, the Company made a noninterest-bearing loan to an employee in the amount of $150,000, which was used to purchase the Plan. This Plan has since been terminated and the surrender value has been returned to the employee who has placed the proceeds from the surrender value in an annuity, which will mature to $150,000. The employee also assigned to the Company an insurance policy on his life in the amount of $150,000 and agreed to maintain it until the date upon which the annuity matures to $150,000, and is included in other assets at December 31, 2001. Accordingly, the loan to the employee will be repaid upon the maturity date of the annuity or upon the death of the employee, whichever occurs first. 5. DISCONTINUED On January 22, 2002, the Company announced a decision made OPERATIONS: by the board of directors as of December 31, 2001 to close the Kolar facilities located in Ithaca, New York, and liquidate Kolar's assets through a public auction of its machinery and equipment and a private sale of its real estate. On February 21, 2002, Kolar sold a substantial portion of its machinery and equipment at an auction conducted by Daley-Hodkin Corporation at Kolar's main facility in Ithaca, New York. In connection with the discontinuance of Kolar's operations, the Company incurred a one-time charge of $10,422,816 related to the write-off of Kolar's assets, net of expected proceeds, and an accrual for estimated losses during the phase-out period. Proceeds from actual and future sales of machinery, equipment and real property are estimated to be approximately $3,970,000. The disposition of Kolar's operations represents a disposal of a business segment under APB No. 30. Accordingly, results of the operation have been classified as discontinued, and prior periods have been restated. For business segment reporting purposes, Kolar's business results were previously classified as the "Machining" segment. Net sales and income (loss) from the discontinued operations are as follows: For the nine months ended September 30, 2002 2001 ------------------------------------------------------------ Net sales $ --- $6,840,056 ============================================================ Pretax loss from discontinued operations $ --- $2,505,481 Income tax benefit --- 934,000 ------------------------------------------------------------ Net loss from discontinued operations $ --- $1,571,481 ============================================================ F-10 CPI AEROSTRUCTURES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- For the three months ended September 30, 2002 2001 ------------------------------------------------------------ Net sales $ --- $2,624,512 ============================================================ Pretax loss from discontinued operations $ --- $ 779,997 Income tax benefit --- 534,000 ------------------------------------------------------------ Net loss from discontinued operations $ --- $ 245,997 ============================================================ Assets of the discontinued operations are as follows: September 30, 2002 ------------------------------------------------------------ Property, plant and equipment, net $ 280,676 ============================================================ Year ended December 31, 2001 2000 ------------------------------------------------------------ Net sales $8,291,690 $20,360,330 ============================================================ Pretax income (loss) from discontinued operations $(3,647,200) $ 729,427 Pretax loss on disposal of business segment (10,422,816) - Income tax benefit - 250,000 ------------------------------------------------------------ Net income (loss) from discontinued operations $(14,070,016) $ 979,427 ============================================================ Assets of the discontinued operations were as follows: Year ended December 31, 2001 ------------------------------------------------------------ Current assets $ 610,492 Property, plant and equipment, net 2,607,492 ------------------------------------------------------------ Total assets of discontinued operations $ 3,217,984 ============================================================ Proceeds from the auction sale were approximately $1,350,000 for the machinery and equipment owned by Kolar. These proceeds have been applied to the reduction of certain bank debt having a principal amount of $2,260,000 outstanding immediately prior to the auction. After giving effect to the applications of the proceeds to the bank debt, the remaining outstanding principal of the bank debt is $910,000. F-11 CPI AEROSTRUCTURES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 6. DEBT: Debt consists of the following: September 30, December 31, 2002 2001 (unaudited) ------------------------------------------------------------ Note payable - bank (a) $2,431,571 $2,438,500 Note payable - bank (b) 259,077 805,320 Note payable - seller (c) 624,484 Note payable - seller (d) 4,898,035 4,691,202 Capitalized lease obligations payable (e) 127,904 1,672,262 ------------------------------------------------------------ $8,341,071 $9,607,284 ============================================================ (a) The note, as amended in June 2002, is payable to a commercial bank in monthly installments from $50,000 to $100,000 through May 30, 2003, and the remaining unpaid balance at June 30, 2003, plus monthly interest at the bank's published prime rate (4.75% at September 30, 2002) plus 3.5%. This note is collateralized by substantially all of the assets of the Company. Approximately $1,249,000 of this loan was repaid upon the sale of certain assets at auction. The note requires the Company to maintain specified levels of working capital and other financial ratios, as defined. The line of credit of $1,700,000 previously listed separately on the balance sheet is now incorporated into this note. In April 2002, the Company agreed to issue 70,000 common shares valued at $110,950, the fair market value on the date of issue, to the bank in consideration for the bank amending and extending this note. The value of the shares will be charged to interest expense over the remaining period of the note. (b) The note is payable to a commercial bank in monthly installments of $9,847, including interest at 8.3%. This note is collateralized by Kolar's land and buildings. The Company sold certain of the underlying land and buildings during 2002 at an aggregate selling price of approximately $555,000. The Company estimates that the sale of the remaining land and buildings will yield proceeds sufficient to repay the note in full. (c) The note is payable to a commercial bank in monthly installments of $20,000 through May 30, 2003, and the remaining unpaid balance at June 30, 2003, plus monthly interest at the bank's published prime rate (4.75% at September 30, 2002) plus 3.5%. This note is collateralized by substantially all of the assets of the Company and was previously included in the capitalized lease obligations payable of the Company. (d) In 1997, the Company acquired substantially all of the assets of Kolar Machine Inc. The acquisition was partially financed through a $4,000,000 note payable to the seller ("Seller") of Kolar Machine Inc. The note payable to the Seller bears interest at 8% per annum. The note matures on September 30, 2003. Until then, it will continue to accrue interest, which will be paid at maturity together with the principal amount, pursuant to the terms of the subordination agreement between the bank lenders and the Seller. The Seller is presently prohibited from receiving current payments of interest on its note. The note payable - seller is convertible into 333,334 shares of the Company's common stock at any time prior to the maturity of the note. The note is subordinated to the notes payable - bank. (e) The Company leases equipment under a capital lease which expires October 24, 2003. The lease requires a monthly payment of $10,227.02, including interest at 9.35%. As of September 30, 2002, proceeds of approximately $674,000 were received upon the sale of certain leased equipment, which amount was remitted to the owners of the equipment. F-12 CPI AEROSTRUCTURES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 7. LINE OF CREDIT: The Company has an aggregate $1,700,000 line of credit agreement, expiring June 30, 2002, with JP Morgan Chase and Mellon Bank for working capital and other corporate purposes as needed. Borrowings are subject to limits based on amounts of accounts receivable, as defined. Interest is at the banks' prime rate (4.75% at December 31, 2001) plus 3.5%. The line of credit is collateralized by substantially all of the assets of the Company. 8. COMMITMENTS: The Company has employment agreements with four employees. The aggregate future commitment under these agreements is as follows: Year ending December 31, 2002 $ 765,200 2003 495,100 2004 468,280 ------------------------------------------------------------ $1,728,580 ============================================================ These agreements provide for additional bonus payments that are calculated as defined. 9. INCOME TAXES: The benefit for income taxes consists of the following: Year ended December 31, 2000 ------------------------------------------------------------ Current: Federal $ 4,000 State and local 10,000 ------------------------------------------------------------ 14,000 ------------------------------------------------------------ Deferred: Federal (101,000) State and local (39,000) ----------------------------------------------------------- (140,000) ----------------------------------------------------------- $(126,000) =========================================================== F-13 CPI AEROSTRUCTURES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The difference between the income tax provision (benefit) computed at the federal statutory rate and the actual tax provision (benefit) is accounted for as follows: December 31, 2001 2000 ------------------------------------------------------------ Taxes (benefit) computed at the federal statutory rate $(3,957,000) $ 280,000 State income taxes, including deferred, net of federal benefit - 7,000 Other, including officers' life insurance and various permanent differences - 59,000 Utilization of net operating loss carryforward - (472,000) Valuation allowance 3,957,000 - ------------------------------------------------------------ $ - 0 - $(126,000) ============================================================ The components of deferred income tax assets and liability at December 31, 2001 are as follows: Current Noncurrent ------------------------------------------------------------ Assets: Federal and state net operating loss carryforwards $ 758,000 $ 2,246,000 Valuation allowance - (2,074,000) ------------------------------------------------------------ $ 758,000 $ 172,000 ============================================================ Liability - long-term contracts $ 147,000 $ - 0 - ============================================================ As of December 31, 2001, the Company had net operating loss carryforwards of approximately $8,035,000 and $5,672,000 for federal and state income tax purposes, respectively, expiring through 2021. 10. EMPLOYEE STOCK In April 1992, the Company adopted the 1992 Stock Option OPTION PLANS: Plan (the "1992 Plan"). The 1992 Plan, for which 83,334 common shares are reserved for issuance, provides for the issuance of either incentive stock options or nonqualified stock options to employees, consultants or others who provide services to the Company. The initial options granted to employees and directors with three or more years of service became exercisable as to one-third of the shares each year beginning on September 16, 1992. The initial options granted to those with less than three years of service became exercisable as to one-third of the shares each year beginning on September 16, 1993. The options may not be exercised more than five years from the date of issuance. In 1995, the option price for all outstanding F-14 CPI AEROSTRUCTURES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- employees' and directors' stock options was lowered to $9.00. In 1995, the Company adopted the 1995 Stock Option Plan (the "1995 Plan"), as amended, for which 200,000 common shares are reserved for issuance. The 1995 Plan provides for the issuance of either incentive stock options or nonqualified stock options to employees, consultants or others who provide services to the Company. The options' exercise price is equal to the closing price of the Company's shares on the day of issuance, except for incentive stock options granted to the Company's president, which are exercisable at 110% of the closing price of the Company's shares on the date of issuance. In 1998, the Company adopted the 1998 Stock Option Plan (the "1998 Plan"). The 1998 Plan, as amended, reserved 463,334 common shares for issuance. The 1998 Plan provides for the issuance of either incentive stock options or nonqualified stock options to employees, consultants or others who provide services to the Company. The options' exercise price is equal to the closing price of the Company's shares on the day of issuance, except for incentive stock options granted to the Company's president, which are exercisable at 110% of the closing price of the Company's shares on the date of issuance. In 2000, the Company adopted the 2000 Stock Option Plan (the "2000 Plan"). The 2000 Plan, as amended, reserved 830,000 common shares for issuance. The 2000 Plan provides for the issuance of either incentive stock options or nonqualified stock options to employees, consultants or others who provide services to the Company. The options' exercise price is equal to the closing price of the Company's shares on the day of issuance, except for incentive stock options granted to the Company's president, which are exercisable at 110% of the closing price of the Company's shares on the date of issuance. The Company has 6,779 options available for future grant under the 1992 Plan, 40,640 options available for grant under the 1995 Plan, 12,332 options available for grant under the 1998 Plan, and 250,000 options available for grant under the 2000 Plan. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123, net income (loss) and earnings (loss) per share would have been adjusted to the pro forma amounts indicated in the table below:
As Reported Pro Forma 2001 2000 2001 2000 ------------------------------------------------------------------------------------------------------- Net income (loss) $(11,638,119) $1,929,206 $(11,937,395) $1,832,000 ======================================================================================================= Earnings (loss) per share: Basic $ (4.39) $ .73 $ (4.50) $ .69 Diluted $ (4.39) $ .70 $ (4.50) $ .66 =======================================================================================================
F-15 CPI AEROSTRUCTURES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- A summary of the status of the Company's four stock option plans as of December 31, 2001 and 2000 and changes during those years is as follows:
Year ended December 31, 2001 2000 ----------------------------------------------------------------------------------------------- Weighted- Weighted- average average Exercise Exercise Fixed Options Options Price Options Price ----------------------------------------------------------------------------------------------- Outstanding at beginning of year 894,312 $3.54 515,313 $4.27 Granted during year 225,000 1.29 408,000 2.67 Exercised - - - - Forfeited 20,640 4.95 29,001 4.11 ----------------------------------------------------------------------------------------------- Outstanding at end of year 1,098,672 $3.06 894,312 $3.54 ===============================================================================================
The following table summarizes information about stock options outstanding and exercisable at December 31, 2001:
Weighted Weighted- Number Average Weighted- Outstanding Remaining average Range of and Contractual Exercise Exercise Price Exercisable Life Price ----------------------------------------------------------------------------------------------- $1.20 - $8.46 1,098,672 4.99 years $3.06 ===============================================================================================
The Company's assumptions used to calculate the fair values of options issued were (i) risk-free interest rate of 5.25%, (ii) expected life of five years, (iii) expected volatility of 174.71% and (iv) expected dividends of zero. 11. WARRANTS In February 1997, the Company issued options to purchase AND OPTIONS: 3,334 shares of common stock to two directors at an exercise price of $6.18 per share of common stock. These options expire in 2002. In January 1998, the Company issued options to purchase 25,000 shares of common stock to a consultant, who was also a director, at an exercise price of $7.50 per share of common stock. In February 1998, the Company issued options to purchase 3,334 shares of common stock to two directors at an exercise price of $6.93 per share of common stock. These options expire in 2003. In March 1998, the Company issued 33,334 warrants to Gaines Berland, Inc. (now known as Ladenburg Capital Management Inc.) as compensation for acting as the Company's investment banker pursuant to a consulting agreement. These warrants entitle the investment banker to purchase 33,334 shares of common stock at an exercise price of $7.50 during the five-year period commencing April 1, 1998. This agreement F-16 CPI AEROSTRUCTURES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- was terminated in 1999. In 1999, the Company recorded a charge to operations of $198,734 to write off the unamortized portion of warrants issued under this agreement. In May 1999, the Company issued 100,000 warrants to Catalyst Financial Corp. as partial compensation in the amount of $227,300 for acting as the Company's investment banker pursuant to a consulting agreement. These warrants entitle the investment banker to purchase 100,000 shares of common stock at an exercise price of $1.875 during the five-year period commencing May 4, 1999. In 2001, 8,537 of these warrants were exercised. In December 1999, the Company issued options to purchase 15,000 shares of common stock to a consultant at the exercise price of $2.53 per share of common stock. Also in December 1999, the Company issued options to purchase 10,000 shares of common stock to two directors at an exercise price of $2.53 per share of common stock. In February 2002, the Company issued 5,000 options to a consultant as compensation related to a one-year consulting agreement. The options are exercisable at $1.65 per share through February 2007. The options are valued at $7,845, which will be expensed over the life of the agreement, based on the Company's assumptions as follows: (i) risk-free interest rate of 5.25%, (ii) expected life of five years, (iii) expected volatility of 170.84%, and (iv) expected dividends of zero. 12. EMPLOYEE On September 11, 1996, CPI's board of directors instituted a BENEFIT PLANS: defined contribution plan under Section 401(k) of the Internal Revenue Code (the "Code"). On October 1, 1998, the Company amended and standardized both the CPI and Kolar plans as required by the Code. Pursuant to the amended plan, qualified employees may contribute a percentage of their pretax eligible compensation to the Plan and the Company will match a percentage of each employee's contribution. Additionally, the Company has a profit-sharing plan covering all eligible employees. Contributions by the Company are at the discretion of management. The amount of contributions recorded by the Company in 2001 and 2000 amounted to $88,412 and $184,373, respectively. 13. CONTINGENCIES: Kolar is currently in the process of liquidating all of its assets through an auction of its fixed assets and the private sale of its real estate. The proceeds of this liquidation will be used to reduce Kolar's liabilities on certain bank debt. The bank debt and Kolar's obligations to its previous owner are secured by liens on the assets and real estate to be sold and are guaranteed by the Company. Various creditors have made claims against Kolar. There can be no assurance that satisfactory payment terms will be made with any of Kolar's creditors or with the banks regarding the balance of portions of the debt, which is currently due no later than June 30, 2003. From time to time, the Company is subject to routine litigation incidental to its business. The Company believes that the settlement of any pending legal proceedings will not have a material adverse effect on the Company's financial condition. F-17 CPI AEROSTRUCTURES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 14. MAJOR Approximately 92% and 76% of the Company's consolidated net CUSTOMERS: sales in 2001 and 2000 were to the U.S. government. Sales to a significant commercial customer accounted for approximately 24% of the Company's consolidated net sales for the year ended December 31, 2000. At December 31, 2001, approximately 77% of accounts receivable was due from the U.S. government. F-18 - --------------------------------------- ------------------------------------ No dealer, salesperson or any other person is authorized to give any information or make any representations in connection with this offering other than those contained in this prospectus CPI AEROSTRUCTURES, INC. and, if given or made, the information or representations must not be relied upon as having been authorized by us. This [LOGO] prospectus does not constitute an offer to sell or a solicitation of an offer to buy any security other than the 2,000,000 Common Shares securities offered by this prospectus, or an offer to sell or a solicitation of an offer to buy any securities by anyone in any jurisdiction in which ----------------- the offer or solicitation is not authorized or is unlawful. The delivery PROSPECTUS of this prospectus will not, under any circumstances, create any implication ----------------- that the information is correct as of any time subsequent to the date of this prospectus. ------------------------- TABLE OF CONTENTS Page Summary..........................3 Risk Factors.....................7 Use of Proceeds.................12 Capitalization..................13 Management's Discussion and Analysis of Financial Condition and Results of Operations.......14 Business........................18 Management......................24 Principal Shareholders..........29 Description of Our Capital Shares..................30 Underwriting....................33 Legal Matters...................34 EarlyBirdCapital, Inc. Experts.........................34 Disclosure of Commission Position on Indemnification for Securities Act Liabilities......34 Where You Can Find Additional Information..........35 February __, 2003 Index to Financial Statements..F-1 ------------------------- Part II Information Not Required in Prospectus ITEM 24. Indemnification of Directors and Officers Sections 721 through 726, inclusive, of the Business Corporation Law of New York ("BCL") authorizes New York corporations to indemnify their officers and directors under certain circumstances against expenses and liabilities incurred in legal proceedings involving such persons because of their being or having been officers or directors and to purchase and maintain insurance for indemnification of such officers and directors. Section 402(b) of the BCL permits a corporation, by so providing in its certificate of incorporation, to eliminate or limit directors' personal liability to the corporation or its shareholders for damages arising out of certain alleged breaches of their duties as directors. The BCL, however, provides that no such limitation of liability may affect a director's liability with respect to any of the following: (1) acts or omissions made in bad faith or which involved intentional misconduct or a knowing violation of law; (2) any transaction from which the director derived a financial profit or other advantage to which he was not legally entitled; (3) the declaration of dividends or other distributions or purchase or redemption of shares in violation of the BCL; or (4) the distribution of assets to shareholders after dissolution of the corporation without paying or adequately providing for all known liabilities of the corporation or making loans to directors in violation of the BCL. The Registrant's Certificate of Incorporation, as amended, provides that the personal liability of the directors of the Registrant is eliminated to the fullest extent permitted by Section 402(b) of the BCL. In addition, the Amended and Restated By-laws of the Registrant provide in substance that, each director and officer shall be indemnified by the Registrant against reasonable expenses, including attorney's fees, and any liabilities that he or she may incur in connection with any action to which he or she may be made a party by reason of his or her being or having been a director or officer of the Registrant. The indemnification provided by the Registrant's By-laws is not deemed exclusive of or in any way to limit any other rights which any person seeking indemnification may be entitled. The Registrant also has directors' and officers' liability insurance. In addition, the Registrant has entered into Indemnification Agreements with each of its executive officers and directors which provide that the Registrant will indemnify and advance expenses to such officer or director to the fullest extent permitted by law and provides the procedure for entitlement of indemnification. ITEM 25. Other Expenses of Issuance and Distribution The estimated expenses actually paid and payable by us in connection with the distribution of the securities being registered are as follows: SEC Registration and Filing Fee.................... $ 996.92 NASD Filing Fee.................................... 1,583.61 American Stock Exchange Additional Listing Fee................................. 22,500.00 Legal Fees and Expenses............................ 200,000.00 Accounting Fees and Expenses....................... 50,000.00 Financial Printing and Engraving................... 20,000.00 Transfer Agent and Registrar Fees.................. 3,500.00 Nonaccountable Expense Allowance................... 255,000.00 Miscellaneous...................................... 125,419.47 ---------- TOTAL.............................................. $679,000.00 i ITEM 26. Recent Sales of Unregistered Securities CPI Aerostructures, Inc. made the following sales of unregistered securities during the past three years:
------------------ --------------------- --------------- --------------------- ------------------ ------------------- Consideration Received and Description of If Option, Underwriting or Warrant or Other Discounts to Convertible Market Price Exemption from Security, Terms Afforded to Registration of Exercise or Date of Sale Title of Security Number Sold Purchasers Claimed Conversion ------------------ --------------------- --------------- --------------------- ------------------ ------------------- 05/18/00 Options to purchase 115,000 Options granted to 4(2) Immediately common shares employees - no exercisable until other consideration 12/31/04 at an received by Company exercise price of until exercise $2.79 per share ------------------ --------------------- --------------- --------------------- ------------------ ------------------- 05/31/00 Options to purchase 350,000 Options granted to 4(2) Immediately common shares employees - no exercisable until other consideration 5/31/10 at an received by Company exercise price of until exercise $2.59 per share ------------------ --------------------- --------------- --------------------- ------------------ ------------------- 04/18/01 Common Shares 25,000 Option granted to 4(2) Fully exercisable employee - pursuant upon the date of to the Performance grant Equity Plan 2000; no cash consideration received by us ------------------ --------------------- --------------- --------------------- ------------------ ------------------- 05/31//01 Common Shares 8,537 Common Shares 4(2) N/A issued to consultant upon the exercise of options; no cash consideration received by us as a result of cashless exercise provision ------------------ --------------------- --------------- --------------------- ------------------ ------------------- 08/14/01 Common Shares 200,000 Option granted to 4(2) Fully exercisable employee pursuant upon the date of to the Performance grant Equity Plan 2000; no cash consideration received by us ------------------ --------------------- --------------- --------------------- ------------------ -------------------
ii
------------------ --------------------- --------------- --------------------- ------------------ ------------------- Consideration Received and Description of If Option, Underwriting or Warrant or Other Discounts to Convertible Market Price Exemption from Security, Terms Afforded to Registration of Exercise or Date of Sale Title of Security Number Sold Purchasers Claimed Conversion ------------------ --------------------- --------------- --------------------- ------------------ ------------------- 2/1/02-6/18/02 Common Shares 300,000 Options granted to 4(2) Fully exercisable employees and upon the date of directors pursuant grant for five or to the Performance ten years at Equity Plan 2000 exercise prices and 1998 Stock ranging from Option Plan; no $1.65 to $6.35 cash consideration received by us ------------------ --------------------- --------------- --------------------- ------------------ ------------------- 2/1/02 Common Shares 5,000 Non-Plan Option 4(2) Fully exercisable issued to upon the date of consultant to grant until purchase common February 1, 2007 shares; no cash consideration received by us ------------------ --------------------- --------------- --------------------- ------------------ ------------------- 4/18/02 Common Shares 50,000 Common Shares 4(2) N/A issued to bank in consideration of extending due date of loan; no cash consideration received by us ------------------ --------------------- --------------- --------------------- ------------------ ------------------- 5/21/02 Common Shares 20,833 Common Shares 4(2) N/A issued to employees upon the exercise of options; $84,102 cash consideration received by us ------------------ --------------------- --------------- --------------------- ------------------ ------------------- 6/03/02 Common Shares 2,653 Common Shares 4(2) N/A issued to consultants upon the cashless exercise of warrants; no cash consideration received by us ------------------ --------------------- --------------- --------------------- ------------------ ------------------- 6/24/02 Common Shares 4,137 Common Shares 4(2) N/A issued to consultants upon the cashless exercise of warrants; no cash consideration received by us ------------------ --------------------- --------------- --------------------- ------------------ -------------------
iii
------------------ --------------------- --------------- --------------------- ------------------ ------------------- Consideration Received and Description of If Option, Underwriting or Warrant or Other Discounts to Convertible Market Price Exemption from Security, Terms Afforded to Registration of Exercise or Date of Sale Title of Security Number Sold Purchasers Claimed Conversion ------------------ --------------------- --------------- --------------------- ------------------ ------------------- 8/16/02 Common Shares 20,000 Common Shares 4(2) N/A issued to bank in consideration of services; no cash consideration received by us ------------------ --------------------- --------------- --------------------- ------------------ ------------------- 09/09/02 Common Shares 1,000 Common Shares 4(2) N/A issued to employee upon the exercise of options; $2,870 cash consideration received by us ------------------ --------------------- --------------- --------------------- ------------------ ------------------- 11/11/02 Common Shares 30,000 Common Shares 4(2) N/A issued to employee upon the exercise of options; $93,900 cash consideration received by us ------------------ --------------------- --------------- --------------------- ------------------ ------------------- 1/23/03 Common Shares 20,000 Common Shares 4(2) N/A issued to bank in consideration of services; no cash consideration received by us ------------------ --------------------- --------------- --------------------- ------------------ -------------------
ITEM 27. Exhibits
Exhibit Number Name of Exhibit No. in Document - -------------- --------------- --------------- *1.1 Form of Underwriting Agreement N/A 3.1 Certificate of Incorporation of the Company, as amended. (1) 3.1 3.1(a) Certificate of Amendment of Certificate of Incorporation filed on July 14, 1998. (2) 3.1(a) 3.2 Amended and Restated By-Laws of the Company. (1) 3.2 *4.7 Form of Warrant issued to Underwriter N/A *5.1 Opinion of Graubard Miller N/A 10.1 1992 Stock Option Plan. (1) 10.3 10.2 1995 Employee Stock Option Plan. (3) 10.4 10.3 Form of military contract. (1) 10.7 10.4 Asset Purchase Agreement, dated September 9, 1997 by and among Kolar Machine, Inc., a 10.19 New York corporation, Daniel Liguori, the Company and Kolar, Inc., a Delaware corporation and wholly-owned subsidiary of the Company. (5)
iv
Exhibit Number Name of Exhibit No. in Document - -------------- --------------- --------------- 10.5 1998 Performance Equity Plan. (2) 10.28 10.6 Performance Equity Plan 2000. (4) 10.29 10.7 Stock Option Agreement, dated August 14, 2001, between Edward J. Fred and the Company. 10.35 (5) 10.8 Stock Option Agreement, dated August 14, 2001, between Arthur August and the Company. 10.36 (6) 10.9 Employment Agreement, dated August 14, 2001, between Edward J. Fred and the Company. 10.37 (7) 10.10 Employment Agreement, dated August 14, 2001, between Arthur August and the Company. (7) 10.38 10.11 Peaceful Possession Agreement, by and among Kolar, Inc., JP Morgan Chase Bank f/k/a/ 10.38 the Chase Manhattan Bank and JP Morgan Leasing, Inc., dated January 24, 2002 (without schedule). (8) 10.12 Auction Sale Agreement, among Daley-Hodkin Corporation, Kolar, Inc., JP Morgan Chase 10.40 and JP Morgan Leasing, Inc., dated January 10, 2002. (8) 10.13 Amended and Restated Credit Agreement, among the Borrowers, the Lenders and JP Morgan, 10.43 dated June 25, 2002. (9) 10.14 Form of Replacement Term Note, between Kolar and JP Morgan, dated June 25, 2002. (9) 10.44 10.15 Tranche C Intercreditor and Subordination Agreement, among the Lenders, the Borrowers 10.45 and JP Morgan, dated June 25, 2002. (9) 10.16 Tranche C Term Note, among the Borrowers and JP Morgan, dated June 25, 2002. (9) 10.46 10.17 Amendment to Intercreditor and Subordination Agreement, among the Subordinated Lenders 10.47 (as therein defined), the Borrowers and JP Morgan, dated June 25, 2002. (9) 10.18 Amendment to Guarantee and Collateral Agreement among the Borrowers and JP Morgan, 10.48 dated June 25, 2002. (9) 10.19 Tranche C Mortgage, Fixture Filing and Assignment of Leases and Rents, between Kolar 10.49 and JPMorgan, dated June 25, 2002. (9) 10.20 Amendment to Security Agreement, between the Borrowers and Ralok, dated June 25, 2002. 10.50 (9) 10.21 Amended and Restated Seller Note, between the Borrowers and Ralok, dated June 25, 10.51 2002. (9) 10.22 CPI Seller Guaranty Amendment, among CPI and Ralok, dated June 25, 2002. (9) 10.52 10.23 Seller Mortgage Subordination Agreement, between Ralok and JPMorgan, dated June 25, 10.53 2002. (9)
v
Exhibit Number Name of Exhibit No. in Document - -------------- --------------- --------------- 10.24 Mortgage Modification Agreement, between Kolar and JPMorgan, dated June 25, 2002. (9) 10.54 ***10.25 Agreement among Ralok, Inc., the Company and Green & Selfler, as Escrow Agent, dated 10.25 November 26, 2002, regarding right to purchase note. ***10.26 Form of Merger & Acquisition Agreement, between the Underwriter and the Company. 10.26 ***10.27 Registration Rights Agreement, between the Registrant and GECapital CFE, Inc. dated 10.27 February 26, 2002. ***10.27.1 Schedule of Omitted Document in the form of Exhibit 10.27.1 10.27, including material detail in N/A which such document differs from Exhibit 10.27. ***10.28 Letter Agreement Amending Employment Agreement, between Edward J. Fred and the Company, 10.28 dated December 12, 2002. ***10.29 Letter Agreement Amending Employment Agreement, between Edward J. Fred and the Company, N/A dated January 1, 2003. ***10.30 Letter Agreement Amending Employment Agreement, between Arthur August and the Company, N/A dated January 1, 2003. ***21.1 Subsidiaries of the Registrant. N/A **23.1 Consent of Graubard Miller (included as part of its opinion). N/A *23.2 Consent of Goldstein Golub Kessler LLP. N/A ***24.1 Power of Attorney (included on signature page). N/A ***99.1 Consent of Person to Become Director. N/A
- ----------------------- * Filed herewith. ** To be filed by amendment. *** Previously filed. (1) Filed as an exhibit to the Company's Registration Statement on Form S-1 (No. 33-49270) declared effective on September 16, 1992 and incorporated herein by reference. (2) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for December 31, 1998 and incorporated herein by reference. (3) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for December 31, 1995 and incorporated herein by reference. (4) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for December 31, 2000 and incorporated herein by reference. (5) Filed as an exhibit to Schedule 13D filed on behalf of Edward J. Fred on October 19, 2001 and incorporated herein by reference. (6) Filed as an exhibit to Schedule 13D filed on behalf of Arthur August on October 19, 2001 and incorporated herein by reference. (7) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for September 30, 2001 and incorporated herein by reference. (8) Filed as an exhibit to the Company's Current Report on Form 8-K for January 22, 2002, as amended, and incorporated herein by reference. (9) Filed as an exhibit to the Company's Current Report on Form 8-K for June 27, 2002. (10) Filed as an exhibit to the Company's Annual Report on Form 10-K for December 31, 1992 and incorporated herein by reference. (11) Filed as an exhibit to the Company's Current Report on Form 8-K for April 29, 1994, as amended, and incorporated herein by reference. vi ITEM 28. Undertakings The Company will: (1) File, during any period in which it offers or sells securities, a post-effective amendment to this Registration Statement to: (i) Include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" Table in the effective registration statement. (iii) Include any additional or changed material information on the plan of distribution. (2) For determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. (3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. (4) For determining any liability under the Securities Act, treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Company under Rule 424(b)(1) or (4), or 497(h) under the Securities Act as part of this registration statement as of the time the Commission declared it effective. (5) For determining any liability under the Securities Act, treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that the offering of the securities at that time as the initial bona fide offering of those securities. Insofar as indemnification for liabilities arising under Securities Act may be permitted to directors, officers and controlling persons of Registrant pursuant to the provisions of its Articles of Incorporation, its By-Laws, or otherwise, Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against liabilities (other than the payment by Registrant for expenses incurred or paid by an officer, director or controlling person of Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. vii SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing this Form SB-2/A and authorized this registration statement to be signed on its behalf by the undersigned, hereunto duly authorized, in Edgewood, New York on February 5, 2003. CPI AEROSTRUCTURES, INC. By /s/ Arthur August ---------------------------------------- Arthur August Chairman of the Board (Principal Executive Officer) Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated. /s/ Arthur August Chairman of the Board February 5, 2003 - --------------------- (Principal Executive Officer) Arthur August /s/ Edward J. Fred Chief Executive Officer, February 5, 2003 - --------------------- President, Chief Financial Edward J. Fred Officer and Secretary (Principal Accounting Officer) and Director * Director February 5, 2003 - --------------------- Walter Paulick * Director February 5, 2003 - --------------------- Kenneth McSweeney *By: /s/ Edward J. Fred ------------------- Edward J. Fred, as Attorney in Fact viii Table of Exhibits
Exhibit Number Name of Exhibit No. in Document - -------------- --------------- --------------- *1.1 Form of Underwriting Agreement N/A 3.1 Certificate of Incorporation of the Company, as amended. (1) 3.1 3.1(a) Certificate of Amendment of Certificate of Incorporation filed on July 14, 1998. (2) 3.1(a) 3.2 Amended and Restated By-Laws of the Company. (1) 3.2 *4.7 Form of Warrant issued to Underwriter N/A *5.1 Opinion of Graubard Miller N/A 10.1 1992 Stock Option Plan. (1) 10.3 10.2 1995 Employee Stock Option Plan. (3) 10.4 10.3 Form of military contract. (1) 10.7 10.4 Asset Purchase Agreement, dated September 9, 1997 by and among Kolar Machine, Inc., a 10.19 New York corporation, Daniel Liguori, the Company and Kolar, Inc., a Delaware corporation and wholly-owned subsidiary of the Company. (5) 10.5 1998 Performance Equity Plan. (2) 10.28 10.6 Performance Equity Plan 2000. (4) 10.29 10.7 Stock Option Agreement, dated August 14, 2001, between Edward J. Fred and the Company. 10.35 (5) 10.8 Stock Option Agreement, dated August 14, 2001, between Arthur August and the Company. 10.36 (6) 10.9 Employment Agreement, dated August 14, 2001, between Edward J. Fred and the Company. 10.37 (7) 10.10 Employment Agreement, dated August 14, 2001, between Arthur August and the Company. (7) 10.38 10.11 Peaceful Possession Agreement, by and among Kolar, Inc., JP Morgan Chase Bank f/k/a/ 10.38 the Chase Manhattan Bank and JP Morgan Leasing, Inc., dated January 24, 2002 (without schedule). (8) 10.12 Auction Sale Agreement, among Daley-Hodkin Corporation, Kolar, Inc., JP Morgan Chase 10.40 and JP Morgan Leasing, Inc., dated January 10, 2002. (8) 10.13 Amended and Restated Credit Agreement, among the Borrowers, the Lenders and JP Morgan, 10.43 dated June 25, 2002. (9)
i
Exhibit Number Name of Exhibit No. in Document - -------------- --------------- --------------- 10.14 Form of Replacement Term Note, between Kolar and JP Morgan, dated June 25, 2002. (9) 10.44 10.15 Tranche C Intercreditor and Subordination Agreement, among the Lenders, the Borrowers 10.45 and JP Morgan, dated June 25, 2002. (9) 10.16 Tranche C Term Note, among the Borrowers and JP Morgan, dated June 25, 2002. (9) 10.46 10.17 Amendment to Intercreditor and Subordination Agreement, among the Subordinated Lenders 10.47 (as therein defined), the Borrowers and JP Morgan, dated June 25, 2002. (9) 10.18 Amendment to Guarantee and Collateral Agreement among the Borrowers and JP Morgan, 10.48 dated June 25, 2002. (9) 10.19 Tranche C Mortgage, Fixture Filing and Assignment of Leases and Rents, between Kolar 10.49 and JPMorgan, dated June 25, 2002. (9) 10.20 Amendment to Security Agreement, between the Borrowers and Ralok, dated June 25, 2002. 10.50 (9) 10.21 Amended and Restated Seller Note, between the Borrowers and Ralok, dated June 25, 10.51 2002. (9) 10.22 CPI Seller Guaranty Amendment, among CPI and Ralok, dated June 25, 2002. (9) 10.52 10.23 Seller Mortgage Subordination Agreement, between Ralok and JPMorgan, dated June 25, 10.53 2002. (9) 10.24 Mortgage Modification Agreement, between Kolar and JPMorgan, dated June 25, 2002. (9) 10.54 ***10.25 Agreement among Ralok, Inc., the Company and Green & Selfler, as Escrow Agent, dated 10.25 November 26, 2002, regarding right to purchase note. ***10.26 Form of Merger & Acquisition Agreement, between the Underwriter and the Company. 10.26 ***10.27 Registration Rights Agreement, between the Registrant and GECapital CFE, Inc. dated 10.27 February 26, 2002. ***10.27.1 Schedule of Omitted Document in the form of Exhibit 10.27.1 10.27, including material detail in N/A which such document differs from Exhibit 10.27. ***10.28 Letter Agreement Amending Employment Agreement, between Edward J. Fred and the Company, 10.28 dated December 12, 2002. ***10.29 Letter Agreement Amending Employment Agreement, between Edward J. Fred and the Company, N/A dated January 1, 2003. ***10.30 Letter Agreement Amending Employment Agreement, between Arthur August and the Company, N/A dated January 1, 2003. ***21.1 Subsidiaries of the Registrant. 21.1 **23.1 Consent of Graubard Miller (included as part of its opinion). N/A *23.2 Consent of Goldstein Golub Kessler LLP. N/A
ii
Exhibit Number Name of Exhibit No. in Document - -------------- --------------- --------------- ***24.1 Power of Attorney (included on signature page). N/A ***99.1 Consent of Person to Become Director. N/A
- ----------------------- * Filed herewith. ** To be filed by amendment. *** Previously filed. (1) Filed as an exhibit to the Company's Registration Statement on Form S-1 (No. 33-49270) declared effective on September 16, 1992 and incorporated herein by reference. (2) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for December 31, 1998 and incorporated herein by reference. (3) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for December 31, 1995 and incorporated herein by reference. (4) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for December 31, 2000 and incorporated herein by reference. (5) Filed as an exhibit to Schedule 13D filed on behalf of Edward J. Fred on October 19, 2001 and incorporated herein by reference. (6) Filed as an exhibit to Schedule 13D filed on behalf of Arthur August on October 19, 2001 and incorporated herein by reference. (7) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for September 30, 2001 and incorporated herein by reference. (8) Filed as an exhibit to the Company's Current Report on Form 8-K for January 22, 2002, as amended, and incorporated herein by reference. (9) Filed as an exhibit to the Company's Current Report on Form 8-K for June 27, 2002. (10) Filed as an exhibit to the Company's Annual Report on Form 10-K for December 31, 1992 and incorporated herein by reference. (11) Filed as an exhibit to the Company's Current Report on Form 8-K for April 29, 1994, as amended, and incorporated herein by reference. iii EX-1.1 3 cpi_am2ex1.txt UNDERWRITING AGREEMENT EXHIBIT 1.1 UNDERWRITING AGREEMENT Between CPI AEROSTRUCTURES, INC. And EARLYBIRDCAPITAL, INC. Dated: February __, 2002 Table of Contents Page ---- 1. Purchase and Sale of Securities.........................................1 1.1 Firm Securities...................................................1 1.1.1 Purchase of Firm Securities............................1 1.1.2 Delivery and Payment...................................1 1.2 Over-Allotment Option............................................2 1.2.1 Option Securities......................................2 1.2.2 Exercise of Option.....................................2 1.2.3 Payment and Delivery...................................2 1.3 Underwriter's Warrant............................................3 1.3.1 Warrant................................................3 1.3.2 Delivery and Payment...................................3 2. Representations and Warranties of the Company...........................3 2.1 Filing of Registration Statement.................................3 2.2 No Stop Orders, Etc..............................................3 2.3 Disclosures in Registration Statement............................4 2.3.1 Securities Act Representation..........................4 2.3.2 Disclosure of Contracts................................4 2.3.3 Prior Securities Transactions..........................4 2.4 Changes After Dates in Registration Statement....................4 2.4.1 No Material Adverse Change.............................4 2.4.2 Recent Securities Transactions, Etc....................5 2.5 Independent Accountants..........................................5 2.6 Financial Statements.............................................5 2.7 Authorized Capital; Options; Etc.................................5 2.8 Valid Issuance of Securities; Etc................................6 2.8.1 Outstanding Securities.................................6 2.8.2 Securities Sold Pursuant to this Agreement.............6 2.9 Registration and Anti-Dilution Rights of Third Parties...........6 2.10 Validity and Binding Effect of Agreements........................7 2.11 No Conflicts, Etc................................................7 2.12 No Defaults; Violations..........................................7 2.13 Corporate Power; Licenses; Consents..............................8 2.13.1 Conduct of Business...................................8 2.13.2 Transactions Contemplated Herein......................8 2.14 Title to Property; Insurance.....................................8 2.15 Litigation; Governmental Proceedings.............................8 2.16 Good Standing....................................................9 2.17 Taxes............................................................9 2.18 Transactions Affecting Disclosure to NASD........................9 2.18.1 Finder's Fees.........................................9 2.18.2 Payments Within 12 Months.............................9 2.18.3 Use of Proceeds......................................10 2.18.4 Insiders' NASD Affiliation...........................10 2.19 Foreign Corrupt Practices Act...................................10 2.20 American Stock Exchange Eligibility.............................10 2.21 Intangibles.....................................................10 Table of Contents (cont.) Page ---- 2.22 Relations With Employees........................................11 2.22.1 Employee Matters.....................................11 2.22.2 Employee Benefit Plans...............................11 2.23 Officers' Certificate...........................................11 2.24 Lock-Up Agreements..............................................11 2.25 Subsidiaries....................................................12 2.26 Environmental Matters...........................................12 2.27 Government Clearances...........................................12 2.28 Product Liability Insurance.....................................12 2.29 Company Not an Investment Company...............................12 2.30 Related Party Transactions......................................12 2.31 Audit Committee.................................................12 3. Covenants of the Company...............................................13 3.1 Amendments to Registration Statement............................13 3.2 Federal Securities Laws.........................................13 3.2.1 Compliance............................................13 3.2.2 Filing of Final Prospectus............................13 3.2.3 Exchange Act Registration.............................13 3.3 Blue Sky Filings................................................13 3.4 Delivery to the Underwriter of Prospectuses.....................14 3.5 Events Requiring Notice to the Underwriter......................14 3.5.1 AMEX Maintenance......................................14 3.6 Reports to the Underwriter......................................14 3.6.1 Periodic Reports, Etc.................................14 3.6.2 Transfer Sheets and Weekly Position Listings..........15 3.7 Agreements between the Underwriter and the Company..............15 3.7.1 Merger and Acquisition Agreement......................15 3.7.2 Underwriter's Warrant.................................15 3.8 Payment of Expenses.............................................15 3.8.1 General Expenses......................................15 3.8.2 Non-Accountable Expenses..............................16 3.9 Application of Net Proceeds.....................................16 3.10 Delivery of Earnings Statements to Security Holders.............16 3.11 Key Person Life Insurance.......................................17 3.12 Stabilization...................................................17 3.13 Internal Controls...............................................17 3.14 Sale of Securities..............................................17 3.15 Disclosure Controls and Procedures..............................17 4. Conditions of the Underwriter's Obligations............................17 4.1 Regulatory Matters..............................................17 4.1.1 Effectiveness of Registration Statement...............17 4.1.2 NASD Clearance........................................18 4.1.3 No Blue Sky Stop Orders...............................18 4.2 Company Counsel Matters.........................................18 4.2.1 Effective Date Opinion of Counsel.....................18 ii Table of Contents (cont.) Page ---- 4.2.2 Closing Date and Option Closing Date Opinions of Counsel................................18 4.2.3 Reliance..............................................18 4.3 Cold Comfort Letter.............................................18 4.4 Officers' Certificates..........................................20 4.4.1 Officers' Certificate.................................20 4.4.2 Secretary's Certificate...............................20 4.5 No Material Changes.............................................20 4.6 Delivery of Agreements..........................................21 4.7 Opinion of Counsel for the Underwriter..........................21 5. Indemnification........................................................21 5.1 Indemnification of the Underwriter..............................21 5.1.1 General...............................................21 5.1.2 Procedure.............................................22 5.2 Indemnification of the Company..................................23 5.3 Contribution....................................................23 5.3.1 Contribution Rights...................................23 5.3.2 Contribution Procedure................................23 6. Omitted................................................................24 7. Board Designee.........................................................24 8. Representations and Agreements to Survive Delivery.....................24 9. Effective Date of This Agreement and Termination Thereof...............25 9.1 Effective Date..................................................25 9.2 Termination.....................................................25 9.3 Expenses........................................................25 9.4 Indemnification.................................................25 10. Miscellaneous..........................................................25 10.1 Notices.........................................................25 10.2 Headings........................................................26 10.3 Amendment.......................................................26 10.4 Entire Agreement................................................26 10.5 Binding Effect..................................................27 10.6 Governing Law, Jurisdiction.....................................27 10.7 Execution in Counterparts.......................................27 10.8 Waiver, Etc.....................................................27 iii INDEX OF DEFINITIONS Term Section - ---- ------- Act.....................................................................2.1 AMEX...................................................................2.20 Closing Date..........................................................1.1.2 Code ................................................................2.22.2 Commission..............................................................2.1 Common Shares.........................................................1.1.1 Company........................................................Introductory Paragraph EBC............................................................Introductory Paragraph Effective Date........................................................1.2.2 ERISA................................................................2.22.2 ERISA Plans..........................................................2.22.2 Exchange Act............................................................2.5 Filing Date..........................................................2.18.2 Firm Securities.......................................................1.1.1 GGK.....................................................................2.5 Insiders...............................................................2.24 Intangibles............................................................2.21 Investment Company Act.................................................2.29 Lock-up Period.........................................................2.24 Merger and Acquisition Agreement......................................3.7.1 NASD.................................................................2.18.1 Option Closing Date...................................................1.2.2 Option Securities.....................................................1.2.1 Over-allotment Option.................................................1.2.1 Preliminary Prospectus..................................................2.1 Prospectus..............................................................2.1 Public Securities.....................................................1.2.1 Registration Statement..................................................2.1 Regulations.............................................................2.1 Securities............................................................1.3.1 Subsidiary(ies)........................................................2.25 Underwriter ...................................................Introductory Paragraph Underwriter's Securities..............................................1.3.1 Underwriter's Shares..................................................1.3.1 Underwriter's Warrant.................................................1.3.1 iv CPI AEROSTRUCTURES, INC. 2,000,000 COMMON SHARES UNDERWRITING AGREEMENT New York, New York February __, 2002 EarlyBirdCapital, Inc. One State Street Plaza New York, New York 10004 Ladies and Gentlemen: The undersigned, CPI Aerostructures, Inc., a New York corporation (the "Company"), hereby confirms its agreement with EarlyBirdCapital, Inc. (being referred to herein variously as "you", "EBC" or the "Underwriter") as follows: 1. Purchase and Sale of Securities. 1.1 Firm Securities. 1.1.1 Purchase of Firm Securities. On the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, the Company agrees to issue and sell to the Underwriter and the Underwriter agrees to purchase from the Company 2,000,000 Common Shares, par value $.001 per share ("Common Shares"), of the Company ("Firm Securities") at a purchase price (net of discounts and commissions) of $____ per share. 1.1.2 Delivery and Payment. Delivery and payment for the Firm Securities shall be made at 10:00 A.M., New York time, on or before the third business day following the date that the Firm Securities commence trading or at such earlier time as the Underwriter shall determine, or at such other time as shall be agreed upon by the Underwriter and the Company, at the offices of counsel to the Underwriter or at such other place as shall be agreed upon by the Underwriter and the Company. The hour and date of delivery and payment for the Firm Securities are called the "Closing Date." Payment for the Firm Securities shall be made on the Closing Date at the Underwriter's election by wire transfer or by certified or bank cashier's check(s) in New York Clearing House funds, payable to the order of the Company upon delivery to the Underwriter of a certificate of the Company's transfer agent stating that the Firm Securities have been registered in book entry form in such name or names and such denominations as are requested by the Underwriter. The Company shall not be obligated to sell or deliver the Firm Securities except upon tender of payment by the Underwriter for all the Firm Securities. 1.2 Over-Allotment Option. 1.2.1 Option Securities. For the purposes of covering any over-allotments in connection with the distribution and sale of the Firm Securities, the Company hereby grants to the Underwriter an option to purchase up to an additional 300,000 Common Shares from the Company ("Over-allotment Option"). Such additional 300,000 Common Shares are hereinafter referred to as the "Option Securities." The Firm Securities and the Option Securities are hereinafter referred to collectively as the "Public Securities." The purchase price to be paid for the Option Securities will be the same price per Option Security as the price per Firm Security set forth in Section 1.1.1 hereof. 1.2.2 Exercise of Option. The Over-allotment Option granted pursuant to Section 1.2.1 hereof may be exercised by the Underwriter as to all or any part of the Option Securities at any time, from time to time, within forty-five (45) days after the effective date ("Effective Date") of the Registration Statement (as hereinafter defined). The Underwriter will not be under any obligation to purchase any Option Securities prior to the exercise of the Over-allotment Option. The Over-allotment Option granted hereby may be exercised by the giving of oral notice to the Company from the Underwriter, which must be confirmed by a letter or telecopy setting forth the number of Option Securities to be purchased, the date and time for delivery of and payment for the Option Securities and stating that the Option Securities referred to therein are to be used for the purpose of covering over-allotments in connection with the distribution and sale of the Firm Securities. If such notice is given at least two full business days prior to the Closing Date, the date set forth therein for such delivery and payment will be the Closing Date. If such notice is given thereafter, the date set forth therein for such delivery and payment will not be earlier than three full business days after the date of the notice, unless the Underwriter and the Company agree upon an earlier date. If such delivery and payment for the Option Securities does not occur on the Closing Date, the date and time of the closing for such Option Securities will be as set forth in the notice (hereinafter the "Option Closing Date"). Upon exercise of the Over-allotment Option, the Company will become obligated to convey to the Underwriter, and, subject to the terms and conditions set forth herein, the Underwriter will become obligated to purchase, the number of Option Securities specified in such notice. 1.2.3 Payment and Delivery. Payment for the Option Securities will be at the Underwriter's election by wire transfer or by certified or bank cashier's check(s) in New York Clearing House funds, payable to the order of the Company at the offices of the Underwriter or at such other place as shall be agreed upon by the Underwriter and the Company upon delivery to the Underwriter of a certificate of the Company's transfer agent stating that the Option Securities have been registered in book entry form in such name or names and in such denominations as are requested by the Underwriter. 1.3 Underwriter's Warrant. 1.3.1 Warrant. The Company hereby agrees to issue and sell to the Underwriter (and/or its designees) on the Closing Date, for an aggregate purchase price of $100, a warrant ("Underwriter's Warrant") for the purchase of an aggregate of 200,000 Common Shares ("Underwriter's Shares") at an initial exercise price equal to 110% of the initial offering price of a Common Share (i.e., $____ per Common Share). Each of the Underwriter's Shares is identical to the Common Shares constituting the Firm Securities. The Underwriter's Warrant shall be exercisable for a period of four years commencing one year from the Effective Date. The Underwriter's Warrant and the Underwriter's Shares are 2 hereinafter referred to collectively as the "Underwriter's Securities." The Public Securities and the Underwriter's Securities are hereinafter referred to collectively as the "Securities." 1.3.2 Delivery and Payment. Delivery and payment for the Underwriter's Warrant shall be made on the Closing Date. The Company shall deliver to the Underwriter, upon payment therefor, certificates evidencing the Underwriter's Warrant in the name or names and in such authorized denominations as the Underwriter may request. 2. Representations and Warranties of the Company. The Company represents and warrants to the Underwriter as follows: 2.1 Filing of Registration Statement. The Company has filed with the Securities and Exchange Commission ("Commission") a registration statement and an amendment or amendments thereto, on Form SB-2 (No. 333-101902), including any related preliminary prospectus ("Preliminary Prospectus"), for the registration of the Securities under the Securities Act of 1933, as amended ("Act"), which registration statement and amendment or amendments have been prepared by the Company in conformity with the requirements of the Act, and the rules and regulations ("Regulations") of the Commission under the Act. Except as the context may otherwise require, such registration statement, as amended, on file with the Commission at the time the registration statement becomes effective (including the prospectus, financial statements, schedules, exhibits and all other documents filed as a part thereof or incorporated therein and all information deemed to be a part thereof as of such time pursuant to paragraph (b) of Rule 430A of the Regulations), is hereinafter called the "Registration Statement," and the form of the final prospectus dated the Effective Date or such later date as may be determined by the Underwriter (or, if applicable, the form of final prospectus filed with the Commission pursuant to Rule 424 of the Regulations), is hereinafter called the "Prospectus." The Registration Statement has been declared effective by the Commission on the date hereof. 2.2 No Stop Orders, Etc. No stop order suspending the effectiveness of the Registration Statement or preventing or suspending the use of any Preliminary Prospectus has been issued under the Act and no proceedings for that purpose have been instituted or are pending or, to the best knowledge of the Company, are contemplated. No state regulatory authority has issued any order preventing or suspending the offering or sale of the Securities in such jurisdiction, or, to the best knowledge of the Company, threatened to institute any proceedings with respect to such order. 2.3 Disclosures in Registration Statement. 2.3.1 Securities Act Representation. At the time the Registration Statement became effective and at all times subsequent thereto up to and including the Closing Date and the Option Closing Date, if any, the Registration Statement and the Prospectus and any amendment or supplement thereto contained and will contain all material statements that are required to be stated therein in accordance with the Act and the Regulations, and conformed and will conform in all material respects to the requirements of the Act and the Regulations; neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, during such time period and on such dates, contained or will contain any untrue statement of a material fact or omitted or will omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The representation and warranty made in this Section 2.3.1 does 3 not apply to statements made or statements omitted in reliance upon and in conformity with written information furnished to the Company with respect to the Underwriter expressly for use in the Registration Statement or Prospectus or any amendment thereof or supplement thereto. 2.3.2 Disclosure of Contracts. The description in the Registration Statement and the Prospectus of contracts and other documents is accurate in all material respects and presents fairly the information required to be disclosed and there are no contracts or other documents required to be described in the Registration Statement or the Prospectus or to be filed with the Commission as exhibits to the Registration Statement that have not been so described or filed. Each contract or other instrument (however characterized or described) to which the Company is a party or by which its property or business is or may be bound or affected and that is (i) referred to in the Prospectus, or (ii) material to the Company's business, has been duly and validly executed, is in full force and effect in all material respects and is enforceable against the Company and, to the Company's knowledge, the other parties thereto in accordance with its terms, and none of such contracts or instruments has been assigned by the Company, and neither the Company nor, to the Company's knowledge, any other party is in default thereunder and, to the Company's knowledge, no event has occurred that, with the lapse of time or the giving of notice, or both, would constitute a default thereunder. None of the provisions of such contracts or instruments violates or will result in a violation of any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court having jurisdiction over the Company or any of its assets or businesses, including, without limitation, those relating to environmental laws and regulations. 2.3.3 Prior Securities Transactions. No securities of the Company have been sold by the Company or by or on behalf of, or for the benefit of, any person or persons controlling, controlled by, or under common control with the Company within the three years prior to the date hereof, except as disclosed in the Registration Statement. 2.4 Changes After Dates in Registration Statement. 2.4.1 No Material Adverse Change. Since the respective dates as of which information is given in the Registration Statement and the Prospectus, except as otherwise specifically stated therein, (i) there has been no material adverse change in the condition, financial or otherwise, or in the results of operations, business or business prospects of the Company, including, but not limited to, a material loss or interference with its business from fire, storm, explosion, flood or other casualty, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, whether or not arising in the ordinary course of business, (ii) there have been no transactions entered into by the Company, other than those in the ordinary course of business, that are material with respect to the condition, financial or otherwise, or to the results of operations, business or business prospects of the Company. 2.4.2 Recent Securities Transactions, Etc. Since the respective dates as of which information is given in the Registration Statement and the Prospectus, and except as may otherwise be indicated or contemplated herein or therein, the Company has not (i) issued any securities or incurred any liability or obligation, direct or contingent, for borrowed money; or (ii) declared or paid any dividend or made any other distribution on or in respect to its capital stock. 4 2.5 Independent Accountants. Goldstein Golub Kessler LLP ("GGK"), whose report is filed with the Commission as part of the Registration Statement, are independent accountants as required by the Act and the Regulations. GGK has not, during the periods covered by the financial statements included in the Prospectus, provided to the Company any non-audit services, as such term is used in Section 10A(g) of the Securities Exchange Act of 1934, as amended ("Exchange Act"). 2.6 Financial Statements. The financial statements, including the notes thereto and supporting schedules included in the Registration Statement and Prospectus, fairly present the financial position and the results of operations of the Company at the dates and for the periods to which they apply; and such financial statements have been prepared in conformity with generally accepted accounting principles, consistently applied throughout the periods involved; and the supporting schedules included in the Registration Statement present fairly the information required to be stated therein. The pro forma financial information set forth in the Registration Statement and Prospectus eflects all significant assumptions and adjustments relating to the business and operations of the Company. The historical financial data set forth in the Prospectus under the captions "Summary--Summary Financial Information" and "Capitalization" fairly present in all material respects the information set forth therein and have been compiled on a basis consistent with that of the audited financial statements contained in the Registration Statement. The Registration Statement discloses all material off-balance sheet transactions, arrangements, obligations (including contingent obligations), and other relationships of the Company with unconsolidated entities or other persons that may have a material current or future effect on the Company's financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenues or expenses. 2.7 Authorized Capital; Options; Etc. The Company had at the date or dates indicated in the Prospectus duly authorized, issued and outstanding capitalization as set forth in the Registration Statement and the Prospectus. Based on the assumptions and adjustments stated in the Registration Statement and the Prospectus, the Company will have on the Closing Date the adjusted stock capitalization set forth therein. Except as set forth in the Registration Statement and the Prospectus, on the Effective Date and on the Closing Date there will be no outstanding or authorized subscriptions, options, warrants or other rights to purchase or otherwise acquire, or preemptive rights with respect to the issuance or sale of, any Common Shares of the Company, including any obligations to issue any shares pursuant to anti-dilution provisions, or any security convertible into Common Shares of the Company, or any contracts or commitments to issue or sell Common Shares or any such options, warrants, rights or convertible securities. 2.8 Valid Issuance of Securities; Etc. 2.8.1 Outstanding Securities. All issued and outstanding securities of the Company have been duly authorized and validly issued and are fully paid and non-assessable; the holders thereof have no rights of rescission with respect thereto, and are not subject to personal liability by reason of being such holders; and none of such securities were issued in violation of the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company. The outstanding options and warrants to purchase Common Shares constitute valid and binding obligations of the Company, enforceable in accordance with their terms. The authorized Common Shares and outstanding options and warrants to purchase Common Shares conform to all statements relating thereto contained in the Registration 5 Statement and the Prospectus. The offers and sales by the Company of the outstanding Common Shares, options and warrants to purchase Common Shares, and securities convertible into Common Shares, were at all relevant times registered under the Act and registered or qualified under the applicable state securities or Blue Sky laws or exempt from such registration or qualification requirements. 2.8.2 Securities Sold Pursuant to this Agreement. The Securities have been duly authorized and, when issued and paid for, will be validly issued, fully paid and non-assessable; the holders thereof are not and will not be subject to personal liability by reason of being such holders; the Securities are not and will not be subject to the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company; and all corporate action required to be taken for the authorization, issuance and sale of the Securities has been duly and validly taken. When issued, the Underwriter's Warrant will constitute a valid and binding obligation of the Company to issue and sell, upon exercise thereof and payment therefor, the number and type of securities of the Company called for thereby and the Underwriter's Warrant will be enforceable against the Company in accordance with its terms, except (i) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally, (ii) as enforceability of any indemnification or contribution provision may be limited under the federal and state securities laws, and (iii) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. 2.9 Registration and Anti-Dilution Rights of Third Parties. Except as described in the Prospectus, no holders of any securities of the Company or of any options or warrants of the Company or other rights exercisable for or convertible or exchangeable into securities of the Company (i) have any right to require the Company to register any such securities of the Company under the Act, except as described in the Registration Rights Chart previously provided to you, or (ii) have rights to have the exercise or conversion prices of their securities lowered and/or the number of securities that they may purchase increased as a result of the issuance by the Company of securities for a price less than such exercise or conversion price. 2.10 Validity and Binding Effect of Agreements. This Agreement has been duly and validly authorized by the Company and constitutes, and the Underwriter's Warrant and the Merger and Acquisition Agreement (as defined below) have been duly and validly authorized by the Company and, when executed and delivered, will constitute, the valid and binding agreements of the Company, enforceable against the Company in accordance with their respective terms, except (i) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally, (ii) as enforceability of any indemnification or contribution provision may be limited under the federal and state securities laws, and (iii) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. 2.11 No Conflicts, Etc. The execution, delivery, and performance by the Company of this Agreement, the Underwriter's Warrant and the Merger and Acquisition Agreement, the consummation by the Company of the transactions herein and therein contemplated and the compliance by the Company with the terms hereof and thereof do not and will not, with or without the giving of notice or the lapse of time or both, (i) result in a breach of, or conflict 6 with any of the terms and provisions of, or constitute a default under, or result in the creation, modification, termination or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to the terms of, any indenture, mortgage, deed of trust, note, loan or credit agreement or any other agreement or instrument evidencing an obligation for borrowed money, or any other agreement or instrument to which the Company is a party or by which the Company may be bound or to which any of the property or assets of the Company is subject; (ii) result in any violation of the provisions of the certificate of incorporation or the by-laws of the Company; (iii) violate any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court, domestic or foreign, having jurisdiction over the Company or any of its properties or businesses; or (iv) have a material adverse effect on any permit, license, certificate, registration, approval, consent, license or franchise of or concerning the Company. 2.12 No Defaults; Violations. Except as described in the Prospectus, no material default exists in the due performance and observance of any term, covenant or condition of any material license, contract, indenture, mortgage, deed of trust, note, loan or credit agreement, or any other agreement or instrument evidencing an obligation for borrowed money, or any other material agreement or instrument to which the Company is a party or by which the Company may be bound or to which any of the properties or assets of the Company is subject. The Company is not in violation of any term or provision of its certificate of incorporation or by-laws or in violation of any material franchise, license, permit, applicable law, rule, regulation, judgment or decree of any governmental agency or court, domestic or foreign, having jurisdiction over the Company or any of its properties or businesses. 2.13 Corporate Power; Licenses; Consents. 2.13.1 Conduct of Business. The Company has all requisite corporate power and authority, and has all necessary and material authorizations, approvals, orders, licenses, certificates and permits of and from all governmental regulatory officials and bodies to own or lease its properties and conduct its business as described in the Prospectus, and the Company is and has been doing business in compliance with all such material authorizations, approvals, orders, licenses, certificates and permits and all federal, state and local laws, rules and regulations. The disclosures in the Registration Statement concerning the effects of federal, state and local regulation on the Company's business as currently contemplated are correct in all material respects and do not omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 2.13.2 Transactions Contemplated Herein. The Company has all corporate power and authority to enter into this Agreement and to carry out the provisions and conditions hereof, and all consents, authorizations, approvals and orders required in connection therewith have been obtained. No consent, approval, authorization or order of, and no filing with, any court, government agency or other body is required for the valid authorization, issuance, sale and delivery of the Securities and the consummation of the transactions and agreements contemplated by this Agreement, the Underwriter's Warrant, the Merger and Acquisition Agreement and the Prospectus, except with respect to applicable federal and state securities laws. 7 2.14 Title to Property; Insurance. The Company has valid and defensible title to, or valid and enforceable leasehold estates in, all items of real and personal property (tangible and intangible) owned or leased by it, free and clear of all liens, encumbrances, claims, security interests, defects and restrictions of any material nature whatsoever, other than those referred to in the Prospectus (including the financial statements and notes thereto), purchase money security interests, and liens for taxes not yet due and payable. The Company has adequately insured its properties against loss or damage by fire, theft, damage, destruction, acts of vandalism or terrorism or other casualty and maintains, in adequate amounts, such other insurance as is usually maintained by companies engaged in the same or similar business. 2.15 Litigation; Governmental Proceedings. Except as set forth in the Prospectus, there is no action, suit, proceeding, inquiry, arbitration, investigation, litigation or governmental proceeding pending or, to the Company's knowledge, threatened against, or involving the properties or business of, the Company that might materially and adversely affect the financial position, prospects, value or the operation of the properties or the business of the Company, or that questions the validity of the capital stock of the Company or this Agreement or of any action taken or to be taken by the Company pursuant to, or in connection with, this Agreement. There are no outstanding orders, judgments or decrees of any court, governmental agency or other tribunal, domestic or foreign, naming the Company and enjoining the Company from taking, or requiring the Company to take, any action, or to which the Company, its properties or business is bound or subject. 2.16 Good Standing. The Company has been duly organized and is validly existing as a corporation and is in good standing under the laws of the state of its incorporation. The Company is duly qualified and licensed and in good standing as a foreign corporation in each jurisdiction in which ownership or leasing of any properties or the character of its operations requires such qualification or licensing, except where the failure to qualify would not have a material adverse effect on the financial position, prospects or value or the operation of the properties or the business of the Company. 2.17 Taxes. The Company has filed all returns (as hereinafter defined) required to be filed with taxing authorities prior to the date hereof or has duly obtained extensions of time for the filing thereof. The Company has paid all taxes (as hereinafter defined) shown as due on such returns that were filed and has paid all taxes imposed on or assessed against the Company. The provisions for taxes payable, if any, shown on the financial statements filed with or as part of the Registration Statement are sufficient for all accrued and unpaid taxes, whether or not disputed, and for all periods to and including the dates of such consolidated financial statements. No issues have been raised (and are currently pending) by any taxing authority in connection with any of the returns or taxes asserted as due from the Company, and no waivers of statutes of limitation with respect to the returns or collection of taxes have been given by or requested from the Company. The term "taxes" mean all federal, state, local, foreign, and other net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease, service, service use, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, windfall profits, customs, duties or other taxes, fees, assessments, or charges of any kind whatever, together with any interest and any penalties, additions to tax, or additional amounts with respect thereto. The term "returns" means all returns, declarations, reports, statements, and other documents required to be filed in respect to taxes. 8 2.18 Transactions Affecting Disclosure to NASD. 2.18.1 Finder's Fees. There are no claims, payments, issuances, arrangements or understandings for services in the nature of a finder's, consulting or origination fee with respect to the introduction of the Company to the Underwriter or the sale of the Securities hereunder, and except for the arrangements, agreements, understandings, payments and issuances between the Company and the Underwriter that are described in the "Underwriting" section of the Prospectus, there are no arrangements, agreements, understandings, payments or issuances pursuant to which the Company will make a payment (i) to any member of the National Association of Securities Dealers, Inc. ("NASD") or (ii) to any person or entity that has any direct or indirect affiliation or association with any NASD member. 2.18.2 Payments Within 12 Months. Except as set forth on Schedule 2.18.2, and other than payments to the Underwriter, the Company has not made or became obligated to make any direct or indirect payments (in cash, securities or otherwise) to (i) any person, as a finder's fee, investing fee or otherwise, in consideration of such person raising capital for the Company or introducing to the Company persons who provided capital to the Company, (ii) any NASD member, or (iii) any person or entity that has any direct or indirect affiliation or association with any NASD member within the 12-month period prior to the date on which the Registration Statement was filed with the Commission ("Filing Date") or thereafter. 2.18.3 Use of Proceeds. None of the net proceeds of the offering will be paid by the Company to any participating NASD member or any affiliate or associate of any participating NASD member, except as specifically authorized herein. 2.18.4 Insiders' NASD Affiliation. Except as set forth on Schedule 2.18.4, no officer or director of the Company or owner of at least 5% of the Company's outstanding Common Shares has any direct or indirect affiliation or association with any NASD member. The Company will advise the Underwriter and the NASD if it learns that any officer, director or owner of at least 5% of the Company's outstanding Common Shares is or becomes an affiliate or associated person of an NASD member participating in the offering. 2.19 Foreign Corrupt Practices Act. Neither the Company nor any of its officers, directors, employees, agents or any other person acting on their behalf has, directly or indirectly, given or agreed to give any money, gift or similar benefit (other than legal price concessions to customers in the ordinary course of business) to any customer, supplier, employee or agent of a customer or supplier, or official or employee of any governmental agency or instrumentality of any government (domestic or foreign) or any political party or candidate for office (domestic or foreign) or any political party or candidate for office (domestic or foreign) or other person who was, is, or may be in a position to help or hinder the business of the Company (or assist it in connection with any actual or proposed transaction) that (i) might subject the Company to any damage or penalty in any civil, criminal or governmental itigation or proceeding, (ii) if not given in the past, might have had a material adverse effect on the assets, business or operations of the Company as reflected in any of the financial statements contained in the Prospectus or (iii) if not continued in the future, might adversely affect the assets, business, operations or prospects of the Company. The Company's internal accounting controls and procedures are sufficient to cause the Company to comply with the Foreign Corrupt Practices Act of 1977, as amended. 9 2.20 American Stock Exchange Eligibility. As of the Effective Date, the Public Securities have been approved for listing on The American Stock Exchange ("AMEX"). 2.21 Intangibles. The Company owns or possesses the requisite licenses or rights to use all trademarks, service marks, service names, trade names, patents and patent applications, copyrights and other rights (collectively, "Intangibles") described as being licensed to or owned by it in the Registration Statement or used by the Company in its business or relating to products or services sold or currently or currently proposed to be sold by the Company. The Company's Intangibles are listed on Schedule 2.21. The Company's Intangibles that have been registered in the United States Patent and Trademark Office have been fully maintained and are in full force and effect. There is no claim or action by any person pertaining to, or proceeding pending or, to the Company's knowledge, threatened relating to, and the Company has not received any notice of conflict with the asserted rights of others that challenges the exclusive right of the Company with respect to, any Intangibles used in the conduct of the Company's business. To the Company's knowledge, after due inquiry, the Intangibles and the Company's current products, services and processes do not infringe on any Intangibles held by any third party, and no others have infringed upon the Intangibles of the Company. The Company has in place all confidentiality agreements with its employees, consultants and third parties as are necessary to protect its Intangibles. 2.22 Relations With Employees. 2.22.1 Employee Matters. The Company has generally enjoyed a satisfactory employer-employee relationship with its employees and is in compliance in all material respects with all federal, state and local laws and regulations respecting the employment of its employees and employment practices, terms and conditions of employment and wages and hours relating thereto. There are no pending investigations involving the Company by the U.S. Department of Labor, or any other governmental agency responsible for the enforcement of such federal, state and local laws and regulations. There is no unfair labor practice charge or complaint against the Company pending before the National Labor Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage pending or, to the Company's knowledge, threatened against or involving the Company or any predecessor entity, and none has ever occurred. No question concerning representation exists respecting the employees of the Company and no collective bargaining agreement or modification thereof is currently being negotiated by the Company. No grievance or arbitration proceeding is pending under any expired or existing collective bargaining agreements of the Company, if any. 2.22.2 Employee Benefit Plans. Other than as set forth in the Registration Statement, the Company neither maintains, sponsors nor contributes to, nor is it required to contribute to, any program or arrangement that is an "employee pension benefit plan," an "employee welfare benefit plan," or a, "multi-employer plan" as such terms are defined in Sections 3(2), 3(1) and 3(37), respectively, of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") ("ERISA Plans"). The Company does not maintain or contribute to, and has at no time maintained or contributed to, a defined benefit plan, as defined in Section 3(35) of ERISA. No ERISA Plan (or any trust created thereunder) has engaged in a "prohibited transaction" within the meaning of Section 406 of ERISA or Section 4975 of the Internal Revenue Code of 1986, as amended ("Code"), that could subject the Company to any material tax penalty for prohibited transactions and that has not adequately been corrected. Each ERISA 10 Plan is in compliance with all material reporting, disclosure and other requirements of the Code and ERISA as they relate to any such ERISA Plan. Determination letters have been received from the Internal Revenue Service with respect to each ERISA Plan that is intended to comply with Code Section 401(a), stating that such ERISA Plan and the attendant trust are qualified thereunder. The Company has never completely or partially withdrawn from a "multi-employer plan." 2.23 Officers' Certificate. Any certificate signed by any duly authorized officer of the Company and delivered directly to you or to your counsel shall be deemed a representation and warranty by the Company to the Underwriter as to the matters covered thereby and as of the date given. 2.24 Lock-Up Agreements. The Company has caused to be duly executed legally binding and enforceable agreements pursuant to which all of the officers and directors of the Company (including their family members and affiliates) (collectively, the "Insiders"), agree not to sell any Common Shares or warrants or options to purchase, or other securities convertible into Common Shares owned by them (either pursuant to Rule 144 of the Regulations or otherwise) for a period of 24 months following the Effective Date ("Lock-up Period") except (i) with the prior written consent of the Underwriter, (ii) that the Lock-up Period for Arthur August and Maureen August shall be 13 months, (iii) that Arthur August may sell up to 10,000 Common Shares per month in conformity with a written plan for trading securities designed to meet the requirements of Rule 10b5-1(c) that is reasonably satisfactory to the Underwriter, and (iv) that no such agreements shall be required from Arthur August's son and stepson. 2.25 Subsidiaries. Except as set forth on Schedule 2.25, the Company does not own an interest in any corporation, partnership, limited liability company, joint venture, trust or other business entity. The Company has no subsidiaries other than those subsidiaries set forth on Schedule 2.25, each of which is a corporation duly organized and validly existing under the laws of the jurisdiction of its incorporation (each a "Subsidiary" and collectively the "Subsidiaries"). The Company owns all of the capital stock of the Subsidiaries free and clear of all liens, security interests and other encumbrances of any nature whatsoever, except as set forth in the Prospectus. The representations and warranties made by the Company in this Agreement shall also apply and be true with respect to each Subsidiary, taken as a whole with the Company and all other Subsidiaries, as if each representation and warranty contained herein made specific reference to the Subsidiaries each time the term "Company" was used. The Company has advised you that Kolar, Inc. is in the process of liquidating its assets, as described in the Prospectus. 2.26 Environmental Matters. The Company has complied in all material respects with all applicable environmental laws. 2.27 Government Clearances. Neither the Company nor any of its current executive officers or engineers has ever been denied a security clearance. 2.28 Product Liability Insurance. To its knowledge, the Company maintains product liability insurance of the types and in the amounts typically maintained by similar companies operating in the industry in which the Company operates. 2.29 Company Not an Investment Company. The Company has been advised of the rules and requirements under the Investment Company Act of 1940, as amended (the "Investment Company Act"). The Company is not, and after 11 receipt of payment for the Securities will not be, an "investment company" within the meaning of the Investment Company Act, and will conduct its business in a manner so that it will not become subject to the Investment Company Act. 2.30 Related Party Transactions. There are no business relationships or related party transactions involving the Company or any other person required to be described in the Prospectus that have not been described as required. 2.31 Audit Committee. The audit committee of the Company's board of directors is comprised of at least three directors, a majority of whom are "independent" within the meaning of Section 10A(m)(3) of the Exchange Act and Section 121 of the AMEX Company Guide (Listing Standards, Policies and Regulations), and one of whom possesses the required past employment experience as specified in Section 121B(b)(i) of the AMEX Company Guide (Listing Standards, Policies and Requirements). From and after the consummation of this offering, all of the members of the audit committee shall be independent. 3. Covenants of the Company. The Company covenants and agrees as follows: 3.1 Amendments to Registration Statement. The Company will deliver to the Underwriter, prior to filing, any amendment or supplement to the Registration Statement or Prospectus proposed to be filed after the Effective Date and not file any such amendment or supplement to which the Underwriter shall reasonably object. 3.2 Federal Securities Laws. 3.2.1 Compliance. During the time when a Prospectus is required to be delivered under the Act, the Company will use all reasonable efforts to comply with all requirements imposed upon it by the Act, the Regulations and the Exchange Act and by the regulations under the Exchange Act, as from time to time in force, so far as necessary to permit the continuance of sales of or dealings in the Public Securities in accordance with the provisions hereof, and the Prospectus. If at any time when a Prospectus relating to the Public Securities is required to be delivered under the Act, any event shall have occurred as a result of which, in the opinion of counsel for the Company or counsel for the Underwriter, the Prospectus, as then amended or supplemented, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend the Prospectus to comply with the Act, the Company will notify the Underwriter and Counsel for the Underwriter promptly and prepare and file with the Commission, subject to Section 3.1 hereof, an appropriate amendment or supplement in accordance with Section 10 of the Act. 3.2.2 Filing of Final Prospectus. The Company will file the Prospectus (in form and substance reasonably satisfactory to the Underwriter) with the Commission pursuant to the requirements of Rule 424 of the Regulations. 3.2.3 Exchange Act Registration. For a period of five years from the Effective Date, the Company will use its best efforts to maintain the registration of the Common Stock under the provisions of Section 12 of the Exchange Act; provided, however, that the Company shall not be in breach of this 12 covenant if the Company consummates a "Rule 13e-3 Transaction" (as such term is defined in Rule 13e-3 promulgated under the Exchange Act). 3.3 Blue Sky Filings. The Company will endeavor in good faith, in cooperation with the Underwriter, at or prior to the time the Registration Statement becomes effective, to qualify the Public Securities for offering and sale under the securities laws of such jurisdictions as the Underwriter may reasonably designate, provided that no such qualification shall be required in any jurisdiction where, as a result thereof, the Company would be subject to service of general process or to taxation as a foreign corporation doing business in such jurisdiction. In each jurisdiction where such qualification shall be effected, the Company will, unless the Underwriter agrees that such action is not at the time necessary or advisable, use all reasonable efforts to file and make such statements or reports at such times as are or may be required by the laws of such jurisdiction. 3.4 Delivery to the Underwriter of Prospectuses. The Company will deliver to the Underwriter, without charge, from time to time during the period when the Prospectus is required to be delivered under the Act or the Exchange Act, such number of copies of each Preliminary Prospectus and the Prospectus as the Underwriter may reasonably request and, as soon as the Registration Statement or any amendment or supplement thereto becomes effective, deliver to the Underwriter two original executed Registration Statements, including exhibits, and all post-effective amendments thereto and copies of all exhibits filed therewith or incorporated therein by reference and all original executed consents of certified experts. 3.5 Events Requiring Notice to the Underwriter. The Company will notify the Underwriter immediately and confirm the notice in writing (i) of the effectiveness of the Registration Statement and any amendment thereto, (ii) of the issuance by the Commission of any stop order or of the initiation, or the threatening, of any proceeding for that purpose, (iii) if it becomes aware of the issuance by any state securities commission of any proceedings for the suspension of the qualification of the Public Securities for offering or sale in any jurisdiction or of the initiation, or the threatening, of any proceeding for that purpose, (iv) of the mailing and delivery to the Commission for filing of any amendment or supplement to the Registration Statement or Prospectus, (v) of the receipt of any comments or request for any additional information from the Commission, and (vi) of the happening of any event during the period described in Section 3.4 hereof that, in the judgment of the Company, makes any statement of a material fact made in the Registration Statement or the Prospectus untrue or that requires the making of any changes in the Registration Statement or the Prospectus in order to make the statements therein, in light of the circumstances under which they were made, not misleading. If the Commission or any state securities commission shall enter a stop order or suspend such qualification at any time, the Company will make every reasonable effort to obtain promptly the lifting of such order. 3.5.1 AMEX Maintenance. For a period of five years from the date hereof, the Company will use its best efforts to maintain the listing by the AMEX of the Common Shares; provided, however, that the Company shall not be in breach of this covenant if the Company consummates a "Rule 13e-3 Transaction" (as such term is defined in Rule 13e-3 promulgated under the Securities Exchange). 13 3.6 Reports to the Underwriter. 3.6.1 Periodic Reports, Etc. For a period of five years from the Effective Date, the Company will promptly furnish to the Underwriter copies of such financial statements and other periodic and special reports as the Company from time to time files with any governmental authority or furnishes generally to holders of any class of its securities (at substantially the same time as such information is filed with the governmental authority or furnished to securityholders), and promptly furnish to the Underwriter (i) a copy of each periodic report the Company shall be required to file with the Commission, (ii) a copy of every press release and every news item and article with respect to the Company or its affairs that was released by the Company, (iii) a copy of each Form 8-K or Schedules 13D, 13G, 14D-1 or 13E-4 received or prepared by the Company, and (iv) such additional documents and information regarding the Company and the affairs of any subsidiaries of the Company as the Underwriter may from time to time reasonably request. 3.6.2 Transfer Sheets and Weekly Position Listings. For a period of five years from the Closing Date, the Company will furnish to the Underwriter at the Company's sole expense such transfer sheets and position listings of the Company's securities as the Underwriter may request, including the daily, weekly and monthly consolidated transfer sheets of the transfer agent of the Company and the weekly position listings of the Depository Trust Company. 3.7 Agreements between the Underwriter and the Company. 3.7.1 Merger and Acquisition Agreement. On the Closing Date, the Company will enter into a Merger and Acquisition Agreement with EBC in the form filed with the Commission as an exhibit to the Registration Statement providing for a finder's fee to be paid to EBC if the Company participates in any merger, consolidation, or other transaction in which EBC introduced the Company to the other party for a period of five years from the Closing Date ("Merger and Acquisition Agreement"). 3.7.2 Underwriter's Warrant. On the Closing Date, the Company will execute and deliver the Underwriter's Warrant to the Underwriter or its designees in the form filed as an exhibit to the Registration Statement. 3.8 Payment of Expenses. 3.8.1 General Expenses. The Company hereby agrees to pay on the Closing Date and, to the extent not paid on the Closing Date, on the Option Closing Date, all expenses incident to the performance of the obligations of the Company under this Agreement, including but not limited to (i) the preparation, printing, filing, delivery and mailing (including the payment of postage with respect to such mailing) of the Registration Statement and any post-effective amendments thereto, the Prospectus and the Preliminary Prospectuses and the printing and mailing of this Agreement and related documents, including the cost of all copies thereof and any amendments thereof or supplements thereto supplied to the Underwriter in quantities as may be required by the Underwriter, (ii) the printing, engraving, issuance and delivery of the Common Shares and the Underwriter's Warrant, including any transfer or other taxes payable thereon, (iii) the qualification of the Public Securities under state or foreign securities or Blue Sky laws, including the filing fees under such Blue Sky laws, the costs of printing and mailing the "Preliminary Blue Sky Memorandum" and all amendments and supplements thereto, the fees and disbursements of the Company's counsel, and fees and disbursements of local counsel, if any, retained for such purpose, (iv) filing fees, costs and expenses (including fees (equal to $5,000) 14 and disbursements for the Underwriter's counsel) incurred in registering the offering with the NASD, (v) costs of placing "tombstone" advertisements in The Wall Street Journal, The New York Times and a third publication to be selected by the Underwriter, (vi) fees and disbursements of the transfer agent, (vii) the Company's expenses associated with "due diligence" meetings arranged by the Underwriter, (viii) the preparation, binding and delivery of transaction "bibles," in quantity, form and style satisfactory to the Underwriter and transaction lucite cubes or similar commemorative items in a style and quantity as reasonably requested by the Underwriter, (ix) any listing of the Public Securities on the AMEX and (x) all other costs and expenses incident to the performance of its obligations hereunder that are not otherwise specifically provided for in this Section 3.8.1. Notwithstanding the foregoing, the aggregate amount of costs relating to "tombstone" advertisements and transaction lucite cubes or similar commemorative items that the Company shall be obligated to pay under this Section 3.8.1 shall not exceed $25,000. The Underwriter may deduct from the net proceeds of the offering payable to the Company on the Closing Date, or the Option Closing Date, if any, the expenses set forth herein to be paid by the Company to the Underwriter and/or to third parties. 3.8.2 Non-Accountable Expenses. The Company further agrees that, in addition to the expenses payable pursuant to Section 3.8.1, it will pay to the Underwriter a non-accountable expense allowance equal to three percent (3%) of the gross proceeds received by the Company from the sale of the Firm Securities and the Option Securities, of which $50,000 has been paid to date, and the Company will pay the balance on the Closing Date and any additional monies owed attributable to the Option Securities or otherwise on the Option Closing Date by certified or bank cashier's check or, at the election of the Underwriter, by deduction from the proceeds of the offering contemplated herein. If the offering contemplated by this Agreement is not consummated for any reason whatsoever then the following provisions shall apply: The Company's liability for payment to the Underwriter of the non-accountable expense allowance shall be equal to the sum of the Underwriter's actual out-of-pocket expenses (including, but not limited to, counsel fees, "road-show" and due diligence expenses). The Underwriter shall retain such part of the non-accountable expense allowance previously paid as shall equal such actual out-of-pocket expenses. If the amount previously paid is insufficient to cover such actual out-of-pocket expenses, the Company shall remain liable for and promptly pay any other actual out-of-pocket expenses. If the amount previously paid exceeds the amount of actual out-of-pocket expenses, the Underwriter shall promptly remit to the Company any such excess. 3.9 Application of Net Proceeds. The Company will apply the net proceeds from the offering received by it in a manner consistent with the application described under the caption "Use of Proceeds" in the Prospectus. The Company hereby agrees that, except as so described, without the express prior written consent of the Underwriter the Company will not apply any net proceeds from the offering to pay (i) any debt for borrowed funds; or (ii) any obligations (including indebtedness, both principal and any interest thereon, for borrowed funds and unpaid salaries, fees or other compensation) owed to any Insider (excluding salaries or fees payable on a current basis to officers and directors in the ordinary course of the Company's business). 3.10 Delivery of Earnings Statements to Security Holders. The Company will make generally available to its security holders as soon as practicable, but not later than the first day of the fifteenth full calendar month following the Effective Date, an earnings statement (which need not be certified by independent certified public accountants unless required by the Act or the Regulations, but which shall satisfy the provisions of Rule 158(a) under Section 15 11(a) of the Act) covering a period of at least twelve (12) consecutive months beginning after the Effective Date. 3.11 Key Person Life Insurance. The Company will maintain key person life insurance in an amount not less than $1,000,000 on the life of Edward J. Fred, and pay the annual premiums therefor and name the Company as the sole beneficiary thereof for at least three years following the Effective Date. 3.12 Stabilization. Neither the Company, nor, to its knowledge, any of its employees, directors or shareholders has taken or will take, directly or indirectly, any action designed to or that has constituted or that might reasonably be expected to cause or result in, under the Exchange Act, or otherwise, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Public Securities. 3.13 Internal Controls. The Company maintains and will continue to maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management's general or specific authorization, (ii) transactions are recorded as necessary in order to permit preparation of financial statements in accordance with generally accepted accounting principles and to maintain accountability for assets, (iii) access to assets is permitted only in accordance with management's general or specific authorization, and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. 3.14 Sale of Securities. Subject to the exceptions described in Section 2.24 hereof, the Company agrees not to permit or cause a private or public sale or private or public offering of any of its securities (in any manner, including pursuant to Rule 144 under the Act) owned nominally or beneficially by the Insiders for the time periods set forth in Section 2.24 following the Effective Date. 3.15 Disclosure Controls and Procedures. The Company has established and observes, and will continue to observe, disclosure controls and procedures meeting the requirements of Rule 13a-14(c) under the Exchange Act. 4. Conditions of the Underwriter's Obligations. The obligations of the Underwriter to purchase and pay for the Securities, as provided herein, shall be subject to the continuing accuracy of the representations and warranties of the Company as of the date hereof and as of each of the Closing Date and the Option Closing Date, if any, to the accuracy of the statements of officers of the Company made pursuant to the provisions hereof and to the performance by the Company of its obligations hereunder and to the following conditions: 4.1 Regulatory Matters. 4.1.1 Effectiveness of Registration Statement. The Registration Statement has been declared effective on the date of this Agreement and, at each of the Closing Date and the Option Closing Date, no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for such purpose shall have been instituted or shall be pending or, to the Company's knowledge, contemplated by the Commission and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of Davis & Gilbert LLP, counsel to the Underwriter. 16 4.1.2 NASD Clearance. By the Effective Date, the Underwriter shall have received clearance from the NASD as to the amount of compensation allowable or payable to the Underwriter as described in the Registration Statement. 4.1.3 No Blue Sky Stop Orders. No order suspending the sale of the Securities in any jurisdiction designated by the Underwriter pursuant to Section 3.3 hereof shall have been issued on or before either the Closing Date or the Option Closing Date, and no proceedings for that purpose shall have been instituted or, to the Company's knowledge, shall be contemplated. 4.2 Company Counsel Matters. 4.2.1 Effective Date Opinion of Counsel. On the Effective Date, the Underwriter shall have received the favorable opinion of Graubard Miller, counsel to the Company, dated the Effective Date, addressed to the Underwriter and in the form attached hereto as Exhibit A. 4.2.2 Closing Date and Option Closing Date Opinions of Counsel. On each of the Closing Date and the Option Closing Date, if any, the Underwriter shall have received the opinion of Graubard Miller, counsel to the Company, dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriter and in form and substance satisfactory to Davis & Gilbert LLP, counsel to the Underwriter, confirming as of the Closing Date and, if applicable, the Option Closing Date, the statements made by Graubard Miller in their opinion delivered on the Effective Date. 4.2.3 Reliance. In rendering such opinions, such counsel may rely (i) as to matters involving the application of laws other than the laws of the United States and jurisdictions in which they are admitted, to the extent such counsel deem proper and to the extent specified in such opinion, if at all, upon an opinion or opinions (in form and substance reasonably satisfactory to counsel for the Underwriter) of other counsel reasonably acceptable to counsel for the Underwriter, familiar with the applicable laws, and (ii) as to matters of fact, to the extent they deem proper, on certificates or other written statements of officers of departments of various jurisdiction having custody of documents respecting the corporate existence or good standing of the Company, provided that copies of any such statements or certificates shall be delivered to counsel for the Underwriter. Any opinion relied upon by counsel for the Company, and the opinions of counsel for the Company, shall include statements to the effect that they may be relied upon by counsel for the Underwriter in its opinion delivered to the Underwriter. 4.3 Cold Comfort Letter. At the time this Agreement is executed, and at each of the Closing Date and the Option Closing Date, if any, you shall have received a letter, addressed to the Underwriter and in form and substance satisfactory in all respects (including the non-material nature of the changes or decreases, if any, referred to in clause (iii) below) to you and to Davis & Gilbert LLP, counsel for the Underwriter, from GGK dated, respectively, as of the date of this Agreement and as of the Closing Date and the Option Closing Date, if any: (i) confirming that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable Regulations and that they have not, during the periods covered by the financial statements included in the Prospectus, provided to the Company any 17 non-audit services, as such term is used in Section 10A(g) of the Exchange Act; (ii) stating that in their opinion the financial statements and the financial statement schedules of the Company included (or incorporated by reference) in the Registration Statement and Prospectus comply as to form in all material respects with the applicable accounting requirements of the Act and the published Regulations thereunder; (iii) stating that, based on the performance of procedures specified by the American Institute of Certified Public Accountants for a review of the latest available unaudited interim financial statements of the Company (as described in Statement on Auditing Standards ("SAS") No. 71 -- "Interim Financial Information"), with an indication of the date of the latest available unaudited interim financial statements, a reading of the latest available minutes of the shareholders and board of directors and the various committees of the board of directors, consultations with officers and other employees of the Company responsible for financial and accounting matters and other specified procedures and inquiries, nothing has come to their attention that would lead them to believe that (a) the unaudited financial statements of the Company included or incorporated by reference in the Registration Statement do not comply as to form in all material respects with the applicable accounting requirements of the Act and the Regulations or any material modification should be made to the unaudited interim financial statements included in the Registration Statement for them to be in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements of the Company included or incorporated by reference in the Registration Statement, (b) at a date not later than five days prior to the Effective Date, Closing Date or Option Closing Date, as the case may be, there was any change in the capital stock or long-term debt of the Company, or any decrease in the net current assets (working capital) or shareholders' equity of the Company as compared with amounts shown in the September 30, 2002 balance sheet included in the Registration Statement, other than as set forth in or contemplated by the Registration Statement, or, if there was any decrease, setting forth the amount of such decrease, and (c) during the period from October 1, 2002 to a specified date not later than five days prior to the Effective Date, Closing Date or Option Closing Date, as the case may be, there was any decrease in revenues, net earnings or net earnings per Common Share, in each case as compared with the corresponding period in the preceding year and as compared with the corresponding period in the preceding quarter, other than as set forth in or contemplated by the Registration Statement, or, if there was any such decrease, setting forth the amount of such decrease; (iv) Setting forth, at a date not later than five days prior to the Effective Date, the amount of liabilities of the Company (including a break-down of commercial paper and notes payable to banks); (v) stating that they have compared specific dollar amounts, numbers of shares, percentages of revenues and earnings, statements and other financial information pertaining to the Company set forth in the Prospectus in each case to the extent that such amounts, numbers, percentages, statements and information may be derived from the general accounting records, and work sheets, of the Company with the results obtained from the application of specified readings, inquiries and other appropriate procedures (which procedures do not constitute an examination in accordance with generally accepted auditing standards) set forth in the letter and found them to be in agreement; and 18 (vi) statements as to such other matters incident to the transaction contemplated hereby as you may reasonably request. 4.4 Officers' Certificates. 4.4.1 Officers' Certificate. At each of the Closing Date and the Option Closing Date, if any, the Underwriter shall have received a certificate, that is true and correct in fact, of the Company signed by the Chief Executive Officer and the Secretary of the Company, dated the Closing Date or the Option Closing Date, as the case may be, respectively, to the effect that the Company has in all material respects performed all covenants and complied with all conditions required by this Agreement to be performed or complied with by the Company prior to and as of the Closing Date, or the Option Closing Date, as the case may be, and that the conditions set forth in Section 4.5 hereof have been satisfied in all material respects as of such date and that, as of Closing Date and the Option Closing Date, as the case may be, the representations and warranties of the Company set forth in Section 2 hereof are true and correct. In addition, the Underwriter will have received such other and further certificates of officers of the Company as the Underwriter may reasonably request. 4.4.2 Secretary's Certificate. At each of the Closing Date and the Option Closing Date, if any, the Underwriter shall have received a certificate of the Company signed by the Secretary of the Company, dated the Closing Date or the Option Date, as the case may be, respectively, certifying (i) that the By-Laws and Certificate of Incorporation, as amended, of the Company are true and complete, have not been modified and are in full force and effect, (ii) that the resolutions relating to the public offering contemplated by this Agreement are in full force and effect and have not been modified, (iii) all correspondence between the Company or its counsel and the Commission, (iv) all correspondence between the Company or its counsel and the AMEX concerning listing of the Securities on the AMEX and (vi) as to the incumbency of the officers of the Company. The documents referred to in such certificate shall be attached to such certificate. 4.5 No Material Changes. Prior to and on each of the Closing Date and the Option Closing Date, if any, (i) there shall have been no material adverse change or development involving a prospective material change in the assets, condition or prospects or the business activities, financial or otherwise, of the Company from the latest dates as of which such condition is set forth in the Registration Statement and Prospectus, (ii) there shall have been no transaction, not in the ordinary course of business, entered into by the Company from the latest date as of which the financial condition of the Company is set forth in the Registration Statement and Prospectus that is materially adverse to the Company, taken as a whole, (iii) the Company shall not be in default under any provision of any instrument relating to any outstanding indebtedness which default would have a material adverse effect on the Company, (iv) no material amount of the assets of the Company shall have been pledged or mortgaged, except as set forth in the Registration Statement and Prospectus, (v) no action suit or proceeding, at law or in equity, shall have been pending or threatened against the Company or affecting any of its property or business before or by any court or federal or state commission, board or other administrative agency wherein an unfavorable decision, ruling or finding may materially adversely affect the business, operations, prospects or financial condition or income of the Company, except as set forth in the Registration Statement and Prospectus, (vi) no stop order shall have been issued under the Act and no proceedings therefor shall have been initiated or threatened by the Commission, and (vii) the Registration Statement and the Prospectus and any amendments or supplements thereto contain 19 all material statements that are required to be stated therein in accordance with the Act and the Regulations and conform in all material respects to the requirements of the Act and the Regulations, and neither the Registration Statement nor the Prospectus nor any amendment or supplement thereto contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 4.6 Delivery of Agreements. The Company has delivered to the Underwriter an executed copy of the Underwriter's Warrant and an executed copy of the Merger and Acquisition Agreement. 4.7 Opinion of Counsel for the Underwriter. All proceedings taken in connection with the authorization, issuance or sale of the Securities as herein contemplated shall be reasonably satisfactory in form and substance to you and to Davis & Gilbert LLP, counsel to the Underwriter, and you shall have received from such counsel a favorable opinion, dated the Closing Date and the Option Closing Date, if any, with respect to such of these proceedings as you may reasonably require. On or prior to the Effective Date, the Closing Date and the Option Closing Date, as the case may be, counsel for the Underwriter shall have been furnished such documents, certificates and opinions as they may reasonably require for the purpose of enabling them to review or pass upon the matters referred to in this Section 4.7, or in order to evidence the accuracy, completeness or satisfaction of any of the representations, warranties or conditions herein contained. 5. Indemnification. 5.1 Indemnification of the Underwriter. 5.1.1 General. Subject to the conditions set forth below, the Company agrees to indemnify and hold harmless the Underwriter, its directors, officers, agents and employees and each person, if any, who controls the Underwriter ("controlling person") within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against any and all loss, liability, claim, damage and expense whatsoever (including but not limited to any and all legal or other expenses reasonably incurred in investigating, preparing or defending against any litigation, or any claims whatsoever, commenced or threatened, whether arising out of any action between the Underwriter and the Company or between the Underwriter and any third party or otherwise) to which they or any of them may become subject under the Act, the Exchange Act or any other statute or at common law or otherwise or under the laws of foreign countries (including in settlement of any litigation, if such settlement is effected with the written consent of the Company), arising out of or based upon any untrue statement or alleged untrue statement of a material fact (i) contained in any Preliminary Prospectus, the Registration Statement or the Prospectus (as from time to time each may be amended and supplemented, and including any information deemed to be a part thereto pursuant to Rule 430A or Rule 434 of the Regulations); (ii) contained in any post-effective amendment or amendments or any new registration statement and prospectus in which is included securities of the Company issued or issuable upon exercise of the Underwriter's Warrant; (iii) contained in any application or other document or written communication (in this Section 5 collectively called "application") executed by the Company or based upon written information furnished by the Company in any jurisdiction in order to qualify the Securities under the securities laws thereof or filed with the Commission, any state securities commission or agency, the NASD (including Nasdaq and NASD Regulation, Inc.) or any securities 20 exchange; or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, unless such statement or omission was made in reliance upon, and in strict conformity with, written information furnished to the Company with respect to the Underwriter by or on behalf of the Underwriter expressly for use in any Preliminary Prospectus, the Registration Statement or Prospectus, or any amendment or supplement thereof, or in any application, as the case may be. The Company agrees promptly to notify the Underwriter of the commencement of any litigation or proceedings against the Company or any of its officers, directors or controlling persons in connection with the issue and sale of the Securities or in connection with the Registration Statement or Prospectus. 5.1.2 Procedure. If any action is brought against the Underwriter or a controlling person in respect of which indemnity may be sought against the Company pursuant to Section 5.1.1, the Underwriter shall promptly notify the Company in writing of the institution of such action and the Company shall assume the defense of such action, including the employment and fees of counsel (subject to the approval of the Underwriter) and payment of actual expenses. The Underwriter or controlling person shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of the Underwriter or such controlling person unless (i) the employment of such counsel shall have been authorized in writing by the Company in connection with the defense of such action, or (ii) the Company shall not have employed counsel to have charge of the defense of such action, or (iii) such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them that are different from or additional to those available to the Company (in which case the Company shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events the fees and expenses of not more than one additional firm of attorneys selected by the Underwriter and/or controlling person shall be borne by the Company. Notwithstanding anything to the contrary contained herein, if the Underwriter or controlling person shall assume the defense of such action as provided above, the Company shall have the right to approve the terms of any settlement of such action which approval shall not be unreasonably withheld. 5.2 Indemnification of the Company. The Underwriter agrees to indemnify and hold harmless the Company against any and all loss, liability, claim, damage and expense described in the foregoing indemnity from the Company to the Underwriter, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions directly relating to the transactions effected by the Underwriter in connection with this offering made in any Preliminary Prospectus, the Registration Statement or Prospectus or any amendment or supplement thereto or in any application in reliance upon, and in strict conformity with, written information furnished to the Company with respect to the Underwriter by or on behalf of the Underwriter expressly for use in such Preliminary Prospectus, the Registration Statement or Prospectus or any amendment or supplement thereto or in any such application. In case any action shall be brought against the Company based on any Preliminary Prospectus, the Registration Statement or Prospectus or any amendment or supplement thereto or any application, and in respect of which indemnity may be sought against the Underwriter, the Underwriter shall have the rights and duties given to the Company, and the Company shall have the rights and duties given to the Underwriter, by the provisions of Section 5.1.2. 21 5.3 Contribution. 5.3.1 Contribution Rights. In order to provide for just and equitable contribution under the Act in any case in which (i) any person entitled to indemnification under this Section 5 makes claim for indemnification pursuant hereto but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 5 provides for indemnification in such case, or (ii) contribution under the Act, the Exchange Act or otherwise may be required on the part of any such person in circumstances for which indemnification is provided under this Section 5, then, and in each such case, the Company and the Underwriter shall contribute to the aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by said indemnity agreement incurred by the Company and the Underwriter, as incurred, in such proportions that the Underwriter is responsible for that portion represented by the percentage that the underwriting discount appearing on the cover page of the Prospectus bears to the initial offering price appearing thereon and the Company is responsible for the balance; provided, that, no person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Notwithstanding the provisions of this Section 5.3.1, the Underwriter shall not be required to contribute any amount in excess of the amount by which the total price at which the Public Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that the Underwriter has otherwise been required to pay in respect of such losses, liabilities, claims, damages and expenses. For purposes of this Section, each director, officer and employee of the Underwriter, and each person, if any, who controls the Underwriter within the meaning of Section 15 of the Act, shall have the same rights to contribution as the Underwriter. 5.3.2 Contribution Procedure. Within fifteen days after receipt by any party to this Agreement (or its representative) of notice of the commencement of any action, suit or proceeding, such party will, if a claim for contribution in respect thereof is to be made against another party ("contributing party"), notify the contributing party of the commencement thereof, but the omission to so notify the contributing party will not relieve it from any liability that it may have to any other party other than for contribution hereunder. In case any such action, suit or proceeding is brought against any party, and such party notifies a contributing party or its representative of the commencement thereof within the aforesaid fifteen days, the contributing party will be entitled to participate therein with the notifying party and any other contributing party similarly notified. Any such contributing party shall not be liable to any party seeking contribution on account of any settlement of any claim, action or proceeding that was effected by the party seeking contribution without the written consent of such contributing party. The contribution provisions contained in this Section are intended to supersede, to the extent permitted by law, any right to contribution under the Act, the Exchange Act or otherwise available. 6. Omitted. 7. Board Designee. For a period of five years from the Effective Date, the Company will appoint a designee of EBC (reasonably acceptable to the Company) as a member of the Board of Directors of the Company. Such designee shall receive no more or less compensation than is paid to other non-management directors of the Company (excluding the Chairman of the Audit Committee) and shall be 22 entitled to be reimbursed for all reasonable out-of-pocket expenses incurred in attending such meetings, including but not limited to food, lodging and transportation. To the extent permitted by law, the Company will agree to indemnify EBC and its designee for the actions of such designee as a director of the Company. In addition, the Company will obtain and maintain a liability insurance policy affording coverage for the acts of its officers and directors in an amount not less than $3,000,000 and will include EBC's designee as an insured under such policy. If EBC has not exercised its option to designate a member of the Company's Board of Directors, EBC shall have the right to send a representative (who need not be the same individual from meeting to meeting) to observe each meeting of the Board of Directors. The Company agrees to give EBC written notice of each such meeting and to provide EBC with an agenda and minutes of the meeting no later than it gives such notice and provides such items to the other directors, and reimburse the representative of EBC for its reasonable out-of-pocket expenses incurred in connection with its attendance at the meeting, including but not limited to, food, lodging and transportation and any fees paid to the directors for attending such meeting. 8. Representations and Agreements to Survive Delivery. Except as the context otherwise requires, all representations, warranties and agreements contained in this Agreement shall be deemed to be representations, warranties and agreements at the Closing Dates and such representations, warranties and agreements of the Underwriter and Company, including the indemnity agreements contained in Section 5 hereof, shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the Underwriter, the Company or any controlling person, and shall survive termination of this Agreement or the issuance and delivery of the Securities to the Underwriter until the earlier of the expiration of any applicable statute of limitations and the seventh anniversary of the later of the Closing Date or the Option Closing Date, if any, at which time the representations, warranties and agreements shall terminate and be of no further force and effect. 9. Effective Date of This Agreement and Termination Thereof. 9.1 Effective Date. This Agreement shall become effective on the Effective Date at the time that the Registration Statement is declared effective. 9.2 Termination. You shall have the right to terminate this Agreement at any time prior to any Closing Date, (i) if any domestic or international event or act or occurrence has materially disrupted, or in your opinion will in the immediate future materially disrupt, general securities markets in the United States; or (ii) if trading on the New York Stock Exchange, the American Stock Exchange or in the over-the-counter market shall have been suspended, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been fixed, or maximum ranges for prices for securities shall have been required on the over-the-counter market by the NASD or by order of the Commission or any other government authority having jurisdiction, or (iii) if the United States shall have become involved in a war or major hostilities, or (iv) if a banking moratorium has been declared by a New York State or federal authority, or (v) if a moratorium on foreign exchange trading has been declared that materially and adversely impacts the United States securities market, or (vi) if the Company shall have sustained a material loss by fire, flood, accident, hurricane, earthquake, theft, sabotage, terrorism or other calamity or malicious act that, whether or not such loss shall have been insured, will, in your opinion, make it inadvisable to proceed with the delivery of the Securities, or (vii) if the Company has breached any of its representations or warranties, or failed to perform any of its obligations 23 hereunder, or (ix) if the Underwriter shall have become aware after the date hereof of such a material adverse change in the condition (financial or otherwise), business, or prospects of the Company, or such adverse material change in general market conditions as in the Underwriter's judgment would make it impracticable to proceed with the offering, sale and/or delivery of the Securities or to enforce contracts made by the Underwriter for the sale of the Securities. 9.3 Expenses. In the event that this Agreement shall not be carried out for any reason whatsoever, within the time specified herein or any extensions thereof pursuant to the terms hereof, the obligations of the Company to pay the expenses related to the transactions contemplated herein shall be governed by Section 3.8 hereof. 9.4 Indemnification. Notwithstanding any contrary provision contained in this Agreement, any election hereunder or any termination of this Agreement, and whether or not this Agreement is otherwise carried out, the provisions of Section 5 shall not be in any way affected by, such election or termination or failure to carry out the terms of this Agreement or any part hereof. 10. Miscellaneous. 10.1 Notices. All communications hereunder, except as herein otherwise specifically provided, shall be in writing and shall be mailed, delivered or telecopied and confirmed If to the Underwriter: EarlyBirdCapital, Inc. One State Street Plaza 24th Floor New York, New York 10004 Attention: Steven Levine Telecopier: (212) 425-5861 Copy to: Davis & Gilbert LLP 1740 Broadway New York, New York 10019 Attention: Ralph W. Norton, Esq. Telecopier: (212) 974-6969 If to the Company: CPI Aerostructures, Inc. 200A Executive Drive Edgewood, New York 11717 Attention: Edward J. Fred Telecopier: (631) 586-5840 24 Copy to: Graubard Miller 600 Third Avenue New York, New York 10016 Attention: David Alan Miller, Esq. Telecopier: (212) 818-8881 10.2 Headings. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Agreement. 10.3 Amendment. This Agreement may be amended only by a written instrument executed by each of the parties hereto. 10.4 Entire Agreement. This Agreement (together with the other agreements and documents being delivered pursuant to or in connection with this Agreement) constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof. 10.5 Binding Effect. This Agreement shall inure solely to the benefit of and shall be binding upon, the Underwriter, the Company and the controlling persons, directors and officers referred to in Section 5 hereof, and their respective successors, legal representatives and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provisions herein contained. 10.6 Governing Law, Jurisdiction. This Agreement shall be governed by and construed and enforced in accordance with the law of the State of New York, without giving effect to principles of conflicts of law. The Company hereby agrees that any action, proceeding or claim against it arising out of or relating in any way to this Agreement shall be brought and enforced in the courts of the State of New York or the United States District Court for the Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company hereby waives any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum. Any such process or summons to be served upon the Company may be served by transmitting a copy thereof by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address set forth in Section 10.1 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the Company in any action, proceeding or claim. The parties agree that the prevailing party(ies) in any such action shall be entitled to recover from the other party(ies) all of its reasonable attorneys' fees and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor. 10.7 Execution in Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement, and shall become 25 effective when one or more counterparts has been signed by each of the parties hereto and delivered to each of the other parties hereto. 10.8 Waiver, Etc. The failure of any of the parties hereto at any time to enforce any of the provisions of this Agreement shall not be deemed or construed to be a waiver of any such provision, nor in any way to affect the validity of this Agreement or any provision hereof or the right of any of the parties hereto thereafter to enforce each and every provision of this Agreement. No waiver of any breach, non-compliance or non-fulfillment of any of the provisions of this Agreement shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach, non-compliance or non-fulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, non-compliance or non-fulfillment. 26 If the foregoing correctly sets forth the understanding between the Underwriter and the Company, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement between us. Very truly yours, CPI AEROSTRUCTURES, INC. By:__________________________________________________ Name: Edward J. Fred Title: President and Chief Executive Officer Accepted as of the date first above written. New York, New York EARLYBIRDCAPITAL, INC. By:_________________________________________ Name: Steven Levine Title: Managing Director 27 EX-4.7 4 cpi_am2ex47.txt FORM OF WARRANT TO BE ISSUED TO UNDERWRITER EXHIBIT 4.7 THE REGISTERED HOLDER OF THIS WARRANT BY ITS ACCEPTANCE HEREOF, AGREES THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS WARRANT EXCEPT AS HEREIN PROVIDED. NOT EXERCISABLE PRIOR TO FEBRUARY __, 2004. VOID AFTER 5:00 P.M. EASTERN TIME, FEBRUARY __, 2008. WARRANT For the Purchase of up to ___________ Common Shares CPI AEROSTRUCTURES, INC. (A New York Corporation) 1. Warrant. THIS CERTIFIES THAT, in consideration of $100.00 duly paid by or on behalf of ____________________________ ("Holder"), as registered owner of this Warrant, to CPI Aerostructures, Inc. ("Company"), Holder is entitled, at any time or from time to time at or after February __, 2004 ("Commencement Date"), and at or before 5:00 p.m., Eastern Time, February __, 2008 ("Expiration Date"), but not thereafter, to subscribe for, purchase and receive, in whole or in part, up to _________________ (_________) Common Shares of the Company, $.001 par value ("Common Shares"), pursuant to which the Company has registered Common Shares. This Warrant is one of a series of similar warrants of like tenor to purchase up to 200,000 Common Shares (collectively, the "Warrants"). The Common Shares are sometimes referred to herein as the "Securities." If the Expiration Date is a day on which banking institutions are authorized by law to close, then this Warrant may be exercised on the next succeeding day that is not such a day in accordance with the terms herein. During the period ending on the Expiration Date, the Company agrees not to take any action that would terminate the Warrant. This Warrant is initially exercisable at $___ per Common Share purchased; provided, however, that upon the occurrence of any of the events specified in Section 6 hereof, the rights granted by this Warrant, including the exercise price and the number of Common Shares to be received upon such exercise, shall be adjusted as therein specified. The term "Exercise Price" shall mean the initial exercise price or the adjusted exercise price, depending on the context. 2. Exercise. 2.1 Exercise Form. In order to exercise this Warrant, the exercise form attached hereto must be duly executed and completed and delivered to the Company, together with this Warrant and payment of the Exercise Price in cash or by certified check or official bank check for the Securities being purchased. If the subscription rights represented hereby shall not be exercised at or before 5:00 p.m., Eastern time, on the Expiration Date, this Warrant shall become and be void without further force or effect, and all rights represented hereby shall cease and expire. 2.2 Legend. Each certificate for Securities purchased under this Warrant shall bear a legend as follows unless such Securities have been registered under the Securities Act of 1933, as amended: "The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended ("Act"), or applicable state law. The securities may not be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement under the Act, or pursuant to an exemption from registration under the Act and applicable state law." 2.3 Conversion Right. 2.3.1 Determination of Amount. In lieu of the payment of the Exercise Price in the manner required by Section 2.1, the Holder shall have the right (but not the obligation) to convert any exercisable but unexercised portion of this Warrant into securities ("Conversion Right") as follows: Upon exercise of the Conversion Right, the Company shall deliver to the Holder (without payment by the Holder of any of the Exercise Price in cash) that number of Common Shares equal to the quotient obtained by dividing (x) the "Value" (as defined below), at the close of trading on the next to last trading day immediately preceding the exercise of the Conversion Right, of the portion of the Warrant being converted by (y) the Market Price (as defined below) at that same time. The "Value" of the portion of the Warrant being converted shall equal the remainder derived from subtracting (a) the Exercise Price multiplied by the number of Common Shares underlying the portion of the Warrant being converted from (b) the Market Price of the Common Shares multiplied by the number of Common Shares underlying the portion of the Warrant being converted. As used in this Section 2.3, the term "Market Price" at any date shall be deemed to be the last reported sale price of the Common Shares on such date, or, in case no such reported sale takes place on such day, the average of the last reported sale price for the three immediately preceding trading days, in either case as officially reported by the principal securities exchange on which the Common Shares are listed or admitted to trading, or, if the Common Shares are not listed or admitted to trading on any national securities exchange or if any such exchange on which the Common Shares are listed is not the principal trading market, the last reported sale price as furnished by the NASD through the Nasdaq National Market or SmallCap Market, or, if applicable, the OTC Bulletin Board or successor trading medium, or if the Common Shares are not listed or admitted to trading on any of the foregoing markets, or similar organization, as determined in good faith by resolution of the Board of Directors of the Company, based on the best information available to it. 2 2.3.2 Mechanics of Conversion. The Conversion Right may be exercised by the Holder on any business day on or after the Commencement Date and not later than the Expiration Date by delivering the Warrant with a duly executed exercise form attached hereto with the conversion right section completed to the Company, exercising the Conversion Right and specifying the total number of Common Shares that the Holder will purchase pursuant to such Conversion Right. 3. Transfer. 3.1 General Restrictions. The registered Holder of this Warrant, by its acceptance hereof, agrees that it will not sell, transfer or assign or hypothecate this Warrant prior to the Commencement Date to anyone other than (i) an officer or partner of such Holder, (ii) an officer of EarlyBirdCapital, Inc. ("EBC" or the "Underwriter") or an officer or partner of any Selected Dealer that executed the Selected Dealer Agreement between the Underwriter and the members of the selling group ("Selected Dealer") in connection with the Company's public offering with respect to which this Warrant has been issued, or (iii) any Selected Dealer. On and after the Commencement Date, transfers to others may be made subject to compliance with or exemptions from applicable securities laws. In order to make any permitted assignment, the Holder must deliver to the Company the assignment form attached hereto duly executed and completed, together with the Warrant and payment of all transfer taxes, if any, payable in connection therewith. The Company shall immediately transfer this Warrant on the books of the Company and shall execute and deliver a new Warrant or Warrants of like tenor to the appropriate assignee(s) expressly evidencing the right to purchase the aggregate number of Common Shares purchasable hereunder or such portion of such number as shall be contemplated by any such assignment. 3.2 Restrictions Imposed by the Act. This Warrant and the Securities underlying this Warrant shall not be transferred unless and until (i) the Company has received the opinion of counsel for the Holder that this Warrant or the Securities, as the case may be, may be transferred pursuant to an exemption from registration under the Act and applicable state law, the availability of which is established to the reasonable satisfaction of the Company (the Company hereby agreeing that an opinion of Graubard Miller in form and substance reasonably satisfactory to the Company shall be deemed satisfactory evidence of the availability of an exemption), or (ii) a registration statement relating to such Warrant or Securities, as the case may be, has been filed by the Company and declared effective by the Securities and Exchange Commission ("Commission") and compliance with applicable state law. 4. New Warrants to be Issued. 4.1 Partial Exercise, Conversion or Transfer. Subject to the restrictions in Section 3 hereof, this Warrant may be exercised, converted or assigned in whole or in part. In the event of the exercise, conversion or assignment hereof in part only, upon surrender of this Warrant for cancellation, together with the duly executed exercise or assignment form and funds (except in the case of conversion) sufficient to pay any Exercise Price and/or transfer tax, the 3 Company shall cause to be delivered to the Holder without charge a new Warrant of like tenor to this Warrant in the name of the Holder evidencing the right of the Holder to purchase the aggregate number of Common Shares purchasable hereunder as to which this Warrant has not been exercised or assigned. 4.2 Lost Certificate. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant and of reasonably satisfactory indemnification, the Company shall execute and deliver a new Warrant of like tenor and date. Any such new Warrant executed and delivered as a result of such loss, theft, mutilation or destruction shall constitute a substitute contractual obligation on the part of the Company. 5. Registration Rights. 5.1 Demand Registration. 5.1.1 Grant of Right. The Company, upon written demand ("Initial Demand Notice") of the Holder(s) of at least 51% of the Warrants and/or the underlying Common Shares ("Majority Holders"), agrees to register, on one occasion, all or any portion of the Warrants requested by the Majority Holders in the Initial Demand Notice and all of the Securities underlying such Warrants (collectively the "Registrable Securities"). On such occasion, the Company will file a registration statement covering the Registrable Securities within sixty (60) days after receipt of the Initial Demand Notice and use its best efforts to have the registration statement declared effective promptly thereafter. If the Company fails to comply with the provisions of this Section 5.1.1, the Company shall, in addition to any other equitable or other relief available to the Holder(s), be liable for any and all incidental, special and consequential damages sustained by the Holder(s). The demand for registration may be made at any time during a period of four years beginning one year from the effective date of the registration statement on Form SB-2 (No. 333-101902) pursuant to which the Company has registered Common Shares ("Effective Date"). The Company covenants and agrees to give written notice of its receipt of any Initial Demand Notice by any Holder(s) to all other registered Holders of the Warrants and/or the Registrable Securities within ten (10) days from the date of the receipt of any such Initial Demand Notice. 5.1.2 Terms. The Company shall bear all fees and expenses attendant to registering the Registrable Securities, but the Holders shall pay any and all underwriting commissions and the expenses of any legal counsel selected by the Holders to represent them in connection with the sale of the Registrable Securities. The Company agrees to use its best efforts to cause the filing required herein to become effective promptly and to qualify or register the Registrable Securities in such States as are reasonably requested by the Holder(s); provided, however, that in no event shall the Company be required to register the Registrable Securities in a State in which such registration would cause (i) the Company to be obligated to register or license to do business in such State or submit to general service of process in such State, or (ii) the principal Shareholders of the Company to be obligated to escrow their shares of capital stock of the Company. The Company shall cause any registration statement 4 filed pursuant to the demand right granted under Section 5.1.1 to remain effective until all of the Registrable Securities covered by such registration statement have been sold. 5.2 "Piggy-Back" Registration. 5.2.1 Grant of Right. In addition to the demand right of registration, the Holders of the Warrants shall have the right at any time for a period of six (6) years commencing one year from the Effective Date to include the Registrable Securities as part of any other registration of securities filed by the Company (other than in connection with a transaction contemplated by Rule 145(a) promulgated under the Act or pursuant to Form S-8 or any equivalent form); provided, however, that if, in the written determination of the Company's managing underwriter or underwriters, if any, for such offering, the inclusion of the Registrable Securities, when added to the securities being registered by the Company or the selling shareholder(s), will exceed the maximum amount of the Company's securities that can be marketed (i) at a price reasonably related to their then current market value, or (ii) without materially and adversely affecting the entire offering, the Company shall nevertheless register all or any portion of the Registrable Securities required to be so registered but such Registrable Securities shall not be sold by the Holders until 90 days after the registration statement for such offering has become effective and provided further that, if any securities are registered for sale on behalf of other shareholders in such offering and such shareholders have not agreed to defer such sale until the expiration of such 90 day period, the number of securities to be sold by all shareholders in such public offering during such 90 day period shall be apportioned pro rata among all such selling shareholders, including all holders of the Registrable Securities, according to the total amount of securities of the Company owned by said selling shareholders, including all holders of the Registrable Securities. 5.2.2 Terms. The Company shall bear all fees and expenses attendant to registering the Registrable Securities, but the Holders shall pay any and all underwriting commissions and the expenses of any legal counsel selected by the Holders to represent them in connection with the sale of the Registrable Securities. In the event of such a proposed registration, the Company shall furnish the then Holders of outstanding Registrable Securities with not less than thirty (30) days written notice prior to the proposed date of filing of such registration statement. Such notice to the Holders shall continue to be given for each registration statement filed by the Company until such time as all of the Registrable Securities have been sold by the Holder. The holders of the Registrable Securities shall exercise the "piggy-back" rights provided for herein by giving written notice, within twenty (20) days of the receipt of the Company's notice of its intention to file a registration statement. The Company shall cause any registration statement filed pursuant to the above "piggyback" rights to remain effective until all of the Registrable Securities covered by such registration statement have been sold. 5.3 General Terms. 5.3.1 Indemnification. The Company shall indemnify the Holder(s) of the Registrable Securities to be sold pursuant to any registration statement hereunder and each person, if any, who controls any such Holder within the 5 meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), against all loss, claim, damage, expense or liability (including all reasonable attorneys' fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Act, the Exchange Act or otherwise, arising from such registration statement but only to the same extent and with the same effect as the provisions pursuant to which the Company has agreed to indemnify the Underwriter contained in Section 5 of the Underwriting Agreement between the Underwriter and the Company, dated the Effective Date. The Holder(s) of the Registrable Securities to be sold pursuant to such registration statement, and their successors and assigns, shall severally, and not jointly, indemnify the Company against all loss, claim, damage, expense or liability (including all reasonable attorneys' fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of such Holders, or their successors or assigns, in writing, for specific inclusion in such registration statement to the same extent and with the same effect as the provisions contained in Section 5 of the Underwriting Agreement pursuant to which the Underwriter has agreed to indemnify the Company. 5.3.2 Exercise of Warrants. Nothing contained in this Warrant shall be construed as requiring the Holder(s) to exercise their Warrants prior to or after the initial filing of any registration statement or the effectiveness thereof. 5.3.3 Documents Delivered to Holders. The Company shall furnish to each Holder participating in any of the foregoing offerings and to each underwriter of any such offering, if any, a signed counterpart, addressed to such Holder or underwriter, of (i) an opinion of counsel to the Company, dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, an opinion dated the date of the closing under any underwriting agreement related thereto), and (ii) a "cold comfort" letter dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, a letter dated the date of the closing under the underwriting agreement) signed by the independent public accountants who have issued a report on the Company's financial statements included in such registration statement, in each case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities. The Company shall also deliver promptly to each Holder participating in the offering requesting the correspondence and memoranda described below and to the managing underwriter copies of all correspondence between the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff with respect to the registration statement and permit each Holder and underwriter to do such investigation, upon reasonable advance notice, with respect to information contained in or omitted from the registration statement as it deems reasonably necessary to comply with applicable securities laws or rules of the National Association of Securities 6 Dealers, Inc. ("NASD"). Such investigation shall include access to books, records and properties and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such reasonable times as any such Holder shall reasonably request, provided that all such persons sign a confidentiality agreement. 5.3.4 Underwriting Agreement. The Company shall enter into an underwriting agreement with the managing underwriter(s) selected by the Majority Holders whose Registrable Securities are being registered pursuant to Section 5.1, which managing underwriter shall be reasonably satisfactory to the Company. Such agreement shall be reasonably satisfactory in form and substance to the Company, each Holder and such managing underwriter, and shall contain such representations, warranties and covenants by the Company and such other terms as are customarily contained in agreements of that type used by the managing underwriter. The Holders shall be parties to any underwriting agreement relating to an underwritten sale of their Registrable Securities and may, at their option, require that any or all of the representations, warranties and covenants of the Company to or for the benefit of such underwriters shall also be made to and for the benefit of such Holders. Such Holders shall not be required to make any representations or warranties to or agreements with the Company or the underwriter except as they may relate to such Holders, their shares and their intended methods of distribution. 5.3.5 Documents to be Delivered by Holder(s). Each of the Holder(s) participating in any of the foregoing offerings shall furnish to the Company a completed and executed questionnaire provided by the Company requesting information customarily sought of selling securityholders. 6. Adjustments. 6.1 Adjustments to Exercise Price and Number of Securities. The Exercise Price and the number of Common Shares underlying the Warrant shall be subject to adjustment from time to time as hereinafter set forth: 6.1.1 Stock Dividends, Recapitalization, Reclassification, Split-Ups. If after the date hereof, and subject to the provisions of Section 6.2 below, the number of outstanding Common Shares is increased by a stock dividend payable in Common Shares or by a split-up, recapitalization or reclassification of Common Shares or other similar event, then, on the effective date thereof, the number of Common Shares issuable on exercise of this Warrant shall be increased in proportion to such increase in outstanding shares. For example, if the Company declares a two-for-one stock dividend and at the time of such dividend the Warrant is for the purchase of 1,000 Common Shares at $10.00 per share, upon effectiveness of the dividend, the Warrant will be adjusted (disregarding for purposes of this example that adjustments shall be rounded to the nearest cent, as provided in Section 6.1.3) to allow for the purchase of 2,000 shares at $5.00 per share. 7 6.1.2 Aggregation of Shares. If after the date hereof, and subject to the provisions of Section 6.2, the number of outstanding Common Shares is decreased by a consolidation, combination or reclassification of Common Shares or other similar event, then, upon the effective date thereof, the number of Common Shares issuable on exercise of the Warrant shall be decreased in proportion to such decrease in outstanding shares. 6.1.3 Adjustments in Exercise Price. Whenever the number of Common Shares purchasable upon the exercise of this Warrant is adjusted, as provided in this Section 6.1, the Exercise Price shall be adjusted (to the nearest cent) by multiplying such Exercise Price immediately prior to such adjustment by a fraction (x) the numerator of which shall be the number of Common Shares purchasable upon the exercise of this Warrant immediately prior to such adjustment, and (y) the denominator of which shall be the number of Common Shares so purchasable immediately thereafter. 6.1.4 Replacement of Securities upon Reorganization, etc. In case of any reclassification or reorganization of the outstanding Common Shares other than a change covered by Section 6.1.1 or 6.1.2 hereof or that solely affects the par value of such Common Shares, or in the case of any merger or consolidation of the Company with or into another corporation (other than a consolidation or merger in which the Company is the continuing corporation and that does not result in any reclassification or reorganization of the outstanding Common Shares), or in the case of any sale or conveyance to another corporation or entity of the property of the Company as an entirety or substantially as an entirety in connection with which the Company is dissolved, the Holder of this Warrant shall have the right thereafter (until the expiration of the right of exercise of this Warrant) to receive upon the exercise hereof, for the same aggregate Exercise Price payable hereunder immediately prior to such event, the kind and amount of shares of stock or other securities or property (including cash) receivable upon such reclassification, reorganization, merger or consolidation, or upon a dissolution following any such sale or other transfer, by a Holder of the number of Common Shares of the Company obtainable upon exercise of this Warrant immediately prior to such event; and if any reclassification also results in a change in Common Shares covered by Section 6.1.1 or 6.1.2, then such adjustment shall be made pursuant to Sections 6.1.1, 6.1.2, 6.1.3 and this Section 6.1.4. The provisions of this Section 6.1.4 shall similarly apply to successive reclassifications, reorganizations, mergers or consolidations, sales or other transfers. 6.1.5 Changes in Form of Warrant. This form of Warrant need not be changed because of any change pursuant to this Section, and Warrants issued after such change may state the same Exercise Price and the same number of Common Shares as are stated in the Warrants initially issued pursuant to this Agreement. The acceptance by any Holder of the issuance of new Warrants reflecting a required or permissive change shall not be deemed to waive any rights to a prior adjustment or the computation thereof. 6.2 Elimination of Fractional Interests. The Company shall not be required to issue certificates representing fractions of Common Shares upon the exercise or transfer of this Warrant, nor shall it be required to issue scrip or pay cash in lieu of any fractional interests, it being the intent of the parties that all 8 fractional interests shall be eliminated by rounding any fraction up or down to the nearest whole number of Common Shares or other securities, properties or rights. 7. Reservation and Listing. The Company shall at all times reserve and keep available out of its authorized Common Shares, solely for the purpose of issuance upon exercise of the Warrants, such number of Common Shares or other securities, properties or rights as shall be issuable upon the exercise thereof. The Company covenants and agrees that, upon exercise of the Warrants and payment of the Exercise Price therefor, all Common Shares and other securities issuable upon such exercise shall be duly and validly issued, fully paid and non-assessable and not subject to preemptive rights of any shareholder. As long as the Warrants shall be outstanding, the Company shall use its reasonable best efforts to cause all Common Shares issuable upon exercise of the Warrants to be listed (subject to official notice of issuance) on all securities exchanges (or, if applicable on Nasdaq) on which the Common Shares issued to the public in connection herewith are then listed and/or quoted. 8. Certain Notice Requirements. 8.1 Holder's Right to Receive Notice. Nothing herein shall be construed as conferring upon the Holders the right to vote or consent or to receive notice as a shareholder for the election of directors or any other matter, or as having any rights whatsoever as a shareholder of the Company. If, however, at any time prior to the expiration of the Warrants and their exercise, any of the events described in Section 8.2 shall occur, then, in one or more of said events, the Company shall give written notice of such event at least fifteen (15) days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the shareholders entitled to such dividend, distribution, conversion or exchange of securities or subscription rights, or entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notice shall specify such record date or the date of the closing of the transfer books, as the case may be. 8.2 Events Requiring Notice. The Company shall be required to give the notice described in this Section 8 upon one or more of the following events: (i) if the Company shall take a record of the holders of its Common Shares for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company, or (ii) the Company shall offer to all the holders of its Common Shares any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor, or (iii) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or merger) or a sale of all or substantially all of its property, assets and business shall be proposed. 8.3 Notice of Change in Exercise Price. The Company shall, promptly after an event requiring a change in the Exercise Price pursuant to Section 6 hereof, send notice to the Holders of such event and change ("Price Notice"). The Price 9 Notice shall describe the event causing the change and the method of calculating same and shall be certified as being true and accurate by the Company's President and Chief Financial Officer. 8.4 Transmittal of Notices. All notices, requests, consents and other communications under this Warrant shall be in writing and shall be deemed to have been duly made on the date of delivery if delivered personally or sent by overnight courier, with acknowledgement of receipt to the party to which notice is given, or on the fifth day after mailing if mailed to the party to whom notice is to be given, by registered or certified mail, return receipt requested, postage prepaid and properly addressed as follows: (i) if to the registered Holder of the Warrant, to the address of such Holder as shown on the books of the Company, or (ii) if to the Company, to its principal executive office. 9. Miscellaneous. 9.1 Amendments. The Company and the Underwriter may from time to time supplement or amend this Warrant without the approval of any of the Holders in order to cure any ambiguity, to correct or supplement any provision contained herein that may be defective or inconsistent with any other provisions herein, or to make any other provisions in regard to matters or questions arising hereunder that the Company and the Underwriter may deem necessary or desirable and that the Company and the Underwriter deem shall not adversely affect the interest of the Holders. All other modifications or amendments shall require the written consent of the party against whom enforcement of the modification or amendment is sought. 9.2 Headings. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Warrant. 9.3 Entire Agreement. This Warrant (together with the other agreements and documents being delivered pursuant to or in connection with this Warrant) constitutes the entire agreement of the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof. 9.4 Binding Effect. This Warrant shall inure solely to the benefit of and shall be binding upon, the Holder and the Company and their respective successors, legal representatives and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Warrant or any provisions herein contained. 9.5 Governing Law; Submission to Jurisdiction. This Warrant shall be governed by and construed and enforced in accordance with the laws of the State of New York, without giving effect to principles of conflict of laws. The Company hereby agrees that any action, proceeding or claim against it arising out of, or relating in any way to this Warrant shall be brought and enforced in 10 the courts of the State of New York or of the United States of America for the Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company hereby waives any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum. Any process or summons to be served upon the Company may be served by transmitting a copy thereof by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address described in Section 8 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the Company in any action, proceeding or claim. The Company agrees that the prevailing party(ies) in any such action shall be entitled to recover from the other party(ies) all of its reasonable attorneys' fees and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor. 9.6 Waiver, Etc. The failure of the Company or the Holder to at any time enforce any of the provisions of this Warrant shall not be deemed or construed to be a waiver of any such provision, nor to in any way affect the validity of this Warrant or any provision hereof or the right of the Company or any Holder to thereafter enforce each and every provision of this Warrant. No waiver of any breach, non-compliance or non-fulfillment of any of the provisions of this Warrant shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach, non-compliance or non-fulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, non-compliance or non-fulfillment. 9.7 Exchange Agreement. As a condition of the Holder's receipt and acceptance of this Warrant, Holder agrees that, at any time prior to the complete exercise of this Warrant by Holder, if the Company and EarlyBirdCapital, Inc. enter into an agreement ("Exchange Agreement") pursuant to which they agree that all outstanding Warrants will be exchanged for securities or cash or a combination of both, then the Holder shall agree to such exchange and become a party to the Exchange Agreement. 11 IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer as of the __ day of February, 2003. CPI AEROSTRUCTURES, INC. By:__________________________________ Edward J. Fred President and Chief Financial Officer 12 Form to be used to exercise Warrant: CPI Aerostructures, Inc. 200A Executive Drive Edgewood, New York 11717 Date:_________________, 200__ The undersigned hereby elects irrevocably to exercise the within Warrant and to purchase _________ Common Shares of CPI Aerostructures, Inc. and hereby makes payment of $____________ (at the rate of $_________ per Common Share) in payment of the Exercise Price pursuant thereto. Please issue the Common Shares as to which this Warrant is exercised in accordance with the instructions given below. or The undersigned hereby elects irrevocably to exercise the within Warrant and to purchase _________ Common Shares of CPI Aerostructures, Inc. by surrender of the unexercised portion of the within Warrant (with a "Value" of $_______ based on a "Market Price" of $__________). Please issue the Common Shares as to which this Warrant is exercised in accordance with the instructions given below. ------------------------------ Signature NOTICE: The signature to this form must correspond with the name as written upon the face of the within Warrant in every particular without alteration or enlargement or any change whatsoever. INSTRUCTIONS FOR REGISTRATION OF SECURITIES Name ________________________________________________________ (Print in Block Letters) Address ________________________________________________________ Form to be used to assign Warrant: ASSIGNMENT (To be executed by the registered Holder to effect a transfer of the within Warrant): FOR VALUE RECEIVED,__________________________________ does hereby sell, assign and transfer unto ______________________ the right to purchase ____________ Common Shares of CPI Aerostructures, Inc. ("Company") evidenced by the within Warrant and does hereby authorize the Company to transfer such right on the books of the Company. Dated:___________________, 200_ ------------------------------ Signature - ------------------------------ Signature Guaranteed NOTICE: The signature to this form must correspond with the name as written upon the face of the within Warrant in every particular without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank, other than a savings bank, or by a trust company or by a firm having membership on a registered national securities exchange. EX-5.1 5 cpi_am2ex51.txt OPINION OF GRAUBARD MILLER EXHIBIT 5.1 GRAUBARD MILLER 600 Third Avenue New York, NY 10016 February 5, 2003 CPI Aerostructures, Inc. 200A Executive Drive Edgewood, New York 11717 Re: Registration Statement on Form SB-2 ----------------------------------- Ladies and Gentlemen: Reference is made to the Registration Statement on Form SB-2 ("Registration Statement") filed by CPI Aerostructures, Inc. ("Company") under the Securities Act of 1933, as amended ("Securities Act"), with respect to up to an aggregate of 2,500,000 common shares, par value $.001 per share ("Common Shares") to be offered by the Company in the Company's public offering ("Public Offering"). We have examined such documents and considered such legal matters as we have deemed necessary and relevant as the basis for the opinion set forth below. With respect to such examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as reproduced or certified copies and the authenticity of the originals of those latter documents. As to questions of fact material to this opinion, we have, to the extent deemed appropriate, relied upon certain representations of certain officers of the Company. Based upon the foregoing, it is our opinion that the Common Shares to be issued by the Company in this Public Offering, when sold in the manner provided in the Registration Statement, will be legally issued, fully paid and nonassessable. In giving this opinion, we have assumed that all certificates for the Company's Common Shares will, prior to their issuance, be duly executed on behalf of the Company by the Company's transfer agent and registered by the Company's registrar, if necessary, and will conform, except as to denominations, to specimens which we have examined. We hereby consent to the use of this opinion as an exhibit to the Registration Statement, to the use of our name as your counsel, and to all reference made to us in the Registration Statement and in the Prospectus forming a part thereof. In giving this consent, we do not hereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act, or the rules and regulations promulgated thereunder. Very truly yours, /s/ Graubard Miller GRAUBARD MILLER EX-23.2 6 cpi_am2ex232.txt CONSENT OF GOLDSTEIN GOLUB KESSLER EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS ------------------------------------------ We hereby consent to the use in this Registration Statement on Form SB-2 of our report dated March 29, 2002, except for the last paragraph of Note 5, as to which the date is April 12, 2002 and Note 6(a) and the first paragrpah of Note 13, as to which the date is June 22, 2002 relating to the consolidated financial statements of CPI Aerostructures, Inc. and Subsidiary as of December 31, 2001 and for each of the two years in the preiod then ended which appear in such Registration Statement. We also consent to the reference of our Firm under the captions "Experts" in such Registration Statement. /s/ Goldstein Golub Kessler LLP GOLDSTEIN GOLUB KESSLER LLP New York, New York February 5, 2003 -----END PRIVACY-ENHANCED MESSAGE-----