<PAGE>
PROSPECTUS
6,000,000 UNITS
ADVANCED AERODYNAMICS & STRUCTURES, INC.
CONSISTING OF 6,000,000 SHARES OF CLASS A COMMON STOCK,
6,000,000 REDEEMABLE CLASS A WARRANTS AND 6,000,000 REDEEMABLE CLASS B WARRANTS
Each unit ("Unit") offered by Advanced Aerodynamics & Structures, Inc. (the
"Company") consists of one share of Class A Common Stock, $.0001 par value (the
"Class A Common Stock"), one redeemable Class A Warrant (the "Class A Warrant")
and one redeemable Class B Warrant (the "Class B Warrant"). The Class A Warrants
and Class B Warrants (collectively, the "Warrants") will be transferable
separately immediately upon issuance. Each Class A Warrant entitles the holder
to purchase one share of Class A Common Stock and one Class B Warrant at an
exercise price of $6.50, subject to adjustment, until the fifth anniversary of
the date of this Prospectus. Each Class B Warrant entitles the holder to
purchase one share of Class A Common Stock at an exercise price of $8.75,
subject to adjustment, until the fifth anniversary of the date of this
Prospectus. The Class A Warrants and the Class B Warrants are subject to
redemption, commencing one year from the date of this Prospectus, by the Company
at a price of $.05 per Warrant on 30 days written notice if the closing bid
price of the Class A Common Stock for 30 consecutive trading days ending within
15 days of the notice of redemption of the Warrants averages in excess of $12.00
per share with respect to the Class A Warrants and $15.00 per share with respect
to the Class B Warrants (subject to adjustment in each case). See "Description
of Securities."
The Class A Common Stock is one of four classes of the Company's Common
Stock (which are collectively referred to herein as the "Common Stock"). The
various classes of the Company's Common Stock are essentially identical, except
that the Class B Common Stock, $.0001 par value per share (the "Class B Common
Stock"), and the Class E-1 Common Stock, $.0001 par value per share (the "Class
E-1 Common Stock"), and the Class E-2 Common Stock, $.0001 par value per share
(the "Class E-2 Common Stock") have five votes per share and the Class A Common
Stock has one vote per share on all matters upon which stockholders may vote.
Each share of Class B Common Stock is convertible into one share of Class A
Common Stock at any time at the option of the holder and automatically upon the
sale or transfer thereof commencing 13 months after the date of this Prospectus.
Upon completion of this offering (the "Offering"), the holders of Class B Common
Stock and Class E-1 Common Stock and Class E-2 Common Stock (collectively, the
"Class E Common Stock") will control approximately 85% of the total voting power
of the Company and will therefore be able to elect all of the Company's
directors and control the Company. See "Description of Securities--Common
Stock."
Prior to the Offering, there has been no public market for the Units, the
Common Stock, or the Warrants, and there can be no assurance that such a market
will develop after the completion of the Offering. The Class A Common Stock, the
Class A Warrants and the Class B Warrants have been approved for quotation on
the Nasdaq National Market and the Units have been approved for quotation on the
Nasdaq SmallCap Market. See "Underwriting" for a discussion of factors
considered in determining the initial public offering price. FOR INFORMATION
CONCERNING A SECURITIES AND EXCHANGE COMMISSION INVESTIGATION RELATING TO D.H.
BLAIR INVESTMENT BANKING CORP. (THE "UNDERWRITER"), SEE "RISK FACTORS" AND
"UNDERWRITING."
The registration statement of which this Prospectus is a part also covers
the offering for resale by certain securityholders (the "Selling
Securityholders") of 3,500,000 Class A Warrants (the "Selling Securityholders'
Class A Warrants"), 3,500,000 Class B Warrants (the "Selling Securityholders'
Class B Warrants") underlying the Selling Securityholders' Class A Warrants and
7,000,000 shares of Class A Common Stock issuable upon the exercise of the
Selling Securityholders' Class A and Class B Warrants. See "Concurrent
Securities Offering." The Selling Securityholders' Class A Warrants and the
securities underlying such warrants are sometimes collectively referred to in
this Prospectus as the "Selling Securityholders' Securities." The Company will
not receive any of the proceeds from the sale of the Selling Securityholders'
Securities. The Selling Securityholders' Class A Warrants are issuable upon the
closing of the Offering to the Selling Securityholders upon the automatic
conversion of 3,500,000 bridge warrants (the "Bridge Warrants") acquired by them
in the Company's private placement completed in August 1996 (the "Bridge
Financing"). The Selling Securityholders have agreed with the Company not to
sell the Selling Securityholders' Class A Warrants for at least 90 days after
the closing of the Offering and have agreed to sell only certain specified
percentages of such warrants during the period from 91 to 270 days after such
closing. In addition, the Selling Securityholders have agreed not to exercise
the Selling Securityholders' Class A Warrants for one year after the closing of
the Offering. See "Concurrent Securities Offering." Sales of any of the Selling
Securityholders' Securities, or even the potential of such sales at any time,
may have an adverse effect on the market prices of the securities offered
hereby. Unless the context otherwise requires, all references to the Warrants
shall include the Selling Securityholders' Warrants.
------------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL
IMMEDIATE DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 8 AND "DILUTION."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING DISCOUNTS PROCEEDS TO
PRICE TO PUBLIC AND COMMISSIONS (1) COMPANY (2)
<S> <C> <C> <C>
Per Unit..................... $5.00 $0.30 $4.70
Total (3).................... $30,000,000 $1,800,000 $28,200,000
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
The Units are offered by the Underwriter on a "firm commitment" basis when,
as and if delivered to and accepted by the Underwriter, and subject to
withdrawal or cancellation of the offer without notice and to their right to
reject orders in whole or in part and to certain other conditions. It is
expected that delivery of the certificates representing the Common Stock and
Warrants comprising the Units will be made at the offices of D.H. Blair
Investment Banking Corp., New York, New York, on or about December 6, 1996.
------------------------------
D.H. BLAIR INVESTMENT BANKING CORP.
The date of this Prospectus is December 3, 1996.
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
(1) Does not reflect additional compensation to be received by the Underwriter
in the form of (i) a non-accountable expense allowance of $900,000 or $0.15
per Unit ($1,035,000 if the over-allotment option is exercised in full) and
(ii) an option to purchase up to 600,000 Units at an exercise price of $6.50
per Unit, exercisable over a period of two years commencing three years from
the date of this Prospectus (the "Unit Purchase Option"). In addition, the
Company has agreed to indemnify the Underwriter against certain liabilities,
including liabilities under the Securities Act of 1933, as amended (the
"Securities Act"). See "Underwriting."
(2) Before deducting estimated expenses of the Offering of approximately
$1,784,035 ($1,919,035 if the over-allotment is exercised) payable by the
Company, including the Underwriter's non-accountable expense allowance.
(3) The Company has granted to the Underwriter a 30-day option to purchase up to
900,000 additional Units on the same terms and conditions as set forth
above, solely to cover over-allotments, if any. If the over-allotment option
is exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, and Proceeds to Company will be increased to $34,500,000,
$2,070,000 and $32,430,000, respectively. See "Underwriting."
PHOTOGRAPH DESCRIPTIONS AND CAPTIONS
1. Top left side corner: Color photo of employee looking into autoclave.
Caption: Nitrogen Pressurized Autoclave (30ft long by 10ft diameter) to
process graphite composite fuselage and components.
2. Second from Top--Left side. Color photo of employees laying up fuselage half
prior to autoclave processing. Caption: Graphite Composite lay up of
JETCRUZER-TM- 450 test aircraft fuselage prior to Autoclave processing.
3. Third from Top--Left side. Color photo with employees showing final stages
of mating wings and fuselage. Caption: Assembly of JETCRUZER-TM- 450 test
aircraft graphite composite fuselage with metal wings.
4. Bottom--Left side corner--Drawing of JETCRUZER-TM- 500 showing top, front
and six place seating. Caption: JETCRUZER-TM- 500 Propjet--Top, Front and
passenger seating views.
5. Upper Right Side Corner: AASI Aircraft Logo
Caption: AASI AIRCRAFT
6. Center Large Main Photo--Color photograph of the JETCRUZER-TM- 450 in
flight.
Caption: FAA Certified--JETCRUZER-TM- 450
THE COMPANY INTENDS TO MODIFY THE MODEL 450 TO PRODUCE AND SELL THE MODEL
500. SEE "BUSINESS--PROPOSED AIRCRAFT."
THE COMPANY INTENDS TO FURNISH ITS STOCKHOLDERS AND HOLDERS OF WARRANTS WITH
ANNUAL REPORTS CONTAINING FINANCIAL STATEMENTS AUDITED BY ITS INDEPENDENT
AUDITORS.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE UNITS, COMMON
STOCK AND/OR WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN
ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL DATA (INCLUDING THE
FINANCIAL STATEMENTS AND THE NOTES THERETO) APPEARING ELSEWHERE IN THIS
PROSPECTUS. UNLESS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS (A)
ASSUMES NO EXERCISE OF (I) THE UNDERWRITER'S OVER-ALLOTMENT OPTION, (II) THE
WARRANTS, (III) THE UNDERWRITER'S UNIT PURCHASE OPTION, (IV) THE SELLING
SECURITYHOLDERS' WARRANTS, OR (V) OPTIONS GRANTED OR AVAILABLE FOR GRANT UNDER
THE COMPANY'S 1996 STOCK OPTION PLAN (THE "OPTION PLAN") AND (B) GIVES EFFECT TO
THE CONVERSION, WHICH WILL OCCUR UPON THE CLOSING OF THE OFFERING, OF THE BRIDGE
WARRANTS INTO THE SELLING SECURITYHOLDERS' WARRANTS. ALL SHARE, PER SHARE AND
OTHER INFORMATION CONTAINED IN THIS PROSPECTUS REFLECTS THE REINCORPORATION AND
RECAPITALIZATION OF THE COMPANY EFFECTED IN JULY 1996. SEE "--THE
RECAPITALIZATION," "CAPITALIZATION," "MANAGEMENT--STOCK OPTION PLAN" AND
"DESCRIPTION OF SECURITIES."
THE COMPANY
The Company is a development stage company organized to design, develop,
manufacture and market propjet and jet aircraft intended primarily for business
use. The Company has obtained a type certificate ("Type Certificate") from the
United States Federal Aviation Administration ("FAA") with respect to a
non-pressurized, single-engine propjet aircraft powered by a Pratt & Whitney
engine (the "JETCRUZER 450"). The Company intends to modify the JETCRUZER-TM-
450 to develop a six-seat (including pilot), pressurized version of such
aircraft for commercial sale (the "JETCRUZER 500") which, the Company
anticipates, will takeoff and land in less than 1,000 feet, be able to fly at
approximately 30,000 feet above sea level, and have a high cruise speed of
approximately 350 mph and a range of approximately 1,600 miles.
Development of the JETCRUZER 450 began in 1990 and continued through the
issuance of the Type Certificate in 1994. Although the Company received
preliminary written indications of interest to purchase the aircraft, the
Company has decided that it will not obtain a production certificate with regard
to the JETCRUZER 450 or otherwise pursue commercialization of that aircraft in
part because the Type Certificate is subject to certain limitations which the
Company believes reduce the commercial viability of the JETCRUZER 450. Instead,
the Company has decided to amend the Type Certificate to develop the JETCRUZER
500 for commercial sale.
The amendment to the Type Certificate will incorporate certain design
changes and modifications required to improve the performance and capabilities
of the aircraft and to remove a number of the limitations imposed on the Type
Certificate. The Company will also be required to obtain a production
certificate from the FAA to commercially produce the JETCRUZER 500 and
airworthiness certificates for individual aircraft upon the completion of
manufacture. To obtain the production certificate the Company will be required
to demonstrate, through the FAA-monitored manufacturing of its first production
aircraft, that it has the capability of building the aircraft in accordance with
the specifications of the Type Certificate. An airworthiness certificate is
issued by the FAA for a particular aircraft when it is certified to have been
built in accordance with specifications approved under the type certificate for
that model.
The Company currently anticipates that it will obtain an amendment to its
Type Certificate during the approximately 18 to 24 months following the Offering
and obtain a production certificate and commence commercial production of the
JETCRUZER 500 within the same time frame. There can be no assurance, however,
that obtaining such an amendment and a production certificate will not take
longer than anticipated, that the Company will not be required to obtain a new
type certificate for the aircraft, that the Company will be successful in
obtaining the necessary type or production certifications, or that the Company
will not experience unforeseen expense or delay in certifying and
commercializing the JETCRUZER 500. See "Business--Government
Regulation--Certification."
The Company's proposed aircraft are based on a canard wing design in which a
smaller wing is installed in front of the aircraft's main wing. The Company
believes that this design provides for improved safety margins, including spin
resistance and increased lift, and increased ride comfort as compared to
3
<PAGE>
more conventional aircraft designs. The engine and propeller of the Company's
aircraft are located at the rear of the fuselage, thus providing the passengers
with a quieter ride. In addition, the Company's aircraft are designed to
incorporate lightweight graphite composite in the fuselage and aluminum in the
main wings, which, when combined with the canard wing, will, in the Company's
opinion, enhance the performance of the aircraft by increasing cruising distance
and fuel efficiency and thereby lowering operating expenses.
The Company's objective is to become a market leader in the sale of small
business aircraft. To achieve this objective, the Company intends to focus on
the performance, efficiency and safety of its proposed aircraft. The Company's
strategy is to capitalize on a perceived current lack of relatively low-priced,
high-performance aircraft by developing, certifying, manufacturing and marketing
aircraft which outperform competitive aircraft at a reduced cost. Additionally,
the Company intends to expend substantial resources on a worldwide sales and
marketing program to position itself with potential customers.
The Company believes that the market for its proposed aircraft will consist
primarily of foreign and domestic corporations, as well as, to a lesser extent,
private individuals and governmental entities. The Company intends to develop
direct marketing programs to target potential customers and to market its
aircraft through in-house sales representatives, trade publications, aircraft
trade shows and independent distributors and agents.
The Company has also initiated the development of two additional aircraft,
the JETCRUZER 650, a stretched twelve passenger (plus pilot) version of the
JETCRUZER 500, and the STRATOCRUZER-Registered Trademark- 1250, a twelve
passenger (plus pilot) twin engine jet aircraft anticipated to fly at
approximately 42,000 feet above sea level, have a maximum cruise speed of 500
mph, and a range of 3,700 miles. The continued development of these aircraft,
including obtaining the requisite regulatory approvals, will require substantial
financing in addition to the proceeds obtained from the Offering. Accordingly,
there can be no assurance that such aircraft will ever become available for
commercial sale.
The Company has incurred operating losses in each of its fiscal years to
date and expects that operating losses will continue for the foreseeable future.
No assurance can be given that the JETCRUZER 500, if successfully developed, or
any other aircraft which the Company may develop, will meet with market
acceptance or that the Company will achieve substantial sales revenue or operate
profitably.
The Company's principal executive offices and design facilities are located
at 3060 Airport Way, Long Beach, California 90806. The Company's telephone
number is (310) 988-2088.
THE RECAPITALIZATION
The Company was incorporated in Delaware in July 1996 and is the successor
by merger to Advanced Aerodynamics and Structures, Inc., a California
corporation incorporated in January 1990. Unless the context requires otherwise,
or as otherwise indicated, all references to the Company include the predecessor
company. Pursuant to the Agreement of Merger between the Company and its
predecessor, each share of the predecessor's common stock and preferred stock
outstanding prior to the merger was converted into approximately .056 shares of
Class B Common Stock, approximately .111 shares of Class E-1 Common Stock and
approximately .111 shares of Class E-2 Common Stock. The foregoing transactions
are collectively referred to in this Prospectus as the "Recapitalization." All
share and per share data set forth in this Prospectus have been restated to
reflect the Recapitalization.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered................ 6,000,000 Units, each Unit consisting of one share of
Class A Common Stock, one Class A Warrant and one Class
B Warrant. Each Class A Warrant entitles the holder to
purchase one share of Class A Common Stock and one Class
B Warrant at an exercise price of $6.50, subject to
adjustment, at any time until the fifth anniversary of
the date of this Prospectus. Each Class B Warrant
entitles the holder to purchase one share of Class A
Common Stock at an exercise price of $8.75, subject to
adjustment, at any time until the fifth anniversary of
the date of this Prospectus. Commencing one year after
the date of this Prospectus, the Warrants are subject to
redemption in certain circumstances on 30 days written
notice. See "Description of Securities."
Securities Offered Concurrently by
Selling Securityholders......... 3,500,000 Class A Warrants, 3,500,000 Class B Warrants
issuable upon exercise of such Class A Warrants, and
7,000,000 shares of Class A Common Stock issuable upon
exercise of such Class A Warrants and Class B Warrants.
See "Concurrent Securities Offering."
Common Stock Outstanding Before
the Offering(1)(2).............. Class A Common Stock .......................... 0 shares
Class B Common Stock .................. 2,000,000 shares
Class E-1 Common Stock ............. 4,000,000 shares(3)
Class E-2 Common Stock ............. 4,000,000 shares(3)
Common Stock Outstanding After the
Offering(1)(4).................. Class A Common Stock .................. 6,000,000 shares
Class B Common Stock .................. 2,000,000 shares
Class E-1 Common Stock ............. 4,000,000 shares(3)
Class E-2 Common Stock ............. 4,000,000 shares(3)
Use of Proceeds................... The Company will use the net proceeds of the Offering to
repay the notes issued in the Bridge Financing (the
"Bridge Notes"), to amend its FAA Type Certificate, to
acquire and produce equipment and tooling, to establish
an appropriate manufacturing facility, to market and
sell its proposed aircraft, and for working capital. See
"Use of Proceeds."
Risk Factors...................... The Offering involves a high degree of risk and
immediate and substantial dilution. See "Risk Factors"
and "Dilution."
Nasdaq Symbols(5):
Units........................... AASIU
Class A Common Stock............ AASI
Class A Warrants................ AASIW
Class B Warrants................ AASIZ
</TABLE>
- ------------------------
(1) For a description of the voting and other rights of the Class A Common
Stock, Class B Common Stock and Class E Common Stock (collectively, the
"Common Stock") see "Description of Securities-- Common Stock."
5
<PAGE>
(2) Does not include (i) 500,000 shares of Class A Common Stock reserved for
issuance under the Option Plan, under which options to purchase 110,000
shares of Class A Common Stock are outstanding at an exercise price of $5.00
per share, or (ii) 7,000,000 shares of Class A Common Stock issuable upon
exercise of the Bridge Warrants and the Class B Warrants underlying the
Bridge Warrants. See "Capitalization" and "Management--Stock Option Plan."
(3) Pursuant to the Company's Certificate of Incorporation, the 4,000,000 shares
of each of Class E-1 and Class E-2 Common Stock (the "Performance Shares")
will automatically convert into Class B Common Stock if the Company attains
certain earnings levels over the next approximately seven years or the
market price of the Company's Class A Common Stock achieves certain levels
over the next approximately three years. If such earnings or market price
levels are met, the Company will record a substantial non-cash charge to
earnings, for financial reporting purposes, as compensation expense relating
to the value of the Performance Shares held by officers, directors,
employees or consultants of the Company converted to Class B Common Stock.
The Performance Shares will be redeemable by the Company at any time after
March 31, 2004 for a nominal amount if such earnings or market price levels
are not achieved within the time periods specified above. See
"Capitalization," "Plan of Operations--Charge to Income in the Event of
Conversion of Performance Shares," "Principal Stockholders" and "Description
of Securities."
(4) Does not include (i) 18,000,000 shares of Class A Common Stock issuable upon
exercise of the Warrants included in the Units offered hereby, (ii)
3,600,000 shares of Class A Common Stock issuable upon exercise of the
Underwriter's over-allotment option, including shares issuable upon exercise
of the Warrants included in the Units subject to such option, (iii)
2,400,000 shares of Class A Common Stock issuable upon exercise of the Unit
Purchase Option and the Warrants included in the Units issuable upon
exercise of the Unit Purchase Option, or (iv) 7,000,000 shares of Class A
Common Stock issuable upon exercise of the Selling Securityholders' Class A
Warrants and the Selling Securityholders' Class B Warrants underlying such
warrants. Also does not include 500,000 shares of Class A Common Stock
reserved for issuance under the Option Plan, under which options to purchase
110,000 shares are outstanding at an exercise price of $5.00 per share.
(5) Notwithstanding quotation on Nasdaq, there can be no assurance that an
active trading market for the Company's securities will develop or, if
developed, that it will be sustained.
6
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 26,
1990
NINE-MONTHS ENDED SEPTEMBER (INCEPTION)
YEAR ENDED DECEMBER 31, 30, THROUGH
---------------------------- ---------------------------- SEPTEMBER 30,
1994 1995 1995 1996 1996
------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Interest and Other Income.......... $ 73,000 $ 27,000 $ 27,000 $ 11,000 $ 758,000
Costs and Expenses................. $ 2,840,000 $ 1,715,000 $ 1,297,000 $ 1,737,000 $ 23,424,000
Net Loss........................... $ (2,767,000) $ (1,688,000) $ (1,270,000) $ (1,726,000) $ (22,666,000)
Net loss per share(1).............. $ (.81) $ (.50) $ (.37) $ (.51)
Weighed average number of shares
outstanding(1)................... 3,400,000 3,400,000 3,400,000 3,400,000
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------------
AS
ACTUAL ADJUSTED(2)
-------------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working Capital (deficit)....................................................... $ (2,713,000) $ 22,530,000
Total assets.................................................................... 6,222,000 24,899,000
Total liabilities............................................................... 7,173,000 607,000
Accumulated deficit............................................................. (22,666,000) (23,839,000)
Total stockholders' equity (deficit)............................................ (951,000) 24,292,000
</TABLE>
- ------------------------
(1) Excludes 8,000,000 Performance Shares. See Note 1 of Notes to Financial
Statements for an explanation of the determination of the weighted average
number of shares outstanding used in computing net loss per share.
(2) Adjusted to give effect to (i) the sale of the 6,000,000 Units offered
hereby at an offering price of $5.00 per Unit and (ii) the receipt of the
net proceeds therefrom and the use of a portion of the net proceeds to repay
the Bridge Notes, together with accrued interest, and a charge to operations
of approximately $1,100,000 upon the repayment of the Bridge Notes. See "Use
of Proceeds" and "Plan of Operations."
7
<PAGE>
RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE IN NATURE AND INVOLVE A
HIGH DEGREE OF RISK, AND ONLY THOSE WHO CAN BEAR THE RISK OF THE LOSS OF THEIR
ENTIRE INVESTMENT SHOULD PURCHASE SUCH SECURITIES. PROSPECTIVE INVESTORS SHOULD
CAREFULLY CONSIDER, ALONG WITH THE OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS, THE FOLLOWING CONSIDERATIONS AND RISKS IN EVALUATING AN INVESTMENT
IN THE COMPANY. CERTAIN STATEMENTS CONTAINED IN THIS PROSPECTUS, INCLUDING
STATEMENTS CONCERNING THE COMPANY'S FUTURE CASH AND FINANCING REQUIREMENTS, THE
COMPANY'S ABILITY TO OBTAIN MARKET ACCEPTANCE OF ITS AIRCRAFT, THE COMPANY'S
ABILITY TO OBTAIN REGULATORY APPROVAL FOR ITS AIRCRAFT, AND THE COMPETITIVE
MARKET FOR SALES OF SMALL BUSINESS AIRCRAFT AND OTHER STATEMENTS CONTAINED
HEREIN REGARDING MATTERS THAT ARE NOT HISTORICAL FACTS, ARE FORWARD LOOKING
STATEMENTS; ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE SET FORTH IN THE
FORWARD LOOKING STATEMENTS, WHICH STATEMENTS INVOLVE RISKS AND UNCERTAINTIES.
DEVELOPMENT STAGE COMPANY; EARLY STAGE OF PRODUCT DEVELOPMENT; NO ASSURANCE
OF SUCCESS; NO COMMERCIAL OPERATIONS. The Company is in the development stage
and has not commenced any commercial operations or received any operating
revenues. Potential investors should be aware of the problems, delays, expenses
and difficulties encountered by an enterprise in the Company's stage of
development, many of which may be beyond the Company's control. These include,
but are not limited to, unanticipated problems relating to product development,
testing, initial and continuing regulatory compliance, manufacturing costs,
production and assembly, the competitive and regulatory environment in which the
Company plans to operate, marketing problems and additional costs and expenses
that may exceed current estimates. The Company has been engaged primarily in
research and development since its inception and has not completed the
development of the JETCRUZER 500. There can be no assurance that the Company
will be able to successfully develop the JETCRUZER 500 or any of its other
proposed aircraft, that the Company will be granted, or if granted, will be able
to maintain the necessary regulatory approvals to produce and sell its proposed
aircraft, that the Company's aircraft will prove to be commercially viable or
successfully marketed, or that the Company will ever achieve significant
revenues. See "Plan of Operations" and "Business."
ACCUMULATED DEFICIT; WORKING CAPITAL DEFICIT; HISTORY OF LOSSES; EXPECTATION
OF SUBSTANTIAL FUTURE LOSSES. To date, the Company has incurred significant
losses. At September 30, 1996, the Company had an accumulated deficit of
approximately $22,666,000 and a working capital deficit of approximately
$2,713,000. The Company incurred net losses of approximately $2,767,000 and
$1,688,000 for the fiscal years ended December 31, 1994 and 1995, respectively,
and has incurred a net loss of $1,726,000 for the nine months ended September
30, 1996. Such losses have resulted principally from significant costs
associated with the design, development and certification of the JETCRUZER 450
aircraft. The Company expects to incur further losses for the foreseeable future
due to significant costs associated with amending its FAA Type Certificate,
establishing manufacturing facilities capable of producing aircraft on a
commercial scale, manufacturing its proposed aircraft and obtaining the
necessary regulatory approvals relating thereto, and marketing and selling its
proposed aircraft. There can be no assurance that sales of the Company's
aircraft will ever generate sufficient revenues to fund its continuing
operations, that the Company will generate positive cash flow from its
operations, or that the Company will attain or thereafter sustain profitability
in any future period. See "Use of Proceeds," "Plan of Operations" and
"Business."
UNCERTAINTY AS TO ABILITY TO CONTINUE AS A GOING CONCERN. The report of the
Company's independent accountants contains an explanatory paragraph that
describes an uncertainty as to the ability of the Company to continue as a going
concern. Among the factors cited by the independent accountants as raising doubt
as to the Company's ability to continue as a going concern is the Company's need
for additional financing and that the Company has suffered recurring losses
during the development stage and has a working capital deficit and net
stockholders' deficit. See Report of Independent Accountants.
UNCERTAINTY OF MARKET ACCEPTANCE OF AIRCRAFT; LACK OF ESTABLISHED MARKET FOR
AIRCRAFT. The Company's business is dependent on market acceptance of its
proposed aircraft. To date, the Company has made only limited attempts to sell
its aircraft. There can be no assurance that, after the initiation of
significant
8
<PAGE>
marketing and sales efforts, the Company's aircraft will be accepted by the
marketplace. The Company's ability to successfully market the JETCRUZER 500 and
any other aircraft it may develop will depend in part upon the Company
convincing potential customers of the price, performance and safety advantages
of its aircraft as compared to competitive aircraft having a more conventional
design and appearance. The canard design is unusual in the aircraft industry,
and there can be no assurance that potential customers will accept such design.
Historically, sales of other manufacturers' aircraft having an unconventional
design and appearance have been disappointing, although such poor sales may be
related to other factors. Further, as a new manufacturer without an established
reputation, the Company would be particularly vulnerable to financial and
reputational harm in the event of an occurrence that aroused concern regarding
the safety or airworthiness of the Company's aircraft, including but not limited
to, an accident or other incident involving an aircraft manufactured by the
Company. Although the Company has received indications of interest to purchase
the JETCRUZER 450 (which the Company no longer intends to market and sell) and
the JETCRUZER 500, a number of which are supported by a nominal deposit, at any
time prior to the commencement of the manufacture of a customer's aircraft, the
deposit will be returned at the customer's request. See "Business--Competition"
and "--Marketing, Distribution and Service."
REGULATORY UNCERTAINTY. The Company intends to amend its Type Certificate
with respect to the JETCRUZER 450 to include the JETCRUZER 500, although there
can be no assurance that the FAA will not require application for a new type
certificate for the JETCRUZER 500. In addition, the Company will be required to
obtain an amendment to its Type Certificate or a new type certificate if and
when it proceeds with development of the JETCRUZER 650. The Company will be
required to obtain a new type certificate if and when it proceeds with
development of the STRATOCRUZER 1250. Obtaining a new or amended FAA type
certificate can be difficult, costly, and time consuming. There can be no
assurance that the Company will be successful in obtaining a new type
certificate or amendments to its existing Type Certificate for its proposed
aircraft, or that, if one or more new or amended type certificates are obtained,
they will not be subject to conditions which may adversely affect the use of the
proposed aircraft for their intended purpose. In the event that the FAA
determines that a new type certificate is required for any of the Company's
proposed aircraft (including the JETCRUZER 500), the time and cost of obtaining
such certification may be substantial, may render it impossible for the Company
to complete such certification and may have an adverse effect on the Company's
operations.
The Company will also need to obtain an FAA production certificate for the
commercial production of its aircraft and airworthiness certificates for
individual aircraft upon the completion of manufacture. There can be no
assurance that the Company will be able to obtain a production certificate for
its planned aircraft models, or airworthiness certificates for individual
aircraft, and therefore there can be no assurance that the Company will be able
to produce and sell aircraft.
The Company will also be subject to the risk of modification, suspension or
revocation of any FAA certificate it holds. Such modification, suspension, or
revocation could occur if, in the FAA's judgement, compliance with airworthiness
or safety standards by the Company was in doubt. If the FAA were to suspend or
revoke the Company's type or production certificate for an aircraft model, sales
of that model would be adversely affected or terminated. If, in the FAA's
judgement, an unsafe condition developed or was discovered after one or more of
the Company's aircraft had entered service, the FAA could issue an
"Airworthiness Directive," which could result in a requirement that the Company
develop appropriate design changes at the Company's expense. Foreign authorities
could impose similar obligations upon the Company as to aircraft within their
jurisdiction. Any or all of the above occurrences could expose the Company to
substantial additional costs and/or liabilities. See "Business--Government
Regulation."
LIMITED PRODUCTION CAPABILITIES; LACK OF MANUFACTURING EXPERIENCE. The
Company has produced only three JETCRUZER 450 aircraft in the course of
obtaining its FAA Type Certificate and has not yet manufactured any other
aircraft or any aircraft on a commercial scale. The manufacture of aircraft is a
complex and exacting process and will require the Company to attract and retain
experienced personnel to develop a manufacturing capability and to comply with
extensive government standards with respect to its proposed aircraft and the
process by which they are manufactured. There can be no assurance that the
9
<PAGE>
Company will be able to successfully implement large scale production
operations, attract and retain experienced personnel or obtain and maintain the
necessary regulatory approvals to commence and continue its manufacturing
operations. The Company intends to finance a substantial portion of the cost to
establish such a manufacturing facility through mortgage financing and/or other
similar means. There can be no assurance, however, that the Company will be able
to obtain such financing in order to establish a facility capable of producing
the Company's proposed aircraft. See "Use of Proceeds," "Plan of Operations" and
"Business."
LIMITED PRODUCT LINE; FLUCTUATIONS IN SALES OF AIRCRAFT. Initially, the
JETCRUZER 500 is intended to be the Company's only product available for
commercial sale. Accordingly, the operating results of the Company and the
future development of additional products will depend substantially upon the
successful sale of that aircraft, as to which there can be no assurance.
Moreover, if there is a downturn in the market for general aviation aircraft due
to economic, political or other reasons, the Company would not be able to rely
on sales of other products to offset the downturn. For example, from a peak of
approximately 18,000 units delivered by United States manufacturers in 1978,
sales of personal and recreational aircraft declined significantly during the
1980's and early 1990's. Since 1986, the number of aircraft delivered per year
by United States manufacturers has not exceeded 1,500, and fewer than 1,000
aircraft were delivered in each of 1992, 1993 and 1994. This decrease in sales
was caused by several factors, including the cost of aviation fuel, high
interest rates, inflation and an increase in negligence and product liability
claims arising from accidents involving general aviation piston aircraft and a
resulting increase in the price of manufacturers' liability insurance and,
therefore, of such aircraft. It is possible that sales of business aircraft
could decline in the future for these or other reasons beyond the Company's
control. Furthermore, if a potential purchaser is experiencing an economic
downturn or is for any other reason seeking to limit its capital expenditures,
the high unit selling price of a new aircraft may result in such potential
purchaser deferring its purchase or electing to purchase a pre-owned aircraft or
a lower priced aircraft. Further, since the Company intends to rely on the sale
of a relatively small number of high unit selling price aircraft to provide
substantially all of its revenue, small decreases in the number of aircraft
delivered in any year may have a material negative effect on the results of
operations for that year. In addition, small changes in the number and timing of
deliveries of, and receipt of payments on, new aircraft may have a material
effect on the Company's liquidity. See "Business--Industry Background" and
"--Proposed Products."
COMPETITION. The Company's aircraft will compete with other aircraft that
have comparable characteristics and capabilities. Most of the Company's
competitors, including Cessna Aircraft Co. (maker of the Caravan), Socata (maker
of the TBM), Pilatus (maker of the PC-12), Raytheon Aircraft Co. (Beechcraft)
(maker of the King Air) and New Piper Aircraft Corp. (maker of the Malibu
Mirage), are substantially larger in size and have far greater financial,
technical, marketing, and other resources than the Company. Certain of the
Company's actual and potential competitors may have technological capabilities
or other resources that would allow them to modify existing aircraft or develop
alternative new aircraft which could compete with the Company's aircraft, and
such competitors may introduce such aircraft and aircraft changes prior to the
anticipated delivery of the Company's first aircraft, which is not expected for
at least two years. The Company's ability to compete effectively may be
adversely affected by the ability of these competitors to devote greater
resources to the sales and marketing of their products than are available to the
Company. In addition, the Company will need to convince potential customers of
the advantages of its aircraft as compared to competitors' aircraft having a
more conventional design and appearance. There can be no assurance that future
technological advances will not result in competitive aircraft with improved
characteristics and capabilities that could adversely affect the Company's
business. The Company's aircraft may also compete with used aircraft which
become available in the resale market at prices sufficiently lower to offset
deficits in performance, if any, as compared to the Company's aircraft. See
"Business-- Competition."
NEED FOR ADDITIONAL FINANCING. The Company believes that the net proceeds
from the Offering will be sufficient to meet its cash requirements for
approximately 18 to 24 months following consummation of the Offering; however,
there can be no assurance that the Company will not require additional financing
prior
10
<PAGE>
to that time or that, if required, additional financing will be available on
acceptable terms or at all. Specifically, if the FAA determines that a new type
certificate is required for the JETCRUZER 500, the time lost to obtain such new
type certificate may be substantial. In addition, following such 18 to 24 month
period, if the Company has not completed the development of the JETCRUZER 500,
received the required regulatory approvals, and successfully commenced sales of
its aircraft, the Company may need to obtain additional financing. Further, the
Company intends to rely on mortgage financing or other similar financing in
connection with the establishment of a new manufacturing facility. The Company
has no binding commitments from any third parties to provide funds to the
Company, and there can be no assurance that additional financing will be
available on terms acceptable to the Company, if at all. Failure to obtain such
additional financing would have a material adverse effect on the Company's
business and prospects and could require the Company to severely limit or cease
its operations. See "Use of Proceeds," "Plan of Operations" and the Financial
Statements and the Notes thereto. Additionally, the Company has completed the
initial design of the JETCRUZER 650 and has designed and partially constructed
the prototype of the STRATOCRUZER 1250. Further development of these aircraft
will not be pursued in the near term future and will require substantial
financing in addition to that received in the Offering. See "Business--Other
Proposed Aircraft."
RELIANCE ON SINGLE SOURCE SUPPLIERS. The Company will be dependent on
certain suppliers of products in order to manufacture its aircraft. In
particular, the Company will be dependent on Pratt & Whitney to supply the
propjet engine for the JETCRUZER 500. The Company has no contractual right to
obtain any specified number of engines from Pratt & Whitney. Should the
Company's ability to obtain the requisite number of engines be limited for any
lengthy period of time or the cost of such engines increase, the Company's
ability to produce and sell aircraft could be materially and adversely affected.
In addition, the failure of other suppliers or subcontractors to meet the
Company's performance specifications, quality standards or delivery standards or
schedules could have a material adverse effect on the Company's operations.
Moreover, the Company's ability to significantly increase its production rate
following the introduction of the JETCRUZER 500 could be limited by the ability
or willingness of its key suppliers to increase their delivery rates. Further, a
significant amount of time has elapsed since the Company has obtained materials
and components from many of its suppliers. Accordingly, at such time as the
Company is ready to commence the manufacture of its aircraft, the prices to
obtain such materials and components may have changed and a number of suppliers
may need to be replaced. The Company's inability to obtain supplies to
manufacture its products would have a material adverse effect on the Company's
business prospects, operations and financial condition. See
"Business--Suppliers."
INSURANCE AND PRODUCT LIABILITY EXPOSURE. Because the failure of an
aircraft manufactured by the Company or any other mishap involving such an
aircraft may result in physical injury or death to the occupants of the aircraft
or others, the Company could be subject to lawsuits involving product liability
claims, which lawsuits may involve claims for substantial sums. Although the
Company intends to obtain comprehensive product liability insurance prior to the
commencement of commercial sales of its aircraft, such insurance can be
expensive, subject to various coverage exclusions and may not be obtainable by
the Company in the future on terms acceptable to the Company or at all. Further,
should the Company become involved in product liability litigation, the expenses
and damages awarded could be large and the scope of any coverage may be
inadequate. Increased insurance costs and/or liability costs could require an
increase in the price of the Company's aircraft and therefore could have a
negative impact on sales. See "--Limited Product Line; Fluctuations in Sales of
Aircraft" and "Business--Industry Background."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company expects to derive
a substantial portion of its revenues from the sale of a relatively small number
of aircraft. As a result, a small reduction in the number of aircraft shipped in
a quarter due to, for example, unanticipated shipment rescheduling or
cancellations, supplier delays in the delivery of component parts or unexpected
manufacturing difficulties, could have a material and adverse effect on the
Company's financial position and results of operations for that quarter.
In addition, the Company's intention to expand its manufacturing
capabilities and the need for continued investment by the Company in research,
development, engineering, and marketing will limit the
11
<PAGE>
Company's ability to reduce expenses in response to any such decrease in sales.
Moreover, because the indications of interest received by the Company from
potential customers will be subject to cancellation or rescheduling by the
customer prior to the commencement of construction of the customer's aircraft, a
backlog of orders at any particular date will not necessarily be representative
of actual sales for any succeeding period. If the Company's anticipated level of
revenues is not achieved for a particular period, the Company's operating
results could be adversely affected by its inability to reduce costs. The impact
of these and other factors on the Company's operating results in any future
period cannot be accurately forecast. See "Plan of Operations."
RISKS OF INTERNATIONAL OPERATIONS. The Company intends to market and sell
its proposed aircraft to foreign customers. Accordingly, the Company will be
subject to all of the risks inherent in international operations, including work
stoppages, transportation delays and interruptions, political instability or
conflict between countries in which the Company may do business, foreign
currency fluctuations, economic disruptions, differences in airworthiness and
certification standards imposed by foreign authorities, the imposition of
tariffs and import and export controls, changes in governmental policies
(including United States trade policy) and other factors, including other
foreign laws and regulations, which could have an adverse effect on the
Company's business. With respect to international sales that are denominated in
U.S. dollars, an increase in the value of the U.S. dollar relative to foreign
currencies can increase the effective price of, and reduce demand for, the
Company's products relative to competitive products priced in the local
currency. These international trade factors may, under certain circumstances,
materially and adversely impact demand for the Company's products or the
Company's ability to sell its aircraft in particular countries or deliver its
products in a timely manner or at a competitive price, which in turn may have an
adverse impact on the Company's relationships with its customers. In addition,
foreign certification or equivalent approval is required prior to importing an
aircraft into a foreign country, and no assurance can be given that the Company
will receive such certification or equivalent approval in any country. The
Company's success will depend in part upon its ability to obtain and maintain
foreign certifications or equivalent approvals and manage international
marketing, sales and service operations. See "Business--Marketing, Distribution
and Service" and "--Government Regulation--Foreign Certi-
fication."
DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL MANAGEMENT PERSONNEL. The
Company's success to date has depended in large part on the skills and efforts
of Dr. Carl Chen, the Company's Chairman and Chief Executive Officer, and, to a
lesser extent, on the skills and efforts of Mr. Gene Comfort, the Company's
Executive Vice President, and Mr. William Leeds, the Company's former Senior
Vice President, who has agreed to rejoin the Company upon the closing of the
Offering. See "Management-- Directors and Executive Officers." The Company has
obtained key-man life insurance coverage with respect to Dr. Chen and Mr.
Comfort in the face amounts of $2,000,000 and $1,000,000, respectively, naming
the Company as beneficiary. The Company's future success will depend to a
significant extent on its ability to identify and hire certain other key
employees on a timely basis. The Company is seeking to hire personnel to
complete its management team in connection with the contemplated expansion of
its operations. Competition for highly-skilled business, product development,
technical and other personnel is intense, and there can be no assurance that the
Company will be successful in recruiting new personnel or in retaining any of
its existing personnel. The Company will experience increased costs in order to
retain and attract skilled employees. The Company's failure to attract
additional qualified employees on a timely basis or at all or to retain the
services of key personnel could have a material adverse effect on the Company's
operating results and financial condition. See "Management."
LIMITED SALES AND MARKETING EXPERIENCE. The Company's operating results
will depend to a large extent on its ability to successfully market and sell its
aircraft. The Company currently has limited marketing capabilities and needs to
hire additional sales and marketing personnel. The Company intends to use a
portion of the proceeds of the Offering to expand its marketing activities and
to hire additional sales and marketing personnel. There can be no assurance that
the Company will be able to recruit, train or retain qualified personnel to sell
and market its products or that it will develop a successful sales and marketing
12
<PAGE>
strategy. The Company also has very limited marketing experience. There can be
no assurance that any marketing efforts undertaken by the Company will be
successful or will result in any significant sales of its products. See
"Business--Marketing, Distribution and Service" and "Management."
RISKS OF PLANNED GROWTH. The Company plans to significantly expand its
operations during the fourth quarter of 1996 and throughout 1997, which could
place a significant strain on its limited personnel, financial and other
resources. The Company intends to expand its manufacturing capabilities and
ultimately commence commercial manufacture of its aircraft. There can be no
assurance that the Company's efforts to conduct manufacturing activities will be
successful or that the Company will be able to satisfy commercial scale
production requirements on a timely and cost-effective basis. The Company's
ability to manage this growth, should it occur, would require significant
expansion of its engineering, production, marketing and sales capabilities and
personnel. There can be no assurance that the Company will be able to find
qualified personnel to fill such additional engineering, production, and sales
and marketing positions or be able to successfully manage a larger sales and
marketing organization. See "Business."
CONTROL BY INSIDERS; OWNERSHIP OF SHARES HAVING DISPROPORTIONATE VOTING
RIGHTS. Upon completion of the Offering, Dr. Carl Chen, the Company's Chairman
and Chief Executive Officer, and C.M. Cheng, a Director of the Company, will
beneficially own, or have voting control over, shares of the Company's capital
stock representing approximately 85% of the total voting power of the Company.
Accordingly, they will continue to be able to elect at least a majority of the
Company's directors and thereby direct the policies of the Company after
completion of the Offering. Furthermore, the disproportionate vote afforded the
shares of Class B Common Stock and Class E Common Stock could also serve to
impede or prevent a change of control of the Company. As a result, potential
acquirors may be discouraged from seeking to acquire control of the Company
through the purchase of Class A Common Stock, which could have a depressive
effect on the market price of the Company's securities. See "Principal
Stockholders."
LIMITATION ON OFFICERS' AND DIRECTORS' LIABILITIES UNDER DELAWARE
LAW. Pursuant to the Company's Certificate of Incorporation, and as authorized
under applicable Delaware law, directors and officers of the Company are not
liable for monetary damages for breach of fiduciary duty, except (i) in
connection with a breach of the duty of loyalty, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for dividend payments or stock repurchases illegal under Delaware law
or (iv) for any transaction in which a director has derived an improper personal
benefit. See "Management--Limitation of Liability and Indemnification Matters."
CHARGE TO INCOME IN THE EVENT OF CONVERSION OF PERFORMANCE SHARES. The
Performance Shares will be subject to redemption by the Company at a price of
$.01 per share if the Company does not attain certain earnings or share price
levels. In the event the Company attains certain earnings or share price levels,
the Performance Shares will be automatically converted into shares of Class B
Common Stock. In the event any Performance Shares held by officers, directors,
employees or consultants of the Company are converted into Class B Common Stock,
the maximum compensation expense recorded for financial reporting purposes will
be an amount equal to the fair value of the shares converted at the time of such
conversion which value cannot be predicted at this time. Therefore, in the event
the Company attains any of the earnings thresholds or the Company's Class A
Common Stock meets certain minimum bid prices required for the conversion of the
Performance Shares, the Company will recognize a substantial charge to earnings
during the period in which such conversion occurs as compensation expense to the
Company, which would have the effect of increasing the Company's loss or
reducing or eliminating its earnings, if any, at such time. Although the amount
of compensation expense recognized by the Company will not affect the Company's
cash flow or liquidity, it may have a depressive effect on the market price of
the Company's securities. In the event the Company does not attain these
earnings thresholds or minimum bid price levels, and no conversion occurs, no
compensation expense will be recorded for financial reporting purposes. See
"Description of Securities--Common Stock."
POSSIBLE ADVERSE EFFECTS OF AUTHORIZATION OF PREFERRED STOCK; ANTI-TAKEOVER
PROVISIONS; ENCHANCED VOTING POWER OF CLASS B COMMON STOCK AND CLASS E COMMON
STOCK. The Company's Certificate of Incorporation
13
<PAGE>
authorizes the issuance of a maximum of 5,000,000 shares of preferred stock on
terms which may be fixed by the Company's Board of Directors without stockholder
action. The terms of any series of preferred stock, which may include priority
claims to assets and dividends and special voting rights, could adversely affect
the rights of holders of the Common Stock. The issuance of preferred stock could
make the possible takeover of the Company or the removal of management of the
Company more difficult, discourage hostile bids or control of the Company in
which stockholders may receive premiums for their shares of Class A Common Stock
or otherwise dilute the rights of holders of Class A Common Stock. See
"Description of Securities--Preferred Stock." In addition, the Company is
subject to Delaware General Corporation Law provisions that may have the effect
of delaying, deferring or preventing certain changes of control of the Company.
See "Description of Securities--Certain Statutory and Charter Provisions under
the Delaware General Corporation Law." Furthermore, the disproportionate vote
afforded the Class B Common Stock and Class E Common Stock could also serve to
impede or prevent a change in control of the Company. See "--Control by
Insiders; Ownership of Shares Having Disproportionate Voting Rights" and
"Description of Securities--Common Stock."
PORTION OF NET PROCEEDS TO BE USED TO REPAY BRIDGE NOTES; CHARGES ARISING
FROM DEBT DISCOUNT AND DEBT ISSUANCE COSTS. Approximately $7,144,000 of the net
proceeds of the Offering will be used to repay in full the Bridge Notes. As a
result, the proceeds from the Offering available for the Company to meet its
ongoing operating needs and expansion plans will be correspondingly reduced. See
"Use of Proceeds." Upon completion of the Offering and repayment of the Bridge
Notes, a non-recurring charge of approximately $1,100,000 representing the
unamortized debt discount and issuance costs incurred in connection with the
Bridge Financing will be charged to operations in the quarter in which the
Offering is completed. See "Plan of Operations."
SHARES AVAILABLE FOR FUTURE SALE; REGISTRATION RIGHTS. Future sales of
Common Stock by existing stockholders pursuant to Rule 144 under the Securities
Act of 1933, as amended (the "Securities Act"), pursuant to the Concurrent
Securities Offering or otherwise, could have an adverse effect on the price of
the Company's securities. Pursuant to the Concurrent Securities Offering,
3,500,000 Selling Securityholders' Class A Warrants and the underlying
securities have been registered for resale concurrently with the Offering,
subject to a contractual restriction that the Selling Securityholders not sell
any of the Selling Securityholders' Class A Warrants for at least 90 days from
the closing of the Offering and, during the period from 91 to 270 days after the
closing of the Offering, only sell specified percentages of such Selling
Securityholders' Class A Warrants. Upon the sale of the 6,000,000 Units offered
hereby, the Company will have outstanding 16,000,000 shares of Common Stock,
6,000,000 Class A Warrants and 6,000,000 Class B Warrants (16,900,000 shares of
Common Stock, 6,900,000 Class A Warrants and 6,900,000 Class B Warrants if the
Underwriter's over-allotment option is exercised in full). The shares of Class A
Common Stock, Class A Warrants and Class B Warrants sold in the Offering will be
freely tradeable without restriction under the Securities Act, unless acquired
by "affiliates" of the Company as that term is defined in the Securities Act.
The remaining 10,000,000 outstanding shares of Common Stock are "restricted
securities" within the meaning of Rule 144 under the Securities Act. Pursuant to
Rule 144, virtually all of these restricted shares would be eligible for resale
commencing 90 days following the date of this Prospectus. However, 2,000,000 of
the 10,000,000 outstanding shares are Class B Common Stock and thus may not be
sold until thirteen months after the date of this Prospectus. In addition, the
remaining 8,000,000 of the outstanding shares are Class E Common Stock, which
shares are not currently transferable and are subject to redemption by the
Company for a nominal consideration if the Company does not meet certain income
or stock price levels, and are convertible into Class B Common Stock if the
Company does meet such levels. The holders of the Unit Purchase Option have
certain demand and "piggyback" registration rights covering their securities.
The exercise of such rights could involve substantial expense to the Company.
Sales of Common Stock, or the possibility of such sales, in the public market
may adversely affect the market price of the securities offered hereby. See
"Concurrent Securities Offering," "Description of Securities," "Shares Eligible
for Future Sale" and "Underwriting."
14
<PAGE>
EFFECT OF OUTSTANDING OPTIONS AND WARRANTS. Upon sale of the 6,000,000
Units offered hereby, the Company will have outstanding 6,000,000 Class A
Warrants to purchase 6,000,000 shares of Class A Common Stock and 6,000,000
Class B Warrants for $6.50 per share (subject to adjustment in certain
circumstances) and 6,000,000 Class B Warrants to purchase 6,000,000 shares of
Class A Common Stock at $8.75 per share (subject to adjustment in certain
circumstances) (or 6,900,000 Class A Warrants and 6,900,000 Class B Warrants if
the Underwriter's over-allotment option is exercised in full). In addition, the
Company will have outstanding 3,500,000 Selling Securityholders' Class A
Warrants to purchase 3,500,000 shares of Class A Common Stock and 3,500,000
Class B Warrants (which are exercisable for 3,500,000 shares of Class A Common
Stock), the Unit Purchase Option to purchase an aggregate of 2,400,000 shares of
Class A Common Stock assuming exercise of the underlying Warrants, and 500,000
shares of Class A Common Stock reserved for issuance under the Option Plan,
under which options to purchase 110,000 shares are outstanding at an exercise
price of $5.00 per share. Holders of such options and warrants may exercise them
at a time when the Company would otherwise be able to obtain additional equity
capital on terms more favorable to the Company. In addition, the Unit Purchase
Option contains a provision permitting the holder to elect a cashless exercise
of the Option. Moreover, while these options are outstanding, the Company's
ability to obtain financing on favorable terms may be adversely affected. See
"Management" and "Description of Securities."
IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of the Units offered hereby
will incur immediate and substantial dilution in the net tangible book value of
the Class A Common Stock included in the Units, estimated to be approximately
$3.48 per share or approximately 70% of the public offering price per share
(allocating no value to the Warrants). Additional dilution to public investors,
if any, may result to the extent that the Warrants, the Unit Purchase Option or
outstanding options and warrants are exercised at a time when the net tangible
book value per share of Common Stock exceeds the exercise price of any such
securities. See "Dilution."
ARBITRARY DETERMINATION OF OFFERING PRICE; ABSENCE OF PUBLIC MARKET AND
POSSIBLE VOLATILITY OF STOCK PRICE. The initial public offering price of the
Units and the exercise prices and other terms of the Warrants have been
arbitrarily determined by negotiation between the Company and the Underwriter
and do not necessarily bear any relationship to the Company's assets, net worth
or other established criteria of value. The exercise and redemption prices of
the Warrants should not be construed to imply or predict any increase in the
market price of the Class A Common Stock. See "Underwriting." No public market
for the securities has existed prior to the Offering. No assurance can be given
that an active trading market in the Company's securities will develop after
completion of the Offering or, if developed, that it will be sustained. No
assurance can be given that the market price of the Company's securities will
not fall below the initial public offering price. The Company believes factors
such as quarterly fluctuations in financial results and announcements of new
technology or products or regulatory developments in the aircraft industry may
cause the market price of the Company's securities to fluctuate, perhaps
substantially. These fluctuations, as well as general economic conditions, such
as recessions or high interest rates, may adversely affect the market price of
the securities.
POSSIBLE DELISTING OF SECURITIES FROM THE NASDAQ STOCK MARKET. The
Company's Class A Common Stock, Class A Warrants and Class B Warrants have been
approved for quotation on The Nasdaq National Market and the Units have been
approved for quotation on the Nasdaq SmallCap Market. The Company will have to
maintain certain minimum financial requirements for continued inclusion on
Nasdaq. If the Company is unable to satisfy Nasdaq's maintenance requirements,
the Company's securities may be delisted from Nasdaq. In such event, trading, if
any, in the Units, Class A Common Stock and Warrants would thereafter be
conducted in the over-the-counter markets in the so-called "pink sheets" or the
NASD's "Electronic Bulletin Board." Consequently, the liquidity of the Company's
securities could be impaired, not only in the number of securities which could
be bought and sold, but also through delays in the timing of the transactions,
reductions in the number and quality of security analysts' and the news media's
coverage of the Company, and lower prices for the Company's securities than
might otherwise be attained. The Nasdaq Stock Market has recently proposed more
stringent financial requirements for listing
15
<PAGE>
on Nasdaq. If adopted, the Company will have to meet and maintain such new
financial requirements for continued inclusion on Nasdaq. If the Company is
unable to satisfy these new requirements, the Company's securities may be
delisted from Nasdaq.
RISK OF LOW-PRICE STOCKS. If the Company's securities were to be delisted
from Nasdaq, they could become subject to Rule 15g-9 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), which imposes additional
sales practice requirements on broker-dealers which sell such securities to
persons other than established customers and "accredited investors" (generally,
individuals with net worths in excess of $1,000,000 or annual incomes exceeding
$200,000, or $300,000 together with their spouses). For transactions covered by
this rule, a broker-dealer must make a special suitability determination for the
purchaser and have received the purchaser's written consent to the transaction
prior to sale. Consequently, the rule may adversely affect the ability of
broker-dealers to sell the Company's securities and may adversely affect the
ability of purchasers in the Offering to sell any of the securities acquired
hereby in the secondary market.
Commission regulations define a "penny stock" to be any non-Nasdaq equity
security that has a market price (as therein defined) of less than $5.00 per
share or with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require delivery, prior to any transaction in a penny stock, of a
disclosure schedule prepared by the Commission relating to the penny stock
market. Disclosure is also required to be made about commissions payable to both
the broker-dealer and the registered representative and current quotations for
the securities. Finally, monthly statements are required to be sent disclosing
recent price information for the penny stock held in the account and information
on the limited market in penny stocks.
The foregoing penny stock restrictions will not apply to the Company's
securities if such securities are listed on Nasdaq and have certain price and
volume information provided on a current and continuing basis or if the Company
meets certain minimum net tangible assets or average revenue criteria. There can
be no assurance that the Company's securities will qualify for exemption from
these restrictions. In any event, even if the Company's securities were exempt
from such restrictions, it would remain subject to Section 15(b)(6) of the
Exchange Act, which gives the Commission the authority to prohibit any person
that is engaged in unlawful conduct while participating in a distribution of a
penny stock from associating with a broker-dealer or participating in a
distribution of a penny stock, if the Commission finds that such a restriction
would be in the public interest. If the Company's securities were subject to the
rules on penny stocks, the market liquidity for the Company's securities could
be severely adversely affected.
CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE
WARRANTS. The Warrants included in the Units offered hereby will be immediately
detachable and separately tradeable. Although the Units will not knowingly be
sold to purchasers in jurisdictions in which the Units are not registered or
otherwise qualified for sale, purchasers who reside in or move to jurisdictions
in which the securities underlying the Warrants are not so registered or
qualified during the period that the Warrants are exercisable may buy Units (or
the Warrants included therein) in the aftermarket. In this event, the Company
would be unable to issue securities to those persons desiring to exercise their
Warrants unless and until the underlying securities could be registered or
qualified for sale in the jurisdictions in which such purchasers reside, or
unless an exemption from such qualification exists in such jurisdictions. No
assurance can be given that the Company will be able to effect any such required
registration or qualification.
Additionally, purchasers of the Units will be able to exercise the Warrants
included therein only if a current prospectus relating to the securities
underlying the Warrants is then in effect under the Securities Act and such
securities are qualified for sale or exempt from qualification under the
applicable securities or "blue sky" laws of the states in which the various
holders of the Warrants then reside. Although the Company has undertaken to use
reasonable efforts to maintain the effectiveness of a current prospectus
covering the securities underlying the Warrants, no assurance can be given that
the Company will be able to do so. The value of the Warrants may be greatly
reduced if a current prospectus covering the securities issuable upon the
exercise of the Warrants is not kept effective or if such securities are not
qualified or exempt from qualification in the states in which the holders of the
Warrants then reside.
16
<PAGE>
ADVERSE EFFECT OF POSSIBLE REDEMPTION OF WARRANTS. The Warrants are subject
to redemption by the Company commencing one year from the date of this
Prospectus, on at least 30 days' prior written notice, if the average closing
bid price of the Class A Common Stock for 30 consecutive trading days ending
within 15 days of the date on which the notice of redemption is given exceeds
$12.00 per share with respect to the Class A Warrants and $15.00 per share with
respect to the Class B Warrants. If the Warrants are redeemed, holders of
Warrants will lose their right to exercise the Warrants, except during such
30-day notice of redemption period. Upon the receipt of a notice of redemption
of the Warrants, the holders thereof would be required to: (i) exercise the
Warrants and pay the exercise price at a time when it may be disadvantageous for
them to do so, (ii) sell the Warrants at the then current market price (if any)
when they might otherwise wish to hold the Warrants, or (iii) accept the
redemption price, which is likely to be substantially less than the market value
of the Warrants at the time of redemption. See "Description of Securities--
Redeemable Warrants."
NO DIVIDENDS. The Company has paid no dividends to its stockholders since
its inception and does not plan to pay dividends in the foreseeable future. The
Company intends to reinvest earnings, if any, in the development and expansion
of its business. See "Dividend Policy."
POSSIBLE ADVERSE EFFECT ON LIQUIDITY OF THE COMPANY'S SECURITIES DUE TO
INVESTIGATION BY THE SECURITIES AND EXCHANGE COMMISSION OF THE UNDERWRITER AND
D.H. BLAIR & CO. The Securities and Exchange Commission (the "Commission") is
conducting an investigation concerning various business activities of the
Underwriter and D.H. Blair & Co., Inc. ("Blair & Co."), a selling group member
that will distribute substantially all of the Units offered hereby. The
investigation appears to be broad in scope, involving numerous aspects of the
Underwriter's and Blair & Co.'s compliance with the Federal securities laws and
compliance with the Federal securities laws by issuers whose securities were
underwritten by the Underwriter or Blair & Co., or in which the Underwriter or
Blair & Co. made over-the counter markets, persons associated with the
Underwriter or Blair & Co., such issuers and other persons. The Company has been
advised by the Underwriter that the investigation has been ongoing since at
least 1989 and that it is cooperating with the investigation. The Underwriter
cannot predict whether this investigation will ever result in any type of formal
enforcement action against the Underwriter or Blair & Co. or, if so, whether any
such action might have an adverse effect on the Underwriter or the securities
offered hereby. The Company has been advised that Blair & Co. intends to make a
market in the securities following the Offering. An unfavorable resolution of
the Commission's investigation could have the effect of limiting such firm's
ability to make a market in the Company's securities, which could adversely
affect the liquidity or price of such securities. See "Underwriting."
POSSIBLE RESTRICTIONS ON MARKET MAKING ACTIVITIES IN THE COMPANY'S
SECURITIES. The Underwriter has advised the Company that Blair & Co. intends to
make a market in the Company's securities. Rule 10b-6 under the Exchange Act
will prohibit Blair & Co. from engaging in any market-making activities with
regard to the Company's securities for the period from nine business days (or
such other applicable period as Rule 10b-6 may provide) prior to any
solicitation by the Underwriter of the exercise of Warrants until the later of
the termination of such solicitation activity or the termination (by waiver or
otherwise) of any right that the Underwriter may have to receive a fee for the
exercise of Warrants following such solicitation. As a result, Blair & Co. may
be unable to provide a market for the Company's securities during certain
periods while the Warrants are exercisable. In addition, under applicable rules
and regulations under the Exchange Act, any person engaged in the distribution
of the Selling Securityholders' Warrants may not simultaneously engage in
market-making activities with respect to any securities of the Company for the
applicable "cooling off" period (at least two and possibly nine business days)
prior to the commencement of such distribution. Accordingly, in the event the
Underwriter or Blair & Co. is engaged in a distribution of the Selling
Securityholders' Warrants, neither of such firms will be able to make a market
in the Company's securities during the applicable restrictive period. Any
temporary cessation of such market-making activities could have an adverse
effect on the market prices of the Company's securities. See "Underwriting."
17
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the 6,000,000 Units offered hereby, after
deducting the underwriting discount and commissions and other estimated expenses
of the Offering, are anticipated to be approximately $26,415,965 ($30,510,965 if
the Underwriter's over-allotment option is exercised in full). The Company
expects the net proceeds to be utilized approximately as follows:
<TABLE>
<CAPTION>
APPROXIMATE AMOUNT PERCENTAGE OF
ANTICIPATED APPLICATION OF NET PROCEEDS NET PROCEEDS
- ------------------------------------------------------------------------------ ------------------- -------------
<S> <C> <C>
Repayment of Bridge Notes(1).................................................. $ 7,144,000 27.04%
Amendment of FAA Type Certificate(2).......................................... 8,000,000 30.28%
Purchase of Equipment and Tooling(3).......................................... 1,450,000 5.49%
Manufacturing Facility Costs(4)............................................... 1,100,000 4.16%
Sales and Marketing(5)........................................................ 900,000 3.41%
Working Capital(6)............................................................ 7,821,965 29.61%
------------------- ------
Total....................................................................... $ 26,415,965 100.00%
------------------- ------
------------------- ------
</TABLE>
- ------------------------
(1) Represents the aggregate principal amount of Bridge Notes issued in the
Bridge Financing completed by the Company in August 1996, together with
estimated accrued interest through November 12, 1996. The Bridge Notes bear
interest at the rate of 10% per annum and mature on the earlier of the
closing of the Offering or August 30, 1997. The proceeds of the Bridge Notes
were and are being used to repay bank and other outstanding indebtedness,
loans from officers and directors (consisting of approximately $401,000 and
$262,000 of indebtedness owed by the Company to C. M. Cheng, a director of
the Company, and Dr. Carl Chen, the Chairman, Chief Executive Officer and
President of the Company, respectively), accrued compensation (consisting of
approximately $213,000 and $34,000 of accrued and unpaid compensation owed
to Dr. Chen and Gene Comfort, the Executive Vice President of the Company,
respectively) and past due accounts payable and for working capital. See
"Plan of Operations" and "Certain Transactions."
(2) Represents the cost of completing development of the JETCRUZER 500,
including the cost of obtaining an amendment of the Company's FAA Type
Certificate to include the JETCRUZER 500, the cost of equipment, tooling,
dies, and jigs necessary to manufacture the JETCRUZER 500, the cost of
static and flight testing, and the cost of hiring, training, and employing
personnel necessary to obtain such amendment. The Company expects that
certain of the equipment and tooling which will be acquired or created by
the Company in amending its Type Certificate will also be used to
manufacture the JETCRUZER 500 for commercial sale. See "Plan of Operations."
(3) Includes the purchase of additional production tools and the in-house
duplication of existing tooling, jigs and dies for commercial production.
(4) Represents a portion of the costs of establishing an appropriate
manufacturing facility. The Company estimates that the total cost of this
facility will be approximately $7,000,000 and anticipates funding the
remaining portion of such facility through mortgage financing and/or other
similar means. In the event that the Company is unable to fully fund the
cost of such facility from such sources, it may be necessary to use the
proceeds allocated to working capital for such purpose or the Company may
determine to lease a facility until such funds become available. See "Plan
of Operations."
(5) Includes the cost of sales materials, advertising, trade shows and hiring,
training and employing additional sales and marketing personnel.
(6) Represents working capital reserves and general and administrative expenses,
including those related to the financial and accounting functions of the
Company, management information systems, insurance and hiring, training and
employing administrative, financial, and accounting personnel.
18
<PAGE>
The foregoing represents the Company's best estimate of its allocation of
the net proceeds of the Offering during the next 18 to 24 months. This estimate
is based upon the current status of the Company's business and upon certain
assumptions, including, primarily, assumptions that the Company's development of
the JETCRUZER 500 will occur as projected and that the Company will obtain the
necessary regulatory approvals on a timely basis. The amounts actually expended
for each purpose set forth above, other than repayment of the Bridge Notes, may
vary significantly in the event that any of these assumptions prove to be
inaccurate. Future events, including the problems, delays, expenses and
difficulties frequently encountered by development stage companies, changes in
economic, regulatory or competitive conditions or the Company's proposed
business, the results of the Company's sales and marketing activities, or the
inability to obtain regulatory approvals as anticipated, may make changes in the
anticipated allocation of funds necessary or desirable. The Company reserves the
right to change its use of proceeds in response to unanticipated events or
opportunities. In addition, the Company may use funds allocated to working
capital to acquire or invest in complementary businesses or products. The
Company does not currently have any plans, agreements, or commitments with
respect to any possible acquisition.
The Company anticipates, based on its current plans and assumptions
regarding its future operations, that the net proceeds of the Offering will be
sufficient to satisfy the Company's cash requirements for at least the next 18
to 24 months. If the Company's estimates prove to be incorrect, however, then
during such period, the Company may have to seek additional sources of
financing, reduce operating costs and/or curtail growth plans. In addition,
following such period, if the Company has not completed the development of the
JETCRUZER 500, received the required regulatory approvals, and commenced
commercial sales of the JETCRUZER 500, the Company may need to obtain additional
financing. No assurances can be given that additional sources of financing would
be available to the Company under those circumstances; and, if the Company were
unable to obtain needed financing, the Company's business would be materially
and adversely affected. See "Plan of Operations."
Prior to their use, the net proceeds of the Offering will be invested in
short-term, investment-grade securities or federally insured accounts or
certificates of deposit. Any proceeds received upon exercise of the
Underwriter's over-allotment option, the Warrants or the Selling
Securityholders' Warrants will be added to working capital.
DIVIDEND POLICY
The Company has not, to date, paid any dividends. The Company has no current
plans to pay dividends and intends to retain earnings, if any, for working
capital purposes. Any future determination as to the payment of dividends by the
Company will depend upon the Company's results of operations, capital
requirements, and financial condition and other factors deemed relevant by the
Company's Board of Directors.
19
<PAGE>
DILUTION
THE FOLLOWING DISCUSSION AND TABLES ALLOCATE NO VALUE TO THE WARRANTS WHICH
ARE A PART OF THE UNITS.
Dilution represents the difference between the initial public offering price
per share paid by the purchasers in the Offering and the net tangible book value
per share immediately after completion of the Offering. Net tangible book value
per share represents the net tangible assets of the Company (total assets less
total liabilities and intangible assets at September 30, 1996) divided by the
number of shares of Common Stock outstanding. At September 30, 1996, the Company
had a net tangible book value deficit of $951,000, or approximately $0.10 per
share ($0.48 per share if the Performance Shares are excluded). After giving
effect to the issuance of the 6,000,000 Units offered hereby at an initial
public offering price of $5.00 per Unit and the Company's receipt of the
estimated net proceeds therefrom and the use of a portion of the net proceeds to
repay the Bridge Notes (including interest), the net tangible book value of the
Company, as adjusted at September 30, 1996, would be $24,292,000, or
approximately $1.52 per share ($3.04 per share if the Performance Shares were
excluded). This would result in an immediate dilution to investors in the
Offering of $3.48, or 70%, per share ($1.96, or 39%, per share if the
Performance Shares were excluded), and the aggregate increase in the net
tangible book value to present stockholders would be $1.62 per share ($3.52 per
share if Performance Shares are excluded), as illustrated by the following
table:
<TABLE>
<S> <C> <C>
Initial public offering price per Unit........................ $ 5.00
Net tangible book value deficit per share before the
Offering.................................................. (0.10)
Increase per share attributable to new investors in the
Units..................................................... 1.62
---------
Net tangible book value per share after the Offering.......... 1.52
---------
Dilution per share to investors(1)............................ $ 3.48
---------
---------
</TABLE>
- ------------------------
(1) If the over-allotment option is exercised in full, the net tangible book
value per share after the Offering would be approximately $1.68, resulting
in dilution to new investors in the Offering of $3.32, or 66%, per share.
The following table sets forth at September 30, 1996 the differences between
existing stockholders and new investors in the Offering with respect to the
number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by
existing stockholders and by new investors at an initial public offering price
of $5.00 per Unit:
<TABLE>
<CAPTION>
PERCENTAGE OF
PERCENTAGE OF TOTAL AVERAGE
OUTSTANDING CONSIDERATION CONSIDERATION PRICE PER
NUMBER SHARES PAID(1) PAID SHARE(1)
------------- --------------- ------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders..................... 10,000,000(2) 62.5% $ 19,374,000 39.2% $ 1.94
New Investors............................. 6,000,000 37.5 30,000,000 60.8 $ 5.00
------------- ----- ------------- -----
Total..................................... 16,000,000 100.0% $ 49,374,000 100.0%
------------- ----- ------------- -----
------------- ----- ------------- -----
</TABLE>
- ------------------------
(1) Prior to the deduction of costs of issuance.
(2) Includes the 8,000,000 Performance Shares. See "Description of
Securities--Common Stock."
20
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996 and as adjusted to give effect to the issuance by the Company
of 6,000,000 Units offered hereby at an initial offering price of $5.00 per
Unit, the receipt of the net proceeds therefrom and the application of the net
proceeds in part to repay the Bridge Notes. See "Use of Proceeds." This table
should be read in conjunction with the financial statements of the Company and
the notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
------------------------------
AS ADJUSTED
ACTUAL (4)
-------------- --------------
<S> <C> <C>
Bridge Notes, net of discount.................................................... $ 6,566,000 $ --
-------------- --------------
Stockholders' Equity:
Preferred Stock, $.0001 par value, 5,000,000 shares authorized; none issued...... -- --
Class A Common Stock, $.0001 par value, 45,000,000 shares authorized; no shares
issued and outstanding actual; 6,000,000 shares issued and outstanding as
adjusted (1)(2)(3)............................................................. -- 1,000
Class B Common Stock, $.0001 par value, 10,000,000 shares authorized; 2,000,000
shares issued and outstanding actual and as adjusted (2)....................... -- --
Class E-1 Common Stock, $.0001 par value, 4,000,000 shares authorized; 4,000,000
shares issued and outstanding actual and as adjusted (2)....................... -- --
Class E-2 Common Stock, $.0001 par value, 4,000,000 shares authorized; 4,000,000
shares issued and outstanding actual and as adjusted (2)....................... -- --
Warrants to Purchase Common Stock................................................ 473,000 473,000
Additional paid-in capital....................................................... 21,242,000 47,657,000
Deficit accumulated during the development stage................................. (22,666,000) (23,839,000)
-------------- --------------
Stockholders' equity (deficit)................................................... (951,000) 24,292,000
-------------- --------------
Total capitalization............................................................. $ (5,615,000) $ 24,292,000
-------------- --------------
-------------- --------------
</TABLE>
- ------------------------
(1) In November 1996 the Company filed an amendment to its Certificate of
Incorporation increasing the number of authorized shares of Class A Common
Stock to 60,000,000.
(2) The various classes of the Company's Common Stock are essentially identical,
except that the Class B, Class E-1, and Class E-2 Common Stock have five
votes per share and the Class A Common Stock has one vote per share, and
each share of Class B Common Stock is convertible into one share of Class A
Common Stock commencing 13 months after the date of this Prospectus. Also,
the shares of Class E-1 and E-2 Common Stock are redeemable by the Company
for nominal consideration if the Company does not achieve certain income or
share price levels, and each share of Class E-1 and E-2 Common Stock is
convertible into one share of Class B Common Stock if the Company does
achieve those levels. See "Description of Securities--Common Stock."
(3) Does not include (i) 18,000,000 shares of Class A Common Stock issuable upon
exercise of the Warrants included in the Units offered hereby, (ii)
3,600,000 shares of Class A Common Stock issuable upon exercise of the
Underwriter's over-allotment option, including the shares issuable upon
exercise of the Warrants included in the Units subject to such option, (iii)
2,400,000 shares of Class A Common Stock issuable upon exercise of the Unit
Purchase Option and the Warrants included in the
21
<PAGE>
Units issuable upon exercise of the Underwriter's Unit Purchase Option, and
(iv) 7,000,000 shares of Class A Common Stock issuable upon exercise of the
Selling Securityholders' Warrants and the Class B Warrants underlying such
warrants. Also does not give effect to options to purchase 110,000 shares of
Class A Common Stock issuable upon exercise of outstanding options with an
exercise price of $5.00 per share and 390,000 shares of Class A Common Stock
reserved for future grant under the Option Plan as of the date of this
Prospectus. See "Management--Stock Option Plan" and Note 7 of Notes to
Financial Statements.
(4) As adjusted amounts give effect to the recognition a charge to earnings of
approximately $1,100,000 upon the repayment of the Bridge Notes. See "Use of
Proceeds" and "Plan of Operations."
BRIDGE FINANCING
In August 1996, the Company completed the Bridge Financing of an aggregate
of $7,000,000 principal amount of Bridge Notes and 3,500,000 Bridge Warrants in
which it received net proceeds of approximately $6,195,000 (after expenses of
such offering). The Bridge Notes are payable, together with interest at the rate
of 10% per annum, on the earlier of one year from the issuance of the Bridge
Notes or the closing of the Offering. See "Use of Proceeds," "Plan of
Operations" and "Certain Transactions." Commencing in August 1997, the Bridge
Warrants entitle the holders thereof to purchase one share of Class A Common
Stock. However, the Bridge Warrants will be exchanged automatically on the
closing of the Offering for the Selling Securityholders' Warrants, each of which
will be identical to the Class A Warrants included in the Units offered hereby.
The Selling Securityholders' Warrants have been registered for resale in the
Registration Statement of which this Prospectus is a part, subject to the
contractual restriction that the Selling Securityholders have agreed not to
exercise the Selling Securityholders' Warrants for a period of one year from the
closing of the Offering and not to sell the Securityholders' Warrants except
after specified periods commencing 90 days after the closing date of the
Offering. See "Concurrent Securities Offering."
22
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below for the years ended December 31,
1994 and 1995 and for the period from January 26, 1990 (inception) to December
31, 1995 are derived from the audited financial statements of the Company
included elsewhere in this Prospectus. The report of Price Waterhouse LLP which
also appears herein contains an explanatory paragraph relating to uncertainty as
to the ability of the Company to continue as a going concern. The selected
financial data as of September 30, 1996 and for the nine months ended September
30, 1995 and 1996 and for the period from January 26, 1990 (inception) through
September 30, 1996 have been derived from the Company's unaudited financial
statements which, in the opinion of Management, reflect all adjustments, which
are of a normal recurring nature, necessary for a fair presentation of the
results of operations for such periods. The results of the interim periods are
not necessarily indicative of the results of a full year. The following selected
financial data should be read in conjunction with the financial statements and
related notes thereto, and with "Plan of Operations," appearing elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 26,
1990
PERIOD FROM NINE-MONTH PERIOD ENDED (INCEPTION) TO
YEAR ENDED DECEMBER 31, JANUARY 26, 1990 SEPTEMBER 30 (UNAUDITED) SEPTEMBER 30,
------------------------ (INCEPTION) TO ------------------------ 1996
1994 1995 DECEMBER 31, 1995 1995 1996 (UNAUDITED)
----------- ----------- ----------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Other income.......................... $ 71,000 $ 27,000 $ 687,000 $ 27,000 $ 7,000 $ 694,000
Interest income....................... 2,000 60,000 4,000 64,000
----------- ----------- ----------------- ----------- ----------- ---------------
73,000 27,000 747,000 27,000 11,000 758,000
----------- ----------- ----------------- ----------- ----------- ---------------
Cost and expenses:
Research and development costs...... 1,088,000 13,636,000 13,636,000
Preoperating costs.................. 282,000 282,000
General and administrative
expenses.......................... 1,239,000 1,453,000 5,463,000 1,151,000 1,418,000 6,881,000
Loss on disposal of assets.......... 357,000 357,000 357,000
Interest expense.................... 156,000 262,000 1,188,000 146,000 319,000 1,507,000
In-process research and development
acquired.......................... 761,000 761,000
----------- ----------- ----------------- ----------- ----------- ---------------
2,840,000 1,715,000 21,687,000 1,297,000 1,737,000 23,424,000
----------- ----------- ----------------- ----------- ----------- ---------------
Net loss.............................. $(2,767,000) $(1,688,000) $ (20,940,000) $(1,270,000) $(1,726,000) $ (22,666,000)
----------- ----------- ----------------- ----------- ----------- ---------------
----------- ----------- ----------------- ----------- ----------- ---------------
Net loss per share(1)................. $ (.81) $ (.50) $ (.37) $ (.51)
Weighted average number of shares
outstanding(1)...................... 3,400,000 3,400,000 3,400,000 3,400,000
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------
(UNAUDITED)
<S> <C>
BALANCE SHEET DATA:
Working capital (deficit)................................................................................. $ (2,713,000)
Total assets.............................................................................................. 6,222,000
Total liabilities......................................................................................... 7,173,000
Deficit accumulated during development stage.............................................................. (22,666,000)
Total stockholders' deficit............................................................................... (951,000)
</TABLE>
- --------------------------
(1) Excludes 8,000,000 Performance Shares, which are redeemable by the Company
for a nominal amount in certain circumstances. See "Capitalization," "Plan
of Operations--Charge to Income in the Event of Conversion of Performance
Shares," "Principal Stockholders" and "Description of Securities." See Note
1 of Notes to Financial Statements for an explanation of the determination
of weighted average number of shares outstanding and shares used in
computing net loss per share.
23
<PAGE>
PLAN OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this Prospectus.
Certain statements contained in this Prospectus, including statements concerning
the Company's future cash and financing requirements, the Company's ability to
obtain market acceptance of its aircraft, the Company's ability to obtain
regulatory approval for its aircraft, and the competitive market for sales of
small business aircraft and other statements contained herein regarding matters
that are not historical facts, are forward looking statements; actual results
may differ materially from those set forth in the forward looking statements,
which statements involve risks and uncertainties.
GENERAL
The Company is a development stage enterprise organized to design, develop,
manufacture and market propjet and jet aircraft intended primarily for business
use. Since its inception, the Company has been engaged principally in research
and development of its proposed aircraft. In January 1990, the Company acquired
the assets of Aerodynamics & Structures, Inc. ("ASI"), a New Jersey corporation
engaged in the design of an aircraft prototype, in exchange for 139,407 shares
of Class B Common Stock, 278,815 shares of Class E-1 Common Stock, and 278,815
shares of Class E-2 Common Stock. In connection with this exchange, the Company
assumed liabilities of ASI in the amount of approximately $400,000. In March
1990, the Company made application to the FAA for a Type Certificate for the
JETCRUZER 450, which Certificate was ultimately granted in June 1994. As a
result, the Company has not generated any operating revenues to date and has
incurred losses from such activities. The Company believes it will continue to
experience losses until such time as it commences the sale of aircraft on a
commercial scale.
Prior to commencing commerical sales, the Company will need to, among other
things, complete the development of the JETCRUZER 500, obtain the requisite
regulatory approvals, establish an appropriate manufacturing facility, hire
additional engineering and manufacturing personnel and expand its sales and
marketing efforts. The Company estimates that the cost to complete development
of the JETCRUZER 500 and obtain an amendment of its FAA Type Certificate will be
approximately $8,000,000. This amount includes the cost of equipment and tooling
(estimated at approximately $1,500,000), static and flight testing of the
aircraft (estimated at approximately $2,500,000) and the employment of the
necessary personnel to build and test the aircraft (estimated at approximately
$4,000,000). The Company estimates that the cost of establishing an appropriate
manufacturing facility will be approximately $7,000,000. The Company intends to
use $1,100,000 of the proceeds from the Offering for this purpose and to finance
the remaining portion through mortgage financing and/or other similar means. The
Company also intends to use approximately $900,000 of the proceeds of the
Offering for sale and marketing of the aircraft. See "Use of Proceeds."
At such time, if ever, as the Company commences the commercial sale of its
proposed aircraft, the Company will derive a substantial portion of its revenues
from the sale of a relatively small number of aircraft. As a result, a small
reduction in the number of aircraft shipped in a quarter could have a material
adverse effect on the Company's financial position and results of operations for
that quarter. The Company expects to receive progress payments during the
construction of aircraft and final payments upon the delivery of aircraft.
Therefore, construction or delivery delays near the end of a particular quarter,
due to, for example, shipment reschedulings, delays in the delivery of component
parts or unexpected manufacturing difficulties experienced by the Company, could
cause the financial results of the quarter to fall significantly below the
Company's expectations and could materially and adversely affect the Company's
financial position and results of operations for the quarter.
24
<PAGE>
During the 18 to 24 months following the Offering, the Company intends to
focus its efforts in the following areas:
- To complete the development of the JETCRUZER 500, including, among other
things, adding a larger engine, pressurization, environmental systems,
de-icing capability and autopilot certification. See "Business--Proposed
Aircraft."
- To obtain an amendment to its Type Certificate to include the JETCRUZER
500, including the manufacture of FAA conformed models of the JETCRUZER
500 and static and flight testing. See "Business--Government Regulation."
- To establish an appropriate manufacturing facility capable of producing
the JETCRUZER 500 on a commercial scale, including the establishment of a
production line in such facility and the acquisition of production
inventory and additional items of equipment, tooling and computer hardware
and software systems. See "Business--Facilities."
- To obtain a production certificate from the FAA and commence commercial
production of the JETCRUZER 500. See "Business--Government Regulation."
- To expand its sales and marketing staff and increase its marketing efforts
with respect to the JETCRUZER 500. See "Business--Marketing, Distribution
and Service."
- To increase its engineering, manufacturing and administrative staff in
anticipation of increased development and production activities. See
"Business--Employees."
The Company believes that the net proceeds of the Offering will be
sufficient to finance its plan of operations for at least the 18 to 24 months
following the Offering, based upon the current status of its business
operations, its current plans and current economic and industry conditions. See
"Use of Proceeds." If the Company's estimates prove to be incorrect, however,
then during such period the Company may have to seek additional sources of
financing, reduce operating costs and/or curtail growth plans. See "--Liquidity
and Capital Resources."
RESULTS OF OPERATIONS
The Company has not generated any revenues from operations. For the period
from inception (January 26, 1990) through September 30, 1996, the Company
incurred a net loss of $22,666,000, $2,767,000 and $1,688,000 of which was
incurred during the years ended December 31, 1994 and December 31, 1995,
respectively, and $1,270,000 and $1,726,000 of which was incurred during the
nine months ended September 30, 1995 ("1995 nine months") and September 30, 1996
("1996 nine months") respectively. These losses have resulted primarily from
expenditures made in connection with the research and development of the
Company's proposed aircraft and general and administrative activities.
Research and development expenses have consisted primarily of the costs of
personnel, facilities and materials and equipment required to conduct the
Company's development activities. Such expenses aggregated $13,636,000 from
inception through September 30, 1996, $1,088,000 of which was incurred in 1994
and none of which was incurred in 1995 or in the 1996 nine months. Such expenses
were incurred to develop the JETCRUZER 450, to obtain a Type Certificate with
respect thereto, and to begin the design of the JETCRUZER 500, the JETCRUZER 650
and the STRATOCRUZER. Research and development expenses will increase in the
fourth quarter of 1996 and in 1997 as the Company accelerates the development of
the JETCRUZER 500 and amends its Type Certificate with respect thereto.
General and administrative expenses have consisted primarily of
administrative salaries and benefits, rent, marketing expenses, insurance and
other administrative costs. Such expenses aggregated $6,881,000 from inception
through September 30, 1996, $1,239,000 and $1,453,000 of which were incurred in
1994 and 1995, respectively, and $1,151,000 and $1,418,000 of which were
incurred in the 1995 nine months and the 1996 nine months, respectively. General
and administrative expenses have increased since 1994 primarily
25
<PAGE>
due to increased compensation expenses payable to the Company's executive
officers who were engaged principally in capital raising and marketing
activities. Such increases were partially offset by decreases in rent,
insurance, employee payroll and other administrative costs occasioned by the
Company's limited development activities during the period. General and
administrative expenses are expected to increase substantially in the fourth
quarter of 1996 and in 1997 due to the addition of personnel and other resources
to support increased administrative, marketing, and development activities. See
"--Liquidity and Capital Resources."
Interest expense has consisted primarily of interest expended by the Company
for bank and private financing. Interest expense aggregated $1,507,000 from
inception through September 30, 1996, $156,000 and $262,000 of which were
incurred in 1994 and 1995, respectively, and $146,000 and $319,000 of which were
incurred in the 1995 nine months and the 1996 nine months, respectively. See
"--Liquidity and Capital Resources."
In 1994, the Company incurred a $357,000 loss on disposal of assets, which
was a result of the disposal of certain tooling equipment in connection with the
Company's relocation in September 1994.
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." The
Company has incurred net losses in each year since its inception and
consequently has paid no federal or state income taxes.
At December 31, 1995, the Company had a federal tax net operating loss
carryforward of approximately $17,000,000 which, if unused, will expire in
varying amounts in years 2005 through 2010 and a state tax net operating loss
carryforward of approximately $3,000,000 which, if unused, will expire in
various amounts in years 1996 through 2000.
At December 31, 1995, the Company had federal and state research and
development ("R&D") credit carryforwards of approximately $1,169,000 and
$468,000, respectively. The federal R&D credit carryforwards will expire in
years 2005 through 2010. The state R&D credit carryforwards can be carried
forward indefinitely. See Note 4 of Notes to Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had a working capital deficit of
$2,713,000, an accumulated deficit of $22,666,000 and a negative net worth of
$951,000. Since its inception in January 1990, the Company has experienced
continuing negative cash flow from operations, which has resulted in the
Company's inability to pay certain existing liabilities in a timely manner. The
Company has financed its operations through private fundings of equity and debt.
Prior to mid-1994, the activities of the Company were financed primarily by
(i) equity contributions from Mr. Song Gen Yeh and members of his immediate
family, who were at that time directors and principal stockholders of the
Company, in the aggregate amount of $7,280,000 and (ii) loans in the aggregate
amount of $10,728,000 from Mr. Yeh. The loans made by Mr. Yeh were repaid
through the issuance of 598,011 shares of Class B Common Stock, 1,196,021 shares
of Class E-1 Common Stock, and 1,196,021 shares of Class E-2 Common Stock of the
Company in June 1996. Additionally, in October 1993, the Company received a loan
of $60,000, bearing interest at a rate of 12%, from SIDA Corporation ("SIDA"), a
corporation then affiliated with Dr. Carl Chen, the President and Chief
Executive Officer and a Director of the Company; and, in February and July 1994,
the Company received loans in an aggregate amount of $565,000, bearing interest
at a rate of 12%, from four individuals who were at the time not affiliated with
the Company. One of such persons, C.M. Cheng, became a Director of the Company
in June 1996. These loans were repaid in September 1996 with the proceeds of the
Bridge Financing described below. See "Certain Transactions."
26
<PAGE>
In the second half of 1994, the Company's expenditures decreased because
capital constraints required a reduction of the Company's development
activities. The Company's capital requirements during that period were satisfied
primarily by a loan from General Bank in the principal amount of approximately
$550,000, bearing interest at the prime rate plus 1 1/2%, which loan was
guaranteed by the Small Business Administration, the California Export Finance
Office and Dr. Chen and secured by substantially all of the Company's assets.
The Company also received an additional $50,000 loan from SIDA.
During 1995 and 1996, the Company's capital requirements were met by
additional advances of $350,000 pursuant to the bank loan described above and
loans by Dr. Chen, bearing interest at a rate of 12%, in the aggregate principal
amount of $562,000. In June 1996, $336,000 of indebtedness owed by the Company
to Dr. Chen was converted into 187,118 shares of Class B Common Stock, 374,236
shares of Class E-1 Common Stock, and 374,236 shares of Class E-2 Common Stock.
In September 1996, the bank loan, in the aggregate principal amount of
$900,000 plus $15,000 in accrued interest, $226,000 of the principal amount owed
to Dr. Chen, together with interest thereon of $36,000, and the loan from SIDA,
in the aggregate principal amount of $110,000 plus $31,000 in accrued interest,
were repaid with the proceeds of the Bridge Financing described below. See
"Certain Transactions."
In August 1996, the Company completed the Bridge Financing of $7,000,000
principal amount of Bridge Notes and 3,500,000 Bridge Warrants (which will
automatically convert to Class A Warrants upon completion of the Offering). See
"Bridge Financing" and "Concurrent Securities Offering." The net proceeds of the
Bridge Financing were approximately $6,195,000 after deducting commissions and a
non-accountable expense allowance aggregating $805,000 paid to the placement
agent and other expenses of the Bridge Financing. The net proceeds of the Bridge
Financing were and are being used to repay bank and other outstanding
indebtedness, loans from officers and directors, accrued compensation and past
due accounts payable and as working capital. The Company has allocated a portion
of the net proceeds of the Offering to repay the Bridge Notes. See "Bridge
Financing," "Certain Transactions," and "Use of Proceeds." Additionally, the
Company will recognize a charge to operations of approximately $1,100,000,
representing the combined unamortized debt discount and issuance costs arising
from the Bridge Financing, in the quarter in which the Bridge Notes are repaid.
The Company expects its cash requirements to increase in the future due to
higher expenses associated with product development, the scale-up of production
(including capital investment in production equipment), implementation of a
sales and marketing program, the hiring of personnel and other anticipated
operating activities. The Company also expects to continue to incur losses until
such time, if ever, as it obtains regulatory approval for the JETCRUZER 500 and
related production processes and market acceptance for its proposed aircraft at
selling prices and volumes which provide adequate gross profit to cover
operating costs and generate positive cash flow. The Company's working capital
requirements will depend upon numerous factors, including the level of resources
devoted by the Company to the scale-up of manufacturing and the establishment of
sales and marketing capabilities and the progress of the Company's research and
development program for the JETCRUZER 500 and other proposed aircraft. See
"Business--Marketing, Distribution and Service."
The Company expects that the net proceeds of the Offering will enable it to
meet its liquidity and capital requirements for at least 18 to 24 months
following completion of the Offering, by which time the Company expects to have
received a type certificate and a production certificate for the JETCRUZER 500
and commenced commercial production and sale of the JETCRUZER 500. During this
period such proceeds will be used primarily for amendment of the Type
Certificate, the purchase of equipment and tooling, the establishment of a
manufacturing facility, and sales and marketing. The Company's capital
requirements are subject to numerous contingencies associated with development
stage companies. Specifically, in the event that the FAA determines that a new
type certificate is required, or if delays are encountered in amending the
current Type Certificate, the time and cost of obtaining such certification
27
<PAGE>
may be substantial, may render it impossible for the Company to complete such
new or amended certification and may therefore have a material and adverse
effect on the Company's operations. Further, following such 18 to 24 month
period, if the Company has not completed the development of the JETCRUZER 500,
received the required regulatory approvals and successfully commenced commercial
sales of its aircraft, the Company may require additional funding to fully
implement its proposed business plan. The Company has no commitments from any
third parties for any future funding, and there can be no assurance that the
Company will be able to obtain financing in the future from bank borrowings,
debt or equity financings or other sources on terms acceptable to the Company or
at all. In the event necessary financing were not obtained, the Company would be
materially and adversely affected and might have to cease or substantially
reduce operations.
The Company had no material capital commitments at September 30, 1996.
Following the Offering, the Company intends to hire a number of additional
employees and to establish a larger manufacturing facility, both of which will
require substantial capital resources. The Company anticipates that it will hire
approximately 50 employees over the next six months and 150 employees over the
next 24 months, including engineers and manufacturing technicians necessary to
produce its aircraft. See "Business-- Employees." Additionally, the Company
plans to acquire, build and/or improve a larger manufacturing facility. The
Company estimates that the total cost of such facility will be approximately
$7,000,000 and has allocated approximately $1,100,000 of the proceeds of the
Offering to fund a portion of such cost. The Company anticipates funding the
remaining portion of such cost through mortgage financing and/or other similar
means. There can be no assurance, however, that such funding will be available
on terms acceptable to the Company or at all. In the event the Company is unable
to fund fully the costs of the facility from such sources, it may utilize a
portion of the proceeds from the Offering allocated to working capital for such
purpose or it may lease a facility until adequate funds become available. See
"Use of Proceeds."
The Report of Independent Accountants includes an explanatory paragraph
indicating that there is substantial doubt as to the Company's ability to
continue as a going concern. See Report of Independent Accountants.
CHARGE TO INCOME IN THE EVENT OF CONVERSION OF PERFORMANCE SHARES
In the event the Company attains certain earnings thresholds or the
Company's Class A Common Stock meets certain minimum bid price levels, the Class
E Common Stock will be converted into Class B Common Stock. In the event any
such converted Class E Common Stock is held by officers, directors, employees or
consultants, the maximum compensation expense recorded for financial reporting
purposes will be an amount equal to the fair value of the shares converted at
the time of such conversion which value cannot be predicted at this time.
Therefore, in the event the Company attains such earnings thresholds or stock
price levels, the Company will recognize a substantial charge to earnings during
the period in which such conversion occurs, which would have the effect of
increasing the Company's loss or reducing or eliminating its earnings, if any,
at that time. In the event the Company does not attain these earnings thresholds
or mimimum bid price levels, and no conversion occurs, no compensation expense
will be recorded for financial reporting purposes. See "Description of
Securities--Common Stock."
28
<PAGE>
BUSINESS
OVERVIEW
The Company is a development stage company organized to design, develop,
manufacture and market propjet and jet aircraft intended primarily for business
use. The Company has obtained a type certificate ("Type Certificate") from the
Federal Aviation Administration ("FAA") with respect to a non-pressurized,
single-engine aircraft powered by a Pratt & Whitney propjet engine (the
"JETCRUZER 450"). The Company intends to modify the JETCRUZER 450 to develop a
six-seat (including pilot), pressurized version of such aircraft for commercial
sale (the "JETCRUZER 500") which, the Company anticipates, will takeoff and land
in less than 1,000 feet, be able to fly at approximately 30,000 feet above sea
level, and have a high cruise speed of approximately 350 mph and a range of
approximately 1,600 miles.
The Company began development of the JETCRUZER 450 in 1990 and obtained the
Type Certificate in 1994. Throughout this period, the Company engaged in design
and engineering of the aircraft, as well as production of the jigs, forms,
tools, dies and molds necessary to manufacture the aircraft. The first FAA
conformed JETCRUZER 450 was completed in 1992. This aircraft was used by the
Company and the FAA to perform static (nonflight) testing. In late 1992 and
1993, two flight test aircraft were completed. These aircraft were flight tested
by the Company and the FAA from 1992 through 1994. The Company received the Type
Certificate for the JETCRUZER 450 on June 14, 1994.
Although the Company received preliminary written indications of interest to
purchase the aircraft, the Company has decided that it will not obtain a
production certificate with regard to the JETCRUZER 450 or otherwise pursue
commercialization of that aircraft in part because the Type Certificate is
subject to certain limitations which the Company believes reduce the commercial
viability of the JETCRUZER 450. See "--Proposed Aircraft--JETCRUZER-TM-500."
Instead, the Company has decided to amend the Type Certificate to develop the
JETCRUZER 500 for commercial sale, which is a modified version of the JETCRUZER
450 that the Company anticipates will not be subject to the limitations imposed
by the existing Type Certificate. See "--Proposed Aircraft."
Based on the limited scope of the changes to be made to the JETCRUZER 450
and the experience of other manufacturers that have modified certificated
aircraft, the Company believes it will need to amend its Type Certificate,
rather than obtain a new type certificate, to develop the JETCRUZER 500 for
commercial sale. The Company currently anticipates that it can obtain an
amendment to its Type Certificate during the approximately 18 to 24 months
following the Offering and obtain a production certificate and commence
commercial production of such aircraft within the same time frame. There can be
no assurance, however, that obtaining the amendment will not take longer that
anticipated, that the Company will not be required to obtain a new type
certificate for the JETCRUZER 500, or that the Company will not experience
unforeseen expense or delay in certifying and commercializing its proposed
aircraft.
INDUSTRY BACKGROUND
The general aviation industry comprises essentially all nonmilitary aviation
activity other than scheduled and charter commercial airlines licensed by the
FAA and the Department of Transportation. General aviation aircraft are
frequently classified by their type and number of engines and include aircraft
with fewer than 20 seats. There are three different types of engines: piston,
propjet and turbofan (jet). Piston aircraft use an internal combustion engine to
drive a propeller. There may be one or two engines and propellers. Propjet
aircraft combine a jet turbine powerplant with a propeller geared to the main
shaft of the turbine. There may be one or two engines and propellers. Turbofan
aircraft use jet propulsion to power the aircraft. There are generally two
engines on general aviation turbofan aircraft, although there may also be one or
three.
29
<PAGE>
Purchasers of general aviation aircraft include (i) corporations, (ii)
governments, (iii) the military, (iv) the general public and (v) fractional
interest entities. A corporation may purchase a general aviation aircraft for
transporting its employees and property. Many companies use an aircraft in their
line of business, including on-demand air taxi services, air ambulance services
and freight and delivery services. Governments and military organizations may
purchase an aircraft for the transportation of personnel, freight and equipment.
Members of the general public may purchase an aircraft for personal and/or
business transportation and pleasure use. Fractional interest entities purchase
one or more aircraft and then sell interests in each aircraft to several persons
or entities. Each entity pays for its share of maintenance and operating costs
and its access to and use of the aircraft. Increased corporate earnings may
encourage corporations to acquire an aircraft. An aircraft must qualify under
FAA regulations in order to be used for certain purposes, and the ability of an
aircraft to so qualify will have a material affect on the potential market for
such aircraft. See "Business--Government Regulation."
Currently, there are fewer than ten major manufacturers of general aviation
aircraft based in the United States. Piston aircraft make up the numerical
majority of aircraft delivered by these manufacturers, whereas propjets and jet
aircraft account for the majority of billings. In 1995, approximately 581 piston
aircraft were delivered for approximately $123 million in billings;
approximately 250 propjets were delivered for billings of approximately $653
million; and approximately 246 jet aircraft were delivered, generating billings
of approximately $2 billion.
Total shipments of general aviation aircraft manufactured in the United
States reached a peak in 1978, when approximately 18,000 aircraft were shipped.
The number of units delivered annually has decreased since that time as a result
of a number of factors, such as the cost of aviation fuel, high interest rates,
inflation and, most importantly, an increase in negligence and product liability
claims arising from accidents involving small, personal/recreational piston
aircraft and a resulting increase in the price of manufacturer's liability
insurance. Since 1986, the number of units delivered per year from United States
manufacturers has not exceeded 1,500, and fewer than 1,000 aircraft were
delivered from United States manufacturers in each of 1992, 1993 and 1994.
Although the total number of general aviation aircraft manufactured in the
United States declined from 1978 to 1994, deliveries of more expensive propjet
and jet aircraft manufactured in the United States increased, resulting in a
less substantial decline in the total dollar value of shipments of aircraft
during such period and a substantial increase in the average price of each such
aircraft delivered from 1978 through 1994. Deliveries of more costly corporate
aircraft powered by propjet or jet engines were affected to a lesser extent by
the liability and insurance coverage problems encountered by piston aircraft. In
addition, on August 17, 1994, Congress enacted the General Aviation
Revitalization Act of 1994 ("GARA"). The GARA imposes an 18-year statute of
limitations on product liability suits involving airplane manufacturers and
suppliers. Although product liability suits will not disappear, nor is it likely
that settlements will be smaller, the Company believes that the reduction to 18
years of an original equipment manufacturer's exposure to lawsuits may lower
insurance costs for the industry which may result in increased sales of aircraft
and a corresponding increase in the number of licensed pilots. Shipments of all
types of general aviation aircraft manufactured in the United States increased
from 928 units in 1994 to 1,077 units in 1995.
STRATEGY
The Company's objective is to become a worldwide market leader in the sale
of small business aircraft. To achieve this objective, the Company intends to
focus on the performance, efficiency and safety of its proposed aircraft. The
Company's strategy is to capitalize on a perceived current lack in the
marketplace of low-priced, high-performance aircraft. The Company believes that
its ability to offer an aircraft which outperforms competitive aircraft at a
reduced cost will enable the Company to penetrate the business, private and
government aircraft markets. Additionally, the Company intends to expend
substantial resources on a worldwide sales and marketing program to position
itself with potential customers.
30
<PAGE>
The Company believes that aircraft sales are heavily dependent on the
quality and safety of a company's products. Accordingly, the Company intends to
maintain high quality and safety standards in all aspects of the design and
manufacture of its proposed aircraft. For example, the Company believes that
certain design features of the JETCRUZER 500, such as the canard wing, will make
the aircraft spin resistant and that the absence of wing flaps will make the
operation of the aircraft less susceptible to pilot error. In addition, the
Company believes that the reliability of the Company's component suppliers, such
as Pratt & Whitney, will be viewed favorably by potential customers.
The Company believes that it will be able to offer aircraft at a
comparatively low price by containing the costs of obtaining FAA certification
and amendments to such certification as well as the costs of manufacturing. The
Company believes that it was able to obtain its Type Certificate for the
JETCRUZER 450 at a significantly lower cost than its competitors with regard to
comparable aircraft due, in part, to the Company's smaller size as compared to
its competitors, resulting in the Company's ability to contain administrative
costs and the overhead expenses allocable to the development process.
Additionally, the Company's Southern California location is home to a number of
workers from recently downsized defense and aerospace companies who the Company
was able to hire to assist in the certification of the JETCRUZER 450. These
employees provided the Company with experience in testing, certifying, tool and
jig manufacturing and other aspects of the certification process that would not
otherwise have been available to the Company. The Company expects that many of
these key employees will return to the Company following the completion of the
Offering.
The Company believes that it will be able to control manufacturing costs by
producing most of the tooling, jigs, dies and molds required for the manufacture
of its aircraft in-house. Also, because the Company will produce the airframe
and most of the associated components of its aircraft in-house, it will have
greater control over the production process; and the Company believes that this
control will also help keep construction and certification costs at reduced
levels.
PROPOSED AIRCRAFT
GENERAL.
The Company's proposed aircraft are based on a canard wing design in which a
smaller wing (the "canard") is installed in front of the aircraft's main wing.
The Company believes that this design provides for improved safety margins and
performance, including spin resistance and increased lift, and increased ride
comfort as compared to more conventional aircraft designs.
The Company believes that the JETCRUZER provides increased safety margins,
in part, because it has been certified under the latest safety regulations
adopted by the FAA. Additionally, the canard design, which provides dual lifting
surfaces, makes the JETCRUZER resistant to spins. An airplane may enter a spin
when one main wing stalls (ie. stops producing lift) before the other. On the
JETCRUZER, the canard wing will stall before the main rear wing, thereby
automatically lowering the aircraft's nose and increasing its airspeed, thus
preventing a stall of either of the main wings. Since the main wing of the
JETCRUZER does not stall, it does not lose lift on one side before the other and
thus the aircraft is resistant to spins. The JETCRUZER has increased lift in
part because the graphite composite fuselage of the JETCRUZER is lighter than a
fuselage made of aluminum, as is used by most of the Company's competitors, and
the canard wing design provides an additional lifting surface as compared to
conventional aircraft. Generally, lighter weight and additional lifting surfaces
result in greater lifting capacity. Increased lift can provide increased fuel
efficiency and thus increased range.
Management also believes that the Company's aircraft will provide
performance advantages over competitors' models, including better stall and
handling characteristics, increased speed, greater fuel efficiency and lower
operating expenses. Based on the reports of its test pilots, the Company also
believes that the JETCRUZER provides increased ride comfort, and a quieter ride,
than aircraft of a conventional
31
<PAGE>
design. The JETCRUZER will not require pilot licensing beyond that required for
other single-engine propjet aircraft. See "Business--Competition."
The fuselage of each aircraft will be made of an advanced graphite
composite/nomex honeycomb sandwich with embedded aluminum and copper screen mesh
for lightning protection, which is processed in the Company's (30 foot long by
10 foot diameter) nitrogen-pressurized autoclave. The canard wing on the
JETCRUZER will be constructed of aircraft aluminum; and the canard wing on the
STRATOCRUZER, if that aircraft is developed, will be constructed of the graphite
composite. The main rear wing and the ailerons of all of the aircraft will be
constructed of aircraft aluminum skin and spar and rib construction. Flaps are
not required on the JETCRUZER because of the design and high lift capabilities
of the canard and the main wing. The engine and propeller of the Company's
JETCRUZER aircraft are located at the rear of the fuselage, thus providing
passengers with a quieter ride.
JETCRUZER-TM- 500.
The JETCRUZER 500 is intended to be a six-seat (including pilot), high
performance single engine propjet with conventionally constructed wings made
from aluminum attached to a fuselage formed from a high-strength graphite nomex
honeycomb composite material. The aircraft is intended to have a canard
configuration with two lift-producing surfaces and no conventional wing flaps.
The JETCRUZER 500 will be powered by a Pratt & Whitney PT6A-42A, 1,132 ESHP
propjet engine located at the rear of the aircraft. The JETCRUZER 500 is
intended to be a modified version of the JETCRUZER 450.
In June 1994, the FAA awarded the Company a Type Certificate for the
JETCRUZER 450, which is a non-pressurized propjet aircraft powered by a smaller
Pratt & Whitney engine. However, the Type Certificate is subject to a number of
FAA limitations which were imposed as a result of the aircraft's early stage of
development. For example, the maximum number of occupants is presently limited
to five, as compared to the six passenger (including pilot) design configuration
of the JETCRUZER 500, and the maximum operating speed is presently limited to
178 mph, as compared to the 350 mph design speed of the JETCRUZER 500. The
Company intends to amend the Type Certificate to remove these limitations in the
course of further development and certification of the JETCRUZER 500.
In order to amend the Type Certificate to include the JETCRUZER 500,
additional work remains to be performed on the aircraft by the Company,
including adding pressurization, environmental systems, de-icing capability,
test retractable landing gear and autopilot certification, all of which will be
necessary to produce the JETCRUZER 500 for commercial sale. The Company
currently anticipates obtaining the amendment to its Type Certificate during the
approximately 18 to 24 months after the Offering. The Company has recently
submitted its application for amendment to the FAA. There can be no assurance,
however, that obtaining such an amendment will not take longer than anticipated,
that any of the FAA limitations will be removed or that such removal will not,
in the FAA's judgment, necessitate a new type certificate, thereby causing
unforeseen expense and delay in certifying the JETCRUZER 500. See "--Government
Regulation."
Although no assurance can be given as to the performance characteristics of
any aircraft in its design phase, based on the performance of the JETCRUZER 450,
the Company believes that the JETCRUZER 500 will carry six passengers (including
pilot) and have a cruise speed of approximately 350 mph. The Company also
believes that such aircraft should be able to climb at approximately 2,600 feet
per minute, cruise at an altitude of approximately 30,000 feet above sea level,
have a range of approximately 1,600 miles and takeoff and land in less than 1000
feet. The interior of the aircraft will be built either to a customer's
specifications or in accordance with one of the Company's standard
configurations. These statistics reflect the overall anticipated performance of
the JETCRUZER 500. However, interior configuration, optional equipment, weather
conditions and flying weight will affect the performance of an individual
aircraft.
32
<PAGE>
Although there can be no assurance, the Company currently anticipates that
the JETCRUZER 500 will be available for commercial sale at a price of
approximately $1,300,000 approximately two years following the date of this
Prospectus. However, since the Company has not yet completed development of the
JETCRUZER 500 and has not yet established a facility for manufacturing it on a
commercial scale, both of which may be subject to unforeseen delays, the date on
which the JETCRUZER 500 is actually available for sale and its initial purchase
price could change materially.
To date, the Company has made only limited test marketing attempts to sell
its aircraft. Notwithstanding these limitations, the Company has received more
than 30 written indications of interest to purchase the JETCRUZER 450 and the
JETCRUZER 500. Because the Company believes that the improved performance
characteristics associated with the JETCRUZER 500 will make it a more desirable
aircraft than the JETCRUZER 450, the Company currently intends to initially
produce only the JETCRUZER 500. Accordingly, the Company has converted all but
two of the indications of interest in the JETCRUZER 450 into indications of
interest in the JETCRUZER 500. Generally, written indications of interest are
supported by a $10,000 deposit. However, each such deposit is refundable at the
request of the purchaser at any time until the commencement of construction of
the purchaser's particular aircraft. Accordingly, there can be no assurance that
any such indications of interest will lead to the sale of an aircraft.
OTHER PROPOSED AIRCRAFT
JETCRUZER-TM- 650.
The Company currently intends to develop the JETCRUZER 650. This aircraft
will be based on the JETCRUZER 450/500 design and will have the same engine and
components as the JETCRUZER 500. However, it is intended to have a longer
fuselage which will accommodate up to twelve passengers plus a pilot. To produce
the JETCRUZER 650, the Company will need either to amend its Type Certificate or
obtain a new type certificate, as determined by the FAA.
The Company anticipates that the cruise speed of the JETCRUZER 650 will be
approximately 300 miles per hour, that it will takeoff in approximately 1,800
feet, climb at a rate of 1,200 to 1,600 feet per minute and have a maximum range
of approximately 1,250 miles. The Company currently plans to offer two versions
of the JETCRUZER 650: a pressurized corporate and on-demand charter passenger
aircraft, which will cruise at approximately 30,000 feet above sea level and
have a maximum passenger seating capacity of twelve, and a non-pressurized
version for use as a utility/freight aircraft which will cruise at a lower
altitude than the pressurized version.
Although it incorporates certain components and systems approved as part of
the JETCRUZER 450 certification process, the JETCRUZER 650 is in a very early
stage of engineering and design, and the completion of the development of the
JETCRUZER 650 and the certification of such aircraft will require substantial
capital resources in addition to the proceeds obtained by the Company in the
Offering. There can be no assurance that the Company will obtain the resources
necessary to continue the development of the JETCRUZER 650 or, if such resources
are obtained, to successfully develop and certify the JETCRUZER 650. Further,
the Company will not continue development of the JETCRUZER 650 until it has
solicited orders for the aircraft and obtained adequate indications of interest
to justify the completion of its design, prototyping, and static and flight
testing. Accordingly, the Company cannot predict when, if ever, the JETCRUZER
650 will be available for commercial sale.
STRATOCRUZER-REGISTERED TRADEMARK- 1250.
The Company also currently intends to develop a twin engine jet aircraft to
be called the STRATOCRUZER 1250. The STRATOCRUZER, if developed, is expected to
be a canard aircraft with three flying surfaces powered by two Williams/Rolls
Royce FJ44-2 fanjets. It will be able to seat up to 12 passengers, plus the
pilot. Based on its design and preliminary testing, it is anticipated that the
33
<PAGE>
STRATOCRUZER will have a maximum cruise speed of approximately 500 mph, a range
of approximately 3,700 miles and a pressurized ceiling of approximately 42,000
feet. The STRATOCRUZER will be able to takeoff in less than 3,200 feet and land
in less than 3,000 feet. The instrumentation of the STRATOCRUZER will consist of
digital electronic avionics, including EFIS (an Electronic Flight
Instrumentation System, which includes color monitors on which flight instrument
data, weather radar, maps and other navigation information are available) and
GPS (Global Positioning System) navigation. The aircraft will be of lightweight
construction. The Company believes that the STRATOCRUZER's comparatively light
weight, combined with, among other things, its additional lifting surfaces, fuel
efficient engines and aerodynamic design, will give the STRATOCRUZER superior
range and fuel efficiency compared to other twin jets. The Company will be
required to obtain a new FAA type certificate for the STRATOCRUZER.
The STRATOCRUZER is in a very early stage of development, and the completion
of such development will also require substantial capital resources beyond those
to be obtained by the Company in the Offering. Therefore, there can be no
assurance that the Company will obtain the resources necessary to continue the
development of the STRATOCRUZER or, if such resources are obtained, successfully
develop and certify the STRATOCRUZER. Accordingly, the Company cannot predict
when, if ever, the STRATOCRUZER will be available for commercial sale.
MANUFACTURING
The Company has designed and produced or procured most of the equipment
necessary for production of the JETCRUZER 450 and has used that equipment to
certify the aircraft. The Company intends to obtain or produce additional sets
of the equipment necessary for production of the JETCRUZER 500 with the proceeds
of the Offering and acquire and/or build a manufacturing facility capable of
producing the JETCRUZER 500. See "--Facilities." The Company intends to produce
in-house nearly all of the tooling necessary for the production of its aircraft,
from master models to major jigs and fixtures. The Company believes it achieves
cost savings by manufacturing tooling itself. Additionally, nearly all airframe
assemblies and parts are intended to be produced in-house, except for special
tasks such as hydroforming, spar milling and painting. The manufacturing process
for the Company's aircraft is highly technical and requires skilled assembly
technicians. The Company intends to rehire a number of employees who assisted
the Company in the development of the JETCRUZER 450 as well as a number of
additional employees. However, no assurance can be given that former employees
of the Company or other personnel with the required skills will in fact be
available to the Company. See "Business--Employees."
The equipment and procedures used by the Company for manufacturing must be
certified, and are subject to inspection and continuing oversight by the FAA.
See "Business--Government Regulation."
The Company has a complete in-house computer design system, with
interactive, computer-aided design ("CAD") capabilities. The Company maintains
an Aircraft Quality Control System ("AQCS") designed to meet the requirements of
the military, the National Aeronautics and Space Administration ("NASA") and the
FAA. An AQCS is a system mandated and approved by the FAA to assure the
integrity and traceability of aircraft components, parts, and systems. It is
required as a condition to obtaining a type certificate and a production
certificate. All of the Company's precision tools and gauges are certified by
the National Bureau of Standards.
The Company intends to manufacture the advanced graphite composite fuselage
structure used in the construction of its aircraft in its own
computer-controlled, nitrogen-pressurized autoclave. Although not operational at
this time, the autoclave was purchased new in 1990 and was used in the
construction of the certification aircraft. It can achieve temperatures of up to
650 degrees Fahrenheit and pressure of 150 pounds per square inch. The graphite
material is very strong and lightweight and in the course of certifying the
JETCRUZER 450, the Company believes it has demonstrated to the FAA that the
graphite material meets or exceeds all standards set by the FAA for aircraft
construction material. Use of the graphite composite material simplifies the
manufacturing process, as opposed to metal construction, because it
34
<PAGE>
eliminates most riveting, which is a labor intensive, time consuming process.
The graphite sections are bonded together through a process which provides
strength equal to or greater than riveting. The metal wings of the aircraft are
attached to the composite portions of the airframe through a manufacturing
technique developed by the Company.
MARKETING, DISTRIBUTION AND SERVICE
MARKETING AND DISTRIBUTION.
To date, the Company has conducted limited marketing activity and has
marketed its aircraft only through test advertisements and news releases in
trade publications. Following completion of the Offering, the Company intends to
use a portion of the proceeds of the Offering to develop an in-house sales
organization and market its aircraft in a number of different territories in the
United States and abroad through trade publications, aircraft trade shows, and
independent distributors and agents.
The Company's efforts will emphasize aircraft trade shows, from which it
believes a significant amount of new aircraft sales are generated. The Company
intends to participate in, among others, the Paris Air Show, the National
Business Aircraft Association USA Show and the Singapore Aerospace Show.
Management believes that, in addition to sales generated directly from such
events, participation in trade shows will help introduce the Company's aircraft
to other potential purchasers and help increase overall awareness of the
Company's products. The Company also intends to promote general knowledge of the
Company's products by issuing press releases to aviation magazines and
newspapers. The Company will also use paid advertising in trade magazines,
general interest flying magazines and international business magazines to
promote its products.
Management anticipates that most of the Company's aircraft will be sold to
corporations for transportation of their personnel, guests and company property.
The Company intends to develop direct marketing programs to target such
corporations. The Company believes that its aircraft will also be attractive to
customers other than corporations and intends to address these markets. These
markets include current owners of single and twin engine aircraft who operate
their own aircraft for business purposes, governmental entities that use
aircraft for surveillance or mapping photography, forest fire detection, and
other purposes, and fractional use entities who purchase one or more aircraft
and sell interests in each aircraft to several persons or entities. The Company
believes that the relatively low purchase price, performance, safety and cost of
operations of its aircraft will make them attractive to such purchasers. Other
potential specialty markets may include air freight and delivery services,
on-demand air taxi services and/or charter and air ambulance use.
The Company intends to provide assistance to customers who require financing
to complete the purchase of an aircraft from the Company. Overseas sales may be
financed through the United States Export/Import Bank ("EXIM"), which may
provide loans to qualified overseas customers, and several domestic banks, of
which at least one provides 20-year loans for corporate aircraft. Additionally,
EXIM may provide low-cost working capital loans to the Company upon the receipt
of evidence of export sales commitments.
SERVICE.
The Company's aircraft will be serviced primarily by fixed base operations
("FBO's") authorized by the Company. FBO's are established aircraft maintenance
companies located at airports throughout the world which service general
aviation aircraft produced by virtually all major aircraft manufacturers. If and
when customers in a particular region or country begin to acquire aircraft
manufactured by the Company, an appropriate FBO for that area will be identified
and authorized by the Company after consultation with the agent and/or
distributor for that area. The Company will provide training and a service
manual to the employees of its authorized FBO's. Required parts and repair
materials will be air freighted to the FBO's
35
<PAGE>
as required. Maintenance and repair of major systems included in the Company's
aircraft, such as engines and avionics, will be provided by the manufacturers of
those systems.
SUPPLIERS
The Company will rely on certain suppliers of products necessary to
manufacture its aircraft, including a number of different suppliers of materials
and components. In particular, the engines and the avionics will be provided by
outside manufacturers. These suppliers also produce equipment for aircraft
manufacturers other than the Company. Engines for the JETCRUZER will be
manufactured by Pratt & Whitney. Engines for the STRATOCRUZER, if that aircraft
is developed, will be manufactured by Williams/Rolls Royce. The Company has no
contractual right to obtain any specified number of engines from Pratt & Whitney
or any other manufacturer. Should the Company's ability to obtain the requisite
number of engines be limited for any lengthy period of time or the cost of such
engines increase, the Company's ability to produce and sell aircraft could be
materially and adversely affected. In addition, the failure of other suppliers
or subcontractors to meet the Company's performance specifications, quality
standards or delivery standards or schedules could have a material adverse
effect on the Company's operations. Moreover, the Company's ability to
significantly increase its production rate following the introduction of the
JETCRUZER 500 could be limited by the ability or willingness of its key
suppliers to increase their delivery rates.
COMPETITION
The JETCRUZER 500 will compete against several other types of aircraft,
including new and used single and multi-engine propjets and high-end piston
powered aircraft. Management believes that competition will be based primarily
on the aircraft's price, performance and operating cost. Single engine propjets
have only recently come into use in the general aviation industry, and there are
not many competitors in this category. Twin engine propjets are far more common
and vary significantly in size.
The following table lists the number of seats (including pilot), estimated
price and high cruise speed of the aircraft which the Company considers to be
the principal competitors of the JETCRUZER 500.
<TABLE>
<CAPTION>
NAME AND MODEL HIGH CRUISE
(NUMBER AND TYPE OF APPROXIMATE SPEED-MILES PER
ENGINES NOTED IN PARENTHESIS) SEATS BASE PRICE HOUR
- --------------------------------------------------------------------- ----- ------------ ---------------
<S> <C> <C> <C>
JETCRUZER 500 (1) (Propjet).......................................... 6 $ 1,295,000 350
Cessna Caravan 208B(1) (Propjet)..................................... 9 $ 1,493,000 210
Socata TBM 700 (1) (Propjet)......................................... 6 $ 2,607,000 345
Pilatus PC - 12 (1) (Propjet)........................................ 10 $ 2,315,000 310
Raytheon/Beech King Air C-90B (2) (Propjet).......................... 7 $ 2,488,000 284
Piper Malibu Mirage (1) (Piston)..................................... 6 $ 755,000 267
</TABLE>
There are currently only three single engine propjet aircraft on the market
in the JETCRUZER 500 category: the Socata TBM 700, the Pilatus PC-12 and the
Cessna Caravan. The TBM 700 is a pressurized, single engine propjet of
conventional design with a Pratt & Whitney engine. It is made in France and has
passenger capacity and performance similar to the JETCRUZER 500. Its base price
is approximately $2,607,000. The Pilatus PC-12 is also a single engine propjet
of conventional design with a Pratt & Whitney engine. The Pilatus PC-12 is made
in Switzerland, has an airspeed of 310 mph and has a base price of approximately
$2,315,000. The Cessna Caravan 208B has a base price of approximately $1,493,000
and is designed primarily for hauling freight at low altitude. Its high speed is
210 mph, its landing gear does not retract, and it is not pressurized. Each of
these competitive products is a standard, one lifting-wing aircraft built
primarily from aircraft aluminum, rather than graphite.
Additional competition to the JETCRUZER 500 may be provided by the Malibu
Mirage. The Malibu Mirage is a single engine piston powered aircraft, rather
than a propjet. It is manufactured in the United
36
<PAGE>
States by The New Piper Aircraft Corp. It has an airspeed of 267 miles per hour
and a range of approximately 1,200 miles. Its approximate base price is
$755,000. The Company believes that piston aircraft such as the Mirage and
propjet aircraft such as the JETCRUZER 500 compete for different customers based
on performance (particularly speed) and reliability. However, the price
differential may induce certain purchasers to select the lower-priced piston
aircraft.
The Company believes that the JETCRUZER 500, and the proposed JETCRUZER 650,
if developed, may compete with and compare favorably to various twin engine
propjets, such as the King Air C-90B, in airspeed and passenger seating at a
significantly lower purchase price and operating cost. The King Air C-90B is a
twin engine propjet of conventional design which is manufactured in the United
States by Raytheon Aircraft Co. (Beechcraft). It has an airspeed of
approximately 284 miles per hour and has seven seats. Its approximate base price
is $2,488,000. However, certain customers may be reluctant to purchase a
single-engine aircraft due to the perception of additional safety associated
with twin-engine aircraft. Additionally, single-engine aircraft are not
permitted by FAA regulations to be used for commercial passenger revenue-paying
flights (whether on-demand charter or scheduled) in instrument conditions.
However, single engine aircraft may currently be used for revenue-paying
on-demand charter and scheduled flights under VFR (visual flight rules) provided
the pilot and aircraft meet certain FAA certification, proficiency, maintenance
and additional equipment and airworthiness requirements. See "--Government
Regulation."
Most of the Company's competitors are substantially larger in size and have
far greater financial, technical, marketing, and other resources than the
Company. Certain of the Company's actual and potential competitors may have
technological capabilities, or other resources that would allow them to modify
existing aircraft or develop alternative new aircraft which could compete with
the Company's aircraft. Therefore, there can be no assurance that the Company's
ability to market its proposed aircraft will not be materially adversely
affected by future technological changes or marketing initiatives on the part of
its competitors.
Additionally, indirect competition and potential sales will come from the
used aircraft market, both propjets and jets, which have sales prices near that
anticipated for the JETCRUZER 500. As the prices of new aircraft have increased,
buyers have turned in greater numbers to the used aircraft market. The Company,
however, believes that it may be able to attract purchasers who might otherwise
acquire a used aircraft by emphasizing the price, performance, technology, fuel
efficiency and operational costs advantages of the Company's aircraft.
PRODUCT LIABILITY AND INSURANCE.
The failure of an aircraft manufactured by the Company or any other mishap
involving such an aircraft may result in physical injury or death to the
occupants of the aircraft or others, and therefore, the Company could be subject
to lawsuits involving product liability claims. The Company intends to obtain
product liability insurance with regard to aircraft purchased by customers
commencing on the delivery of the first customer's aircraft. However, such
insurance is expensive, subject to various exclusions and, although the product
liability insurance for manufacturers of general aviation aircraft has become
somewhat more available and less costly over the last two years, there can be no
assurance that such coverage will be available to the Company on acceptable
terms or at all. Further, should the Company become involved in product
liability litigation, the expenses and damages awarded could be large and the
scope of any coverage may be inadequate. In the past it has obtained other
insurance as needed, including flight test insurance for the pilots and aircraft
used during the FAA certification process.
37
<PAGE>
GOVERNMENT REGULATION
The manufacture of aircraft is subject to extensive regulation by the
Federal Aviation Administration ("FAA"). Both the finished product and the
process of manufacturing itself must be certified by the FAA, as must the type
design. Failure to obtain or maintain all required FAA certifications would have
a material adverse effect on the Company's operations.
CERTIFICATION.
On June 14, 1994, the Company obtained a Type Certificate from the FAA for
the JETCRUZER 450. For an aircraft model to be manufactured for sale, the FAA
must issue a type certificate and production certificate for that model; for an
individual aircraft to be operated, the FAA must issue an airworthiness
certificate for that aircraft. Type certificates are issued by the FAA when an
aircraft model is determined to meet applicable performance, safety,
environmental, and other technical criteria. In the case of aircraft such as the
Company's which have one or more unconventional design characteristics for which
there are no applicable criteria, such criteria are developed and applied in the
course of the type certification process. More stringent airworthiness criteria
and additional equipment requirements become applicable if the aircraft will be
used in commercial passenger operations, whether on-demand charter or scheduled.
Production certificates are issued by the FAA after it determines that the type
certificate holder (or its licensee) has the facilities and quality control
capability to manufacture aircraft that will meet the design provisions of the
applicable type certificate. An airworthiness certificate is issued by the FAA
for a particular aircraft when it is certified to have been built in accordance
with specifications approved under the type certificate for that model; the
airworthiness certificate remains in effect so long as required maintenance,
repairs and upkeep are performed.
The Company intends to amend its Type Certificate with respect to the
JETCRUZER 450 to include the JETCRUZER 500, although there can be no assurance
that the FAA will not require application for a new type certificate for the
JETCRUZER 500. In addition, the Company will be required to obtain a further
amendment to its Type Certificate or a new type certificate if and when it
proceeds with development of the JETCRUZER 650. The Company will be required to
obtain a new type certificate if and when it proceeds with development of the
STRATOCRUZER 1250.
Obtaining a new or amended FAA type certificate can be difficult, costly,
and time consuming. In either case, the Company must accomplish, to the extent
deemed necessary by the FAA, among other things, (a) the filing of an
appropriate application with the FAA, (b) development and submission to the FAA
of an appropriate design and substantiating data and receipt of FAA approval
that such design and data comply with applicable FAA airworthiness standards,
(c) development and receipt of FAA approval of a flight test plan, (d)
successful completion of conformity inspections requested by the FAA from time
to time to ensure compliance of the aircraft with the type design, (e)
modification and reassembly of an existing JETCRUZER 450 for use for initial
flight testing, (f) modification and reassembly of an additional existing
JETCRUZER 450 for flight and static testing, (g) completion of Company flight
tests and receipt of precertification approval from the FAA, (h) completion of
additional flight tests under FAA supervision, (i) development and receipt of
FAA approval of an airplane flight manual, and (j) development and receipt of
FAA approval of maintenance and inspection requirements for the aircraft.
Although the time required to obtain a new or amended type certificate may vary,
the Company believes that it can obtain a new or amended certificate for the
JETCRUZER 500 within the 18 to 24 months following the closing of the Offering.
There can be no assurance that the Company will be successful in obtaining a new
type certificate or amendments to its existing Type Certificate for its planned
aircraft models, or, if the Company is successful in obtaining a type
certificate for its planned aircraft, that the new or amended type certificate
will not be subject to conditions which may adversely affect the use of the
planned aircraft models for their intended purpose or the Company's operations.
In the event that the FAA determines that a new type certificate is required for
any of the Company's planned aircraft models (including the JETCRUZER 500),
38
<PAGE>
the time and cost of obtaining such certification may be substantial, may render
it impossible for the Company to complete such certification and may have an
adverse effect on the Company's operations.
The Company will also need to obtain an FAA production certificate for the
commercial production of its aircraft. In order to obtain a production
certificate, the Company must commence production of an aircraft and make
application for the certificate. The FAA will regularly inspect the Company's
facilities and procedures during the production process. When the initial
aircraft is nearly complete, the Company must have submitted all required
materials, including a copy of the applicable quality assurance manual. The FAA
will then review the materials submitted and the results of its inspections and
will either issue the production certificate or require that the Company modify
either or both of its quality assurance manual or the manufacturing process.
While production does not necessarily stop during the review process, a failure
to receive a production certificate would likely delay the manufacturing
process. The time required to obtain a production certificate is identical to
and concurrent with the time required to manufacture the first
commercially-produced applicable aircraft; which the Company believes will be
five to six months in the case of the JETCRUZER 500. The Company expects to
obtain the production certificate within the 18 to 24 months following the
completion of the Offering.
There can be no assurance that the Company will not encounter a delay in
obtaining a production certificate for its planned aircraft models, or
airworthiness certificates for individual aircraft.
The Company will also be subject to the risk of modification, suspension or
revocation of any FAA certificate it holds. Such modification, suspension, or
revocation could occur if, in the FAA's judgement, compliance with airworthiness
or safety standards by the Company was in doubt. If the FAA were to suspend or
revoke the Company's type or production certificates for an aircraft model,
sales of that model would be adversely affected or terminated. If, in the FAA's
judgement, an unsafe condition developed or was discovered after one or more of
the Company's aircraft had entered service, the FAA could issue an
"Airworthiness Directive," which could result in a regulatory obligation upon
the Company to develop appropriate design changes at the Company's expense.
Foreign authorities could impose similar obligations upon the Company as to
aircraft within their jurisdiction. Any or all of the above occurrences could
expose the Company to substantial additional costs and/or liability.
GOVERNMENT ASSISTANCE.
The Company has negotiated with local and state governments regarding
incentives for locating the Company's facilities in a certain state or locality,
including facility construction, tax incentives and employee training. One city
in which the Company may locate its facilities has informed the Company that the
city would assist the Company by providing coordinated permit processing and
possibly matching funds for federal job training subsidies. The city has also
informed the Company that the potential site being considered by the Company
would cause the Company to be eligible for enterprise zone, state revitalization
zone and manufacturers' investment tax credits. If the Company is able to obtain
such assistance or financing, the Company may be subject to certain restrictions
on its operations, including an inability to relocate or to obtain certain types
of financing.
PRODUCT LIABILITY.
In 1994, the United States Congress passed and the President signed the
General Aviation Revitalization Act of 1994 ("GARA"). GARA provides protection
for manufacturers of general aviation aircraft against certain lawsuits for
wrongful death or injuries resulting from an aircraft accident. Except as set
forth in GARA, and provided a period of 18 years has passed from the date of
delivery of the aircraft to the original purchaser or retailer, no claim for
damages resulting from personal injury or wrongful death may be brought against
the manufacturer of a general aviation aircraft. Although GARA will not directly
affect the Company until eighteen years from the date it delivers its first
aircraft, management believes that GARA will indirectly benefit the Company
immediately, in that it may encourage increased manufacturing
39
<PAGE>
and sales of general aviation aircraft and this increased activity may in turn
result in an increased number of licensed pilots. Management believes that a
greater number of licensed pilots may provide an increased market for the
Company's aircraft. However, there can be no assurance that Management's view of
GARA's effects will prove to be correct.
FOREIGN CERTIFICATION.
In order for the Company to sell its aircraft in foreign countries, it must
comply with each country's aircraft certification process. Certain countries
will accept as adequate the certification issued by the FAA, while others impose
additional requirements. In countries which do require additional certification,
the FAA certification often provides a starting point from which such country
begins its certification process. The Company intends to begin certification
processes in foreign countries once it has received the amendment to the Type
Certificate for the JETCRUZER 500 and has finalized a sale or distributorship in
that country. The Company has not yet determined which foreign markets it will
first address. Priorities in this area will be established by the levels of
interest in the Company's products of dealers and distributors in the various
foreign markets.
FACILITIES
The Company's executive offices and research and limited manufacturing
facilities are located in an approximately 40,000 sq. ft. building near the Long
Beach, California airport pursuant to a month to month lease at a monthly rent
of $12,000. The Company has allocated a portion of the net proceeds of the
Offering to establish a larger facility to enable the Company to expand its
manufacturing capabilities as soon as a suitable location is found. The Company
presently has no other facilities.
The Company has identified several possible locations for its manufacturing
facility. The Company believes that establishment of the manufacturing facility
will take approximately 5 to 7 months and that the municipality selected by the
Company as the site of its main manufacturing facility will provide assistance
with streamlining the permit process, local licensing and other requirements.
The Company believes the cost of establishing the facility will be approximately
$7,000,000, which the Company intends to fund in part with the proceeds of the
Offering and in part through mortgage financing and/or other similar means. The
total anticipated size of the facility will be approximately 220,000 square
feet, with approximately 20,000 square feet of office space and approximately
200,000 square feet of manufacturing space. In the event that the Company is
unable to fully fund the cost of such facility, the Company may determine to
lease a facility until such funds become available. See "Use of Proceeds" and
"Plan of Operations."
EMPLOYEES
As of November 1, 1996, the Company had six full-time employees and eight
part-time technical consultants. The Company believes that its relations with
its employees are good. The Company is not a party to any collective bargaining
agreement.
The Company will require highly skilled engineers and manufacturing
technicians to complete the design of and produce the JETCRUZER 500. The Company
believes that a number of such individuals are available in Southern California
in general, and the Long Beach area in particular, as a result of recent
downsizings by large aerospace and defense contractors. In the past, the Company
has obtained the majority of its employees from this pool. However, there can be
no assurance that these individuals will remain available or that the Company
will be able to fill all necessary positions with qualified personnel.
The Company intends to hire employees as needed and believes that
approximately 50 employees will be hired within six months of the closing of the
Offering. Those employees will be needed to work on obtaining the amendment to
the Company's Type Certificate, as well as to plan and prepare for the Company's
relocation to a new manufacturing facility. The Company believes that it will
require a total of
40
<PAGE>
approximately 150 employees within 24 months of the closing of the Offering to
produce, manufacture, market and sell the JETCRUZER 500.
LEGAL PROCEEDINGS
In the ordinary course of business the Company is generally subject to
claims, complaints, and legal actions. The Company is not currently a party to
any material lawsuit.
In connection with the Recapitalization in July 1996, the stockholders of
the Company had the right, within thirty days of receiving notice of the merger
which was a part of the Recapitalization, to exercise dissenters' rights and
make written demand upon the Company to purchase their shares at fair market
value. The Company did not receive any such demands within such thirty-day
period. However, one stockholder, who presently owns slightly less than 5% of
the Company's outstanding Common Stock, forwarded a letter to the Company
claiming that he did not receive sufficient information in order to exercise his
rights and that therefore the time to exercise his rights should be extended. In
addition, such stockholder has asserted that his ownership interest in the
Company has been improperly diluted. Such stockholder threatened to commence
litigation against the Company and recently requested information to determine
whether his interest was improperly diluted.
The Company believes that it has complied with the statutory requirements
with respect to the Recapitalization as well as with respect to all issuances of
its capital stock. However, there can be no assurance as to whether such
stockholder will in fact assert any such claims against the Company or whether
any such claims will be successful. The Company does not believe, however, that
any adverse outcome of claims asserted against the Company by such stockholder
would have a material adverse effect on the Company.
41
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following are the executive officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- ------------------------------------------------------------
<S> <C> <C>
Carl Leei Chen, Ph.D. .............. 50 Chairman of the Board, Chief Executive Officer and
President(1)
Gene Comfort........................ 53 Executive Vice President, General Manager, Secretary and
Director(2)
William V. Leeds.................... 53 Senior Vice President--Operations(3)
Sandra Andre........................ 42 Chief Financial Officer
C.M. Cheng.......................... 50 Director(1)(2)
Steve Gorlin........................ 59 Director(1)
</TABLE>
- ------------------------
(1) Member of Compensation Committee and Option Committee
(2) Member of Audit Committee
(3) Mr. William V. Leeds has consented to become the Senior Vice
President--Operations of the Company following the closing of the Offering.
DR. CARL L. CHEN is the founder of the Company and has been its President
and a director since the Company's incorporation in January 1990 and the Chief
Executive Officer of the Company since December 1994. From January 1992 to
October 1995, Dr. Chen served as President, and since January 1992 has been a
minority stockholder, of Union China Investment and Development Group, Inc.
("Union China"), a company located in Monterey Park, California, which was
formed to invest in commercial real estate. Union China confirmed a plan of
reorganization pursuant to Chapter 11 of the Federal bankruptcy laws in August
1995. The bankruptcy case for Union China was closed in May 1996 pursuant to a
Final Decree and Order Closing Case entered by the Bankruptcy Court for the
Central District of California. Since January 1992, Dr. Chen has served as the
President of California Aerospace Technology, Inc., a consulting company for the
satellite industry, located in Monterey Park, California. Dr. Chen was Chairman
of SIDA Corporation, a high technology trading company located in Monterey Park,
California, from 1989 to May 1996. Prior to founding the Company in 1990, Dr.
Chen was a Satellite System Engineering Manager at Hughes Space and
Communications, Inc. for 15 years. Dr. Chen has a Ph.D. in Engineering from the
California Institute of Technology and Masters Degrees in Control Engineering
and Aerospace Engineering from UCLA and West Virginia University, respectively.
Dr. Chen is a graduate of the Owner/President Management program at the Graduate
School of Business Administration of Harvard University.
GENE COMFORT has been the Executive Vice President and General Manager of
the Company since September 1995 and a director since May 1996. From July 1993
to September 1995, Mr. Comfort was the Vice President--Marketing of the Company,
and he was the Director of Marketing of the Company from April 1991 to July
1993. Mr. Comfort has been involved in the aircraft industry for over 25 years
in a variety of marketing, sales and management positions. Mr. Comfort is a
single and multi engine rated pilot.
SANDRA J. ANDRE became Chief Financial Officer of the Company in June 1996.
From May 1995 to March 1996, Ms. Andre served as the Chief Financial Officer at
Lottery Enterprises, Inc., a public company located in San Diego, California,
engaged in the manufacture of vending terminals for instant winner lottery
tickets. From July 1990 to May 1995, Ms. Andre was the Chief Financial Officer
and Vice
42
<PAGE>
President of Plitt Amusement Co., Inc., a private company located in Torrance,
California, engaged in the entertainment business.
WILLIAM V. LEEDS has agreed to serve as a Senior Vice President of the
Company following the completion of this Offering. He served as the Senior Vice
President of the Company from 1991 to September 1994 and has acted as a
consultant to the Company on an as-needed basis since that time. He was one of
the key employees responsible for obtaining the Type Certificate for the
JETCRUZER 450. Since October 1994, Mr. Leeds has served as the General Manager
of Aerostar Corporation, a private company located in the State of Washington
engaged in the development and sale of small aircraft. From February 1986 to
January 1990, Mr. Leeds was the General Manager of Quiet Nacelle Corp., a
private company which retrofits aircraft engine nacelles for noise reduction.
Mr. Leeds has an Aeronautical Engineering Degree from Northrop Institute of
Technology and is an FAA Structure Designated Engineering Representative (DER).
He is a single engine, instrument rated pilot.
C.M. CHENG has served as a director of the Company since June 1996. Since
April 1996, Mr. Cheng has been a Vice President of Eurotai International, Ltd.,
a private company located in Taipei, Taiwan, which distributes health food
products. From 1984 to April 1996, Mr. Cheng served as a Vice President,
Director of the Office of the President, and Manager of Corporate Planning with
Taiwan Yeu Tyan Machinery, Mfg Co. Ltd., a public company located in Taipei,
Taiwan, which manufactures automobiles and heavy equipment. From 1980 to 1983,
Mr. Cheng was an Associate Professor of Economics and Management at Taiwan
National Sun-Yet-Sen University. Mr. Cheng is the director of Harpa Limited, a
corporation organized under the laws of the Cayman Islands ("Harpa"), a
principal stockholder of the Company. See "Certain Transactions" and "Principal
Stockholders."
STEVE GORLIN has served as a director of the Company since July 1996. Over
the past twenty-five years, Mr. Gorlin has founded several biotechnology and
pharmaceutical companies, including Hycor Biomedical, Inc., Theragenics
Corporation, CytRx Corporation, and Medicis Corporation, which are public
companies, and SeaLite Sciences, Inc., which is a private company. Mr. Gorlin
founded, and served as Chairman of the Board of, EntreMed Inc., a public
company, from its inception in 1991 until December 1995 (EntreMed was privately
held during his tenure). He founded, and is a member of the Board of Directors
of, Perma-Fix Environmental Services, Inc., a public company involved in the
disposal of hazardous waste. Mr. Gorlin also established the Touch Foundation, a
non-profit organization for the blind. He is a single and multi-engine pilot.
Directors serve until the next annual meeting or until their successors are
elected or appointed. Officers are elected by and serve at the discretion of the
Board of Directors. There are no family relationships among the officers or
directors of the Company.
BOARD COMMITTEES AND DESIGNATED DIRECTORS
The Board of Directors has a Compensation Committee, which makes
recommendations to the Board concerning salaries and incentive compensation for
officers and employees of the Company. The members of the Compensation Committee
are Dr. Chen, and Messrs. Cheng and Gorlin. The Board of Directors has
established an Option Committee to administer the Option Plan. The members of
the Option Committee are Dr. Chen and Messrs. Gorlin and Cheng. The Board of
Directors also has an Audit Committee which reviews the results and scope of the
audit and other accounting related matters. The members of the Audit Committee
are currently Messrs. Comfort and Cheng and the Company intends to add an
additional member following the Offering.
The Company has agreed to nominate a designee of the Underwriter who is
reasonably acceptable to the Company for election to the Company's Board of
Directors, if so requested by the Underwriter, for a period of five years from
the date of this Prospectus.
43
<PAGE>
DIRECTOR COMPENSATION
Directors who are employees of the Company receive no compensation for
serving on the Board of Directors. Non-employee Directors serving on the
Company's Board receive $1,000 per meeting plus out of pocket expenses for
attending such meetings. In addition, non-employee Directors are not precluded
from serving the Company in any other capacity and receiving compensation
therefor.
Directors are also eligible to participate in the Company's Stock Option
Plan. It is a policy of the Company that each Director who is not an employee of
the Company receive options to purchase 25,000 shares of Class A Common Stock
upon joining the Board. As of the date of this Prospectus, Messrs. Comfort,
Cheng and Gorlin each had received 25,000 shares of Class A Common Stock at an
exercise price of $5.00 per share. The options vest in equal annual installments
over five years. See
"--Stock Option Plan."
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company for its
fiscal year ended December 31, 1995, to Dr. Carl Chen, the Chief Executive
Officer and President of the Company. No other executive officer of the Company
received salary and bonus in excess of $100,000 in such fiscal year:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION (1)
--------------------------------------------
SALARY OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR ($)(2) COMPENSATION ($)(3)
- -------------------------------------------- --------- ------------ -------------------
<S> <C> <C> <C>
Dr. Carl Leei Chen, 1995 $ 53,000 $ 242,000
Chief Executive Officer and President
</TABLE>
- ------------------------
(1) The compensation described in this table does not include medical insurance,
retirement benefits and other benefits received by the foregoing executive
officer which are available generally to all employees of the Company and
certain perquisites and other personal benefits received by the foregoing
executive officer of the Company, the value of which did not exceed the
lesser of $50,000 or 10% of the executive officer's compensation in the
table.
(2) Pursuant to the New Management Agreement, which became effective on January
29, 1995 (the "New Management Agreement"), Dr. Chen was entitled to receive
a salary of $323,000 in 1995. This amount was accrued and unpaid as of
December 31, 1995. In May 1996, Dr. Chen agreed to convert $300,000 of such
accrued amount into 16,724 shares of Class B Common Stock, 33,448 shares of
Class E-1 Common Stock and 33,448 shares of Class E-2 Common Stock and to
receive the remainder in cash. See "Certain Transactions" and Note 6 of
Notes to Financial Statements. $30,000 of the amount stated reflects the
approximate fair value of such shares. In May 1996, the New Management
Agreement was terminated, and Dr. Chen's annual salary was changed to
$200,000 per year. See "--Employment Agreement."
(3) Represents the approximate fair value of 135,416 shares of Class B Common
Stock, 270,832 shares of Class E-1 Common Stock, and 270,832 shares of Class
E-2 Common Stock issued to Dr. Chen in June 1996 and earned by him under the
New Management Agreement during 1995. See "Certain Transactions."
EMPLOYMENT AGREEMENT
The Company entered into an eight-year employment agreement (the "Chen
Employment Agreement") with Dr. Carl Chen, the Company's, Chairman, Chief
Executive Officer and President, commencing in May 1996. The Chen Employment
Agreement provides that, in consideration for Dr. Chen's services, he is to be
paid an annual salary of $200,000. He will receive increases in salary and
bonuses as
44
<PAGE>
deemed appropriate by the Board of Directors. The Company will maintain life
insurance coverage on Dr. Chen, and Dr. Chen may name the beneficiary of such
policy. The Chen Employment Agreement also provides that he will not compete
with the Company during the term of the Agreement and for eighteen months
thereafter and that, if Dr. Chen's employment is terminated by the Company
without cause (as defined therein), he will receive up to eighteen months'
salary as severance, payable monthly commencing on the thirtieth day following
such termination without cause.
STOCK OPTION PLAN
The Board of Directors and the stockholders of the Company have adopted and
approved the 1996 Stock Option Plan ("Stock Option Plan"). The Stock Option Plan
provides for the grant of incentive stock options ("ISOs") within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and
non-qualified stock options ("NQSOs") to certain employees, officers, directors,
consultants and agents of the Company. The purpose of the Stock Option Plan is
to attract and retain qualified employees, agents, consultants, officers and
directors.
The total number of shares of Class A Common Stock with respect to which
options may be granted under the Stock Option Plan is 500,000. The shares
subject to, and available under, the Stock Option Plan may consist, in whole or
in part, of authorized but unissued stock or treasury stock not reserved for any
other purpose. Any shares subject to an option that terminates, expires or
lapses for any reason, and any shares purchased upon exercise of an option and
subsequently repurchased by the Company pursuant to the terms of the option,
become available for grant under the Stock Option Plan.
The Stock Option Plan is administered by the Board of Directors of the
Company, which determines, in its discretion, among other things, the recipients
of grants, whether a grant will consist of ISOs or NQSOs, or a combination
thereof, and the number of shares of Class A Common Stock to be subject to such
option. The Board may, in its discretion, delegate its power, duties and
responsibilities under the Stock Option Plan to a committee consisting of two or
more directors. The exercise price for ISOs must be at least 100% of the fair
market value per share of Class A Common Stock on the date of grant, as
determined by the Board. ISOs are not transferable, other than by will or the
laws of descent and distribution. NQSOs may be transferred to the optionee's
spouse or lineal descendants, subject to certain restrictions. Options may be
exercised during the holder's lifetime only by the holder or his or her guardian
or legal representative.
Options may be exercisable for a term determined by the Board, which may not
be less than one year or greater than 10 years from the date of grant. Options
may be exercised only while the original optionee has a relationship with the
Company which confers eligibility to be granted options or within 90 days after
termination of such relationship with the Company, or up to six months after
death or total and permanent disability. In the event the Company terminates its
relationship with the original optionee for cause (as defined in the Stock
Option Plan), all options granted to the optionee terminate immediately.
The Stock Option Plan contains certain limitations applicable only to ISOs
granted thereunder to satisfy specific provisions of the Internal Revenue Code.
For example, the aggregate fair market value, as of the date of grant, of shares
as to which an ISO becomes exercisable for the first time by an optionee during
any calendar year may not exceed $100,000. In addition, if an optionee owns more
than 10% of the Company's stock at the time the individual is granted as ISO,
the exercise price per share cannot be less than 110% of the fair market value
per share and the term of the option cannot exceed five years.
Options may be paid for in cash, by check or, in certain instances, by
delivering an assignment of shares of Class A Common Stock having a value equal
to the option price, or any combination of the foregoing, as stipulated in the
option agreement entered into between the Company and the optionee. At the
discretion of the Board, the Company may loan to the optionee some or all of the
purchase price of the shares acquired upon exercise of an option granted under
the Stock Option Plan.
45
<PAGE>
The Board may modify, suspend or terminate the Stock Option Plan; provided,
however, that certain material modifications affecting the Stock Option Plan
must be approved by the stockholders, and any change in the Stock Option Plan
that may adversely affect an optionee's rights under an option previously
granted under the Stock Option Plan requires the consent of the optionee.
As of the date of this Prospectus, the Company had granted options to
purchase 110,000 shares of Class A Common Stock at an exercise price of $5.00
per share under the Stock Option Plan. See "--Director Compensation" and
"Certain Transactions."
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation eliminates in certain
circumstances the liability of directors of the Company for monetary damages for
breach of their fiduciary duty as directors. This provision does not eliminate
the liability of a director (i) for breach of the director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions by the director not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for willful or negligent declaration of an unlawful dividend, stock
purchase or redemption, or (iv) for transactions from which the director derived
an improper personal benefit. Such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission.
The Company has entered into indemnification agreements ("Indemnification
Agreement(s)") with each of its directors and officers. Each such
Indemnification Agreement provides that the Company will indemnify the
indemnitee against expenses, including reasonable attorneys' fees, judgements,
penalties, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with any civil or criminal action or administrative
proceeding arising out of his performance of his duties as a director or
officer, other than an action instituted by the director or officer. Such
indemnification is available if the indemnitee acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Company, and with respect to any criminal action, had no reasonable cause to
believe his conduct was unlawful. The Indemnification Agreements also require
that the Company indemnify the director or other party thereto in all cases to
the fullest extent permitted by applicable law. Each Indemnification Agreement
permits the director or officer that is party thereto to bring suit to seek
recovery of amounts due under the Indemnification Agreement and to recover the
expenses of such suit if he is successful.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that it is the opinion of the Commission that such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.
46
<PAGE>
CERTAIN TRANSACTIONS
From January 1990 through December 1993, Mr. Song Gen Yeh, who was at that
time a principal stockholder and director of the Company, advanced funds to the
Company in the aggregate amount of $10,478,000. In December 1993, the Company
entered into an agreement with Mr. Yeh to repay such advances through the
issuance of 584,074 shares of Class B Common Stock, 1,168,148 shares of Class
E-1 Common Stock, and 1,168,148 shares of Class E-2 Common Stock of the Company.
Such shares were issued to Mr. Yeh in June 1996. From 1994 through 1995, Mr. Yeh
provided additional advances to the Company aggregating $250,000. In June 1996,
such advances were repaid by the Company through the issuance of 13,937 shares
of Class B Common Stock, 27,873 shares of Class E-1 Common Stock, and 27,873
shares of Class E-2 Common Stock. Such shares were subsequently transferred to
Harpa Limited ("Harpa"), a Cayman Islands corporation the voting stock of which
is controlled by two of Mr. Yeh's children. C.M. Cheng, a director of the
Company, is the Director of Harpa and, as such, has the power to vote the shares
of the Company's Common Stock held by Harpa. See "Principal Stockholders."
In January 1990, the Company entered into a five-year agreement (the
"Management Agreement") with SIDA Corporation ("SIDA"). Dr. Carl L. Chen, the
Chairman, Chief Executive Officer and President of the Company, was, at that
time, a principal stockholder of SIDA, and the other two stockholders of SIDA
were also, at that time, stockholders of the Company. The Management Agreement
provided for annual payments to SIDA of $140,000 for management services
consisting essentially of those customarily performed by the President of a
company. The SIDA agreement expired by its terms in January 1995. As of June 30,
1996, SIDA was owed $259,000 of unpaid management fees. This amount, together
with accrued interest of $64,000 through August 30, 1996, was paid from the
proceeds of the Bridge Financing in September 1996. In October 1993 and February
1994, the Company obtained loans from SIDA in the aggregate principal amount of
$110,000, bearing interest at 12%. These loans, together with accrued interest
of $31,000, were repaid from the proceeds of the Bridge Financing in September
1996.
In February and July 1994, the Company received loans in an aggregate
principal amount of $565,000, bearing interest at a rate of 12%, from four
individuals who were at the time not affiliated with the Company. One of such
persons, C.M. Cheng, became a director of the Company in June 1996. These loans,
together with accrued interest of $161,000, were repaid with the proceeds of the
Bridge Financing in September 1996.
In December 1994, the Company entered into a New Management Agreement (the
"New Management Agreement") with Dr. Chen which took effect in January 1995.
Pursuant to the New Management Agreement, Dr. Chen agreed to serve as the
Company's President and Chief Executive Officer. The New Management Agreement
had a term of 10 years and provided that Dr. Chen was to receive a signing bonus
of 139,365 shares of Class B Common Stock, 278,730 shares of Class E-1 Common
Stock, and 278,730 shares of Class E-2 Common Stock, an annual salary of
$350,000, and additional annual compensation payable in 147,727 shares of Class
B Common Stock, 295,454 shares of Class E-1 Common Stock, and 295,454 shares of
Class E-2 Common Stock. In May 1996, Dr. Chen agreed to terminate the New
Management Agreement. Pursuant to the New Management Agreement and in connection
with its termination, the Company issued a total of 577,823 shares of Class B
Common Stock, 1,155,647 shares of Class E-1 Common Stock, and 1,155,647 shares
of Class E-2 Common Stock to Dr. Chen. At June 30, 1996, $144,000 remained
accrued and unpaid under the New Management Agreement. This amount was paid to
Dr. Chen with the proceeds of the Bridge Financing in September 1996.
In May 1996 the Company entered into an Employment Agreement with Dr. Chen
pursuant to which he agreed to serve as its Chairman, Chief Executive Officer
and President. See "Management--Employment Agreement." As of August 31, 1996,
compensation of $69,000 was accrued and unpaid under this Agreement. This amount
was paid from the proceeds of the Bridge Financing in September 1996.
From September 1995 through August 1996, Dr. Chen made loans bearing
interest at a rate of 12% to the Company in the aggregate principal amount of
$562,000. In May 1996, Dr. Chen agreed to convert
47
<PAGE>
$336,000 of these loans into 187,118 shares of Class B Common Stock, 374,236
shares of Class E-1 Common Stock, and 374,236 shares of Class E-2 Common Stock.
The remaining $226,000 principal amount of these loans, together with $36,000 of
accrued interest, was repaid with the proceeds of the Bridge Financing in
September 1996.
In 1994 and 1995, the Company obtained loans from General Bank in the
aggregate principal amount of $900,000. This loan bore interest at the prime
rate plus 1.5% and had a maturity date of October 1996. Repayment of the loan
was guaranteed by the Small Business Administration, the California Export
Finance Office and Dr. Chen and was secured by substantially all the assets of
the Company. The total outstanding balance of the loan of approximately $915,000
(including accrued interest) was repaid from the proceeds of the Bridge
Financing in September 1996.
In May 1996, the Company issued 17,460 shares of Class B Common Stock,
34,919 shares of Class E-1 Common Stock, and 34,919 shares of Class E-2 Common
Stock to Gene Comfort, its Executive Vice President, as partial consideration
for marketing and general administrative services performed by Mr. Comfort for
the Company. In September 1996, $34,000 of accrued but unpaid salary was paid to
Mr. Comfort from the proceeds of the Bridge Financing.
In September 1996, the Company granted options to purchase 25,000 shares of
Class A Common Stock to each of C.M. Cheng and Steve Gorlin, directors of the
Company, and Gene Comfort, an officer and director of the Company, and 5,000
shares of Class A Common Stock to Sandra Andre, an officer of the Company, at an
exercise price of $5.00 per share. The options vest in equal annual installments
over five years.
The Company believes that each of the foregoing transactions was on terms at
least as favorable to the Company as those that could have been obtained from
nonaffiliated third parties.
48
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of the date of this Prospectus by (i)
each person who is known by the Company to own beneficially more than 5% of the
Company's outstanding Common Stock, (ii) each of the Company's directors and
executive officers, and (iii) all officers and directors of the Company as a
group (a) prior to the Offering, and (b) as adjusted to give effect to the sale
of the 6,000,000 Units offered hereby.
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
COMMON STOCK OWNERSHIP PERCENT OF TOTAL VOTING
BENEFICIALLY BEFORE OWNERSHIP POWER AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED(2) OFFERING AFTER OFFERING OFFERING(3)
- --------------------------------------------------------- -------------- ----------- --------------- -------------
<S> <C> <C> <C> <C>
Dr. Carl L. Chen(4)...................................... 4,196,460 41.96% 26.23% 37.47%
Gene Comfort(5).......................................... 87,298 .87 .55 .78
Sandra Andre(6).......................................... 0 0 0 0
C.M. Cheng(5)(7)......................................... 5,217,860 52.18 32.61 46.59
Steve Gorlin(5).......................................... 0 0 0 0
Harpa Limited(8)......................................... 5,217,860 52.18 32.61 46.59
Shih Jen Yeh(8).......................................... 5,217,860 52.18 32.61 46.59
Chyao Chi Yeh(8)......................................... 5,217,860 52.18 32.61 46.59
All executive officers and directors as a group (5
persons)............................................... 9,501,618 95.02 59.39 84.84
</TABLE>
- ------------------------
(1) Except as otherwise indicated, the address of each principal stockholder is
c/o the Company at 3060 Airport Way, Long Beach, California 90806. The
Company believes that all persons named have sole voting power and sole
investment power, subject to community property laws where applicable.
(2) Except as otherwise noted, all shares beneficially owned are 20% Class B
Common Stock and 80% Class E Common Stock, which shares of Class E Common
Stock are subject to redemption by the Company if the Company does not
achieve certain income or market price levels. See "Description of
Securities--Performance Shares."
(3) The Common Stock of the Company is divided into four classes. Each share of
Class B Common Stock, Class E-1 Common Stock and Class E-2 Common Stock is
entitled to five votes per share, and the Class A Common Stock is entitled
to one vote per share. See "Description of Securities-- Common Stock."
(4) Includes 200,000 shares of Class E-2 Common Stock held by Julie C. Chen, as
trustee of the Eric F. Chen Trust under Declaration of Trust dated August
31, 1996, for the benefit of Eric F. Chen, Dr. Chen's son. Julie Chen is Dr.
Chen's sister-in-law. Dr. Chen disclaims beneficial ownership of the 200,000
shares held by the Trust for the benefit of his son.
(5) Excludes 25,000 shares of Class A Common Stock issuable upon the exercise of
options not exercisable within 60 days of the date of this Prospectus.
(6) Excludes 5,000 shares of Class A Common Stock issuable upon the exercise of
options not exercisable within 60 days of the date of this Prospectus.
(7) Includes 5,208,177 shares of Common Stock held by Harpa Limited, a Cayman
Island corporation ("Harpa"). C.M. Cheng is a director of Harpa and has sole
voting and investment control over the shares of Common Stock held by Harpa
and thus may be deemed to beneficially own such shares. Mr. Cheng disclaims
beneficial ownership of such shares. The address of Harpa is c/o Coutts Co.
(Cayman) Ltd., Coutts House, P.O. Box 707, West Bay Road, Grand Cayman,
Cayman Islands.
(8) The voting stock of Harpa is currently held equally by Shih Jen Yeh and
Chyao Chi Yeh, who are children of Song Gen Yeh, the former Chairman and
principal stockholder of the Company. See "Certain Transactions." The
address of Mr. Shih Jen Yeh and Mr. Chyao Chi Yeh is 14th Floor, No. 55,
Section 2, Chung-Cheng Road, Shih-Lin District, Taipei, Taiwan.
49
<PAGE>
CONCURRENT SECURITIES OFFERING
An additional 3,500,000 redeemable Class A Warrants (the "Selling
Securityholders' Class A Warrants") have been registered pursuant to the
Registration Statement under the Securities Act of which this Prospectus is a
part for sale by the holders thereof (the "Selling Securityholders"). The
Selling Securityholders' Class A Warrants are identical to the Class A Warrants
included in the Units offered hereby and are being issued to the Selling
Securityholders on the closing of the Offering upon the automatic conversion of
all of the Company's outstanding Bridge Warrants. All of the Selling
Securityholders' Class A Warrants issued upon conversion of the Bridge Warrants,
the Class A Common Stock and Class B Warrants issuable upon exercise of such
Class A Warrants and the Class A Common Stock issuable upon exercise of the
Class B Warrants will be registered, at the Company's expense, under the
Securities Act and are expected to become tradeable on or about the closing of
the Offering, subject to a contractual restriction agreed to with the Company
that such Selling Securityholders' Class A Warrants and underlying securities
may not be sold for at least 90 days after the closing of the Offering; and,
during the period from 91 to 270 days after such closing, only certain specified
percentages of such securities may be sold. See "Shares Eligible For Future
Sale." The Selling Securityholders have also agreed with the Company not to
exercise their Selling Securityholders' Class A Warrants for a period of one
year following the closing of the Offering; provided, however, that purchasers
of such Selling Securityholders' Class A Warrants are not subject to such
restrictions on exercise. After the one-year period following the closing of the
Offering, the Selling Securityholders may exercise the Selling Securityholders'
Class A Warrants and sell the Class B Warrants and Class A Common Stock issuable
upon exercise of their warrants without restriction if a current prospectus
relating to such Class A Common Stock is in effect and the securities are
qualified for sale. The Company will not receive any proceeds from the sale of
the Selling Securityholders' Class A Warrants. Sales of Selling Securityholders'
Class A Warrants or the securities underlying such Class A Warrants or even the
potential of such sales could have an adverse effect on the market prices of the
Units, the Class A Common Stock and the Warrants. See "Shares Eligible For
Future Sale."
There are no material relationships between any of the Selling
Securityholders and the Company, nor have any such material relationships
existed within the past three years. The Company has been informed by the
Underwriter that there are no agreements between the Underwriter and any Selling
Securityholder regarding the distribution of the Selling Securityholders'
Warrants or the underlying securities.
The sale of the securities by the Selling Securityholders may be effected
from time to time in transactions (which may include block transactions by or
for the account of the Selling Securityholders) in the over-the-counter market
or in negotiated transactions, a combination of such methods of sale or
otherwise. Sales may be made at fixed prices which may be changed, at market
prices prevailing at the time of sale or at negotiated prices.
Selling Securityholders may effect such transactions by selling their
securities directly to purchasers, through broker-dealers acting as agents for
the Selling Securityholders or to broker-dealers who may purchase shares as
principals and thereafter sell the securities from time to time in the
over-the-counter market, in negotiated transactions or otherwise. Such
broker-dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders or the purchasers
for whom such broker-dealers may act as agents or to whom they may sell as
principals or otherwise (which compensation as to a particular broker-dealer may
exceed customary commissions).
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the Selling Securityholders' Class A Warrants may
not simultaneously engage in market making activities with respect to any
securities of the Company for a period of at least two (and possibly nine)
business days prior to the commencement of such distribution. Accordingly, in
the event the Underwriter or Blair & Co. is engaged in a distribution of the
Selling Securityholders' Class A Warrants, neither of such firms will be able to
make a market in the Company's securities during the applicable restrictive
period. However, neither the Underwriter nor Blair & Co. has agreed to, nor is
either of them obligated to, act as
50
<PAGE>
a broker-dealer in the sale of the Selling Securityholders' Class A Warrants,
and the Selling Securityholders may be required, and in the event Blair & Co. is
a market maker, will likely be required, to sell such securities through another
broker-dealer. In addition, each Selling Securityholder desiring to sell
Warrants will be subject to the applicable provisions of the Exchange Act and
the rules and regulations thereunder, including without limitation Rules l0b-6
and l0b-7, which provisions may limit the timing of the purchases and sales of
shares of the Company's securities by such Selling Securityholders.
The Selling Securityholders and broker-dealers, if any, acting in connection
with sales of the Selling Securityholders' Class A Warrants or the securities
underlying such Warrants may deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act, and any commission received by them and any
profit on the resale of such securities might be deemed to be underwriting
discounts and commissions under the Securities Act.
51
<PAGE>
DESCRIPTION OF SECURITIES
The following description of the capital stock of the Company and certain
provisions of the Company's Certificate of Incorporation and Bylaws is a summary
and is qualified in its entirety by the provisions of the Certificate of
Incorporation and Bylaws, which have been filed as exhibits to the Company's
Registration Statement of which this Prospectus is a part.
The authorized capital stock of the Company currently consists of 60,000,000
shares of Class A Common Stock, $.0001 par value (giving effect to the amendment
to the Company's Certificate of Incorporation in November 1996), 10,000,000
shares of Class B Common Stock, $.0001 par value, 4,000,000 shares of Class E-1
Common Stock, $.0001 par value, 4,000,000 shares of Class E-2 Common Stock,
$.0001 par value, and 5,000,000 shares of Preferred Stock, $.0001 par value. As
of the date of this Prospectus, there were outstanding 2,000,000 shares of Class
B Common Stock (held of record by four stockholders), 4,000,000 shares of Class
E-1 Common Stock (held of record by four stockholders), 4,000,000 shares of
Class E-2 Common Stock (held of record by four stockholders), no shares of Class
A Common Stock and no shares of Preferred Stock.
UNITS
Each Unit offered hereby consists of one share of Class A Common Stock, one
Class A Warrant and one Class B Warrant. At any time commencing on the date of
issuance until the fifth anniversary date of this Prospectus, each Class A
Warrant will be exercisable to purchase one share of Class A Common Stock and
one Class B Warrant and each Class B Warrant will be exercisable to purchase one
share of Class A Common Stock. The Common Stock and Warrants included in the
Units are immediately transferable separately upon issuance.
COMMON STOCK
The Class A Common Stock, Class B Common Stock, Class E-1 Common Stock and
Class E-2 Common Stock are substantially identical, except that the holders of
Class A Common Stock have the right to cast one vote, and the holders of Class B
Common Stock, Class E-1 Common Stock, and Class E-2 Common Stock have the right
to cast five votes, for each share held of record on all matters submitted to a
vote of the holders of Common Stock, including the election of directors. The
Class A Common Stock, Class B Common Stock, Class E-1 Common Stock and Class E-2
Common Stock vote together as a single class on all matters on which
stockholders may vote, including the election of directors, except when voting
by class is required by applicable law. Holders of the Class A Common Stock,
Class B Common Stock, Class E-1 Common Stock and Class E-2 Common Stock have
equal ratable rights to dividends from funds legally available therefor, when,
as and if declared by the Board of Directors and are entitled to share ratably,
as a single class, in all of the assets of the Company available for
distribution to the holders of shares of Common Stock upon the liquidation,
dissolution or winding up of the affairs of the Company. Except as described
herein, no pre-emptive, subscription, or conversion rights pertain to the Common
Stock and no redemption or sinking fund provisions exist for the benefit
thereof. All outstanding shares of Common Stock are, and those shares of Class A
Common Stock offered hereby will be duly authorized, validly issued, fully paid
and nonassessable.
As a consequence of their ownership of Common Stock and the enhanced voting
power of the Class B Common Stock, Class E-1 Common Stock, and Class E-2 Common
Stock, the current stockholders of the Company will continue to control a
majority of the voting power of the Company following completion of the Offering
and, accordingly, will be able to elect all of the Company's directors. This
difference in voting rights and consequent increase in the voting power of the
Class E-1 Common Stock, Class E-2 Common Stock and Class B Common Stock has an
anti-takeover effect, in that the existence of the Class E-1 Common Stock, Class
E-2 Common Stock and Class B Common Stock may make the Company a less attractive
target for a hostile takeover bid or render more difficult or discourage a
merger proposal, an
52
<PAGE>
unfriendly tender offer, a proxy contest, or the removal of incumbent
management, even if such transactions were favored by the stockholders of the
Company other than the holders of Class E-1 Common Stock, Class E-2 Common Stock
and Class B Common Stock. Thus, the stockholders of the Company may be deprived
of an opportunity to sell their shares at a premium over prevailing market
prices in the event of a hostile takeover bid. Those seeking to acquire the
Company through a business combination will be compelled to consult first with
the holders of the Class E-1 Common Stock, Class E-2 Common Stock and Class B
Common Stock in order to negotiate the terms of such a business combination.
Additionally, any such proposed business combination would have to be approved
by the Board of Directors, which may be under the control of the holders of the
Class E-1 Common Stock, Class E-2 Common Stock and Class B Common Stock; and, if
stockholder approval were required, the approval of the holders of the Class E-1
Common Stock, Class E-2 Common Stock and Class B Common Stock would be necessary
before any such business combination could be consummated.
PERFORMANCE SHARES
The Company's Certificate of Incorporation provides that the Class E-1 and
the Class E-2 Common Stock is redeemable by the Company at a price of $.01 per
share unless the Company meets certain income or share price thresholds. If the
thresholds are met, the Performance Shares will be automatically converted into
shares of Class B Common Stock. The Performance Shares are not assignable or
transferable other than upon death, by operation of law, or to related parties
who agree to be bound by the restrictions on the Performance Shares set forth in
the Company's Certificate of Incorporation.
(a) The 4,000,000 shares of outstanding Class E-1 Common Stock will be
automatically converted into Class B Common Stock if, and only if, one or more
of the following conditions are met:
(i) the Company's net income before provision for income taxes and
exclusive of any extraordinary earnings as audited and determined by the
Company's independent public accountants (the "Minimum Pretax Income")
amounts to at least $17.5 million for the fiscal year ending December 31,
1998;
(ii) the Minimum Pretax Income amounts to at least $22.5 million for the
fiscal year ending December 31, 1999;
(iii) the Minimum Pretax Income amounts to at least $28.5 million for the
fiscal year ending December 31, 2000;
(iv) the Minimum Pretax Income amounts to at least $36.0 million for the
fiscal year ending on December 31, 2001;
(v) the Minimum Pretax Income amounts to at least $45.0 million for the
fiscal year ending on December 31, 2002;
(vi) the Minimum Pretax Income amounts to at least $56.0 million for the
fiscal year ending on December 31, 2003;
(vii) commencing on the date of this Prospectus and ending 18 months
after the date of this Prospectus, the Bid Price (as defined herein) of the
Company's Class A Common Stock averages in excess of $14.00 per share
(subject to adjustment in the event of any reverse stock splits or other
similar events) for 30 consecutive business days; or
(viii) commencing 18 months after the date of this Prospectus and ending
36 months after the date of this Prospectus, the Bid Price (as defined
herein) of the Company's Class A Common Stock averages in excess of $18.50
per share (subject to adjustment in the event of any reverse stock splits or
other similar events) for 30 consecutive business days.
53
<PAGE>
(b) The 4,000,000 shares of outstanding Class E-2 Common Stock will be
converted into Class B Common Stock if, and only if, at least one of the
following conditions is met.
(i) the Minimum Pretax Income amounts to at least $21.875 million for
the fiscal year ending on December 31, 1998;
(ii) the Minimum Pretax Income amounts to at least $28.125 million for
the fiscal year ending on December 31, 1999;
(iii) the Minimum Pretax Income amounts to at least $35.625 million for
the fiscal year ending on December 31, 2000;
(iv) the Minimum Pretax Income amounts to at least $45.0 million for the
fiscal year ending on December 31, 2001
(v) the Minimum Pretax Income amounts to at least $56.25 million for the
fiscal year ending on December 31, 2002;
(vi) the Minimum Pretax Income amounts to at least $69.5 million for the
fiscal year ending on December 31, 2003;
(vii) commencing on the date of this Prospectus and ending 18 months
after the date of this Prospectus, the Bid Price (as defined herein) of the
Company's Class A Common Stock averages in excess of $18.00 per share
(subject to adjustment in the event of any reverse stock splits or other
similar events) for 30 consecutive business days; or
(viii) commencing 18 months after the date of this Prospectus and ending
36 months after the date of this Prospectus, the Bid Price (as defined
herein) of the Company's Class A Common Stock averages in excess of $23.00
per share (subject to adjustment in the event of any reverse stock splits or
other similar events) for 30 consecutive business days.
The Minimum Pretax Income amounts set forth above (i) shall be calculated
exclusive of any extraordinary earnings or charge, including, but not limited
to, any charge to income resulting from conversion of the Performance Shares and
(ii) shall be increased proportionately, with certain limitations, in the event
additional shares of Common Stock or securities convertible into, exchangeable
for or exercisable into Common Stock are issued after completion of the
Offering. The bid price amounts set forth above are subject to adjustment in the
event of any stock splits, reverse stock splits or other similar events.
If none of the applicable Minimum Pretax Income or bid price levels set
forth above have been met by March 31, 2004, the Performance Shares will be
redeemable by the Company at a price of $.01 per share. The Company expects that
the conversion of Performance Shares owned by officers, directors, employees and
consultants of the Company will be deemed compensatory and, accordingly, will
result in a substantial charge to reportable earnings equal to the fair market
value of such shares on the date of conversion. Such charge could substantially
increase the loss or reduce or eliminate the Company's net income for financial
reporting purposes for the period or periods during which such shares are, or
become probable of being, converted. Therefore, although the amount of
compensation expense recognized by the Company will not affect the Company's
cash flow, it may have a negative effect on the market price of the Company's
securities.
The restrictions on the Class E-1 Common Stock and Class E-2 Common Stock
were required by the Underwriter as a condition to this Offering. The Minimum
Pretax Income and bid price levels set forth above were determined by
negotiation between the Company and the Underwriter and should not be construed
to imply or predict any future earnings by the Company or any increase in the
market price of its securities.
54
<PAGE>
Bid Price shall mean the closing bid price of the Class A Common Stock as
quoted on the Nasdaq SmallCap Market or as reported by the National Quotation
Bureau, Inc. or the closing sales price of the Class A Common Stock if it is
listed on the Nasdaq National Market or a national stock exchange.
The "Minimum Pretax Income" amounts set forth above assume the conversion
into Class B Common Stock of all of the shares of Class E Common Stock and the
conversion into Class A Common Stock of any outstanding Class B Common Stock and
any other securities which are convertible into Class A or Class B Common Stock
solely upon surrender of such convertible securities without the payment of any
additional consideration, but shall be increased proportionally to reflect the
issuance of any other additional shares, including any shares that may be issued
upon the exercise of any warrants or options presently outstanding or hereafter
granted, provided, however, that, with respect to any shares of Class A Common
Stock issued upon exercise of warrants subject to a registration statement
covering shares of Class A Common Stock (the "Registration Statement") filed
with the Commission (provided such Registration Statement is filed on or before
September 30, 1996), so long as any portion of the net proceeds received by the
Company upon such exercise is not utilized by the Company, but such proceeds
(the "Invested Proceeds") are instead invested in short-term high interest
bearing securities or accounts or securities issued or guaranteed by the United
States government, then the adjustment to the Minimum Pretax Income amounts set
forth above with respect to that number of warrants which generated such
Invested Proceeds shall be equal to 8% per annum multiplied by such amount of
Invested Proceeds. The Minimum Pretax Income shall be calculated exclusive of
any extraordinary earnings or extraordinary charges including, but not limited
to, any charge to income resulting from the conversion of shares of Class E
Common Stock.
CLASS B COMMON STOCK
Each share of Class B Common Stock is convertible at any time commencing
thirteen months following the date of this Prospectus at the option of the
holder into one share of Class A Common Stock. Shares of Class B Common Stock
will also automatically convert into an equivalent number of fully paid and
non-assessable shares of Class A Common Stock after such period upon the sale or
transfer of such shares of Class B Common Stock (other than a transfer to
another holder of Class B Common Stock) by the original record holder thereof or
upon the death of the holder thereof unless and to the extent that such shares
are acquired by another holder of Class B Common Stock.
REDEEMABLE WARRANTS
The following is a brief summary of the material provisions of the Warrants,
but such summary does not purport to be complete and is qualified in all
respects by reference to the actual text of the Warrant Agreement between the
Company, the Underwriter, and American Stock Transfer and Trust Company (the
"Transfer and Warrant Agent"). A copy of the Warrant Agreement has been filed as
an exhibit to the Registration Statement of which this Prospectus is a part.
CLASS A WARRANTS
The holder of each Class A Warrant is entitled, upon payment of the exercise
price of $6.50, to purchase one share of Class A Common Stock and one Class B
Warrant. Unless previously redeemed, the Class A Warrants are exercisable at any
time after their issuance until the fifth anniversary of the date of this
Prospectus, provided that at such time a current prospectus relating to the
Class A Common Stock and the Class B Warrants underlying the Class A Warrants is
in effect and the underlying Class A Common Stock and the Class B Warrants are
qualified for sale or exempt from qualification under applicable state
securities laws. The Class A Warrants included in the Units offered hereby are
immediately transferable separately from the Class A Common Stock and the Class
B Warrants issued with such Class A Warrants as part of the Units. The Class A
Warrants are subject to redemption, as described below.
55
<PAGE>
CLASS B WARRANTS
The holder of each Class B Warrant is entitled, upon payment of the exercise
price of $8.75, to purchase one share of Class A Common Stock. Unless previously
redeemed, the Class B Warrants are exercisable at any time after their issuance
until the fifth anniversary of the date of this Prospectus, provided that at
such time a current prospectus relating to the underlying Class A Common Stock
is then in effect and the Class A Common Stock underlying the Warrants is
qualified for sale or exempt from qualification under applicable state
securities laws. The Class B Warrants included in the Units offered hereby are
transferable separately from the Class A Common Stock and Class A Warrants
issued with such Class B Warrants as part of the Units, and the Class B Warrants
underlying the Class A Warrants will be transferable separately from the Class A
Common Stock received upon exercise of the Class A Warrants. The Class B
Warrants are subject to redemption, as described below.
REDEMPTION
Commencing one year from the date of this Prospectus, the Class A Warrants
are subject to redemption by the Company, upon 30 days written notice, at a
price of $.05 per Warrant, if the average closing bid price of the Class A
Common Stock for any 30 consecutive trading days ending within 15 days of the
date on which the notice of redemption is given shall have exceeded $12.00 per
share. The Class B Warrants are subject to redemption by the Company commencing
one year from the date of this Prospectus, upon 30 days written notice, at a
price of $.05 per Warrant, if the average closing bid price of the Class A
Common Stock for any 30 consecutive trading days ending within 15 days of the
date on which the notice of redemption is given shall have exceeded $15.00 per
share. Holders of Warrants will automatically forfeit their rights to purchase
the shares of Class A Common Stock and/or Class B Warrants issuable upon
exercise of such Warrants unless the Warrants are exercised before the close of
business on the business day immediately prior to the date set for redemption.
All of the outstanding Warrants of a class, except for those underlying the Unit
Purchase Option, must be redeemed if any of that class are redeemed. A notice of
redemption shall be mailed to each of the registered holders of the Warrants by
first class mail, postage prepaid, upon 30 days' notice before the date fixed
for redemption. The notice of redemption shall specify the redemption price, the
date fixed for redemption, the place where the Warrant certificates shall be
delivered and the redemption price to be paid, and that the right to exercise
the Warrants shall terminate at 5:00 p.m. (New York City time) on the business
day immediately preceding the date fixed for redemption.
GENERAL
The Warrants may be exercised upon surrender of the certificate or
certificates therefor on or prior to the expiration or the redemption date (as
explained above) at the offices of the Company's warrant agent (the "Warrant
Agent") with the subscription form on the reverse side of the certificate or
certificates completed and executed as indicated, accompanied by payment (in the
form of a certified or cashier's check payable to the order of the Company) of
the full exercise price for the number of Warrants being exercised.
The Warrants contain provisions that protect the holders thereof against
dilution by adjustment of the exercise price per share and the number of shares
issuable upon exercise thereof upon the occurrence of certain events, including
issuances of Class A Common Stock (or securities convertible, exchangeable or
exercisable into Class A Common Stock) at less than market value, stock
dividends, stock splits, mergers, sale of substantially all of the Company's
assets, and for other extraordinary events; provided, however, that no such
adjustment shall be made upon, among other things, (i) the issuance or exercise
of options or other securities under the Company's Stock Option Plan or other
employee benefit plans or (ii) the sale or exercise of outstanding options or
warrants or the Warrants offered hereby.
56
<PAGE>
The Company is not required to issue fractional shares of Class A Common
Stock and in lieu thereof will make a cash payment based upon the current market
value of such fractional shares. The holder of the Warrants will not possess any
rights as a stockholder of the Company unless and until he or she exercises the
Warrants.
PREFERRED STOCK
The Preferred Stock may be issued in series, and shares of each series will
have such rights, preferences, and privileges as are fixed by the Board of
Directors in the resolutions authorizing the issuance of that particular series.
In designating any series of Preferred Stock, the Board of Directors may,
without further action by the holders of Common Stock, fix the number of shares
constituting the series and fix the dividend rights, dividend rate, conversion
rights, voting rights (which may be greater or lesser than the voting rights of
the Common Stock), rights and terms of redemption (including any sinking fund
provisions), and the liquidation preferences of the series of Preferred Stock.
The holders of any series of Preferred Stock, when and if issued, are expected
to have priority claims to dividends and to any distributions upon liquidation
of the Company, and they may have other preferences over the holders of the
Common Stock.
The Board of Directors may issue series of Preferred Stock without action by
the holders of the Common Stock. Accordingly, the issuance of Preferred Stock
may adversely affect the rights of the holders of the Common Stock. In addition,
the issuance of Preferred Stock may be used as an "anti-takeover" device without
further action on the part of the holders of the Common Stock. The issuance of
Preferred Stock may also dilute the voting power of the holders of Common Stock,
in that a series of Preferred Stock may be granted enhanced per share voting
rights and the right to vote on certain matters separately as a class, and may
render more difficult the removal of current management, even if such removal
may be in the stockholders' best interest. The Company has no current plans to
issue any Preferred Stock.
UNIT PURCHASE OPTION
Upon the closing of the Offering, the Company has agreed to grant to the
Underwriter the Unit Purchase Option to purchase up to 600,000 Units. The Units
issuable upon exercise of the Unit Purchase Option will, when so issued, be
identical to the Units offered hereby. The Unit Purchase Option cannot be
transferred, sold, assigned or hypothecated for three years, except to any
officer of the Underwriter or members of the selling group or their officers.
The Unit Purchase Option is exercisable during the two-year period commencing
three years from the date of this Prospectus at an exercise price of $6.50 per
Unit (130% of the initial public offering price) subject to adjustment under
certain circumstances. The holders of the Unit Purchase Option have certain
demand and piggyback registration rights. See "Underwriting."
REGISTRATION RIGHTS
The Company has granted certain demand and piggyback registration rights to
the holder of the Unit Purchase Option relating to their options and the
underlying securities. See "Underwriting."
TRANSFER AGENT AND WARRANT AGENT
American Stock Transfer & Trust Company, New York, New York, will serve as
Transfer Agent for the shares of Common Stock and Warrant Agent for the
Warrants.
CERTAIN STATUTORY AND CHARTER PROVISIONS UNDER THE DELAWARE GENERAL CORPORATION
LAW
Section 203 of the Delaware General Corporation Law provides, in general,
that a stockholder acquiring more than 15% of the outstanding voting shares of a
publicly-held Delaware corporation subject to the statute (an "Interested
Stockholder") may not engage in certain "Business Combinations" with the
corporation for a period of three years subsequent to the date on which the
stockholder became an
57
<PAGE>
Interested Stockholder unless (i) prior to such date the corporation's board of
directors approved either the Business Combination or the transaction in which
the stockholder became an Interested Stockholder or (ii) upon consummation of
the Business Combination, the Interested Stockholder owns 85% or more of the
outstanding voting stock of the corporation (excluding shares owned by directors
who are also officers of the corporation or shares held by employee stock option
plans that do not provide employees with the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer), or (iii) the Business Combination is approved by the corporation's board
of directors and authorized at an annual or special meeting of stockholders, and
not by written consent, by the affirmative vote of at least two-thirds of the
outstanding voting stock of the corporation not owned by the Interested
Stockholder.
Section 203 defines the term "Business Combination" to encompass a wide
variety of transactions with or caused by an Interested Stockholder in which the
Interested Stockholder receives or could receive a benefit on other than a pro
rata basis with other stockholders, including mergers, certain asset sales,
certain issuances of additional shares to the Interested Stockholder or
transactions in which the Interested Stockholder receives certain other
benefits.
These provisions could have the effect of delaying, deferring or preventing
a change of control of the Company. The Company's stockholders, by adopting an
amendment to the Certificate of Incorporation or Bylaws of the Company, may
elect not to be governed by Section 203, effective twelve months after adoption.
Neither the Certificate of Incorporation nor the Bylaws of the Company currently
excludes the Company from the restrictions imposed by Section 203.
The Delaware General Corporation Law permits a corporation through its
Certificate of Incorporation to eliminate the personal liability of its
directors to the Corporation or its stockholders for monetary damages for breach
of fiduciary duty of loyalty and care as a director with certain exceptions. The
exceptions include a breach of the director's duty of loyalty, acts or omissions
not in good faith or which involve intentional misconduct or knowing violation
of law, and improper personal benefit. The Company's Certificate of
Incorporation exonerates its directors from monetary liability to the fullest
extent permitted by this statutory provision.
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding 6,000,000
shares of Class A Common Stock (6,900,000 shares of Class A Common Stock if the
Underwriter's over-allotment option is exercised in full) 2,000,000 shares of
Class B Common Stock, 4,000,000 shares of Class E-1 Common Stock and 4,000,000
shares of Class E-2 Common Stock. All of the shares of Class A Common Stock
offered hereby will be freely tradeable without restriction or further
registration under the Securities Act, except for any shares purchased by any
person who is or thereby becomes an "affiliate" of the Company, which shares
will be subject to the resale limitations contained in Rule 144 promulgated
under the Securities Act, as described below.
All of the 10,000,000 shares of Class B Common Stock, Class E-1 Common
Stock, and Class E-2 Common Stock currently outstanding (and the shares of Class
A Common Stock or Class B Common Stock, as the case may be, into which they are
convertible) are "restricted securities" within the meaning of Rule 144 under
the Securities Act and, in general, may not be sold unless they are registered
under the Securities Act or sold pursuant to Rule 144 or another exemption from
registration. Pursuant to Rule 144, virtually all of these restricted shares
would be eligible for resale commencing 90 days following the date of this
Prospectus. However, 2,000,000 of the 10,000,000 outstanding shares are Class B
Common Stock and thus may not be sold until thirteen months after the date of
this Prospectus. In addition, the remaining 8,000,000 of the outstanding shares
are Class E Common Stock, which shares are not currently tradeable and are
subject to redemption by the Company for a nominal consideration if the Company
does not meet certain income or stock price levels, and are convertible into
Class B Common Stock if the Company does meet such levels. See "Description of
Securities."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including a person who may be deemed to be an
"affiliate" of the Company as that term is defined under the Securities Act, is
entitled to sell, within any three month period, the number of shares
beneficially owned for at least two years that does not exceed the greater of
(i) one percent of the number of the then outstanding shares of Class A Common
Stock, or (ii) the average weekly trading volume of the Class A Common Stock
during the four calendar weeks preceding such sale. Sales under Rule 144 are
also subject to certain requirements as to manner of sale, notice and the
availability of current public information about the Company. Furthermore, a
person who is not deemed to have been an affiliate of the Company during the
ninety days preceding a sale by such person and who has beneficially owned such
shares for at least three years is entitled to sell such shares without regard
to the volume, manner of sale and notice requirements.
In addition, Rule 701 under the Securities Act provides an exemption from
the registration requirements of the Act for offers and sales of securities
issued pursuant to certain compensatory benefit plans or written contracts of a
company not subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act. Securities issued pursuant to Rule 701 are defined as restricted
securities for purposes of Rule 144. However, 90 days after the issuer becomes
subject to the reporting provisions of the Exchange Act, the Rule 144 resale
restrictions, except for the broker's transaction requirements, are inapplicable
for nonaffiliates. Affiliates are subject to all Rule 144 restrictions after
this 90-day period, but without the Rule 144 holding period requirement.
Holders of the Class A Warrants included in the Units offered hereby
(assuming no exercise of the Underwriter's over-allotment option) will be
entitled to purchase an aggregate of 6,000,000 shares of Class A Common Stock
upon exercise of the Class A Warrants and holders of the Class B Warrants
offered hereby and underlying the Class A Warrants offered hereby will be
entitled to purchase an aggregate of 12,000,000 additional shares of Class A
Common Stock upon exercise of the Class B Warrants, in each case at any time
during the five-year period following the date of this Prospectus, provided that
the Company satisfies certain securities registration requirements with respect
to the securities underlying the Warrants.
59
<PAGE>
Up to 2,400,000 additional shares of Class A Common Stock may be purchased
by the Underwriter
through the exercise of the Unit Purchase Option and the Class A Warrants and
Class B Warrants contained in and underlying the Unit Purchase Option. Any and
all of such shares of Class A Common Stock will be tradeable without
restriction, provided that the Company satisfies certain securities registration
requirements in accordance with the terms of the Unit Purchase Option. The
Underwriter also has demand and "piggyback" registration rights with respect to
the securities underlying the Unit Purchase Option. See "Underwriting."
The Company has also registered on behalf of the Selling Securityholders an
aggregate of 3,500,000 Selling Securityholders' Class A Warrants and the
securities underlying such Class A Warrants. The Selling Securityholders have
agreed not to sell their Selling Securityholder Class A Warrants or the
securities issuable on exercise thereof except pursuant to the restrictions set
forth below:
<TABLE>
<CAPTION>
PERCENTAGE
ELIGIBLE
LOCK-UP PERIOD FOR RESALE
- -------------------------------------------------------------------- -----------------
<S> <C>
Up to 90 days after closing......................................... 0%
Between 91 and 150 days after closing............................... 25%
Between 151 and 210 days after closing.............................. 50%
Between 211 and 270 days after closing.............................. 75%
After 270 days after closing........................................ 100%
</TABLE>
The Selling Securityholders have also agreed with the Company not to
exercise the Selling Securityholders' Class A Warrants for a period of one year
following the closing of the Offering; provided, however, that purchasers of
such Selling Securityholders' Class A Warrants are not subject to this
restriction on exercise.
The Company has adopted a Stock Option Plan and reserved 500,000 shares of
Class A Common Stock for issuance under the Plan. As of the date of this
Prospectus, the Company has granted options under the Plan to purchase 110,000
shares of Class A Common Stock. Such options vest in equal annual installments
over five years. See "Management--Stock Option Plan."
Prior to the Offering, no public market for the Company's securities has
existed. Following the Offering, no predictions can be made of the effect, if
any, of future public sales of restricted shares or the availability of
restricted shares for sale in the public market. Moreover, the Company cannot
predict the number of shares of Class A Common Stock that may be sold in the
future pursuant to Rule 144 or Rule 701 because such sales will depend on, among
other factors, the market price of the Class A Common Stock and the individual
circumstances of the holders thereof. The availability for sale of substantial
amounts of Class A Common Stock acquired through the exercise of the Class A
Warrants and Class B Warrants, under Rule 144 or Rule 701, other options or the
Unit Purchase Option could adversely affect prevailing market prices for the
Company's securities.
60
<PAGE>
UNDERWRITING
D.H. Blair Investment Banking Corp., the Underwriter, has agreed, subject to
the terms and conditions of the Underwriting Agreement, to purchase the
6,000,000 Units offered hereby from the Company on a "firm commitment" basis, if
any are purchased. It is expected that Blair & Co. will distribute as a selling
group member substantially all of the Units offered hereby. Blair & Co. is owned
by a corporation that is substantially owned by family members of J. Morton
Davis. Mr. Davis is the sole stockholder of the Underwriter.
The Underwriter has advised the Company that it proposes to offer the Units
to the public at the public offering price set forth on the cover page of this
Prospectus. The Underwriter may allow to selected dealers who are members of the
National Association of Securities Dealers, Inc. (the "NASD") concessions not in
excess of $.12 per Unit, of which not in excess of $.06 per Unit may be
reallowed to other dealers who are members of the NASD. After commencement of
the offering, the public offering price, concession and the reallowance may be
changed by the Underwriter.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act. The Company has
also agreed to pay to the Underwriter a nonaccountable expense allowance of 3%
of the gross proceeds derived from the sale of the Units offered hereby,
including any Units purchased pursuant to the Underwriter's over-allotment
option, $20,000 of which has been paid as of the date of this Prospectus.
The Underwriter has informed the Company that it does not expect sales to
any discretionary accounts to exceed 5% of the Offering.
The Company has granted to the Underwriter an option, exercisable during the
30-day period commencing on the date of this Prospectus, to purchase from the
Company at the public offering price, less underwriting discounts and
commissions, up to 900,000 additional Units for the purpose of covering
over-allotments, if any.
The Company has agreed to sell to the Underwriter and its designees, for
nominal consideration, the Unit Purchase Option to purchase up to 600,000 Units
substantially identical to the Units being offered hereby, except that the
Warrants included therein are subject to redemption by the Company at any time
after the Unit Purchase Option has been exercised and the underlying Warrants
are outstanding. The Unit Purchase Option will be exercisable during the
two-year period commencing three years from the date of this Prospectus at an
exercise price of $6.50 per Unit, subject to adjustment in certain events to
protect against dilution, and is not transferable for a period of three years
from the date of this Prospectus except to officers of the Underwriter or to
members of the Underwriter's selling group. The Company has agreed to register
the securities issuable upon exercise thereof under the Securities Act on two
separate occasions (the first at the Company's expense and the second at the
expense of the holders of the Unit Purchase Option) during the five-year period
commencing one year from the date of this Prospectus. The Unit Purchase Option
includes a provision permitting the holder to elect a cashless exercise of the
Option. The Company has also granted certain piggyback rights to holders of the
Unit Purchase Option.
The Underwriter has the right to designate one director for nomination to
the Company's Board of Directors for a period of five years from the completion
of the Offering. Such designee may be a director, officer, partner, employee or
affiliate of the Underwriter.
During the five-year period from the closing of the Offering, in the event
the Underwriter originates any transaction, including mergers, acquisitions and
joint ventures, to which the Company is a party, the Underwriter will be
entitled to receive a finder's fee in consideration for origination of such
transaction. The fee is based on a percentage of the consideration paid in the
transaction, ranging from 7% of the first $1,000,000 to 2.5% of any
consideration in excess of $9,000,000.
61
<PAGE>
The Underwriter acted as placement agent in connection with the Bridge
Financing in August 1996 and, in connection therewith, received a placement
agent fee of $560,000 and a non-accountable expense allowance of $210,000.
The Company has agreed not to solicit Warrant exercises other than through
the Underwriter, unless the Underwriter declines to make such solicitation. Upon
any exercise of the Class A or Class B Warrants after one year from the date of
this Prospectus, the Company will pay the Underwriter a fee of 5% of the
aggregate exercise price for Warrant exercises solicited in writing by the
Underwriter or its representatives or agents, if (i) the market price of the
Company's Class A Common Stock on the date the Warrant is exercised is greater
than the then exercise price of the Warrants; (ii) the exercise of the Warrant
was solicited in writing by a member of the NASD; (iii) the Warrant is not held
in a discretionary account; (iv) disclosure of compensation arrangements was
made both at the time of the offering and at the time of exercise of the
Warrants; and (v) the solicitation of exercise of the Warrant was not in
violation of Rule 10b-6 promulgated under the Exchange Act.
Rule 10b-6 may prohibit Blair & Co. from engaging in any market making
activities with regard to the Company's securities for the period from two to
nine business days (or such other applicable period as Rule l0b-6 may provide)
prior to any solicitation by the Underwriter of the exercise of Warrants until
the later of the termination of such solicitation activity or the termination
(by waiver or otherwise) of any right that the Underwriter may have to receive a
fee for the exercise of Warrants following such solicitation. As a result, Blair
& Co. may be unable to provide a market for the Company's securities during
certain periods while the Warrants are exercisable.
The Commission is conducting an investigation concerning various business
activities of the Underwriter and Blair & Co. The investigation appears to be
broad in scope, involving numerous aspects of the Underwriter's and Blair & Co's
compliance with the federal securities laws and compliance with the federal
securities laws by issuers whose securities were underwritten by the Underwriter
or Blair & Co., or in which the Underwriter or Blair & Co. made over-the-counter
markets, persons associated with the Underwriter or Blair & Co., such issuers
and other persons. The Company has been advised by the Underwriter that the
investigation has been ongoing since at least 1989 and that it is cooperating
with the investigation. The Underwriter cannot predict whether this
investigation will ever result in any type of formal enforcement action against
the Underwriter or Blair & Co. or, if so, whether any such action might have an
adverse effect on the Underwriter or the securities offered hereby. The Company
has been advised that Blair & Co. will make a market in the securities following
the Offering. An unfavorable resolution of the Commission's investigation could
have the effect of limiting such firm's ability to make a market in the
Company's securities, which could adversely affect the liquidity or price of
such securities.
Prior to the Offering, there has been no market for any of the securities
offered hereby. Accordingly, the initial public offering price of the Units and
the exercise prices and other terms of the Warrants have been determined by
negotiations between the Company and the Underwriter and are not necessarily
related to the Company's assets, net worth or other established criteria of
value. Factors considered in determining such prices and terms, in addition to
prevailing market conditions, include the history of, and prospects for, the
industry in which the Company competes, the Company's management, the Company's
financial condition, the Company's capital structure and such other factors as
were deemed relevant.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Luce, Forward, Hamilton & Scripps LLP, San Diego, California. The
statements herein relating to federal aviation regulatory matters will be passed
upon by Boros & Garofalo, P.C., Washington, D.C. Certain legal matters will be
passed upon for the Underwriter by Bachner, Tally, Polevoy & Misher LLP, New
York, New York.
62
<PAGE>
EXPERTS
The financial statements of Advanced Aerodynamics & Structures, Inc. at
December 31, 1995 and for the years ended December 31, 1995 and 1994 and the
period from January 26, 1990 (inception) to December 31, 1995 included in this
Prospectus have been so included in the reliance on the report (which contains
an explanatory paragraph relating to the Company's ability to continue as a
going concern as disclosed in Note 1 to the financial statements) of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Washington D.C. office of the Securities and
Exchange Commission a Registration Statement on Form SB-2 under the Securities
Act, with respect to the Units offered by this Prospectus. This Prospectus,
which is part of the Registration Statement, omits certain information contained
in the Registration Statement and the exhibits thereto, as permitted by the
Rules and Regulations of the Commission. For further information, reference is
made to the Registration Statement and to the exhibits filed therewith, which
may be examined without charge at the Washington, D.C. office of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices
of the Commission located at Seven World Trade Center, 13th Floor, New York, New
York 10048 and at 500 Madison (Suite 1400), Chicago, Illinois 60661. Copies of
all or any part thereof may be obtained from the Public Reference Section of the
Commission upon payment of the fees prescribed by the Commission. The Company is
an electronic filer, and the Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding the
Company at www.sec.gov/edgarhp.htm. Statements contained in this Prospectus as
to the contents of any contract or other document referred to are materially
complete, but in each instance such statement is qualified by reference to each
such contract or document.
63
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Report of Independent Accountants....................................... F-1
Balance Sheet........................................................... F-2
Statement of Operations................................................. F-3
Statement of Stockholders' Deficit...................................... F-4
Statement of Cash Flows................................................. F-5
Notes to Financial Statements........................................... F-6
</TABLE>
64
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Advanced Aerodynamics
& Structures, Inc.
(A Development Stage Enterprise)
In our opinion, the accompanying balance sheet and the related statements of
operations, of stockholders' deficit, and of cash flows present fairly, in all
material respects, the financial position of Advanced Aerodynamics & Structures,
Inc. (a Development Stage Enterprise) at December 31, 1995, and the results of
its operations and its cash flows for the years ended December 31, 1994 and 1995
and for the period from January 26, 1990 (inception) to December 31, 1995, in
conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses during the
development stage and has a working capital deficit and a stockholders' deficit
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
PRICE WATERHOUSE LLP
Los Angeles, California
September 4, 1996
F-1
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER
DECEMBER 31, 30,
1995 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ -- $ 1,499,000
Marketable securities.................................................. -- 1,360,000
Certificate of deposit................................................. 10,000 11,000
Receivable from officer................................................ -- 115,000
Deferred debt issuance costs........................................... -- 739,000
Deferred offering costs................................................ -- 586,000
Prepaid expenses and other current assets.............................. 150,000 150,000
------------ ------------
Total current assets............................................... 160,000 4,460,000
Property and equipment, net (Note 3)..................................... 2,007,000 1,762,000
------------ ------------
Total assets....................................................... $ 2,167,000 $ 6,222,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Bridge Notes, net of discount (Note 8)................................. $ -- $ 6,566,000
Obligations under capital leases....................................... 19,000 4,000
Note payable to bank (Note 5).......................................... 900,000 --
Accounts payable....................................................... 252,000 373,000
Accrued liabilities.................................................... 1,478,000 172,000
Loan from SIDA Corporation (Note 5).................................... 110,000 --
Loan from officer (Note 5)............................................. 160,000 --
Other short-term loans (Note 5)........................................ 565,000 --
Interest payable....................................................... 235,000 58,000
Advances from stockholder (Note 5)..................................... 10,728,000 --
------------ ------------
Total current liabilities.......................................... 14,447,000 7,173,000
------------ ------------
Commitments and contingencies (Note 6)
Stockholders' deficit (Notes 1 and 7):
Preferred stock, par value $.0001 per share; 5,000,000 shares
authorized, no shares issued and outstanding......................... -- --
Class A Common Stock, par value $.0001 per share; 45,000,000 shares
authorized; no shares issued and outstanding......................... -- --
Class B Common Stock, par value $.0001 per share; 10,000,000 shares
authorized; 619,588 and 2,000,000 shares issued and outstanding at
December 31, 1995 and September 30, 1996, respectively............... -- --
Class E-1 Common Stock, par value $.0001 per share; 4,000,000 shares
authorized; 1,239,177 and 4,000,000 shares issued and outstanding at
December 31, 1995 and September 30, 1996, respectively............... -- --
Class E-2 Common Stock, par value $.0001 per share; 4,000,000 shares
authorized; 1,239,177 and 4,000,000 shares issued and outstanding at
December 31, 1995 and September 30, 1996, respectively............... -- --
Warrants to purchase common stock (Note 8)............................. -- 473,000
Additional paid-in capital (Note 5).................................... 8,660,000 21,242,000
Deficit accumulated during the development stage....................... (20,940,000) (22,666,000)
------------ ------------
Total stockholders' deficit...................................... (12,280,000) (951,000)
------------ ------------
Total liabilities and stockholders' deficit...................... $ 2,167,000 $ 6,222,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
YEAR ENDED JANUARY 26, 1990 NINE MONTHS ENDED JANUARY 26, 1990
DECEMBER 31, (INCEPTION) TO SEPTEMBER 30, (INCEPTION) TO
------------------------ DECEMBER 31, ---------------------------- SEPTEMBER 30,
1994 1995 1995 1995 1996 1996
----------- ----------- ---------------- ------------ ------------- ----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Other income....................... $ 71,000 $ 27,000 $ 687,000 $ 27,000 $ 7,000 $ 694,000
Interest income.................... 2,000 60,000 4,000 64,000
----------- ----------- ---------------- ------------ ------------- ----------------
73,000 27,000 747,000 27,000 11,000 758,000
----------- ----------- ---------------- ------------ ------------- ----------------
Costs and expenses:
Research and development costs... 1,088,000 13,636,000 13,636,000
Preoperating costs............... 282,000 282,000
General and administrative
expenses....................... 1,239,000 1,453,000 5,463,000 1,151,000 1,418,000 6,881,000
Loss on disposal of assets....... 357,000 357,000 357,000
Interest expense................. 156,000 262,000 1,188,000 146,000 319,000 1,507,000
In-process research and
development acquired........... 761,000 761,000
----------- ----------- ---------------- ------------ ------------- ----------------
2,840,000 1,715,000 21,687,000 1,297,000 1,737,000 23,424,000
----------- ----------- ---------------- ------------ ------------- ----------------
Net loss........................... $(2,767,000) $(1,688,000) $(20,940,000) $(1,270,000) $ (1,726,000) $(22,666,000)
----------- ----------- ---------------- ------------ ------------- ----------------
----------- ----------- ---------------- ------------ ------------- ----------------
Net loss per share................. $ (.81) $ (.50) $ (.37) $ (.51)
----------- ----------- ------------ -------------
----------- ----------- ------------ -------------
Weighted average number of shares
outstanding...................... 3,400,000 3,400,000 3,400,000 3,400,000
----------- ----------- ------------ -------------
----------- ----------- ------------ -------------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
PREFERRED STOCK
---------------------------
SHARES AMOUNT
------------ ------------
<S> <C> <C>
Common stock issued.........................................
Common stock issued in exchange for
in-process research and development.......................
Imputed interest on advances from stockholder (Note 5)......
Net loss from inception to December 31, 1993................
------------ ------------
Balance at December 31, 1993................................
Imputed interest on advances from stockholder (Note 5)......
Net loss....................................................
------------ ------------
Balance at December 31, 1994................................
Imputed interest on advances from stockholder (Note 5)......
Net loss....................................................
------------ ------------
Balance at December 31, 1995................................
Unaudited:
Conversion of stockholder advances (Note 5).................
Conversion of officer loan (Note 5).........................
Stock issued in consideration for services in 1994, 1995,
and 1996 (Note 6).........................................
Imputed interest on advances from stockholder (Note 5)......
Warrants issued in connection with issuance of Bridge Notes
(Note 8)..................................................
Net loss....................................................
------------ ------------
Balance at September 30, 1996 (unaudited)................... $
------------ ------------
------------ ------------
<CAPTION>
COMMON STOCK
---------------------------------------------------------
CLASS A CLASS B
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Common stock issued......................................... 418,094 $ --
Common stock issued in exchange for
in-process research and development....................... 201,494 --
Imputed interest on advances from stockholder (Note 5)......
Net loss from inception to December 31, 1993................
------------ ------------ ------------ ------------
Balance at December 31, 1993................................ 619,588 --
Imputed interest on advances from stockholder (Note 5)......
Net loss....................................................
------------ ------------ ------------ ------------
Balance at December 31, 1994................................ 619,588 --
Imputed interest on advances from stockholder (Note 5)......
Net loss....................................................
------------ ------------ ------------ ------------
Balance at December 31, 1995................................ 619,588 --
Unaudited:
Conversion of stockholder advances (Note 5)................. 598,011 --
Conversion of officer loan (Note 5)......................... 187,118 --
Stock issued in consideration for services in 1994, 1995,
and 1996 (Note 6)......................................... 595,283 --
Imputed interest on advances from stockholder (Note 5)......
Warrants issued in connection with issuance of Bridge Notes
(Note 8)..................................................
Net loss....................................................
------------ ------------ ------------ ------------
Balance at September 30, 1996 (unaudited)................... $ 2,000,000 $ --
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
<CAPTION>
COMMON STOCK
---------------------------------------------------------
CLASS E-1 CLASS E-2
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
Common stock issued......................................... 836,189 $ -- 836,189 $ --
Common stock issued in exchange for
in-process research and development....................... 402,988 -- 402,988 --
Imputed interest on advances from stockholder (Note 5)......
Net loss from inception to December 31, 1993................
------------ ------------ ------------ ------------
Balance at December 31, 1993................................ 1,239,177 -- 1,239,177 --
Imputed interest on advances from stockholder (Note 5)......
Net loss....................................................
------------ ------------ ------------ ------------
Balance at December 31, 1994................................ 1,239,177 -- 1,239,177 --
Imputed interest on advances from stockholder (Note 5)......
Net loss....................................................
------------ ------------ ------------ ------------
Balance at December 31, 1995................................ 1,239,177 -- 1,239,177 --
Unaudited:
Conversion of stockholder advances (Note 5)................. 1,196,021 -- 1,196,021 --
Conversion of officer loan (Note 5)......................... 374,236 -- 374,236 --
Stock issued in consideration for services in 1994, 1995,
and 1996 (Note 6)......................................... 1,190,566 -- 1,190,566 --
Imputed interest on advances from stockholder (Note 5)......
Warrants issued in connection with issuance of Bridge Notes
(Note 8)..................................................
Net loss....................................................
------------ ------------ ------------ ------------
Balance at September 30, 1996 (unaudited)................... 4,000,000 $ -- 4,000,000 $ --
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
<CAPTION>
DEFICIT
ACCUMULATED
WARRANTS TO ADDITIONAL DURING THE
PURCHASE PAID-IN DEVELOPMENT
COMMON STOCK CAPITAL STAGE TOTAL
------------ ------------ ------------ ------------
Common stock issued......................................... -- $ 7,500,000 $ 7,500,000
Common stock issued in exchange for
in-process research and development....................... -- 361,000 361,000
Imputed interest on advances from stockholder (Note 5)...... -- 765,000 765,000
Net loss from inception to December 31, 1993................ -- $(16,485,000) (16,485,000)
------------ ------------ ------------ ------------
Balance at December 31, 1993................................ -- 8,626,000 (16,485,000) (7,859,000)
Imputed interest on advances from stockholder (Note 5)...... -- 11,000 11,000
Net loss.................................................... -- (2,767,000) (2,767,000)
------------ ------------ ------------ ------------
Balance at December 31, 1994................................ -- 8,637,000 (19,252,000) (10,615,000)
Imputed interest on advances from stockholder (Note 5)...... -- 23,000 23,000
Net loss.................................................... -- (1,688,000) (1,688,000)
------------ ------------ ------------ ------------
Balance at December 31, 1995................................ -- 8,660,000 (20,940,000) (12,280,000)
Unaudited:
Conversion of stockholder advances (Note 5)................. -- 10,728,000 10,728,000
Conversion of officer loan (Note 5)......................... -- 336,000 336,000
Stock issued in consideration for services in 1994, 1995,
and 1996 (Note 6)......................................... -- 1,507,000 1,507,000
Imputed interest on advances from stockholder (Note 5)...... -- 11,000 11,000
Warrants issued in connection with issuance of Bridge Notes
(Note 8).................................................. 473,000 473,000
Net loss.................................................... -- (1,726,000) (1,726,000)
------------ ------------ ------------ ------------
Balance at September 30, 1996 (unaudited)................... $ 473,000 $ 21,242,000 $(22,666,000) $ (951,000)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-4
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
YEAR ENDED JANUARY 26, 1990 NINE MONTHS ENDED JANUARY 26, 1990
DECEMBER 31, INCEPTION TO SEPTEMBER 30, (INCEPTION) TO
------------------------ DECEMBER 31, ---------------------------- SEPTEMBER 30,
1994 1995 1995 1995 1996 1996
----------- ----------- ---------------- ------------- ------------ ----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss......................... $(2,767,000) $(1,688,000) $(20,940,000) $(1,269,000) $(1,726,000) $(22,666,000)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and
amortization................. 332,000 325,000 1,487,000 244,000 245,000 1,732,000
Noncash interest expense....... 105,000 105,000
Noncash stock compensation
expense...................... 250,000 367,000 617,000 267,000 590,000 1,207,000
Loss on disposal of assets..... 357,000 357,000 357,000
Cost of in-process research and
development acquired......... 761,000 761,000
Imputed interest on advances
from stockholder............. 11,000 23,000 799,000 17,000 11,000 810,000
Changes in assets and
liabilities:
Decrease (increase) in
prepaid expenses and other
current assets............. 22,000 (150,000) (11,000) -- (150,000)
Decrease in lease security
deposits................... 1,000
Increase (decrease) in
accounts payable........... 56,000 (86,000) 252,000 64,000 121,000 373,000
Increase (decrease) in
accrued liabilities........ 253,000 403,000 461,000 238,000 (389,000) 72,000
Increase in interest
payable.................... 86,000 150,000 235,000 85,000 (177,000) 58,000
Increase in receivable from
officer.................... (115,000) (115,000)
----------- ----------- ---------------- ------------- ------------ ----------------
Net cash used in operating
activities............... (1,399,000) (506,000) (16,121,000) (365,000) (1,335,000) (17,456,000)
----------- ----------- ---------------- ------------- ------------ ----------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures............. (7,000) (3,841,000) (3,841,000)
Proceeds from insurance claims
upon loss of aircraft.......... 30,000 30,000
Purchase of certificate of
deposit........................ (10,000) (1,000) (11,000)
Purchase of marketable
securities..................... (1,499,000) (1,499,000)
----------- ----------- ---------------- ------------- ------------ ----------------
Net cash used in investing
activities............... (7,000) (3,821,000) (1,500,000) (5,321,000)
----------- ----------- ---------------- ------------- ------------ ----------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Advances from stockholder........ 250,000 10,728,000 10,728,000
Proceeds from issuance of common
stock.......................... 7,500,000 7,500,000
Repayment of obligation under
capital leases................. (9,000) (4,000) (21,000) (10,000) (15,000) (36,000)
Proceeds from (repayment of) bank
note........................... 550,000 350,000 900,000 350,000 (900,000)
Proceeds from loan from
officer........................ 160,000 160,000 32,000 402,000 562,000
Repayment of loan from officer... (226,000) (226,000)
Proceeds from (repayment of) loan
from SIDA Corporation.......... 50,000 110,000 (110,000)
Proceeds from (repayment of)
other short-term loans......... 565,000 565,000 (565,000)
Proceeds from bridge financing,
net of issuance costs.......... 6,195,000 6,195,000
Increase in deferred offering
costs.......................... (586,000) (586,000)
----------- ----------- ---------------- ------------- ------------ ----------------
Net cash provided by
financing activities..... 1,406,000 506,000 19,942,000 372,000 4,195,000 24,137,000
----------- ----------- ---------------- ------------- ------------ ----------------
NET INCREASE IN CASH............... -- -- -- 7,000 1,360,000 1,360,000
CASH AT BEGINNING OF PERIOD........ -- -- -- -- -- --
----------- ----------- ---------------- ------------- ------------ ----------------
CASH AT END OF PERIOD.............. $ -- $ -- $ -- $ 7,000 $ 1,360,000 $ 1,360,000
----------- ----------- ---------------- ------------- ------------ ----------------
----------- ----------- ---------------- ------------- ------------ ----------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Stockholder advances converted to
common stock................... $10,728,000 $ 10,728,000
------------ ----------------
------------ ----------------
Loan from officer converted to
common stock................... $ 336,000 $ 336,000
------------ ----------------
------------ ----------------
Common stock issued for noncash
consideration and
compensation................... $ 361,000 $ 1,507,000 $ 1,868,000
------------ ----------------
------------ ----------------
Liabilities assumed from ASI..... 400,000 $ 400,000
----------------
----------------
----------------
In-process research and
development acquired......... $ 761,000
----------------
----------------
Equipment acquired under capital
leases......................... $ 24,000 $ 40,000 $ 40,000
----------- ---------------- ----------------
----------- ---------------- ----------------
Deposit surrendered as payment
for rents due.................. $ 80,000 $ 80,000 $ 80,000 $ 80,000
----------- ---------------- ------------- ----------------
----------- ---------------- ------------- ----------------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY
Advanced Aerodynamics & Structures, Inc. (the "Company" or "AASI") was
incorporated in California on January 26, 1990. The Company is in the
development stage of designing a multi-purpose light aircraft. The present
design of the aircraft is based on a canard design using Pratt &
Whitney-designed engines; the Company's ability to manufacture aircraft to its
present design is dependent on its having access to such engines.
Upon formation of AASI, an aircraft prototype and related proprietary
technology were contributed by Aerodynamics and Structures, Inc. ("ASI") in
exchange for 2,500,764 AASI common shares with a fair value of $250,000. In
connection with this exchange, the Company also assumed ASI's liabilities of
approximately $400,000. Three other individuals contributed technical
information in exchange for 1,113,740 AASI common shares with a fair value of
$111,000. Such technology and prototype acquired were immediately expensed as
in-process research and development. Finally, certain investors contributed
$7,500,000 in cash in exchange for 7,500,000 shares of convertible preferred
stock of AASI. ASI was subsequently liquidated and its sole asset, investment in
AASI common shares, was distributed to ASI's stockholders. The Company's
aforementioned common and preferred shares were converted into approximately
619,588, 1,239,177 and 1,239,177 shares, respectively, upon reincorporation of
the Company into Class B, Class E-1 and Class E-2 Common Stock as part of the
July 1996 recapitalization described below.
In July 1996, the Company reincorporated by merging with a newly formed
corporation in Delaware (the "reincorporation"). In connection with the
reincorporation, the Company (i) increased the authorized capital of the Company
to 63,000,000 shares of $.0001 par value common stock, of which 45,000,000 are
designated Class A Common Stock, 10,000,000 are designated Class B Common Stock,
4,000,000 are designated Class E-1 Common Stock and 4,000,000 are designated
Class E-2 Common Stock (Note 7) and (ii) authorized 5,000,000 shares of $.0001
par value preferred stock. All issued and outstanding shares of common and
preferred stock at the time of the reincorporation were exchanged into
approximately .0557 shares of Class B common stock, approximately .1115 shares
of Class E-1 common stock and approximately .1115 shares of Class E-2 common
stock (the "recapitalization"). All share and per share data have been
retroactively restated to reflect the recapitalization.
BASIS OF PRESENTATION
The Company is a development stage enterprise and has incurred losses since
its inception, and has a working capital deficit of $14,287,000 and a
stockholders' deficit of $12,280,000 at December 31, 1995. The Company expects
to continue to incur losses for the foreseeable future due to the significant
costs anticipated to be incurred with the development, certification,
manufacture and marketing of its product. In August 1996, the Company completed
a private placement of bridge financing (Note 8). Success of future operations
is dependent upon, among other things, the Company's ability to obtain necessary
additional capital and appropriate government certification for the commercial
production of its aircraft. The Company intends to actively pursue the
contemplated initial public offering (Note 8) to develop, manufacture and market
its product to achieve commercial viability. In the event the proposed public
offering is not consummated, the Company intends to limit expenditures and seek
alternative sources of financing. The net proceeds of the offering, if
consummated, will be used to amend its Federal Aviation Administration ("FAA")
Type Certificate for technical revisions to its product, establish a production
line and obtain a FAA Production Certificate for its product, repay borrowings
under a bridge loan (Note 8), expand the Company's sales and marketing efforts,
establish a new manufacturing facility, and acquire production materials and
additional tooling and equipment.
F-6
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY (CONTINUED)
The Company is subject to all of the risks inherent in a new business
enterprise and the likelihood of the success of the Company must be considered
in light of the difficulties and delays frequently encountered in connection
with a new business. These matters raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
NET LOSS PER SHARE
The Company's net loss per share was computed based on the weighted average
number of shares of common stock outstanding during the years ended December 31,
1994 and 1995 and the nine months ended September 30, 1995 and 1996 and excludes
all outstanding shares of Class E-1 and Class E-2 Common Stock because the
conditions for the lapse of restrictions on such shares have not been satisfied
(Note 7).
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, stock options and warrants granted and common shares issued since July 1,
1995 other than Class E-1 and Class E-2 Common Stock have been included as
outstanding in net loss per share computations for all periods presented using
the treasury stock method and the expected public offering price per share.
UNAUDITED INTERIM INFORMATION
The information presented as of September 30, 1996, and for the nine months
ended September 30, 1995 and 1996, has not been audited. In the opinion of
management, the unaudited interim financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
results for the interim periods presented. The information disclosed in the
notes to the financial statements as of such date and for such periods are also
unaudited.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RESEARCH AND DEVELOPMENT COSTS
All costs incurred in the design, testing, and certification of aircraft
being developed by the Company (including cost of in-process research and
development acquired) are expensed as incurred.
PREOPERATING COSTS
Preoperating costs are expensed as incurred.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over their estimated useful lives of five to ten years.
Leasehold improvements are amortized over the shorter of their estimated useful
lives or the term of the lease.
OTHER INCOME
Other income consists primarily of sales of aircraft engines used for
testing.
F-7
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist primarily of deposits for
aircraft engines.
INCOME TAXES
Income taxes are accounted for under an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. A valuation allowance is established to
reduce deferred tax assets if it is more likely than not, all or some portion
of, such deferred tax assets will not be realized.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers short-term, highly liquid instruments purchased with
an original maturity of three months or less to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents,
marketable securities, a certificate of deposit, prepaid expenses and other
current assets, accounts payable, accrued and other current liabilities, and
short-term loans. The carrying value of these financial instruments approximates
fair value due to their short-term nature. The fair value of the Bridge Notes is
not determinable because of their unusual terms.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS No. 121"). SFAS No. 121 was adopted by the Company
effective January 1, 1996. The adoption of SFAS No. 121 did not have a material
impact on the Company's financial position, results of operations or liquidity.
The FASB issued Statement No. 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123"). SFAS No. 123 establishes an alternative method of accounting
for stock-based compensation plans and must be adopted in the Company's 1996
financial statements. The Company intends to adopt only the disclosure
provisions for stock compensation and does not expect that the adoption of SFAS
No. 123 will have a material impact on the Company's financial position, results
of operations or liquidity.
F-8
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
-------------
<S> <C>
Office furniture and equipment................................................. $ 123,000
Machinery and equipment........................................................ 3,063,000
-------------
3,186,000
Accumulated depreciation and amortization...................................... (1,179,000)
-------------
$ 2,007,000
-------------
-------------
</TABLE>
4. INCOME TAXES
The temporary differences and carryforwards which give rise to the Company's
net deferred tax assets at December 31, 1995 of $7,675,000 were subject to a
full valuation allowance because their realization is not likely. The primary
components of the temporary differences consisted of net operating loss and
research and development credits carryforwards.
At December 31, 1995, the Company had Federal tax net operating loss ("NOL")
carryforwards of approximately $17 million which will, if unused, expire in
varying amounts in years 2005 through 2010. The Company also had California
franchise tax NOL carryforwards of approximately $3 million which will, if
unused, expire in various amounts in years 1996 through 2000.
At December 31, 1995, the Company had Federal and California research and
development ("R&D") credit carryforwards of approximately $1,169,000 and
$468,000, respectively. The Federal R&D credit carryforwards will expire in
years 2005 through 2010. The California R&D credit carryforwards can be carried
forward indefinitely.
Utilization of the net operating loss and tax credit carryforwards may be
subject to an annual limitation if a change in the Company's ownership should
occur as defined by Section 382 of the Internal Revenue Code.
As a result of the Company's operating losses, no income tax provision has
been recorded.
5. DEBT AND RELATED PARTY TRANSACTIONS
As of December 31, 1995, the loan from SIDA Corporation (Note 6) of $110,000
and the loans from non-affiliated individuals aggregating $565,000 are payable
on demand and bear interest at 12% per annum. One of these individuals
subsequently became a director of the Company in June 1996.
The loan from officer amounting to $160,000 at December 31, 1995 increased
to $336,000 in April 1996 which was subsequently converted in May 1996 to
187,118 shares of Class B Common Stock and 374,236 shares each of Class E-1 and
Class E-2 Common Stock. An additional $226,000 was advanced subsequent to such
conversion through August 1996 and was repaid, together with interest accrued at
12% per annum totaling $36,000, in September 1996. Receivable from officer of
$115,000 at September 30, 1996 (representing overpayment of accrued compensation
from proceeds of bridge financing (Note 8)) was repaid in full in October 1996.
F-9
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. DEBT AND RELATED PARTY TRANSACTIONS (CONTINUED)
The note payable to bank matures in October 1996, bears interest of prime
rate plus 1.5% (10% per annum at December 31, 1995) and is guaranteed by the
United States Small Business Administration, the California Export Finance
Office and the Company's President, and secured by substantially all of the
Company's assets.
On December 23, 1993, the Company entered into an agreement with a
stockholder to convert the advances from such stockholder aggregating
$10,478,000 at that date to 584,074 shares of Class B Common Stock, and
1,168,148 shares each of Class E-1 and Class E-2 Common Stock. The Company
issued these shares in June 1996. Interest expense was not recorded on these
advances subsequent to December 23, 1993 due to the intent to convert the
advances to equity. In 1994 the stockholder provided additional advances
aggregating $250,000, which were converted to 13,937 shares of Class B Common
Stock and 27,873 shares each of Class E-1 and Class E-2 Common Stock in June
1996. Imputed interest on all advances, based on prevailing market rates, of
$23,000 in 1995, $11,000 in 1994 and $799,000 for the period from January 26,
1990 (inception) to December 31, 1995 was charged to expense and credited to
additional paid-in capital.
6. COMMITMENTS, CONTINGENCIES AND EMPLOYMENT AGREEMENTS
In January 1990, the Company entered into a five-year management services
agreement (the "1990 Agreement") with SIDA Corporation, the stockholders of
which are also minority stockholders of the Company. During the period from
January 26, 1990 (inception) to December 31, 1995, the Company incurred $700,000
of service fees ($140,000 and $12,000 in 1994 and 1995, respectively) pursuant
to this agreement. As of December 31, 1995, the unpaid service fee of $259,000
and interest of $31,000, accrued at 12% per annum, are included in accrued
liabilities and interest payable, respectively, in the accompanying balance
sheet.
In January 1995, the 1990 Agreement expired and was replaced by a new
management services agreement (the "1995 Agreement") entered into with the
Company's President on December 29, 1994 for an original term of ten years. The
1995 Agreement provides for an annual base compensation of $350,000 to be paid
to the Company's President, a $250,000 signing incentive payable in shares of
common stock and additional common stock to be earned for services performed.
Pursuant to the 1995 Agreement, the unpaid base compensation of $323,000 and
interest of $39,000, accrued at 12% per annum, are included in accrued
liabilities and interest payable, respectively, in the accompanying balance
sheet at December 31, 1995. The liability for signing incentive of $250,000 and
additional compensation for services performed of $367,000 that was ultimately
paid in the form of shares of common stock was included in accrued liabilities
at December 31, 1995. Unpaid base compensation of $300,000 was subsequently
converted to shares of Class B, Class E-1 and Class E-2 Common Stock as
discussed below.
F-10
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS, CONTINGENCIES AND EMPLOYMENT AGREEMENTS (CONTINUED)
In May 1996, the 1995 Agreement was terminated and renegotiated (see below).
The following shares of Class B, Class E-1 and Class E-2 Common Stock were
issued to the Company's President pursuant to the terms of the 1995 Agreement
and in consideration of the termination thereof:
<TABLE>
<CAPTION>
CLASS B CLASS E-1 CLASS E-2
--------- ----------- -----------
<S> <C> <C> <C>
Consideration for termination of the 1995 Agreement................... 237,076 474,152 474,152
Partial settlement of $300,000 of accrued 1995 base compensation...... 16,724 33,448 33,448
Signing incentive provided per the 1995 Agreement..................... 139,365 278,730 278,730
Shares earned for services performed per the 1995 Agreement........... 184,658 369,317 369,317
</TABLE>
Stock compensation cost of $250,000, $367,000 and $559,000 in 1994, 1995 and
the nine months ended September 30, 1996, respectively, was charged to expense
based on the fair value of the stock awarded by reference to an independent
appraisal.
In May 1996, the Company entered into an employment agreement with the
Company's President, which replaced the terminated 1995 Agreement. This
employment agreement extends to April 30, 2004 and provides for an annual salary
of $200,000. If the employment agreement is terminated by the Company without
cause, the President may be entitled to receive up to eighteen months' salary as
severance payment.
Also in May 1996, an officer of the Company was awarded 17,460 shares of
Class B Common Stock and 34,919 shares each of Class E-1 and Class E-2 Common
Stock for services rendered. Compensation cost of $31,000 was charged to expense
in the nine months ended September 30, 1996 based on the fair value of the stock
awarded by reference to an independent appraisal.
The Company leases its office and warehouse facility for approximately
$12,000 per month on a month-to-month basis.
In the ordinary course of business, the Company is generally subject to
claims, complaints, and legal actions. The Company is not currently a party to
any material lawsuits.
7. STOCKHOLDERS' EQUITY
COMMON STOCK
The rights and privileges of holders of Class A, Class B, Class E-1 and
Class E-2 Common Stock are substantially the same on a share-for-share basis,
except that (i) the holder of each outstanding share of Class A Common Stock is
entitled to one vote and the holder of each outstanding share of Class B, Class
E-1 and Class E-2 Common Stock is entitled to five votes, (ii) Class B Common
Stock cannot be transferred or sold for thirteen months following the effective
date of the offering, after which time the Class B Common Stock may be converted
at any time at the option of the holder into one share of Class A Common Stock.
F-11
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
CLASS E-1 AND E-2 COMMON STOCK
All shares of Class E-1 and Class E-2 Common Stock ("Performance Shares")
are not transferable or assignable and may be converted into shares of Class B
Common Stock in the event income before provision for income taxes, exclusive of
any extraordinary earnings, reaches certain targets over the next seven years,
or if the market price of the Class A Common Stock reaches specified levels over
the next three years. With respect to targeted earnings, Class E-1 Common Stock
shares may be converted if pretax income exceeds $17.5 million in 1998, $22.5
million in 1999, $28.5 million in 2000, $36.0 million in 2001, $45.0 million in
2002 and $56.0 million in 2003. Class E-2 Common Stock shares may be converted
if pretax income exceeds $21.875 million in 1998, $28.125 million in 1999,
$35.625 million in 2000, $45.0 million in 2001, $56.25 million in 2002 or $69.5
million in 2003. With respect to market price levels, the Class E-1 Common Stock
shares may be converted if, commencing at the effective date of the public
offering (see Note 8) and ending 18 months thereafter, the bid price of the
Company's Class A Common Stock averages in excess of $14.00 per share for 30
consecutive business days, or commencing 18 months after the effective date and
ending 36 months after the effective date, the bid price averages $18.50 per
share for 30 consecutive business days. Class E-2 Common Stock shares may be
converted if commencing at the effective date of the public offering and ending
18 months thereafter, the bid price of the Company's Class A Common Stock
averages in excess of $18.00 per share for 30 consecutive business days or
commencing 18 months after such date and ending 36 months after such date, the
bid price averages in excess of $23.00 for 30 consecutive business days.
All Performance Shares that have not been converted by March 31, 2004 may be
redeemed by the Company for $.01 per share. For accounting purposes, the
Performance Shares are treated in a manner similar to a variable stock option
award. As a consequence, a compensation charge will be recorded in an amount
equal to the then fair value of any Performance Shares that are ultimately
converted into Class B Common Stock.
STOCK OPTION PLAN
In July 1996, the Company's Board of Directors approved the Stock Option
Plan (the Plan). The Plan provides for the grant of incentive and non-qualified
stock options to certain employees, officers, directors, consultants, and agents
of the Company. Under the Plan, the Company may grant options with respect to
500,000 shares of the Class A Common Stock. The options are to be granted at not
less than fair market value, vest immediately and may be exercised for a period
of one to ten years as determined by the Board of Directors. In September 1996,
options to purchase 110,000 shares of Class A Common Stock were granted at an
exercise price of $5 per share.
8. PROPOSED PUBLIC OFFERING
On May 13, 1996, the Company entered into a letter of intent, as amended on
July 23, 1996, with an underwriter (the "Underwriter") whereby the Underwriter
has agreed in principle to act as an underwriter in an initial public offering
of units (the "Units"). Each Unit will be comprised of one share of the
Company's Class A Common Stock, one Class A Warrant and one Class B Warrant.
Upon exercise, the Class A Warrants entitle the holder to purchase one share of
Class A Common Stock and one Class B Warrant. Each Class B Warrant entitles the
holder to purchase one share of Class A Common Stock.
F-12
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. PROPOSED PUBLIC OFFERING (CONTINUED)
On August 30, 1996, the Company completed a private placement of an
aggregate of $7,000,000 principal amount of notes (the "Bridge Notes") and
3,500,000 warrants (the "Bridge Warrants") in which it received net proceeds of
approximately $6,195,000 (after expenses of issuance). The Bridge Notes are
payable, together with cash interest at the rate of 10% per annum, on the
earlier of one year from the issuance of the Bridge Notes or the closing of the
proposed public offering discussed above. Each Bridge Warrant will be
exercisable for a period commencing one year from the date of issuance and
expiring approximately two years thereafter, and entitles the holder thereof to
purchase one share of Class A Common Stock at an exercise price of $3.00 per
share if the Company does not consummate the proposed public offering. In the
event the Company completes the proposed offering and such offering includes
warrants or Class A Warrants, each Bridge Warrant will automatically convert on
the closing date of the public offering into one warrant or Class A Warrant (a
"Public Warrant") which is identical in all respects to the Class A Warrant sold
in the public offering, except that purchasers of the Bridge Notes acquiring the
Bridge Warrants have agreed (i) not to exercise the Public Warrants for a period
of one year from the closing date of the public offering and (ii) not to sell
publicly the Public Warrants except as provided in certain lock-up provisions
which expire between 90 and 270 days after the closing date of the public
offering. The fair value of the Bridge Warrants, amounting to approximately
$473,000 by reference to an independent appraisal, together with the cost of
issuance (approximately $805,000), will be treated as additional interest
expense over the term of the Bridge Notes.
F-13
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED BY THE COMPANY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO
ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN CONTAINED IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 8
Use Of Proceeds........................................................... 18
Dividend Policy........................................................... 19
Dilution.................................................................. 20
Capitalization............................................................ 21
Selected Financial Data................................................... 23
Plan of Operations........................................................ 24
Business.................................................................. 29
Management................................................................ 42
Certain Transactions...................................................... 47
Principal Stockholders.................................................... 49
Concurrent Securities Offerings........................................... 50
Description Of Securities................................................. 52
Shares Eligible For Future Sale........................................... 59
Underwriting.............................................................. 61
Legal Matters............................................................. 62
Experts................................................................... 63
Additional Information.................................................... 63
Index to Financial Statements............................................. 64
</TABLE>
------------------------
UNTIL DECEMBER 28, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
ADVANCED
AERODYNAMICS &
STRUCTURES, INC.
6,000,000 UNITS
CONSISTING OF
6,000,000 SHARES OF
CLASS A COMMON STOCK
6,000,000 REDEEMABLE CLASS A WARRANTS
6,000,000 REDEEMABLE CLASS B WARRANTS
---------------------
PROSPECTUS
------------------
D. H. BLAIR
INVESTMENT BANKING
CORP.
DECEMBER 3, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
