As filed with the Securities and Exchange Commission on August 5, 1997
Registration No. 333-12273
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
POST-EFFECTIVE
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ADVANCED AERODYNAMICS & STRUCTURES, INC.
(Name of small business issuer in its charter)
Delaware 3721 95-4257380
(State or Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation) Organization Number) Identification
Classification Code
Number)
3501 Lakewood Boulevard
Long Beach, California 90808
(562) 938-8618
(Address and telephone number of principal executive offices and principal
place of business)
Carl L. Chen, Chairman of the Board of Directors
Advanced Aerodynamics & Structures, Inc.
3501 Lakewood Boulevard
Long Beach, California 90808
(562) 938-8618
(Name, address and telephone number of agent for service)
-----------
Copies to:
Otto E. Sorensen, Esq. Sheldon E. Misher, Esq.
Steven J. Davis, Esq. Alison S. Newman, Esq.
Luce, Forward, Hamilton & Scripps LLP Bachner, Tally, Polevoy & Misher LLP
600 West Broadway, Suite 2600 380 Madison Avenue
San Diego, California 92101 New York, New York 10017-2590
(619) 236-1414 (212) 687-7000
(619) 232-8311 (fax) (212) 682-5729 (fax)
-----------
Approximate date of proposed sale to
the public: As soon as practicable after the
effective date of this registration statement.
-----------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
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<PAGE>
Pursuant to Rule 416, there are also being registered such additional
shares and warrants as may become issuable pursuant to anti-dilution provisions
upon the exercise of the Class A Warrants, the Class B Warrants and the Unit
Purchase Option.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
(Continued from previous page)
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
Proposed Maximum Proposed Maximum
Title of Each Class of Securities Amount to be Offering Price Per Aggregate Offering Amount of
to be Registered Registered Security(1) Price Registration Fee(11)
- -------------------------------------------------------------------------------------------------------------------------
Units, each consisting of one share of
Class A Common Stock, $.0001 par
value, and one Class B Warrants(2) 7,255,721 $6.50 $ 47,162,187 $14,291.57
Class A Common Stock, $.0001 par
value(3) 14,155,721 $8.75 $123,862,559 $37,534.19
Unit Purchase Option(4) 600,000 $.001 $ 600 .18
Units, each consisting of one share
of Class A Common Stock,
$.0001 par value, one Class A
Warrant and one Class B Warrant(5) 600,000 $6.00 $ 3,600,000 $ 1,090.91
Units, each consisting of one share
of Class A Common Stock, $.0001 par
value, and one Class B Warrant(6) 600,000 $6.50 $ 3,900,000 $ 1,181.82
Class A Common Stock, $.0001 par
value(7) 1,200,000 $8.75 $ 10,500,000 $ 3,181.82
Class A Warrants(8) 3,144,279 -- -- 0
Units, each consisting of one share
of Class A Common Stock, $.0001
par value, and one Class B
Warrant(9) 3,144,279 $6.50 $ 20,437,814 $ 6,193.28
Class A Common Stock, $.0001 par
value(10) 3,144,279 $8.75 $ 27,512,441 $ 8,337.10
TOTAL
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
(2) Issuable upon exercise of outstanding Class A Warrants.
(3) Issuable upon exercise of outstanding Class B Warrants and Class B
Warrants issuable upon the exercise of outstanding Class A Warrants.
(4) Issued to the Underwriter of the Company's offering registered on Form
SB-2.
(5) Issuable upon exercise of the Unit Purchase Option.
(6) Issuable upon exercise of the Class A Warrants underlying the Unit
Purchase Option.
(7) Issuable upon exercise of the Class B Warrants underlying the Unit
Purchase Option.
(8) These Class A Warrants are being registered for resale by selling
security holders, each of whom was an investor in the Registrant's
private
placement (the "Remaining Selling Securityholders").
(9) Issuable upon exercise of Class A Warrants registered for resale by the
Remaining Selling Securityholders.
(10) Issuable upon exercise of Class B Warrants registered for resale by the
Remaining Selling Securityholders.
(11) The Registrant has paid a registration fee of $81,077 with its filing
of the Registration Statement on Form SB-2 on September 19, 1996. No
registration fee is due with the filing of this Post-Effective Amend-
ment No. 1.
--------------------------
<PAGE>
EXPLANATORY NOTE
This Post-Effective Amendment No. 1 to Form SB-2 Registration Statement
covers the registration of (i) the offer and sale of Class A Common Stock,
$.0001 par value ("Common Stock"), of Advanced Aerodynamics & Structures, Inc.,
a Delaware corporation (the "Company"), and redeemable Class B Warrants of the
Company ("Class B Warrants"), issuable upon the exercise of outstanding
redeemable Class A Warrants of the Company ("Class A Warrants") and Class B
Warrants issued in the Company's underwritten initial public offering in
December 1996 or subsequently sold in registered resales by selling
securityholders and (ii) the resale of Class A Warrants (the "Remaining Selling
Securityholders' Class A Warrants") by certain holders thereof who acquired such
securities in a private transaction, and the sale of the Class B Warrants (the
"Remaining Selling Securityholders' Class B Warrants") and Class A Common Stock
(the "Remaining Selling Securityholders' Stock") issuable upon exercise of such
Class A Warrants, and the Class A Common Stock issuable upon exercise of such
Class B Warrants. The Remaining Selling Securityholders' Class A Warrants, the
Remaining Selling Securityholders' Class B Warrants and the Remaining Selling
Securityholders' Stock are sometimes collectively referred to herein as the
"Remaining Selling Securityholders' Securities."
The first of these transactions involves the registration of (1)
6,900,000 units (the "Units"), each Unit consisting of one share of Class A
Common Stock, and one Class B Warrant, for sale by the Company upon the exercise
of Class A Warrants, (2) an additional 13,800,000 shares of Class A Common Stock
issuable upon exercise of outstanding Class B Warrants or Class B Warrants
issuable upon exercise of the Class A Warrants contained within the Units, and
(3) 355,721 Class A Warrants and 355,749 Class B Warrants and 711,442 shares of
Class A Common Stock underlying the Class A Warrants previously sold in
registered resales by Selling Securityholders. The second of these transactions
involves the registration of (1) an additional 3,144,279 Class A Warrants for
resale by the holders thereof (the "Remaining Selling Securityholders'
Warrants") in an offering that is not underwritten, (2) an additional 3,144,279
shares of Class A Common Stock and 3,144,279 Class B Warrants underlying the
Remaining Selling Securityholders' Warrants, and 6,288,558 shares of Class A
Common Stock issuable upon exercise of the Class B Warrants underlying the
Remaining Selling Securityholders' Warrants. The Remaining Selling
Securityholders' Warrants were issued upon the closing of the underwritten
offering in exchange for warrants issued in a private placement by the Company
completed in August 1996 prior to the filing of this Registration Statement. An
aggregate of seventy-five percent of the Remaining Selling Securityholders'
Warrants had become freely tradeable as of July 2, 1997, and the remaining 25%
will become freely tradeable on August 30, 1997.
Following the Prospectus for the offering made on behalf of the Company
are pages of the Prospectus relating solely to the Remaining Selling
Securityholders' Securities, including alternative front and back cover pages
and sections entitled "Concurrent Offering," "Plan of Distribution" and "Selling
Securityholders" to be used in lieu of the sections entitled "Concurrent
Offering" and "Plan of Distribution" in the Prospectus relating to the offering
on behalf of the Company. All other sections of the Prospectus for the offering
made on behalf of the Company are to be used in the Prospectus relating to the
resale of the Remaining Selling Securityholder Securities.
The Registration Statement on Form SB-2 which is amended by this
Post-Effective Amendment also registered the issuance of options issued to the
Company's underwriter in its December 1996 initial public offering, as well as
the issuance of underlying securities upon the exercise of such option. This
Post-Effective Amendment is not intended to deregister any of the securities so
registered, and such Registration Statement, as amended hereby, is intended to
continue to register such transactions.
<PAGE>
PROSPECTUS
7,255,721 Units
ADVANCED AERODYNAMICS & STRUCTURES, INC.
Consisting of 7,255,721 Shares of Class A Common Stock and
7,255,721 Redeemable Class B Warrants Issuable Upon the Exercise of Redeemable
Class A Warrants
and 14,155,721 Shares of Class A Common Stock Issuable Upon the Exercise of
Outstanding Redeemable Class B Warrants
and the Redeemable Class B Warrants Issuable Upon the Exercise of Redeemable
Class A Warrants
Advanced Aerodynamics & Structures, Inc. (the "Company") hereby offers:
(i) 7,255,721 units ("Units") issuable upon the exercise of 7,255,721 Class A
Warrants (the "Class A Warrants"), each Unit consisting of one share of Class A
Common Stock, $.0001 par value (the "Class A Common Stock") and one redeemable
Class B Warrant (the "Class B Warrant"); and (ii) 14,155,721 shares of Class A
Common Stock issuable upon the exercise of the 6,900,000 Class B Warrants
presently outstanding and the 7,255,721 Class B Warrants issuable upon the
exercise of the Class A Warrants contained in the Units. The Class A Common
Stock and Class B Warrants included in the Units will be transferable separately
immediately, and the Units will not trade as a separate security. 6,000,000 of
the outstanding Class A Warrants and Class B Warrants (collectively, the
"Warrants") were issued in connection with the Company's initial public offering
("IPO") in December 1996 of 6,000,000 Units ("IPO Units"), with each IPO Unit
consisting of one share of Class A Common Stock, one Class A Warrant and one
Class B Warrant. In December 1996, D.H. Blair Investment Banking Corp.
("Blair"), as the underwriter of the IPO, exercised its over-allotment to
purchase an additional 900,000 IPO Units. The Company also registered in the IPO
3,500,000 Class A Warrants (the "Selling Securityholders' Warrants") on behalf
of certain selling securityholders (the "Selling Securityholders"), 355,721 of
which have been sold to date by the Selling Securityholders. There are 7,255,721
Class A Warrants outstanding and 6,900,000 Class B Warrants outstanding as of
the date of this Prospectus (excluding the 3,144,279 Class A Warrants that
continue to be held the Selling Securityholders (the "Remaining Selling
Securityholders") and an option on the part of Blair to purchase 600,000 Units
for an exercise price of $6.50 (the "Unit Purchase Option"). Assuming the
exercise of all of the Class A Warrants, there will be 7,255,721 Class B
Warrants issuable, for a total of 14,155,721 Class B Warrants.
Each Class A Warrant entitles the holder to purchase one Unit at an
exercise price of $6.50, subject to adjustment. 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. The Class A Warrants and Class B Warrants are
exercisable until December 3, 2001. The Class A Warrants and the Class B
Warrants are subject to redemption, commencing December 3, 1997, 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 January 3, 1998. 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") control approximately 83% of the
total voting power of the Company and therefore are able to elect all of the
Company's directors and control the Company. See "Description of
Securities-Common Stock."
The Registration Statement in which this Prospectus is a part also covers
the offering for resale by the Remaining Selling Securityholders of 3,144,279
Class A Warrants (the "Remaining Selling Securityholders Class A Warrants"),
3,144,279 Class B Warrants (the "Remaining Selling Securityholders Class B
Warrants") underlying the Remaining Selling Securityholders Class A Warrants and
6,288,558 shares of Class A Common Stock issuable upon exercise of the Remaining
Selling Securityholders Class A and Class B Warrants. See "Concurrent Securities
Offering." The Remaining Selling Securityholders Class A Warrants and the
securities underlying such Warrants are sometimes collectively referred to in
this Prospectus as the "Remaining Selling Securityholders Securities." The
Company will not receive any of the proceeds from the sale of the Remaining
Selling Securityholders Securities. Sales of any of the Remaining Selling
Securityholders Securities or even the potential of such sales at any time may
have an adverse affect on the marking prices of the securities offered hereby.
Unless the context otherwise requires, all references to the Warrants shall
including the Remaining Selling Securityholders Warrants. -----------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL
IMMEDIATE DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 8.
-----------
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.
The Company has agreed to pay to Blair a solicitation fee (the
"Solicitation Fee") equal to 5% of the exercise price in connection with the
exercise of Warrants under certain conditions. See "Plan of Distribution." The
exercise prices of the Warrants were determined by negotiation between the
Company and Blair and are not necessarily related to the Company's asset value,
net worth or other criteria of value.
The Company's IPO Units are traded on the Nasdaq SmallCap Market under
the symbol AASIU, and its Class A Common Stock, Class A Warrants and Class B
Warrants are traded on the Nasdaq National Market under the symbols AASI, AASIW
and AASIZ, respectively. On July 17, 1997, closing prices of the IPO Units,
Class A Common Stock, Class A Warrants and Class B Warrants were $4.813, $3.688,
$1.00 and $.50, respectively.
<TABLE>
<S> <C> <C> <C>
Warrant Exercise Price Warrant Solicitation Fee(1) Proceeds to the Company
Per Class A Warrant.................. $6.50 $.325 $6.175
Total(2)....................... $47,162,186 $2,358,109 $44,804,077
Per Class B Warrant.................. $8.75 $.4375 $8.3125
Total(2)....................... $123,862,559 $6,193,128 $117,669,431
</TABLE>
(1) Represents Solicitation Fees payable to Blair in certain circumstances
pursuant to the Warrant Agreement between the Company and Blair. See "Plan
of Distribution."
(2) Assumes the exercise of 7,255,721 Class A Warrants and 14,155,721 Class B
Warrants. There can be no assurance that any of the Warrants will be
exercised
The date of this Prospectus is _____________.
<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 assumes
no exercise of any outstanding options or warrants other than those registered
hereby. This Prospectus contains forward-looking statements that involve risks
and uncertainties. The Company's actual results may differ significantly from
the results discussed in the forward-looking statements. Factors that might
cause such differences include, but are not limited to, those discussed under
the heading "Risk Factors."
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 by approximately the third quarter of 1998 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 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 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.
2
<PAGE>
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(R) 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 Company's IPO. 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 3501 Lakewood Boulevard, Long Beach, California 90808. The Company's
telephone number is (562) 938-8618.
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.
The Offering
Securities Offered 6,900,000 Units consisting of one share of Class A
by the Company Common Stock and one Class B Warrant issuable upon the
exercise of outstanding Class A Warrants and 13,800,000
shares of Class A Common Stock issuable upon the
exercise of outstanding Class B Warrants and Class B
Warrants issuable upon the exercise of Class A
Warrants. 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 December 3, 2001. 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
December 3, 2001. Commencing December 3, 1997, the
Warrants are subject to redemption in certain
circumstances on 30 days written notice. The Class A
Common Stock and Class B Warrants will be
3
<PAGE>
separately tradeable immediately upon issuance. The
Company is also registering 355,721 shares of Class A
Common Stock, 355,721 Class B Warrants and 355,721
shares of Class A Common Stock underlying such Class B
Warrants, which securities all underlie Class A
Warrants previously transferred by certain Selling
Securityholders in registered transactions. See
"Description of Securities."
Securities Offered 3,144,279 Class A Warrants, 3,144,279 Class B Warrants
Concurrently by issuable upon exercise of such Class A Warrants, and
Remaining Selling 6,288,558 shares of Class A Common Stock issuable upon
Securityholders exercise of such Class A Warrants and Class B Warrants.
See "Concurrent Securities Offering."
Common Stock Class A Common Stock 6,900,000 shares(2)(4)
Outstanding June 30, Class B Common Stock 2,000,000 shares 1997(1)
1997(1) 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 intends to use the net proceeds received
upon the exercise of the Warrants, if any, for general
corporate purposes and to continue development of the
STRATOCRUZER 1250 jet aircraft. See "Use of Proceeds."
Risk Factors The Offering involves a high degree of risk and
immediate and substantial dilution to public investors.
An investment in the Units offered hereby should be
made only after a careful consideration of the various
risks which may affect the Company and its operations.
See "Risk Factors."
Nasdaq Symbols: Units............................................AASIU
Class A Common Stock............................. AASI
Class A Warrants.................................AASIW
Class B Warrants.................................AASIZ
-----------
(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."
(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 420,000
shares of Class A Common Stock are outstanding at an exercise price of
$5.00 per share. 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) 20,700,000 shares of Class A Common Stock issuable
upon exercise of the Warrants included in the IPO Units, (ii) 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 (iii) 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.
4
<PAGE>
Summary Financial Information
<TABLE>
Period from
January 26, 1990
(inception) through
Year ended December 31, Three Months Ended March 31, March 31, 1997
---------------------------------------------------------------------------------------------------
1995 1996 1996 1997
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Interest and Other Income. $27,000 $133,000 $290,000 $1,170,000
Costs and Expenses........ $1,715,000 $2,579,000 $341,000 $809,000 $25,075,000
Net Loss.................. $(1,688,000) $(3,388,000) $(341,000) $(519,000) $(24,847,000)
Net Loss per share(1)..... $(.50) $(.96) $(.10) $(.06)
Weighted average number of
shares outstanding(1)..... 3,400,000 3,546,000 3,400,000 8,900,000
</TABLE>
March 31, 1997
-------------------------------
Balance Sheet Data:
Working capital........................................ $25,422,000
Total assets.......................................... 27,588,000
Total liabilities..................................... 309,000
Accumulated deficit................................... (24,847,000)
Total stockholders' equity............................ 27,279,000
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(1) Excludes 8,000,000 Performance Shares. See Note 2 of Notes to Financial
Statements for the year ended December 31, 1996, and Note 2 of Notes to
Financial Statements for the three-months ended March 31, 1997 for an
explanation of the determination of the weighted average number of
shares outstanding used in computing net loss per share.
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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; History of Losses; Expectation of Substantial
Future Losses. To date, the Company has incurred significant losses. At March
31, 1997, the Company had an accumulated deficit of approximately $24,847,000.
The Company incurred net losses of approximately $1,688,000 and $3,388,000 for
the years ended December 31, 1995 and 1996, respectively, and has incurred a net
loss of $519,000 for the three months ended March 31, 1997. Such losses have
resulted principally from significant costs associated with the design,
development and certification of the JETCRUZER 450 aircraft and, to a lesser
extent, the development of its successor, the JETCRUZER 500. 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 "Plan of Operations"
and "Business."
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 initial attempts to
market its aircraft. There can be no assurance that, after the initiation of
significant 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 500 which are supported by nominal deposits, certain of such
deposits
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are refundable prior to the commencement of the manufacture of a customer's
aircraft. 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. 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, 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, is in the process of producing a "proof-of-
concept" version of the JETCRUZER 500, 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
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 industrial development bonds.
See "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
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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
until at least the third quarter of 1998. 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 its initial public offering completed in December 1996 (the "IPO")
will be sufficient to meet its cash requirements until approximately the third
or fourth quarter of 1998; however, there can be no assurance that the Company
will not require additional financing prior to that time or that, if required,
additional financing will be available on acceptable terms or at all. In
addition, if the Company has not completed the development of the JETCRUZER 500
prior to the third or fourth quarter of 1998, 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
industrial development bonds 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 "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 IPO. 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. At such
time as the Company is ready to commence the manufacture of its aircraft, the
prices to obtain materials and components may have
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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 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."
Substantial Portion of Cash Assets Pledged as Collateral. The Company
intends to finance the construction of its manufacturing facility through the
issuance of industrial development bonds. The Company will be required to pledge
cash as collateral for such bonds in an amount equal to the principal amount of
such bonds. The Company currently anticipates that it will issue $8,500,000
aggregate principal amount of such bonds and therefore it will be required to
pledge $8,500,000 cash. This cash will be placed in an escrow account and will
not be available for the Company's use until such time as other collateral
satisfactory to the bank guaranteeing the bonds is obtained. The inability to
access the pledged cash could have a material adverse affect on the Company,
should such access become necessary.
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
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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 Certification."
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 Senior
Vice President - Operations. 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. 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 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 third and fourth quarters of 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. Dr. Carl Chen, the Company's Chairman and Chief Executive Officer, and
C.M. Cheng, a Director of the Company, beneficially own, or have voting control
over, shares of the Company's capital stock representing approximately 83% 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 for the foreseeable future. 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."
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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; Enhanced Voting Power of Class B Common Stock and
Class E Common Stock. The Company's Certificate of Incorporation 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."
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"), or otherwise, could have an
adverse effect on the price of the Company's securities. The Company has
outstanding 16,900,000 shares of Common Stock, 10,400,000 Class A Warrants
(including Class A Warrants originally issued to certain Selling Securityholders
in December 1996) and 6,900,000 Class B Warrants (excluding the 10,400,000 Class
B Warrants issuable upon the exercise of the Class A Warrants). 10,000,000 of
the 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 are eligible for resale. However, 2,000,000 of
the 10,000,000 outstanding shares are Class B Common Stock and thus may not be
sold until January 3, 1998. In addition, 8,000,000 of the restricted 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 "Description of Securities," "Shares Eligible for Future
Sale."
Effect of Outstanding Options and Warrants. Upon completion of the IPO
and the exercise by Blair of its over-allotment option, the Company had
outstanding 6,900,000 Class A Warrants to purchase 6,900,000 shares of Class A
Common Stock and 6,900,000 Class B Warrants for $6.50 per share (subject to
adjustment in certain circumstances) and 6,900,000 Class B Warrants to purchase
6,9000,000 shares of Class A Common Stock at $8.75 per share (subject to
adjustment in certain circumstances). In addition, the Company had outstanding
3,500,000 Selling Securityholders' Class A
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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 420,000 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."
Arbitrary Determination of Warrant Exercise Price; Possible Volatility
of Stock Price. The initial exercise prices and other terms of the Warrants have
been arbitrarily determined by negotiation between the Company and Blair 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. No assurance can be given that an active
trading market in the Company's securities will be sustained. 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 are quoted
on The Nasdaq National Market and the IPO Units are quoted 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 IPO 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 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.
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<PAGE>
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.
Adverse Effect of Possible Redemption of Warrants. The Warrants are
subject to redemption by the Company commencing December 3, 1997, 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 D.H. Blair Investment
Banking Corp. ("Blair"). The Securities and Exchange Commission (the
"Commission") is conducting an investigation concerning various business
activities of Blair and D.H. Blair & Co., Inc. ("Blair & Co."), the underwriter
of the Company's IPO and a market maker in the Company's securities. The
investigation appears to be broad in scope, involving numerous aspects of
Blair'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 Blair or Blair & Co., or in which Blair or Blair & Co. made
over-the counter markets, persons associated with Blair or Blair & Co., such
issuers and other persons. The Company has been advised by Blair that the
investigation has been ongoing
13
<PAGE>
since at least 1989 and that it is cooperating with the investigation. Blair
cannot predict whether this investigation will ever result in any type of formal
enforcement action against Blair or Blair & Co. or, if so, whether any such
action might have an adverse effect on Blair or the securities offered hereby.
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.
Possible Restrictions on Market Making Activities in the Company's
Securities. Blair & Co. makes 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 Blair 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
Blair 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.
14
<PAGE>
USE OF PROCEEDS
Holders of Warrants are not obligated to exercise their Warrants and
there can be no assurance that the Warrantholders will choose to exercise all or
any of their Warrants. In the event that all of the 7,255,721 outstanding Class
A Warrants (excluding the Remaining Security Holders and Unit Purchase Option)
are exercised, the net proceeds to the Company would be $44,804,077, after
deducting the Solicitation Fee. In the event that all of the 14,155,721 Class B
Warrants outstanding and issuable upon the exercise of the outstanding Class A
Warrants are exercised (excluding the Remaining Security Holders and Unit
Purchase Option), the Company would receive additional net proceeds of
$117,669,431, after deducting the Solicitation Fee.
The Company intends to use the net proceeds received upon the exercise
of the Class A Warrants and Class B Warrants, if any, for general corporate
purposes and to continue development of the STRATOCRUZER 1250 jet aircraft.
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.
PRICE RANGE OF CLASS A COMMON STOCK
The Company's Class Common Stock has been quoted on the Nasdaq National
Market under the symbol AASI since December 3, 1996.
The Company estimates there were approximately 300 holders of record
and approximately 2,000 beneficial holders on July 14, 1997. The Company has not
paid dividends in the past and does not intend to pay cash dividends in the
foreseeable future. Declaration of dividends will be at the discretion of the
Board of Directors.
The following table sets forth the range of high and low bid prices for
the Class A Common Stock for the periods indicated, as reported by NASDAQ, the
principal system or exchange on which such securities are quoted or traded.
Class A Common Stock
---------------------------
High Low
---------------------------
For periods noted
December 3, 1996 to December 31, 1996 $5.25 $3.50
Quarter ended March 31, 1997 $4.75 $2.50
Quarter ended June 30, 1997 $4.3125 $2.375
15
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below for the years ended
December 31, 1995 and 1996 and for the period from January 26, 1990 (inception)
to December 31, 1996 are derived from the audited financial statements of the
Company included elsewhere in this Prospectus. The selected financial data as of
March 31, 1997 and for the three months ended March 31, 1996 and 1997 and for
the period from January 26, 1990 (inception) through March 31, 1997 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>
Three Month Period Ended Period from
Year Ended December 31, Period from March 31, (unaudited) January 26, 1990
----------------------------- January 26, 1990 ------------------------ (Inception) to
(Inception) to March 31, 1997
1995 1996 December 31, 1996 1996 1997 (unaudited)
--------------- ------------- ----------------- ------------ ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Other income............. $27,000 $23,000 $710,000 $1,000 $711,000
110,000 170,000 289,000 459,000
Interest income.......... ------------- ------------- ----------------- ------------- ----------- ---------------
27,000 133,000 880,000 290,000 1,170,000
------------- ------------- ----------------- ------------- ----------- ---------------
Cost and expenses:
Research and development
costs.............. 13,636,000 326,000 13,962,000
Preoperating costs.... 282,000 282,000
General and administrative
expenses........... 1,453,000 1,927,000 7,390,000 $ 268,000 481,000 7,871,000
Loss on disposal of assets 357,000 2,000 359,000
Interest expense...... 262,000 652,000 1,840,000 73,000 1,840,000
In-process research and 761,000 761,000
development acquired ------------- ------------- ----------------- ------------ ------------ ---------------
1,715,000 2,579,000 24,266,000 341,000 809,000 25,075,000
------------- ------------- ----------------- ------------ ------------ ---------------
Loss before extraordinary (1,688,000) (2,446,000) (23,386,000) (341,000) (519,000) (23,905,000)
item
Extraordinary loss on
retirement of Bridge Notes (942,000) (942,000) (942,000)
$(1,688,000) $(3,388,000) $(24,328,000) $(341,000) $(519,000) $(24,847,000)
Net loss................. --------------- ------------- ---------------- ------------ ------------ ---------------
Net loss per share(1).... $(.50) $(.96) $(.10) $(.06)
Weighted average number of 3,400,000 3,546,000 3,400,000 8,900,000
shares outstanding(1).
</TABLE>
March 31, 1997
(unaudited)
Balance Sheet Data:
Working capital....................................... $25,422,000
Total assets.......................................... 27,588,000
Total liabilities..................................... 309,000
Deficit accumulated during development stage.......... (24,847,000)
Total stockholders' equity............................ 27,279,000
- -----------
(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 2 of Notes to Financial
Statements for the year ended December 31, 1996, and Note 2 of Notes to
Financial Statements for the three months ended March 31, 1997 for
explanations of the determination of weighted average number of shares
outstanding and shares used in computing net loss per share.
16
<PAGE>
PLAN OF OPERATIONS
The following plan of operations 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 commercial 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
finance the facility through industrial development bond financing. The Company
also intends to use approximately $900,000 for sale and marketing of the
aircraft.
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.
Through the end of the third quarter of 1998, the Company intends to
focus its efforts in the following areas:
o 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, as well as lengthening its
fuselage. See "Business-Proposed Aircraft."
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<PAGE>
o 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."
o 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."
o To obtain a production certificate from the FAA and commence commercial
production of the JETCRUZER 500. See "Business-Government Regulation."
o To expand its sales and marketing staff and increase its marketing efforts
with respect to the JETCRUZER 500. See "Business-Marketing, Distribution
and Service."
o 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 through approximately the third
quarter of 1998, based upon the current status of its business operations, its
current plans and current economic and industry conditions. 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."
Liquidity and Capital Resources
Since its inception in January 1990, the Company has experienced
continuing negative cash flow from operations. 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."
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
18
<PAGE>
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. See
"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
used to repay bank and other outstanding indebtedness, loans from officers and
directors, accrued compensation and past due accounts payable and as working
capital.
In December of 1996, the Company completed its IPO, realizing net
proceeds of approximately $30,411,000. The Company used a portion of the net
proceeds of the IPO to repay the Bridge Notes. See "Certain Transactions".
Additionally, the Company recognized a charge to operations of approximately
$942,000, representing the combined unamortized debt discount and issuance costs
arising from the Bridge Financing, in the quarter in which the Bridge Notes were
repaid.
During 1997, the Company's cash requirements have increased, and the
Company expects such requirements to continue to increase, due to higher
expenses associated with product development, the scale-up of production
(including capital investment in production equipment), intensification of the
Company's 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 IPO will enable it to
meet its liquidity and capital requirements at least through the third quarter
of 1998, 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. Such proceeds are being, and 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, if the
Company has not completed the development of the JETCRUZER 500 or received the
required regulatory approvals and successfully commenced commercial sales of its
aircraft by the third quarter of 1998, 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 June 30, 1997.
However, 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 10 employees over the next six months and 150 employees over the
next 21 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 anticipates funding that amount through the issuance of industrial
development bonds. The bonds will require cash collateralization for a stand-by
letter of credit in the aggregate principal amount of the outstanding borrowing
under the bonds and therefore will not have a positive effect on the Company's
available liquidity until such time as the stand-by letter of credit expires
(five years from the initial date of funding) or noncash collateral is used to
collaterize the bonds.
19
<PAGE>
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 minimum bid price levels, and no conversion occurs, no compensation expense
will be recorded for financial reporting purposes. See "Description of
Securities-Common Stock."
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 by approximately the third quarter of 1998 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 than anticipated, or that the
Company will not experience unforeseen expense or delay in certifying and
commercializing its proposed aircraft.
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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.
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 1996,
approximately 600 piston aircraft, approximately 289 propjets and approximately
243 jet aircraft were delivered, generating total billings of approximately $3.1
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 918 units in 1994, to 1,077 units in 1995, and to 1,132 units in 1996.
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.
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<PAGE>
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.
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 certain
of these key employees will return to the Company.
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 (i.e., 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 design. The JETCRUZER will not require pilot
licensing beyond that required for other single-engine propjet aircraft. See
"Business-Competition."
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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-64, 1572 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, as well as
lengthening the fuselage to provide for additional interior space and improved
aesthetics, 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 approximately the third quarter of 1998. 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 or that any of the FAA limitations will be removed, 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.
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 during approximately the third quarter of 1998.
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 initial marketing attempts to sell
its aircraft. Notwithstanding these limitations, the Company has received more
than 30 written indications of interest to purchase 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
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<PAGE>
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(R) 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 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.
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<PAGE>
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 IPO and 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 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 initial marketing activity through
advertisements, news releases in trade publications and participation in an air
show. The Company intends 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.
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<PAGE>
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 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.
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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>
NAME AND MODEL High Cruise
(Number and type of Approximate Base Speed-Miles Per
engines noted in parenthesis) Seats 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 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
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<PAGE>
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 three 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.
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. 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 JETCRUZER 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
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<PAGE>
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 during the third
quarter of 1998. 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), 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 during the third quarter of 1998.
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
29
<PAGE>
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 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 23,000 sq. ft. building on Long
Beach, California airport property pursuant to a one-year lease which commenced
January 1, 1997, at a monthly rent of $15,000. Additionally, the Company leases
an approximately 4,200 square feet of office space near the Long Beach,
California airport for use by its design team pursuant to a nine-month lease
which commenced July 1, 1997 at a monthly rate of approximately $1,800 and a
eight-month lease which commenced August 1, 1997, at a monthly rate of
approximately $1,400. The Company also leases an approximately 7,750 square foot
industrial warehouse space in Long Beach pursuant to a one-year lease which
commenced March 15, 1997, at a monthly rent of $2,000. The Company intends to
establish a larger facility to enable the Company to expand its manufacturing
capabilities. The Company presently has no other facilities.
The Company has located property for the establishment of its
manufacturing facility and believes it will successfully complete negotiations
for the lease. The Company has obtained an initial commitment from the State of
California to provide Industrial Development Bonds ("IDB's") for the
construction of the manufacturing facility, subject to standard contingencies,
including satisfactory completion of due diligence and documentation prior to
the funding deadline.
The Company believes it will issue approximately $8,500,000 principal
amount of IDB's, which will have a term of 30 years at a variable percentage
rate of interest. The Company must provide cash collateral for a stand-by letter
of credit in the aggregate principal amount of the outstanding borrowing under
the IDB's, which stand-by letter will expire five years from the date of the
initial funding under the IDB's. As a result, cash which is used to
collateralize the stand-by letter of credit will not be available for the
Company's use until such time as the stand-by letter of credit expires (five
years from the initial funder under the IDB's) or noncash collateral is used to
collateralize the bonds.
The Company believes the cost of establishing the facility will be
approximately $7,000,000. The Company may use any additional IDB financing to
purchase production equipment for the new facility. The total anticipated size
of the facility will be approximately 200,000 square feet, with approximately
20,000 square feet of office space and approximately 180,000 square feet of
manufacturing space. See "Plan of Operations."
Employees
As of July 14, 1997, the Company had 79 full-time employees and 19
independent contractor 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
30
<PAGE>
assurance that these individuals will remain available or that the Company will
be able to fill all necessary positions with qualified personnel.
The Company believes that it will require a total of approximately 300
employees by the fourth quarter of 1998 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 3% 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 has requested information to determine
whether his interest was improperly diluted. Additionally, such shareholder has
notified the SEC of his concerns and the SEC has requested that the Company
reply to his comments. The Company has responded to the SEC's request and has
received no communication from the SEC on this matter since such response.
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.
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<PAGE>
MANAGEMENT
Directors and Executive Officers
The following are the executive officers and directors of the Company:
Name Age Position
Carl Leei Chen, Ph.D... 51 Chairman of the Board, President, Chief Executive
Officer and Director
Gene Comfort........... 54 Executive Vice President, General Manager,
Secretary and Director
William V. Leeds....... 54 Senior Vice President-Operations
David M. Turner........ 61 Vice President-Finance and Chief Financial
Officer
George E. Hysore. . . . 64 Vice President - Manufacturing
C.M. Cheng............. 51 Director(1)(2)
Steve Gorlin........... 60 Director(1)
James A. Lovell........ 68 Director(1)(2)
- -----------
(1) Member of Audit Committee
(2) Member of Compensation Committee
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.
William V. Leeds served as the Senior Vice President of the Company
from 1991 to September 1994 and rejoined the company as an officer in January of
1997. He was one of the key employees responsible for obtaining the Type
Certificate for the JETCRUZER 450. From October 1994 until January 1997, Mr.
Leeds 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
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<PAGE>
Northrop Institute of Technology and is an FAA Structure Designated Engineering
Representative (DER). He is a single engine, instrument rated pilot.
David M. Turner, CPA joined the Company in January 1997. Prior to that,
from 1994, he served as the Chief Financial Officer of Taitron Incorporated, a
publicly-held company that distributes discrete semiconductors. From 1991 to
1994, Mr. Turner was President and sole owner of Maynard Enterprises,
Incorporated, of Manassas, Virginia, a privately held consulting business
working primarily in the health care industry. From 1988 to 1991, Mr. Turner was
the Chief Financial Officer and Corporate Vice President of Finance of the
Greater Southeast Management Company, a Washington D.C. company that operated an
inner city health care system, which included two hospitals, three nursing homes
and several subsidiary health care companies in the Mid Atlantic area. During
the same period, Mr. Turner was President and a Director of Greater Southeast
Asset Management Company, the asset-holding subsidiary of the Greater Southeast
Healthcare System. Mr. Turner received a Master of Business of Administration
from the University of Cincinnati.
George E. Hysore has served as the Vice President of Manufacturing for
the Company since February 1997. From 1970 to 1990, Mr. Hysore served in various
capacities for McDonnell Douglas Helicopter Company until his retirement in
1990. After his retirement from McDonnel Douglas, from July 1990 to December
1993, he served as Vice President- General Manager of Star of Phoenix Aircraft
Inc., located in Mesa, Arizona, a company engaged in the manufacture of small
aircraft. From January 1994 to December 1994, he served as Vice
President-General Manager of General Aviation Industries, Inc., an Oklahoma
company engaged in the manufacture of aircraft. From January 1995 to December
1995, he was a consultant for Stroud Aerotech, Inc., located in the State of
Oklahoma, where he worked on the certification of the engineering and
manufacturing operations of the Kestrel Aircraft. From January 1996 to December
1996, he served as Vice President of Operations of Hydrogiene, a San Diego
company that manufactures a variety of hygienic products. Mr. Hysore has
received a Bachelor of Science Certificate in Computer Science from the State of
Missouri University.
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.
James A. Lovell Jr. is the former spacecraft commander of the Apollo 13
mission. He currently is the President of Lovell Communications, a business
devoted to disseminating information about the United States Space Program.
Prior to that he was Executive Vice President of Centel Corporation. Mr. Lovell
is a Fellow in the Society of Experimental Test Pilots and a member of the
Golden Eagles. He has been granted many honors and awards, including the
Presidential Medal for Freedom, the French Legion of Honor and the Congressional
Space Medal of Honor. In 1994 he and Jeff Kluger wrote Lost Moon, the story of
the Apollo 13 mission. He has served as a director of the Company since March
1997.
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.
33
<PAGE>
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 Messrs. Cheng, Gorlin and Lovell. 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. Cheng
and Lovell.
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.
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 certain information as to the Company's
Chief Executive Officer and each of the Company's four most highly compensated
executive officers whose total annual salary and bonus for the fiscal year
ending December 31, 1996 exceeded $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
Longterm Compensation
-------------------------
Annual Compensation(1) Shares of Class A Common
--------------------------- Other Stock Underlying
Name and Principal Position Year Salary Bonus Compensation Options/SARS
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Carl L. Chen, Ph.D. 1996 $273,076 $242,000(2)
Chairman and Chief Executive 1995 $53,000(3) $242,000(2)
Officer 1994 $0 $0
Gene Comfort 1996 $131,538 $31,000(4) 25,000
Executive Vice President 1995 $90,000 $0
1994 $55,000 $0
</TABLE>
- ------------------
(1) The compensation described in this table does not include medical
insurance, retirement benefits and other benefits which are available
generally to all employees of the Company and certain perquisites and other
personal benefits, the value of which did not exceed the lesser of $50,000
or 10% of the executive officer's compensation in the table.
(2) Represents the approximate fair market 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
34
<PAGE>
earned by him under the New Management Agreement during 1995. See "Certain
Relationships and Related Transactions."
(3) 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 for the year ended December 31, 1996. $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."
(4) Represents the approximate fair market value of 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 issued to Mr. Comfort in May 1996 in exchange for
services rendered.
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 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.
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<PAGE>
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.
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
420,000 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."
Option Grants in Last Fiscal Year
The following table sets forth information regarding options granted to
the named officers and directors during the fiscal year ended December 31, 1996.
<TABLE>
Percentage of Total
Options Granted to
Number of Shares Employees and
Underlying Options Directors in Exercise or Base
Name Granted Fiscal Year Price Per Share Expiration Date
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gene Comfort 25,000 22.73% $5.0 July 15, 2006
C.M. Cheng 25,000 22.73% $5.0 July 15, 2006
Steve Gorlin 25,000 22.73% $5.0 July 15, 2006
William V. Leeds 25,000 22.73% $5.0 September 3, 2006
</TABLE>
- -------------------
(1) None of the reported options were in-the-money at the end of the fiscal
year as a result of the closing price of the Common Stock as reported
on the NASDAQ System on December 31, 1996 ($3.875/share) being less
than the exercise price of those options ($5.00/share).
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<PAGE>
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.
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.
37
<PAGE>
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 $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, a former officer of the Company,
at an exercise price of $5.00 per share. In March 1997, the Company granted
options to purchase 25,000 shares of Class A Common Stock to James A. Lovell, a
director of the Company, at an exercise price of $5.00 per share. In March 1997,
the Company granted options to purchase 70,000 shares of Class A Common Stock to
William Leeds and options to purchase 30,000 shares of Class A Common Stock to
David Turner, officers 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.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of July 1, 1997 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.
<TABLE>
Common Stock Percent of Percent of Total
Name and Address of Beneficial Owner(1) Beneficially Owned(2) Ownership Voting Power(3)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dr. Carl L. Chen(4)........................ 4,133,757 24.46% 36.32%
Gene Comfort(5)............................ 305,001 1.78 2.64
C.M. Cheng(5)(6)........................... 5,072,860 30.01 44.54
Steve Gorlin(7)............................ 15,000 .09 .03
James A. Lovell Jr.(8)..................... 1,000 0 0
Harpa Limited(9)........................... 5,067,860 29.99 44.53
Shih Jen Yeh(9)............................ 5,067,860 29.99 44.53
Chyao Chi Yeh(9)........................... 5,067,860 29.99 44.53
David Turner(10)........................... 0 0 0
William Leeds(11).......................... 0 0 0
All executive officers and directors as a
group (5 persons).......................... 9,517,618 56.32 83.52
</TABLE>
- ----------------------
(1) Except as otherwise indicated, the address of each principal
stockholder is c/o the Company at 3501 Lakewood Blvd., Long Beach,
California 90808. 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.
(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 Class A Common
Stock is entitled to one vote per share.
(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. Does not include 25,031 shares of Class E-1 Common Stock and
25,031 shares of Class E-2 Common Stock, the beneficial ownership of
which Dr. Chen transferred to Gene Comfort in May 1997. Dr. Chen
disclaims beneficial ownership of the shares the beneficial ownership
of which was transferred to Mr. Comfort.
(5) Includes 5,000 shares of Class A Common Stock issuable upon the
exercise of options exercisable within 60 days of the date of this
Prospectus. Excludes 20,000 shares of Class A Common Stock issuable
upon the exercise of options not exercisable within 60 days of this
Prospectus.
(6) Includes 5,067,860 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
39
<PAGE>
Cayman, Cayman Islands. Excludes 60,000 shares of Class E-1 Common
Stock and 60,000 shares of Class E-2 Common Stock, the beneficial
ownership of which was transferred to Gene Comfort in May 1997. Harpa
disclaims beneficial ownership of the shares the beneficial ownership
of which was transferred to Mr. Comfort.
(7) Common Stock beneficially owned is Class A Common Stock which was
contained in Units purchased by Mr. Gorlin in March and April 1997 in
broker transactions.
(8) Common Stock beneficially owned is Class A Common Stock purchased by
Mr. Lovell in December 1996 in a broker transaction. Excludes 25,000
shares of Class A Common Stock issuable upon the exercise of options
not exercisable within 60 days of this Prospectus.
(9) 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. Excludes 60,000 shares of Class E-1 Common Stock and
60,000 shares of Class E-2 Common Stock, the beneficial ownership of
which was transferred to Gene Comfort in May 1997. Mr. Yeh and Mr. Yeh
each disclaims beneficial ownership of the shares the beneficial
ownership of which was transferred to Mr. Comfort.
(10) Excludes 30,000 shares of Class A Common Stock issuable upon the
exercise of options not exercisable within 60 days of the date of this
Prospectus.
(11) Excludes 70,000 shares of Class A Common Stock issuable upon the
exercise of options not exercisable within 60 days of the date of this
Prospectus.
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") of which
approximately 3,144,279 are still owned by the Selling Securityholders (the
"Remaining Selling Securityholders"). The Remaining Selling Securityholders'
Class A Warrants are identical to the Class A Warrants included in the IPO Units
and were being issued to the Selling Securityholders on the closing of the IPO
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 were registered, at the Company's
expense, under the Securities Act and become tradeable on or about the closing
of the IPO, subject to a contractual restriction agreed to with the Company that
such Selling Securityholders' Class A Warrants and underlying securities could
not be sold for at least 90 days after the closing of the IPO; 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 IPO; 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
IPO, 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."
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<PAGE>
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 Blair that
there are no agreements between Blair 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 Blair 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 Blair nor Blair & Co. has agreed to, nor is either of them
obligated to, act as 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.
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, 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.
41
<PAGE>
IPO Units
The Company has outstanding IPO Units which are currently listed on the
Nasdaq SmallCap Market. Each IPO Unit consists of one share of Class A Common
Stock, one Class A Warrant and one Class B Warrant. At any time until December
3, 2001, 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 were transferable separately immediately 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 for the foreseeable future 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 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.
42
<PAGE>
(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 December 3, 1996 and ending June 3, 1998, 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 June 4, 1998 and ending December 3, 1999, 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.
(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;
43
<PAGE>
(vii) commencing December 3, 1996 and ending June 3, 1998, 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 June 4, 1998 and ending December 3, 1999, 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 IPO. 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 Blair as a condition to the IPO. The Minimum Pretax
Income and bid price levels set forth above were determined by negotiation
between the Company and Blair 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.
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
44
<PAGE>
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 December 3, 2001, 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 IPO Units were immediately transferable separately from
the Class A Common Stock and the Class B Warrants issued with such Class A
Warrants as part of the IPO Units. The Class A Warrants are subject to
redemption, as described below.
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 December 3, 2001, 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 IPO 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 IPO 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 December 3, 1997, 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 December 3, 1997,
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.
45
<PAGE>
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.
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 IPO, the Company granted 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
IPO Units. The Unit Purchase Option cannot be transferred, sold, assigned or
hypothecated for three years, except to any officer of Blair or members of the
selling group or their officers. The Unit Purchase Option is exercisable during
the two-year period commencing December 3, 1999 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.
46
<PAGE>
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 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.
47
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
As of June 30, 1997, the Company has outstanding 6,900,000 shares of
Class A Common Stock , 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 in the IPO 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 IPO Units will be
entitled to purchase an aggregate of 6,900,000 shares of Class A Common Stock
upon exercise of the Class A Warrants and holders of the Class B Warrants and
underlying the Class A Warrants will be entitled to purchase an aggregate of
13,800,000 additional shares of Class A Common Stock upon exercise of the Class
B Warrants, in each case at any time December 3, 2001, provided that the Company
satisfies certain securities registration requirements with respect to the
securities underlying the Warrants.
Up to 2,400,000 additional shares of Class A Common Stock may be
purchased by Blair 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. Blair also has demand and "piggyback" registration rights with
respect to the securities underlying the Unit Purchase Option.
48
<PAGE>
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:
Percentage Eligible
Lock-Up Period for Resale
Up to 90 days after closing of IPO............................... 0%
Between 91 and 150 days after closing of IPO..................... 25%
Between 151 and 210 days after closing of IPO.....................50%
Between 211 and 270 days after closing of IPO.....................75%
After 270 days after closing of IPO..............................100%
The Selling Securityholders have also agreed with the Company not to
exercise the Selling Securityholders' Class A Warrants until December 3, 1997;
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 420,000
shares of Class A Common Stock. Such options vest in equal annual installments
over five years. See "Management-Stock Option Plan."
PLAN OF DISTRIBUTION
The securities offered hereby are being offered directly by the Company
pursuant to the terms of the Warrants. No underwriter is being utilized in
connection with this offering.
The Company has agreed to pay to Blair a Solicitation Fee of 5% of the
aggregate exercise price of each Warrant which is exercised, if (i) the market
price of the Class A Common Stock on the date of the Warrant is exercises is
greater than the then exercise price of the Warrant; (ii) the exercise of the
Warrant was solicited 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 Warrant; and
(v) the solicitation of exercise of the Warrants was not in violation of Rule
10b-6 as promulgated under the Exchange Act or respective state blue sky laws.
Any costs incurred by the Company in connection with the exercising of the
Warrants shall be borne by the Company.
Blair acted as the underwriter of the Company's IPO in December 1996.
Other than the securities underlying the Unit Purchase Option granted to Blair
in connection with the IPO, the Company is not aware of any other securities of
the Company owned by Blair. In connection with the IPO, the Company and Blair
agreed to indemnify each other against certain liabilities in connection with
the IPO and this offering including liabilities under the Act.
In connection with the IPO, the Company sold to Blair, for nominal
consideration, the Unit Purchase Option to purchase up to 600,000 IPO Units at
an exercise price of $6.50 per IPO Unit. The Unit Purchase Options and the
underlying securities cannot be transferred, sold, or assigned until December 3,
1999, except to officers of Blair or to any NASD member participating in the IPO
and its exercisable during the period commencing December 4, 1999 and ending
December 3, 2001.
The Company entered into an agreement with Blair providing for the
payment of a fee to Blair, in the event that Blair is responsible for a merger
or other acquisition transaction to which the Company is a party. 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.
49
<PAGE>
Unless granted an exemption by the Commission from Rule 10b-6, Blair
will be prohibited 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 of the
exercise of Warrants until the later of the termination of such solicitation 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 Blair may
have to receive a fee for the exercise of Warrants following such solicitation.
As a result, Blair may be unable to continue to make a market in the Company's
securities during certain periods while the Warrants are exercisable.
The warrant prices and other terms of the Warrants have been determined
by negotiation between the Company and Blair and are not necessarily related to
the Company's asset value, net worth or other established criteria of value.
Blair acted as a placement agent in connection with the Private
Placement of the Bridge Notes and warrants completed in August 1996.
Blair has informed the Company The Securities and Exchange Commission
is conducting an investigation concerning various activities of Blair. The
investigation appears to be broad in scope, involving numerous aspects of
Blair's compliance with the Federal securities laws and compliance with the
Federal securities laws by issuers whose securities were underwritten by Blair,
or in which Blair made over-the-counter markets, persons associated with Blair,
such issuers and other persons. The Company has been advised by Blair that the
investigation has been ongoing since at least 1989 and that it is cooperating
with the investigation. Blair cannot predict whether this investigation will
ever result in any type of formal enforcement action against Blair, or, if so,
whether any such action might have an adverse effect on Blair or the securities
offered hereby. Blair intends to make a market in the securities following the
IPO. 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 affect the liquidity or price of such securities.
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.
EXPERTS
The financial statements of Advanced Aerodynamics & Structures, Inc. at
December 31, 1996 and for the years ended December 31, 1996 and 1995 and the
period from January 26, 1990 (inception) to December 31, 1996 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
50
<PAGE>
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.
51
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A Development Stage Enterprise)
INDEX TO FINANCIAL STATEMENTS
Page
Number
------
FINANCIAL STATEMENTS
Report of Independent Accountants................................. F-1
Balance Sheet at December 31, 1996................................ F-2
Statement of Operations for the years ended December 31, 1995 and
1996 and for the period from January 26, 1990 (inception) to December
31, 1996......................................................... F-3
Statement of Stockholders' Equity (Deficit) for the years ended
December 31, 1995 and 1996 and for the period from January 26, 1990
(inception) to December 31, 1996................................. F-4
Statement of Cash Flows for the years ended December 31, 1995 and
1996 and for the period from January 26, 1990 (inception) to December
31, 1996......................................................... F-6
Notes to Financial Statements..................................... F-7
UNAUDITED FINANCIAL STATEMENTS
Balance sheet at March 31, 1997................................... F-15
Statement of Operations for the three months ended March 31, 1996 and
1997 and for the period from January 26, 1990 (inception) to March
31, 1997......................................................... F-16
Statement of Cash Flows for the three months ended March 31, 1996 and
1997 and for the period from January 26, 1990 (inception) to March 31,
1997............................................................. F-17
Notes to Financial Statements..................................... F-20
53
<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' equity (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, 1996, and the
results of its operations and its cash flows for the years ended December 31,
1995 and 1996 and for the period from January 26, 1990 (inception) to December
31, 1996, 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.
PRICE WATERHOUSE LLP
Los Angeles, California
March 26, 1997
F-1
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A Development Stage Enterprise)
BALANCE SHEET
<TABLE>
December 31, 1996
-----------------
<S> <C>
Assets
Current Assets:
Cash and cash equivalents $24,222,000
Marketable securities 2,026,000
Certificate of deposit 12,000
Prepaid expenses and other current assets 155,000
-----------------
Total current assets 26,415,000
Property and equipment, net (Note 3) 1,686,000
-----------------
Total assets $28,101,000
-----------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 145,000
Accrued liabilities 158,000
-----------------
Total current liabilities 303,000
-----------------
Commitments and contingencies (Note 6)
Stockholders' equity (Notes 1, 7 and 8):
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;
60,000,000 shares authorized; 6,900,000 shares
issued and outstanding 1,000
Class B Common Stock, par value $.0001 per share;
10,000,000 shares authorized; 2,000,000 shares
issued and outstanding --
Class E-1 Common Stock, par value $.0001 per share;
4,000,000 shares authorized; 4,000,000 shares
issued and outstanding --
Class E-2 Common Stock, par value $.0001 per share;
4,000,000 shares authorized; 4,000,000 shares
issued and outstanding --
Warrants to purchase common stock:
Public Warrants 473,000
Class A Warrants 11,290,000
Class B Warrants 4,632,000
Additional paid-in capital (Note 5) 35,730,000
Deficit accumulated during the development stage 24,328,000)
-----------------
Total stockholders' equity 27,798,000
-----------------
Total liabilities and stockholders' equity $28,101,000
-----------------
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A Development Stage Enterprise)
STATEMENT OF OPERATIONS
<TABLE>
Period from
January 26, 1990
(inception) to
Year Ended December 31, December 31,
---------------------------------------------------------------
1995 1996 1996
---------------------------------------------------------------
<S> <C> <C> <C>
Other income $27,000 $23,000 $710,000
Interest income 110,000 170,000
---------------------------------------------------------------
27,000 133,000 880,000
---------------------------------------------------------------
Costs and expenses:
Research and development costs 13,636,000
Preoperating costs 282,000
General and administrative expenses 1,453,000 1,927,000 7,390,000
Loss on disposal of assets 357,000
Interest expense 262,000 652,000 1,840,000
In-process research and development acquired 761,000
----------------------------------------------------------------
1,715,000 2,579,000 24,266,000
----------------------------------------------------------------
Loss before extraordinary item (1,688,000) (2,446,000) (23,386,000)
Extraordinary loss on retirement of Bridge Notes (942,000) (942,000)
----------------------------------------------------------------
Net loss ($1,688,000) ($3,388,000) ($24,328,000)
----------------------------------------------------------------
Loss per share before extraordinary item $(.50) $(.69)
Extraordinary loss per share on retirement of
Bridge Notes -- (.27)
----------------------------------------------------------------
Net loss per share $(.50) $(.96)
----------------------------------------------------------------
Weighted average number of shares outstanding 3,400,000 3,546,000
----------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
Advanced Aerodynamics & Structures, Inc.
(A Development Stage Enterprise)
Statement of Stockholders' Equity (Deficit)
- -------------------------------------------------------------------------------
<TABLE>
Common Stock
------------------------------------------------------------------------------------------
Preferred Stock
--------------------------------------------------------------------------------------------------------------
Class A Class B Class E-1 Class E-2
----------------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common stock issued 418,094 $ - - 836,189 $ -- 836,189 $ --
Common stock issued in
exchange for in-
process research and
development 201,494 -- 402,988 -- 402,988 --
Imputed interest on
advances from
stockholder (Note 5)
Net loss from inception
to December 31, 1994
--------------------------------------------------------------------------------------------------------------
Balance at December 31
1994 619,588 -- 1,239,177 -- 1,239,177 --
Imputed interest on
advances from
stockholder (Note 5)
Net loss
--------------------------------------------------------------------------------------------------------------
Balance at December
31, 1995 619,588 -- 1,239,177 --- 1,239,177 --
Conversion of
stockholder advances
(Note 5) 598,011 -- 1,196,021 -- 1,196,021 --
Conversion of officer
loans (Note 5) 187,118 -- 374,236 -- 374,236 --
Stock issued in
consideration for
services in 1994,
1995, and 1996 595,283 -- 1,190,566 -- 1,190,566 --
(Note 6)
Imputed interest on
advances from
stockholder (Note 5)
Net proceeds from initial
public offering of
Units (Note 8) 6,000,000 $1,000
Net proceeds from
exercise of over-
allotment option
(Note 8) 900,000 --
Warrants issued in
connection with
issuance of Bridge
Notes (Note 8)
Net loss
--------------------------------------------------------------------------------------------------------------
Balance at December
31, 1996 -- $ -- 6,900,000 $1,000 2,000,000 $ -- 4,000,000 $ -- 4,000,000 $ --
--------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
Advanced Aerodynamics & Structures, Inc.
(A Development Stage Enterprise)
Statement of Stockholders' Equity (Deficit)
- -------------------------------------------------------------------------------
<TABLE>
Deficit
Accumulated
During the
Public Class A Class B Additional Development
Warrants Warrants Warrants Paid-In Capital Stage Total
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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 776,000 776,000
stockholder (Note 5)
Net loss from inception
to December 31, 1994 $(19,252,000)(19,252,000)
--------------------------------------------------------------------------------------------------------------
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)
Conversion of
stockholder advances
(Note 5) 10,728,000 10,728,000
Conversion of officer
loans (Note 5) 336,000 336,000
Stock issued in
consideration for
services in 1994,
1995, and 1996 1,507,000 1,507,000
(Note 6)
Imputed interest on
advances from
stockholder (Note 5) 11,000 11,000
Net proceeds from initial
public offering of
Units (Note 8) $9,583,000 $4,166,000 12,566,000 26,316,000
Net proceeds from
exercise of over-
allotment option
(Note 8) 1,707,000 466,000 1,922,000 4,095,000
Warrants issued in
connection with
issuance of Bridge
Notes (Note 8) $473,000 473,000
Net loss (3,388,000) (3,388,000)
--------------------------------------------------------------------------------------------------------------
Balance at December
31, 1996 $473,000 $11,290,000$4,632,000 $35,730,000 $(24,328,000)$27,798,000
--------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
Advanced Aerodynamics & Structures, Inc.
(A Development Stage Enterprise)
Statement of Cash Flows
- ------------------------------------------------------------------------------
<TABLE>
Period from
January 26,
Year Ended December 31, 1990 (inception) to
------------------------------------- December 31,
1995 1996 1996
------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(1,688,000) $(3,388,000) $(24,328,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 325,000 327,000 1,814,000
Extraordinary loss on retirement of Bridge Notes 942,000 942,000
Noncash stock compensation expense 367,000 590,000 1,207,000
Noncash interest expense 336,000 336,000
Loss on disposal of assets 357,000
Cost of in-process research and development
acquired 761,000
Imputed interest on advances from stockholder 23,000 11,000 810,000
Changes in assets and liabilities:
Increase in prepaid expenses and other current
assets (5,000) (155,000)
(Decrease) increase in accounts payable (86,000) (107,000) 145,000
Increase (decrease) in accrued liabilities 403,000 (403,000) 58,000
Increase (decrease) in interest payable 150,000 (235,000)
-----------------------------------------------------------
Net cash used in operating activities (506,000) (1,932,000) (18,053,000)
-----------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (6,000) (3,847,000)
Proceeds from insurance claims upon loss of aircraft 30,000
Purchase of marketable securities (2,026,000) (2,026,000)
Purchase of certificate of deposit (2,000) (12,000)
----------------------------------------------------------
Net cash used in investing activities (2,034,000) (5,855,000)
----------------------------------------------------------
Cash flows from financing activities:
Advances from stockholder 10,728,000
Proceeds from issuance of common stock prior to
initial public offering 7,500,000
Net proceeds from initial public offering and exercise
of over-allotment option 30,411,000 30,411,000
Net proceeds from bridge financing 6,195,000 6,195,000
Repayment of bridge financing (7,000,000) (7,000,000)
Repayment of obligation under capital leases (4,000) (19,000) (40,000)
Proceeds from (repayment of) bank notes 350,000 (900,000) --
Net proceeds from loans from officer 160,000 176,000 336,000
Repayment of loans from SIDA Corporation (110,000)
Repayment of other short-term loans (565,000)
-----------------------------------------------------------
Net cash provided by financing activities 506,000 28,188,000 48,130,000
-----------------------------------------------------------
Net increase in cash and cash equivalents -- 24,222,000 24,222,000
Cash and cash equivalents at beginning of period -- -- --
------------------------------------------------------------
Cash and cash equivalents at end of period -- $24,222,000 $24,222,000
------------------------------------------------------------
Supplemental cash flow information:
Cash paid for interest $540,000 $694,000
------------------------------------------------------------
Supplemental disclosure of noncash investing and
financing activities:
Stockholder advances converted to common stock $10,728,000 $10,728,000
------------------------------------------------------------
Loans from officer converted to common stock $336,000 $336,000
------------------------------------------------------------
Common stock issued for noncash consideration
and compensation $1,507,000 $1,507,000
------------------------------------------------------------
Liabilities assumed from ASI $400,000
------------------------------------------------------------
Common stock issued for in-process research
and development acquired $361,000
------------------------------------------------------------
Equipment acquired under capital leases $40,000
------------------------------------------------------------
Deposit surrendered as payment for rents due $80,000 $80,000
------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-6
<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 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. Upon
reincorporation of the Company, the Company's aforementioned common and
preferred shares were converted into approximately 619,588, 1,239,177
and 1,239,177 shares, respectively, of 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 were designated Class A Common Stock, 10,000,000 were
designated Class B Common Stock, 4,000,000 were designated Class E-1
Common Stock and 4,000,000 were designated Class E-2 Common Stock (Note
7); and (ii) authorized 5,000,000 shares of $.0001 par value preferred
stock. Each issued and outstanding share of common and preferred stock
at the time of the reincorporation was exchanged into approximately
.0557 share of Class B common stock, approximately .1115 share of Class
E-1 common stock and approximately .1115 share of Class E-2 common
stock (the "recapitalization"). All share and per share data have been
retroactively restated to reflect the recapitalization.
In November 1996, the Company increased the number of authorized shares
of Class A Common Stock to 60,000,000.
The Company is a development stage enterprise. On December 3, 1996 the
Company successfully completed an initial public offering (Note 8) to
finance the continued development, manufacture and marketing of its
product to achieve commercial viability. The net proceeds of the
offering were and will be used to amend its Federal Aviation
Administration ("FAA") Type Certificate for technical revisions to its
product, to obtain a FAA Production Certificate for its product, to
repay borrowings under a bridge loan (Note 8), to expand the Company's
sales and marketing efforts, to establish a new manufacturing facility,
and to acquire production materials and additional tooling and
equipment.
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.
F-7
<PAGE>
Advanced Aerodynamics & Structures, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements
- -------------------------------------------------------------------------------
Preoperating costs
Preoperating costs are expensed as incurred.
Cash equivalents
Cash equivalents represent short-term, highly liquid instruments that
have original maturities of three months or less and are readily
convertible to cash. Such investments consist primarily of a money
market account and U.S. Treasury Bills. The cost of such investments
approximates fair value at December 31, 1996.
Marketable securities and other financial instruments
Company's investment in marketable securities is classified as
"available-for-sale" and is reported at fair market value. Any
unrealized holding gains or losses are reported as a separate component
of stockholders' equity. The Company's investment strategies consider
safety of principal, availability of funds and maximum return on
investment. The Company's marketable securities portfolio at December
31, 1996 consists of investments in U.S. Treasury Bills. The carrying
value of these marketable securities approximates fair value at
December 31, 1996.
The Company's other financial instruments consist primarily of cash and
cash equivalents, a certificate of deposit, accounts payable and
accrued liabilities. The carrying value of these financial instruments
approximates fair value due to their short-term nature.
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.
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 that 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.
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, 1995 and 1996 and excludes all outstanding shares of
Class E-1
F-8
<PAGE>
Advanced Aerodynamics & Structures, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements
- -------------------------------------------------------------------------------
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, certain common stock equivalents issued by the Company
from July 1, 1995 through September 30, 1996 have been included as
outstanding in net loss per share computations. Common stock
equivalents were not included in the net loss per share computation
subsequent to September 30, 1996 as their effect on net loss per share
is antidilutive.
3. Property and equipment
Property and equipment consist of the following:
December 31, 1996
-----------------
Office furniture and equipment $ 129,000
Machinery and equipment 3,063,000
-----------------
3,192,000
Accumulated depreciation and amortization (1,506,000)
-----------------
$1,686,000
-----------------
Effective January 1, 1996, the Company adopted Statement on Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of'". SFAS
No. 121 establishes accounting standards for the impairment of
long-lived assets to be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In addition, SFAS No. 121 requires that certain
long-lived assets be reported at the lower of carrying amount or fair
value less cost to sell. The adoption of SFAS No. 121 did not have a
material impact on the Company's financial position, results of
operations or liquidity.
4. Income taxes
The temporary differences and carryforwards which give rise to the
Company's net deferred tax assets at December 31, 1996 of $9,467,000
were subject to a full valuation allowance because their realization is
not likely. The primary components of the temporary differences consist
of net operating loss and research and development credit
carryforwards.
At December 31, 1996, the Company had Federal tax net operating loss
("NOL") carryforwards of approximately $22 million which will, if
unused, expire in varying amounts in the years 2004 through 2010. The
Company also had California franchise tax NOL carryforwards of
approximately $4 million which will, if unused, expire in various
amounts in the years 1997 through 2000.
At December 31, 1996, the Company had Federal and California research
and development ("R&D") credit carryforwards of approximately
$1,356,000 and $542,000, respectively. The Federal R&D credit
carryforwards will expire in the years 2004 through 2009. The
California R&D credit carryforwards can be carried forward
indefinitely.
F-9
<PAGE>
Advanced Aerodynamics & Structures, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements
- -------------------------------------------------------------------------------
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 and Section 383 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
In 1993 and 1994, the Company obtained loans from SIDA Corporation
(Note 6) in the aggregate principal amount of $110,000, bearing
interest at 12% per annum. These loans, together with accrued interest
of $31,000, were repaid from the proceeds of the Bridge Notes (Note 8).
In 1994, the Company received loans in the aggregate principal amount
of $565,000, bearing interest at 12% per annum, from four individuals
who were at the time not affiliated with the Company. One such
individual 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 Notes (Note 8).
In 1994 and 1995, the Company obtained loans from a bank in the
aggregate principal amount of $900,000, bearing interest of prime rate
plus 1.5%. These loans, together with accrued interest of $15,000, were
repaid with the proceeds of the Bridge Notes (Note 8).
In 1995 and through August 1996, an officer of the Company made loans
to the Company in the aggregate principal amount of $562,000 bearing
interest at 12% per annum. In May 1996, $336,000 of such loans were
converted into 187,118 shares of Class B Common Stock and 374,236
shares each of Class E-1 and Class E-2 Common Stock. The remaining
$226,000 principal amount of these loans, together with accrued
interest of $36,000, was repaid with the proceeds of the Bridge Notes
(Note 8).
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 into 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 into stockholders' equity. In 1994, the
stockholder provided additional advances aggregating $250,000, which
were converted into 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.
Based on prevailing market rates, imputed interest of $11,000 in 1996,
$23,000 in 1995 and $810,000 for the period from January 26, 1990
(inception) to December 31, 1996 on the advances 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 were also minority stockholders of the Company.
During the period from January 26, 1990 (inception) to December 31,
1996, the Company incurred $700,000 of service fees (including $12,000
in 1995) pursuant to this agreement. Unpaid service fees of $259,000,
together with accrued interest of $64,000, were repaid from the
proceeds of the Bridge Notes (Note 8).
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
F-10
<PAGE>
Advanced Aerodynamics & Structures, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements
- -------------------------------------------------------------------------------
years. The 1995 Agreement provided 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. Base compensation of $300,000 and
the signing incentive of $250,000 were subsequently converted to shares
of Class B, Class E-1 and Class E-2 Common Stock as discussed below.
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>
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 $367,000 and $559,000 in 1995 and 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 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 $15,000 per
month with a lease term expiring on December 31, 1997.
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.
F-11
<PAGE>
Advanced Aerodynamics & Structures, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements
- -------------------------------------------------------------------------------
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; and (ii) Class B Common Stock cannot be transferred or sold
for thirteen months following the effective date of the initial public
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.
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 or losses,
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 on December 3, 1996 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 December 3, 1996 and ending 36
months thereafter, 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 December 3, 1996 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 December 3, 1996 and ending 36 months
thereafter, 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 in equal annual installments over five years 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.
F-12
<PAGE>
Advanced Aerodynamics & Structures, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements
- -------------------------------------------------------------------------------
Effective January 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation." In accordance with the
provisions of SFAS No. 123, the Company applies APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations
in accounting for its plan and does not recognize compensation expense
for its stock-based compensation plan based on the fair market value
method prescribed by SFAS No. 123. If the Company had elected to
recognize compensation expense based upon the fair value at the grant
date for awards under this Plan consistent with the methodology
prescribed by SFAS No. 123, the pro forma impact on the Company's 1996
net loss and loss per share would not be material.
The weighted average fair value of options granted during 1996 for
which the exercise price equals the market price on the grant date was
$.73, based on the Black-Scholes option-pricing model. The weighted
average exercise price is $5.00. No shares were exercisable at December
31, 1996. The weighted average remaining contractual life of options
outstanding is 9.67 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of employee stock options.
At December 31, 1996, options to purchase 390,000 shares of Class A
Common Stock were available for future grants and 110,000 shares of
Class A Common Stock were reserved for the exercise of options.
Transactions under the Plan during the year ended December 31, 1996 are
summarized as follows:
Weighted Average
Shares Exercise Price
---------------------------------------
Outstanding at December 31, 1995 -- --
Granted 110,000 $5.00
Exercised -- --
Canceled -- --
---------------------------------------
Outstanding at December 31, 1996 110,000 $5.00
---------------------------------------
F-13
<PAGE>
Advanced Aerodynamics & Structures, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements
- -------------------------------------------------------------------------------
On March 4, 1997, options to purchase 310,000 shares of Class A Common
Stock were granted by the Company's Board of Directors to certain
employees, officers, consultants, and agents of the Company. The grant
is subject to obtaining the approval of the underwriter of the initial
public offering (Note 8) in accordance with the Underwriting Agreement.
8. Initial public offering
On December 3, 1996, the Company completed an initial public offering
of 6,000,000 units (the "Units) at an initial public offering price of
$5 per Unit. Each Unit is composed of one share of the Company's Class
A Common Stock, one Class A Warrant and one Class B Warrant. The
Company realized net proceeds of $26,316,000 from this offering. 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
entities the holder to purchase one share of Class A Common Stock.
Class A Warrants and Class B Warrants may be exercised at an exercise
price of $6.50 and $8.75, respectively, at anytime until December 3,
2001. Commencing one year from December 3, 1996, 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. Class B Warrants are subject to
redemption by the Company commencing one year from December 3, 1996,
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. For
purposes of these financial statements, the Class A and Class B
Warrants have been valued at their relative closing prices on the first
day they were traded.
On December 23, 1996, the underwriter in the initial public offering
exercised its over-allotment option to purchase 900,000 additional
Units at the initial public offering price of $5 per Unit, resulting in
net proceeds of $4,095,000 to the Company.
On August 30, 1996, the Company completed a private placement of an
aggregate of $7,000,000 principal amount of notes payable (the "Bridge
Notes") bearing interest at the rate of 10% per annum 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
were fully repaid upon the closing of the initial public offering and
the Company recognized an extraordinary loss on extinguishment of debt
of $942,000.
Each Bridge Warrant was converted on the closing date of the public
offering into one Class A Warrant ("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 December 3, 1996; 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 December 3, 1996. The fair
value of the Bridge Warrants ($473,000), together with the cost of
issuance (approximately $805,000), has been treated as additional
interest expense over the term of the Bridge Notes.
F-14
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A Development Stage Enterprise)
Balance Sheet
(unaudited)
<TABLE>
March 31, 1997
--------------
<S> <C>
Assets
Current Assets:
Cash and cash equivalents $24,048,000
Marketable securities 501,000
Certificate of deposit 1,012,000
Prepaid expenses and other current assets 160,000
--------------
Total current assets 25,721,000
Property and equipment, net 1,867,000
--------------
Total assets $27,588,000
--------------
</TABLE>
See accompanying notes to financial statements.
F-15
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A Development Stage Enterprise)
Balance Sheet (continued)
(unaudited)
<TABLE>
March 31, 1997
--------------
<S> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $76,000
Accrued liabilities 223,000
--------------
Total current liabilities 299,000
Advance deposit 10,000
-------------
Total liabilities 309,000
-------------
Commitments and contingencies
Stockholders' equity:
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;
60,000,000 shares authorized; 6,900,000 shares
issued and outstanding 1,000
Class B Common Stock, par value $.0001 per share;
10,000,000 shares authorized; 2,000,000 shares
issued and outstanding
Class E-1 Common Stock, par value $.0001 per share;
4,000,000 shares authorized; 4,000,000 shares
issued and outstanding
Class E-2 Common Stock, par value $.0001 per share;
4,000,000 shares authorized, 4,000,000 shares
issued and outstanding
Warrants to purchase common stock:
Public Warrants 473,000
Class A Warrants 11,290,000
Class B Warrants 4,632,000
Additional paid-in capital 35,730,000
Deficit accumulated during the development stage (24,847,000)
--------------
Total stockholders' equity 27,279,000
--------------
Total liabilities and stockholders' equity $27,588,000
--------------
</TABLE>
See accompanying notes to financial statements.
F-16
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A Development Stage Enterprise)
Statement of Operations
(unaudited)
<TABLE>
Period from
January 26, 1990
Three Months Ended (inception) to
March 31, March 31,
-------------------------------------------------------------------
1996 1997 1997
-------------------------------------------------------------------
<S> <C> <C> <C>
Other income $ $ 1,000 $ 711,000
Interest income 289,000 459,000
-------------------------------------------------------------------
290,000 1,170,000
-------------------------------------------------------------------
Costs and expenses:
Research and development costs 326,000 13,962,000
Preoperating costs 282,000
General and administrative expenses 268,000 481,000 7,871,000
Loss on disposal of assets 2,000 359,000
Interest expense 73,000 1,840,000
In-process research and development acquired 761,000
-------------------------------------------------------------------
341,000 809,000 25,075,000
-------------------------------------------------------------------
Loss before extraordinary item (341,000) (519,000) (23,905,000)
Extraordinary loss on retirement of Bridge Notes (942,000)
-------------------------------------------------------------------
Net loss ($341,000) ($519,000) ($24,847,000)
-------------------------------------------------------------------
Net loss per share ($.10) ($.06)
-------------------------------------------------------------------
Weighted average number of shares outstanding 3,400,000 8,900,000
-------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-17
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A Development Stage Enterprise)
Statement of Cash Flows
(unaudited)
<TABLE>
Period from
January 26, 1990
Three Months Ended (inception) to
March 31, March 31,
-----------------------------------------------------------------
1996 1997 1997
-----------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(341,000) $(519,000) $(24,847,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 82,000 79,000 1,893,000
Extraordinary loss on retirement of Bridge Notes 942,000
Noncash stock compensation expense 1,207,000
Noncash interest expense 336,000
Loss on disposal of assets 2,000 359,000
Cost of in-process research and development
acquired 761,000
Imputed interest on advances from stockholder 5,000 810,000
Changes in assets and liabilities:
Increase in prepaid expenses and other current
assets (5,000) (160,000)
Increase (decrease) in accounts payable 12,000 (69,000) 76,000
Increase in accrued liabilities 91,000 65,000 123,000
Increase in interest payable 29,000
Increase in advance deposit 10,000 10,000
-----------------------------------------------------------------
Net cash used in operating activities (122,000) (437,000) (18,490,000)
-----------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (265,000) (4,112,000)
Proceeds from disposal of assets 3,000 3,000
Proceeds from insurance claims upon loss of aircraft 30,000
Proceeds from sale of marketable securities 1,525,000 1,525,000
Purchase of marketable securities (2,026,000)
Purchase of certificate of deposit (1,000,000) (1,012,000)
----------------------------------------------------------------
Net cash proceeds provided by (used in)
investing activities 263,000 (5,592,000)
-----------------------------------------------------------------
Cash flows from financing activities:
Advances from stockholder 10,728,000
Proceeds from issuance of common stock prior to
initial public offering 7,500,000
Net proceeds from initial public offering and
exercise of over-allotment option 30,411,000
Net proceeds from bridge financing 6,195,000
Repayment of bridge financing (7,000,000)
Repayment of obligation under capital leases (3,000) (40,000)
Net proceeds from loans from officer 125,000 336,000
----------------------------------------------------------------
Net cash provided by financing activities 122,000 48,130,000
----------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
F-18
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A Development Stage Enterprise)
Statement of Cash Flows (continued)
(unaudited)
<TABLE>
Period from
January 26, 1990
Three Months Ended (inception) to
March 31, March 31,
--------------------------------------------------------------
1996 1997 1997
--------------------------------------------------------------
<S> <C> <C> <C>
Net (decrease) increase in cash and cash
equivalents -- (174,000) 24,048,000
Cash and cash equivalents at beginning of period -- 24,222,000 --
--------------------------------------------------------------
Cash and cash equivalents at end of period $ -- $24,048,000 $24,048,000
--------------------------------------------------------------
Supplemental cash flow information:
Cash paid for interest $694,000
---------------------------
Supplemental disclosure of noncash investing and
financing activities:
Stockholder advances converted to common stock $10,728,000
---------------------------
Loans from officers converted to common stock $336,000
---------------------------
Common stock issued for noncash consideration
and compensation $1,507,000
---------------------------
Liabilities assumed from ASI $400,000
---------------------------
Common stock issued for in-process research and
development acquired $361,000
---------------------------
Equipment acquired under capital leases $40,000
---------------------------
Deposit surrendered as payment for rents due $80,000
---------------------------
</TABLE>
See accompanying notes to financial statements.
F-19
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
1. General
In the opinion of the Company's management, the accompanying unaudited
financial statements include all adjustments (which include only normal
recurring adjustments) necessary for a fair presentation of the
financial position of the Company at March 31, 1997 and the results of
operations and cash flows for the three months ended March 31, 1997 and
1996. Although the Company believes that the disclosures in these
financial statements are adequate to make the information presented not
misleading, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant
to the rules and regulations of the Securities and Exchange Commission.
Results of operations for interim periods are not necessarily
indicative of results of operations to be expected for any other
interim period or the full year.
The financial information in this quarterly report should be read in
conjunction with the audited December 31, 1996 financial statements and
notes thereto included in the Company's annual report filed on Form
10-KSB.
The Company is a development stage enterprise. On December 3, 1996, the
Company successfully completed an initial public offering to finance
the continued development, manufacture and marketing of its product to
achieve commercial viability. The net proceeds of the offering were and
will be used to amend its Federal Aviation Administration ("FAA") Type
Certificate for technical revisions to its product, to obtain a FAA
Production Certificate for its product, to repay borrowings under a
bridge loan, to expand the Company's sales and marketing efforts, to
establish a new manufacturing facility, and to acquire production
materials and additional tooling and equipment.
2. 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 three
months ended March 31, 1996 and 1997 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.
Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 83, certain common stock equivalents issued by the Company
have been included as outstanding in net loss per share computations
for the quarter ended March 31, 1996. Common stock equivalents were not
included in the net loss per share computation for the quarter ended
March 31, 1997 as their effect on net loss per share is antidilutive.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share." SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS") and supersedes APB Opinion No.
15, "Earnings per Share." It replaces the presentation of primary EPS
with a presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all
entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the basic EPS computation to the
numerator and denominator of the diluted EPS computation. SFAS No. 128
will become effective for the Company for the year ending December 31,
1997. The impact of the adoption of SFAS No. 128 on the Company's
financial statements is not expected to be material.
F-20
<PAGE>
3. Stock Option Plan
On March 4, 1997, options to purchase 210,000 shares of Class A Common
Stock were granted at an exercise price of $5 per share, by the
Company's Board of Directors to certain employees, officers,
consultants and agents of the Company.
F-21
<PAGE>
No dealer, salesman or any 7,255,721 Units
other person has been authorized by
the Company to give any information and
or to make any representations other
than those contained in this Propsectus, 14,155,721 Shares
Prospectus, and, if given or made, such of Class A Common Stock
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 ADVANCED
to sell, or a soliciation of an offer to AERODYNAMICS &
buy, any securities offered hereby by STRUCTURES, INC.
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 Each Unit Consisting of
this Prospectus. One Share of Class A Common Stock and
______________________ One Redeemable Class B Warrant,
issuable upon the exercise of
TABLE OF CONTENTS Redeemable Class A Warrants; and
14,155,721 Shares of Class A Common
Page stock issuable upon the
Prospectus Summary................... Warrants exercise of outstanding
Risk Factors......................... Class B Warrants and Class B
Use Of Proceeds...................... Warrants contained in the Units
Dividend Policy......................
Dilution ............................
Capitalization.......................
Selected Financial Data.............. _________________________
Plan of Operations..................
Business ............................ PROSPECTUS
Management........................... _________________________
Certain Transactions.................
Principal Stockholders...............
Concurrent Securities Offerings......
Description Of Securities............
Shares Eligible For Future Sale......
Underwriting.........................
Legal Matters........................
Experts ............................
Additional Information...............
Index to Financial Statements........F-1
-----------------
Until _______________, 1997
(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. ____________, 1997
======================================== ===================================
A-1
<PAGE>
SUBJECT TO COMPLETION DATED __________________, 1997
PROSPECTUS
ADVANCED AERODYNAMICS & STRUCTURES, INC.
3,144,279 Redeemable Class A Warrants
3,144,279 Redeemable Class B Warrants and
6,288,558 Shares of Class A Common Stock
This Prospectus relates to 3,144,279 redeemable Class A Warrants (the
"Selling Securityholders' Warrants" or the "Class A Warrants") of Advanced
Aerodynamics & Structures, Inc., a Delaware corporation (the "Company"), issued
to certain investors upon the conversion of warrants issued to such investors
(the "Remaining Selling Securityholders") in a private placement by the Company
completed in August 1996 (the "Bridge Financing"), the 3,144,279 redeemable
Class B Warrants (the "Class B Warrants") issuable upon exercise of the Class A
Warrants, and the 6,288,558 shares of Class A Common Stock, $.0001 par value, of
the Company (the "Class A Common Stock") underlying the Class A Warrants and
Class B Warrants. See "Selling Securityholders and Plan of Distribution." 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, December 3, 2001. 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 December 3, 2001. The Class A Warrants and the
Class B Warrants are subject to redemption, commencing December 3, 1997, by the
Company at $.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 Remaining Selling Securityholders have agreed not to exercise the
Selling Securityholders' Warrants until December 3, 1997. An aggregate of 75% of
the Selling Securityholders' Warrants have become freely tradable as of July 2,
1997 and the remaining 25% will become freely tradable on August 30, 1997.
Purchasers of such warrants in permitted sales will be entitled to exercise such
warrants immediately.
The securities offered by this Prospectus may be sold from time to time
by the Selling Securityholders, or by their transferees. The distribution of the
securities offered hereby may be effected in one or more transactions that may
take place in the over-the-counter market, including ordinary brokers'
transactions, privately negotiated transactions or through sales to one or more
dealers for resale of such securities as principals, at market prices prevailing
at the time of sale, at prices related to such prevailing market prices or at
negotiated prices. Usual and customary or specifically negotiated brokerage fees
or commissions may be paid by the Selling Securityholders.
The Selling Securityholders and intermediaries through whom such
securities are sold may be deemed "underwriters" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
securities offered, and any profits realized or commission received may be
deemed underwriting compensation. The Company has agreed to indemnify the
Selling Securityholders against certain liabilities, including liabilities under
the Securities Act.
The Company will not receive any of the proceeds from the sale of
securities by the Selling Securityholders. In the event the Warrants are fully
exercised, the Company will receive gross proceeds of $75,252,697. See "Selling
Securityholders."
On December 3, 1996, the Company filed a registration statement under
the Securities Act with the Securities and Exchange Commission (the
"Commission") relating to a public offering by the Company (the "IPO") of
6,900,000 Units, each Unit consisting of one share of Class A Common Stock, one
Class A Warrant and one Class B Warrant. The Company received approximately
$30,411,000 in net proceeds from the sale of the Units (including the exercise
of the Underwriter's over-allotment option) after payment of underwriting
discounts and commissions and estimated expenses of the IPO.
The Company has agreed to pay to the underwriter of the IPO, D.H. Blair
Investment Banking Corp. ("Blair"), a solicitation fee (the "Solicitation Fee")
equal to 5% of the exercise prices in connection with the exercise of Warrants
under certain conditions. See "Plan of Distribution." The exercise prices of the
Warrants were determined by negotiation between the Company and Blair, and are
not necessarily related to the Company's asset value, net worth or other
criteria of value.
<PAGE>
--------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
--------------------------
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.
The date of this Prospectus is , 1996
A-2
<PAGE>
SELLING SECURITYHOLDERS
An aggregate of up to 3,135,529 Class A Warrants, 3,135,529 shares of
Class A Common Stock and 3,500,000 Class B Warrants issuable upon exercise of
the Class A Warrants, and 3,135,529 shares of Class A Common Stock issuable upon
exercise of the Class B Warrants may be offered by certain securityholders who
received their Class A Warrants in connection with the Bridge Financing or by
their transferees.
The following table sets forth certain information with respect to each
Selling Securityholder for whom the Company is registering securities for resale
to the public. The Company will not receive any of the proceeds from the sale of
these securities. Except as described below, 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.
Number of Class A
Warrants Beneficially
Owned and Maximum
Selling Securityholder Number to be Sold (1)
- ------------------------------------------------------------------------------
Magid Abraham................................................... 37,500
Leonard J. Adams................................................ 12,500
Agent 17, Inc................................................... 37,500
Carmine Agnello................................................. 75,000
L.S. Agrawal.................................................... 6,250
James L. Alderman............................................... 6,250
Keith Alliotts.................................................. 12,500
Amore Perpetuo, Inc............................................. 75,000
Eric C. Appolonia............................................... 6,250
Earl M. and Bonnie B. Baldwin, JTROS............................ 6,250
Robert S. and Sonia T. Benach, JTROS............................ 6,250
Milan Beres..................................................... 6,250
Morde Bernfeld.................................................. 12,500
Mitchell J. and Kathryn W. Birzon, JTROS........................ 6,300
William H. Boyce................................................ 6,250
Harry Bram...................................................... 6,250
Robert D. Burke, M.D............................................ 3,250
James Paul Clay................................................. 6,250
CLFS Equities Ltd............................................... 6,250
Richard P. Cole................................................. 12,500
David Cymrot.................................................... 12,500
Daryl Lee Scot, LLC............................................. 12,500
Ronald L. and Carolyn C. Drake, JTROS........................... 12,500
Allen D. and Carole J. Drewes, JTROS............................ 12,500
Isaac R. Dweck.................................................. 12,500
Edara Partnership............................................... 100,000
EDN Equities #2................................................. 100,000
Jonathan and Irene Elias, TBE................................... 12,500
Factory Direct Ind., Inc........................................ 6,250
David B. Falk................................................... 12,500
Bruce F. and D'Arbra L. Fetzer, JTROS........................... 6,250
Gary B. Flom.................................................... 6,250
Neil C. Friess.................................................. 12,500
Lawrence Frisina................................................ 12,500
Larry P. and Connie P. Galloway................................. 12,500
Lisa Susan Gatschet............................................. 50,000
Bernard J. Golan Revocable Living Trust......................... 12,500
A-3
<PAGE>
Number of Class A
Warrants Beneficially
Owned and Maximum
Selling Securityholder Number to be Sold (1)
- ------------------------------------------------------------------------------
Bob and Gwendolyn Gold, JTROS................................... 6,250
Andrew M. Goldfarb.............................................. 12,500
Dr. Ross H. Golding............................................. 12,500
Ernest Gottdiener............................................... 50,000
Gary A. Greenberg............................................... 6,250
Varda Grodko.................................................... 6,250
Gulf Stream Asset Management Corp Retirement Trust.............. 6,250
Jay B. Gutkin................................................... 6,250
Esther Hellman.................................................. 6,250
Dr. Julian Herskowitz........................................... 9,400
Samuel J. Holtzman Trust........................................ 75,000
Len A. Holubowich............................................... 12,500
Clarence B. Horton.............................................. 12,500
Steven R. Hurlburt.............................................. 18,750
Arthur Inden.................................................... 25,000
Anthony D. Ivankovich, M.D...................................... 6,250
Stuart and Allison Jacobson, JTROS.............................. 6,250
Robert and Elizabeth A. Jennee, JTROS........................... 6,250
James P. and Joyce Johnson, JTROS............................... 25,000
Michael Jordon.................................................. 12,500
Robert and Carole M. Juranek, JTROS............................. 6,250
Daniel Kane..................................................... 37,500
Patti and Neil Karnofsky, JTROS................................. 1,539
Dennis L. and Kathryn G. Karsh, JTROS........................... 12,500
Robert Katz..................................................... 12,500
Leonard and Eileen Keller, JTROS................................ 125,000
Brian Kelley.................................................... 12,500
Marvin and Muriel Kogod, JTROS.................................. 12,500
Nicole and Michael Kubin, JTROS................................. 31,250
Joseph S. Kulpa................................................. 6,250
Frank Lagano.................................................... 25,000
Charles F. Larimer.............................................. 6,250
George Lichtenstein............................................. 18,750
Phil Lifschitz.................................................. 3,125
Jan Linhart..................................................... 6,250
J. Jay and Beverly O. Lobell, JTROS............................. 12,500
Frank J. Loccisano Defined Benefit Pension Plan................. 3,125
Robert and Margaret Lombardi, JTROS............................. 12,500
Ronald B. Low................................................... 6,250
Jerry A. and Melissa Lubliner, JTROS............................ 12,500
David Maleh..................................................... 12,500
Jack M. and Michelle Maleh, JTROS............................... 12,500
Thomas J. Mannausa.............................................. 6,250
Jamie Massimi................................................... 25,000
Mark and Diane McAllister....................................... 6,250
George A. McDonnell............................................. 6,250
Kathleen McGlynn................................................ 50,000
Lee H., M.D. and Lynne Miller, JTROS............................ 6,250
Wayne Mixson.................................................... 6,250
A-4
<PAGE>
Number of Class A
Warrants Beneficially
Owned and Maximum
Selling Securityholder Number to be Sold (1)
- -------------------------------------------------------------------------------
Pavel and Liliana Mostovoy, JTROS............................... 25,000
Vadim Mostovoy.................................................. 6,250
Morton M. Mower................................................. 12,500
Richard A. and Elaine M. Nelson, JTROS.......................... 75,000
Richard A., Elaine M., and Ross R. Nelson, JTROS................ 25,000
James Nigro..................................................... 100,000
Veniamin Nilva.................................................. 6,250
Iouri Ostanine.................................................. 6,250
Grace T. and Ruby G. O'Steen, TIC............................... 6,250
Richard E. Otoski, M.D. PC Pension & Profit Sharing Plan........ 12,500
Ronald Palmer................................................... 6,250
Ignazio Paneduro................................................ 12,500
Alan N. Parnes, D.D.S........................................... 12,500
Kirit S. and Shobha K. Patel, JTROS............................. 12,500
Amy R. Paul..................................................... 3,175
Phillip J. Picchietti1.......................................... 2,500
Harry A. Pinkman................................................ 6,250
Curtis J. Polk.................................................. 12,500
James Polley.................................................... 6,250
Pierre F. and Claire T. Pype, JTROS............................. 6,250
Martin Ratner................................................... 4,500
Anthony C. Recchia.............................................. 6,250
Ronald Reduce................................................... 6,250
Susie R. Reinsberg.............................................. 12,500
Edward F. Reitz................................................. 6,250
John Rini....................................................... 6,250
Marc Roberts.................................................... 12,500
Roger C. Rohrs.................................................. 6,250
Norton A. Rosenberg............................................. 12,500
Michael Rosin................................................... 56,250
Alan J. Rubin................................................... 12,500
Gregg Rubin..................................................... 1,564
Peter J. Russo.................................................. 6,250
Wayne Saker..................................................... 25,000
Anand J. Sathe.................................................. 12,500
Lewis J. Saul, P.C. Retirement Income Plan and Trust............ 6,250
R. Douglas Scheidt.............................................. 6,250
Steve Schnipper................................................. 6,250
Kenneth Schwartz................................................ 3,200
Alan J. Shaw.................................................... 6,250
Steven R. Sheck................................................. 12,500
Mike Sheen...................................................... 7,475
Barry Shemaria.................................................. 6,250
Robert J. Shilliday, Jr......................................... 12,500
Marc K. Siegel.................................................. 12,500
Dr. Stephen M. Silston.......................................... 12,500
SJG Management, Inc. ........................................... 6,250
Steven Sklow.................................................... 6,250
Robert S. and Irene S. Sloan, JTROS............................. 12,500
A-5
<PAGE>
Number of Class A
Warrants Beneficially
Owned and Maximum
Selling Securityholder Number to be Sold (1)
- -------------------------------------------------------------------------------
Jeffrey D. and Susanne M. Smith, JTROS.......................... 6,250
Kevin W. Smyth.................................................. 25,000
Ilker Sonmez.................................................... 12,500
Harvey and Donna Sorkin, JTROS.................................. 14,500
Howard Sorkin................................................... 19,600
South Ferry #2, L.P............................................. 50,000
Dr. George Spiegel.............................................. 37,500
Richard J. Stephenson........................................... 12,500
Victor M. Sternberg DMD PC...................................... 15,626
Ely Tama........................................................ 6,250
TCM Partners, L.P............................................... 12,500
25 Broadway Realty Company...................................... 50,000
W. Ed and Vickie S. Tyler, JTROS................................ 50,000
Donald J. Vernine............................................... 12,500
Kevin and Lisa Waltzer, JTROS................................... 14,150
David C. and Patricia Bray-Ward, JTROS.......................... 12,500
Jonathan Waxberg, M.D........................................... 6,250
Sherwyn J. Wayne................................................ 12,500
Michael R. and Mary J. Webb, JTROS.............................. 6,250
Barry and Helen Webster, JTROS.................................. 25,000
Carl F.R. and Beverly J. Weiman, JTROS.......................... 25,000
Eric Wiborg Trus................................................ 37,500
Morris Wolfson Family Limited Partnership....................... 87,500
Aaron Wolfson................................................... 87,500
Abraham Wolfson................................................. 50,000
Wolfson Equities #2............................................. 100,000
Wolfson Descendants' 1983 Trust................................. 100,000
Casimer Zaremba................................................. 6,250
Herman L. Zeller Living Trust................................... 6,250
Robert D. Zucker................................................ 12,500
Total........................................................... 3,144,279
- - ------------------------
(1) Does not include shares of Class A Common Stock and Class B Warrants
issuable upon exercise of the Class A Warrants and the shares of Class
A Common Stock issuable upon exercise of the Class B Warrants. The
Remaining Selling Securityholders have agreed not to exercise the Class
A Warrants offered hereby for a period of one year after the closing of
the Offering.
PLAN OF DISTRIBUTION
The sale of the securities by the Remaining Selling Securityholders may
be effected from time to time in transactions (which may include block
transactions by or for the account of the Remaining 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.
The Remaining Selling Securityholders may effect such transactions by
selling their securities directly to purchasers, through broker-dealers acting
as agents for the Remaining 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
A-6
<PAGE>
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).
Each Remaining Selling Securityholder has agreed (i) not to sell,
transfer or otherwise dispose of publicly the Selling Securityholder Warrants
except after the time periods and in the percentage amounts set forth below, on
a cumulative basis, and (ii) not to exercise the Selling Securityholder Warrants
until December 3, 1997. Purchasers of the Selling Securityholder Warrants will
not be subject to such restrictions.
PERCENTAGE ELIGIBLE
LOCK UP PERIOD FOR RESALE
- ----------------------------------------------------------------------
Before August 30, 1997 75%
After August 30, 1997 100%
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 a period of at least two (and possibly nine)
business days prior to the commencement of such distribution. Accordingly, in
the event the Underwriter of the Company's initial public offering or D.H. Blair
& Co., Inc. ("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. However,
neither the Underwriter nor Blair & Co. has agreed to, nor is either of them
obligated to, act as a broker-dealer in the sale of the Selling Securityholders'
Warrants, and the Remaining 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 10b-6 and 10b-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 such sales may be 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 the securities by them might be deemed to be
underwriting discounts and commissions under the Securities Act.
CONCURRENT OFFERING
On December 3, 1996, the Company filed a Registration Statement under
the Securities Act with respect to an underwritten offering of the 6,900,000 IPO
Units (including Blair's over-allotment option) by the Company, i.e., the IPO).
The offering of the IPO Units has subsequently been completed, but the Company
may be deemed to continue to be offering securities pursuant to outstanding
Warrants. Sales of securities by the Remaining Selling Securityholders, or the
potential of such sales, could have an adverse effect on the market price of the
Warrants and the Class A Common Stock issuable upon exercise of the Warrants.
A-7
<PAGE>
No dealer, salesman or any 7,255,721 Units
other person has been authorized by
the Company to give any information and
or to make any representations other
than those contained in this Propsectus, 14,155,721 Shares
Prospectus, and, if given or made, such of Class A Common Stock
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 ADVANCED
to sell, or a soliciation of an offer to AERODYNAMICS &
buy, any securities offered hereby by STRUCTURES, INC.
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 3,144,279 Redeemable Class A
this Prospectus. Warrants, 3,144,279 Redeemable Class
______________________ B Warrants; and 6,288,558 Shares
of Class A Common Stock issuable
TABLE OF CONTENTS upon the exercise of the Class A
Warrants and the Class B Warrants
Page underlying the Class A Warrants
Prospectus Summary...................
Risk Factors.........................
Use Of Proceeds......................
Dividend Policy......................
Dilution ............................
Capitalization.......................
Selected Financial Data.............. _________________________
Plan of Operations..................
Business ............................ PROSPECTUS
Management........................... _________________________
Certain Transactions.................
Principal Stockholders...............
Concurrent Securities Offerings......
Description Of Securities............
Shares Eligible For Future Sale......
Underwriting.........................
Legal Matters........................
Experts ............................
Additional Information...............
Index to Financial Statements........F-1
-----------------
Until _______________, 1997
(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. ____________, 1997
======================================== ===================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Reference is made to Section 145 of the General Corporation Law of the
State of Delaware. As permitted by Delaware law, the Company's Certificate of
Incorporation contains an article limiting the personal liability of directors.
The Certificate of Incorporation provides that a director of the Company shall
not be personally liable for any damages from any breach of fiduciary duty as a
director, except for liability based on a judgment or other final adjudication
adverse to him establishing that his acts or omissions were committed in bad
faith or were the result of active or deliberate dishonesty and were material to
the cause of action so adjudicated, or that he personally gained a financial
profit or other advantage to which he was not legally entitled. The Company's
Certificate of Incorporation and Bylaws also provide for indemnification of all
officers and directors of the Company to the fullest extent permitted by law.
The Company has entered into Indemnification Agreements
("Indemnification Agreements") with each of Dr. Carl Chen, Gene Comfort, Sandra
Andre (a former officer of the Company), C.M. Cheng and Steve Gorlin
(collectively, the "Indemnitees"). The Indemnification Agreements permit the
Company to indemnify the Indemnitees for liabilities and expenses arising from
certain actions taken by the Indemnitees for or on behalf of the Company and
require indemnification in certain circumstances.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be incurred in
connection with the offering, other than underwriting discounts, commissions and
non-accountable expense allowances:
Amount
Printing and engraving........................... 20,000
Legal fees and expenses.......................... 10,000
Accounting fees and expenses..................... 8,000
-----------
TOTAL...................................... $38,000
-----------
Item 26. Recent Sales of Unregistered Securities
The following discussion gives retroactive effect to the
Recapitalization effected by the Registrant in July 1996. The Registrant has
sold and issued the following securities during the past three years.
In September 1996, the Registrant issued options to purchase 25,000
shares of Class A Common Stock to each of Gene Comfort, C.M. Cheng, William
Leeds and Steve Gorlin and options to purchase 5,000 shares of Class A Common
Stock to each of Chom Kruesopon and Sandra Andre under the Registrant's 1996
Stock Option Plan. These options are exercisable at a price of $5.00 per share
and vest in equal annual installments over five years. Messrs. Comfort, Cheng
and Gorlin are members of the Registrant's Board of Directors; Mr. Leeds is
currently a consultant to the Registrant and has agreed to become a Senior Vice
President of the Company following the closing of the Offering; Ms. Kruesopon is
an employee of the Registrant; Ms. Andre is the Registrant's Chief Financial
Officer; and Mr. Comfort is the Registrant's Executive Vice President and
Secretary. The securities were issued in reliance on Section 4(2) of the
Securities Act and Rule 506 promulgated thereunder, and no commissions or
discounts were paid.
In August 1996, in connection with the Bridge Financing, the Registrant
issued 140 units, each unit consisting of a note in the principal amount of
$50,000 and warrants to purchase 25,000 shares of Class A Common Stock at an
exercise price of $3.00 per share (the "Bridge Warrants") to 166 accredited
investors for an aggregate purchase price of $7,000,000. The Bridge Warrants
will be converted on the closing of the Offering into 3,500,000 Class A
Warrants. D.H. Blair Investment Banking Corp. acted as the placement agent for
the Bridge Financing and, in that capacity, received a commission of $560,000
and a $210,000 nonaccountable expense allowance. Neither the Company nor any
person acting on its behalf offered or sold the securities by means of a general
solicitation, the resale of the securities was restricted, and all of the
purchasers of the securities were accredited investors. The securities were
issued in reliance on Section 4(2) of the Securities Act and Rule 506
promulgated thereunder.
In July 1996, in connection with the Recapitalization, the Company
issued an aggregate of 10,000,000 shares of its Common Stock in exchange for all
of the outstanding shares of the capital stock of Company's predecessor. The
shares were issued in reliance on Sections 3(a)(9), 3(b) and 4(2) of the
Securities Act and Rules 505 and 506 promulgated thereunder. No commissions or
discounts were paid.
In May 1996, the Registrant agreed to issue 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. Carl Chen, the Chairman. Chief Executive Officer
and President of the Registrant,
II-1
<PAGE>
pursuant to, and in connection with the termination of, the New Management
Agreement effective as of January 29, 1995 between the Registrant and Dr. Chen.
The shares were issued to Dr. Chen in June 1996 in reliance on Section 4(2) of
the Securities Act and Rule 506 promulgated thereunder, and no commissions or
discounts were paid.
In May 1996, the Registrant agreed to issue 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 to Dr. Chen in exchange for the cancellation of loans in
the aggregate amount of $336,000. The shares were issued in June 1996 in
reliance on Section 4(2) of the Securities Act and Rule 506 promulgated
thereunder, and no commissions or discounts were paid.
In May 1996, the Registrant authorized the issuance of 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, in
consideration for Mr. Comfort's services to the Company. The securities were
issued on June 26, 1996 in reliance on Section 4(2) of the Securities Act and
Rule 506 promulgated thereunder, and no commissions or discounts were paid.
In December 1993, the Registrant and Mr. Song Gen Yeh, who was at the
time a principal stockholder and director of the Registrant, agreed that the
Registrant would issue 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 to Mr. Yeh in repayment of advances made by Mr. Yeh to the Company in
the aggregate amount of $10,478,000. Such shares were issued to Mr. Yeh in June
1996. Also in June 1996, Mr. Yeh was issued 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 of the Registrant in repayment of $250,000 in additional advances
made by Mr. Yeh to the Company. The foregoing shares were issued in reliance
upon Section 4(2) of the Securities Act and Rule 506 promulgated thereunder, and
no commissions or discounts were paid. In August 1996, Mr. Yeh transferred all
of the shares of the Registrant held by him to Harpa Limited, a corporation
organized under the laws of the Cayman Islands ("Harpa"). C.M. Cheng, a director
of the Registrant, is the Director of Harpa and thus has voting control of the
shares of the Registrant held by Harpa. The voting control of Harpa is held
equally by Shih Jen Yeh and Chyao Chi Yeh, who are sons of Song Gen Yeh.
Item 27. Exhibits.
(a) Exhibits
Exhibit
No. Description Page
No.
*1.1 Form of Underwriting Agreement......................................
*3.1 Certificate of Incorporation........................................
*3.2 Bylaws..............................................................
*3.3 Amendment to Certificate of Incorporation...........................
*4.1 Specimen Certificate of Class A Common Stock........................
*4.2 Warrant Agreement (including forms of Class A
and Class B Warrant Certificates)...................................
*4.3 Form of Underwriter's Unit Purchase Option..........................
*5.1 Opinion of Luce, Forward, Hamilton & Scripps........................
*10.1 Form of Indemnification Agreement...................................
*10.2 1996 Stock Option Plan..............................................
*10.3 Employment Agreement dated as of May 1, 1996
between the Company and Dr. Carl L. Chen............................
*10.4 Agreement of Merger dated July 16, 1996 between
Advanced Aerodynamics and Structures, Inc.,
California corporation, and Advanced
Aerodynamics & Structures, Inc., a Delaware
corporation.........................................................
**10.5 Standard Sublease dated June 17, 1997 with Budget Rent-A-Car
of Southern California..............................................
**10.6 Standard Sublease dated July 16, 1997 with Budget Rent-A-Car
of Southern California..............................................
**10.7 Standard Industrial/Commercial Multi-Tenant Lease-Gross dated
March 12, 1997 with the Golgolab Family Trust.......................
**11.1 Statement re: Computation of Per Share Earnings.....................
*23.1 Consent of Luce, Forward, Hamilton & Scripps LLP
(contained in Exhibit 5.1)..........................................
**23.2 Consent of Price Waterhouse LLP, independent accountants............
**23.3 Consent of Boros & Garofalo, P.C....................................
*24 Power of Attorney (included on page II-5)...........................
<PAGE>
- -----------
*Previously filed
**Filed herewith
Item 28. Undertakings
The Registrant hereby undertakes:
II-2
<PAGE>
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement: (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act; (ii) to reflect
in the prospectus any facts or events arising after the effective date of the
registration statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the
information in the registration statement; and (iii) to include any additional
or changed material information with respect to the plan of distribution.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) To provide to the underwriter at the closing specified in the
underwriting agreements certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
(5) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding in connection with the securities being registered), the registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
(6) The undersigned Registrant hereby undertakes that it will:
(a) For determining any liability under the Securities Act,
treat the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4), or 497(h) under the Securities Act as part of this
registration statement as of the time it was declared effective.
(b) For determining any liability under the Securities Act,
treat each post-effective amendment that contains a form of prospectus
as a new registration statement for the securities offered in the
registration statement, and the offering of such securities at that
time as the initial bona fide offering of those securities.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has duly caused this
Post-Amendment No. 1 to Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in Long Beach, State of California, on
August __, 1997.
ADVANCED AERODYNAMICS & STRUCTURES, INC.
By: /s/ Carl L. Chen
------------------------------------
Carl L. Chen, President
Signature Title Date
/s/ Carl L. Chen
______________________ President, Chief Executive Officer
Carl L. Chen and Chairman of the Board July 31, 1997
/s/ Gene Comfort
______________________
Gene Comfort Executive Vice President July 31, 1997
Secretary and Director
/s/ Dave Turner
______________________
Dave Turner Chief Financial Officer July 31, 1997
/s/ C.M. Cheng
______________________
C.M. Cheng Director July 31, 1997
/s/ Steve Gorlin
______________________
Steve Gorlin Director July 31, 1997
/s/ James Lovell
______________________
James Lovell Director July 31, 1997
*By: /s/ Carl L. Chen July 31, 1997
-----------------------------------
Carl L. Chen
Attorney in Fact
II-4
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description Page
No.
*1.1 Form of Underwriting Agreement.......................................
*3.1 Certificate of Incorporation.........................................
*3.2 Bylaws...............................................................
*3.3 Amendment to Certificate of Incorporation............................
*4.1 Specimen Certificate of Class A Common Stock.........................
*4.2 Warrant Agreement (including forms of Class A
and Class B Warrant Certificates)....................................
*4.3 Form of Underwriter's Unit Purchase Option...........................
**5.1 Opinion of Luce, Forward, Hamilton & Scripps.........................
*10.1 Form of Indemnification Agreement....................................
*10.2 1996 Stock Option Plan...............................................
*10.3 Employment Agreement dated as of May 1, 1996
between the Company and Dr. Carl L. Chen.............................
*10.4 Agreement of Merger dated July 16, 1996 between
Advanced Aerodynamics and Structures, Inc.,
California corporation, and Advanced Aerodynamics
& Structures, Inc., a Delaware corporation...........................
**10.5 Standard Sublease dated June 27, 1997 with Budget
Rent-A-Car of Southern California....................................
**10.6 Standard Sublease dated July 16, 1997 with Budget
Rent-A-Car of Southern California....................................
**10.7 Standard Industrial/Commercial Multi-Tenant
Lease-Gross dated March 12, 1997 with the Golgolab
Family Trust.........................................................
**11.1 Statement re: Computation of Per Share Earnings......................
**23.1 Consent of Luce, Forward, Hamilton & Scripps LLP
(contained in Exhibit 5.1)...........................................
**23.2 Consent of Price Waterhouse LLP, independent accountants.............
**23.3 Consent of Boros & Garofalo, P.C.....................................
*24 Power of Attorney (included on page II-5)............................
- -----------
*Previously filed
**Filed herewith
II-5
August 5, 1997
Advanced Aerodynamics & Structures, Inc.
3501 Lakewood Boulevard
Long Beach, California 90808
Re: Post-Effective Amendment No. 1. to the Registration Statement on
Form SB-2
Ladies and Gentlemen:
We are counsel for Advanced Aerodynamics & Structures, Inc., a Delaware
corporation (the "Company"), in connection with the preparation of
Post-Effective No. 1 to the Registration Statement on Form SB-2 (the
"Registration Statement") as to which this opinion is a part, filed with the
Securities and Exchange Commission (the "Commission") on August 5, 1997 for the
sale of 7,255,721 units ("Units"), each consisting of one share of Class A
Common Stock and one Class B Warrant issuable upon the exercise of outstanding
Class A Warrants, 14,155,721 shares of Class A Common Stock issuable upon the
exercise of outstanding Class B Warrants and Class B Warrants issuable upon the
exercise of outstanding Class A Warrants, 600,000 Unit purchase options (the
"Unit Purchase Options"), 600,000 Units issuable upon the exercise of the Unit
Purchase Options, each such Unit consisting of one share of Class A Common
Stock, one Class A Warrant and one Class B Warrant, 600,000 Units issuable upon
the exercise of the Class A Warrants underlying the Unit Purchase Options,
1,200,000 shares of Class A Common Stock issuable upon exercise of the Class B
Warrants underlying the Unit Purchase Options, 3,144,279 Class A Warrants for
certain selling security holders, each of whom was an investor in the Company's
private placement prior to its initial public offering (the "Remaining Selling
Securityholders"), 3,144,279 Units issuable upon the exercise of Class A
Warrants registered for the resale by the Remaining Selling Securityholders, and
3,144,279 shares of Class A Common Stock issuable upon the exercise of Class B
Warrants underlying the Class A Warrants, registered for the resale by the
Remaining Selling Securityholders.
In connection with rendering our opinion as set forth below, we have reviewed
and examined originals or copies of such corporate records and other documents
and have satisfied ourselves as to such other matters as we have deemed
necessary to enable us to express our opinion hereinafter set forth.
Based upon the foregoing, it is our opinion that:
The Units, Class A Warrants, Class B Warrants and Class A Common Stock covered
by the Registration Statement and registered on behalf of the Company, when
issued in accordance with the terms and conditions set forth in the Registration
Statement, will be duly authorized, validly issued, fully paid, and
nonassessable.
The Unit Purchase Options are duly authorized, validly issued, fully paid and
nonassessable.
<PAGE>
Advanced Aerodynamics & Structures, Inc.
August 5, 1997
Page 2
The Class A Warrants covered by the Registration Statement and registered for
the account of the Remaining Selling Securityholders are duly authorized,
validly issued, fully paid and nonassessable.
The shares of Class A Common Stock and Class B Warrants underlying the Class A
Warrants covered by the Registration Statement, when issued in accordance with
the terms and conditions set forth therein, will be duly authorized, validly
issued, fully paid, and nonassessable.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Prospectus included in the Registration Statement.
Very truly yours,
LUCE, FORWARD, HAMILTON & SCRIPPS LLP
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD SUBLEASE
(Short-form to be used with post 1995 AIR leases)
1. Parties. This Sublease, dated, for reference purposes only, June
27, 1997, is made by and between Budget Rent-A-Car of Southern California
("Sublessor") and AASI Aircraft or Advanced Aerodynamics and Structures, Inc.
("Sublessee").
2. Premises. Sublessor hereby subleases to Sublessee and Sublessee
hereby subleases from Sublessor for the term, at the rental, and upon all of the
conditions set forth herein, that certain real property, including all
improvements therein, and commonly known by the street address of 3409 Lakewood
Boulevard located in the County of Los Angeles, State of California and
generally described as approximately 2,150 square feet of office space located
on the ground floor of a two-story office building located at 3409 Lakewood
Boulevard, Long Beach, California ("Premises").
3. Term.
3.1 Term. The term of this Sublease shall be for nine (9)
months commencing on July 1, 1997 and ending on March 31,1998 unless sooner
terminated pursuant to any provision hereof.
3.2 Delay in Commencement. Sublessor agrees to use its best
commercially reasonable efforts to deliver possession of the Premises by the
commencement date. If, despite said efforts, Sublessor is unable to deliver
possession as agreed, the rights and obligations of Sublessor and Sublessee
shall be as set forth in Paragraph 3.3 of the Master Lease (as modified by
Paragraph 7.3 of this Sublease).
4. Rent.
4.1 Base Rent. Sublessee shall pay to Sublessor as Base Rent
for the Premises equal monthly payments of $1,827.50 in advance, on the 1st day
of each month of the term hereof. Sublessee shall pay Sublessor upon the
execution hereof $1,827.50 as Base Rent for July 1, 1997 - July 31, 1997. Base
Rent for any period during the term hereof which is for less than one month
shall be a pro rata portion of the monthly installment.
4.2 Rent Defined. All monetary obligations of Sublessee to
Sublessor under the terms of this Sublease (except for the Security Deposit) are
deemed to be rent ("Rent"). Rent shall be payable in lawful money of the United
States to Sublessor at the address stated herein or to such other persons or at
such other places as Sublessor may designate in writing.
5. Security Deposit. Sublessee shall deposit with Sublessor upon
execution hereof $1,827.50 as security for Sublessee's faithful performance of
Sublessee's obligations hereunder. The rights and obligations of Sublessor and
Sublessee as to said Security Deposit shall be as set forth in Paragraph 5 of
the Master Lease (as modified by Paragraph 7.3 of this Sublease).
6. Use.
6.1 Agreed Use. The Premises shall be used and occupied only
for general office use and for no other purpose.
6.2 Compliance. Sublessor warrants that the improvements on
the Premises comply with all applicable covenants or restrictions of record and
applicable building codes, regulations and ordinances ("Applicable
Requirements") in effect on the commencement date. Said warranty does not apply
to the use to which Sublessee will put the Premises or to any alterations or
utility installations made or to be made by Sublessee. NOTE: Sublessee is
responsible for determining whether or not the zoning is appropriate for its
intended use, and acknowledges that past uses of the Premises may no longer be
allowed. If the Premises do not comply with said warranty, or in the event that
the Applicable Requirements are hereafter changed, the rights and obligations of
Sublessor and Sublessee shall be as provided in Paragraph 2.3 of the Master
Lease (as modified by Paragraph 7.3 of this Sublease).
<PAGE>
6.3 Acceptance of Premises and Lessee. Sublessee acknowledges
that:
(a) it has been advised by Brokers to satisfy itself with respect
to the condition of the Premises (including but not limited to the electrical,
HVAC and fire sprinkler systems, security, environmental aspects, and compliance
with Applicable Requirements), and their suitability for Sublessee's intended
use,
1
<PAGE>
(b) Sublessee has made such investigation as it deems necessary
with reference to such matters and assumes all responsibility therefor as the
same relate to its occupancy of the Premises, and
(c) neither Sublessor, Sublessor's agents, nor any Broker has
made any oral or written representations or warranties with respect to said
matters other than as set forth in this Sublease.
In addition, Sublessor acknowledges that:
(a) Broker has made no representations, promises or warranties
concerning Sublessee's ability to honor the Sublease or suitability to occupy
the Premises, and
(b) it is Sublessor's sole responsibility to investigate the
financial capability and/or suitability of all proposed tenants.
7. Master Lease.
7.1 Sublessor is the lessee of the Premises by virtue of a
lease, hereinafter the "Master Lease", a copy of which is attached hereto marked
Exhibit 1, wherein City of Long Beach is the lessor, hereinafter the "Master
Lessor".
7.2 This Sublease is and shall be at all times subject
and subordinate to the Master Lease.
7.3 The terms, conditions and respective obligations of
Sublessor and Sublessee to each other under this Sublease shall be the terms and
conditions of the Master Lease except for those provisions of the Master Lease
which are directly contradicted by this Sublease in which event the terms of
this Sublease document shall control over the Master Lease. Therefore, for the
purposes of this Sublease, wherever in the Master Lease the word "Lessor" is
used it shall be deemed to mean the Sublessor herein and wherever in the Master
Lease the word "Lessee" is used it shall be deemed to mean the Sublessor herein
and wherever in the Master Lease the word "Lessee" is used it shall be deemed to
mean the Sublessee herein.
7.4 During the term of this Sublease and for all periods
subsequent for obligations which have arisen prior to the termination of this
Sublease, Sublessee does hereby expressly assume and agree to perform and comply
with, for the benefit of Sublessor and Master Lessor, each and every obligation
of Sublessor under the Master Lease except for the following paragraphs which
are excluded therefrom: N/A.
7.5 The obligations that Sublessee has assumed under paragraph
7.4 hereof are hereinafter referred to as the "Sublessee's Assumed Obligations".
The obligations that Sublessee has not assumed under paragraph 7.4 hereof are
hereinafter referred to as the "Sublessor's Remaining Obligations".
7.6 Sublessee shall hold Sublessor free and harmless from all
liability, judgments, costs, damages, claims or demands, including reasonable
attorneys fees, arising out of Sublessee's failure to comply with or perform
Sublessee's Assumed Obligations.
7.7 Sublessor agrees to maintain the Master Lease during the
entire term of this Sublease, subject, however, to any earlier termination of
the Master Lease without the fault of the Sublessor, and to comply with or
perform Sublessor's Remaining Obligations and to hold Sublessee free and
harmless from all liability, judgments, costs, damages, claims or demands
arising out of Sublessor's failure to comply with or perform Sublessor's
Remaining Obligations.
7.8 Sublessor represents to Sublessee that the Master Lease is
in full force and effect and that no default exists on the part of any Party to
the Master Lease.
8. Assignment of Sublease and Default.
8.1 Sublessor hereby assigns and transfers to Master Lessor
the Sublessor's interest in this Sublease, subject, however, to the provisions
of Paragraph 8.2 hereof.
8.2 Master Lessor, by executing this document, agrees that
until a Default shall occur in the performance of Sublessor's Obligations under
the Master Lease, that Sublessor may receive, collect and enjoy the Rent
accruing under this Sublease. However, if Sublessor shall Default in the
performance of its obligations to Master Lessor then Master Lessor may, at its
option, receive and collect, directly from Sublessee, all Rent owing and to be
owed under this Sublease. Master Lessor shall not, by reason of this assignment
of the Sublease nor by reason of the collection of the Rent from the Sublessee,
be deemed liable to Sublessee for any failure of the Sublessor to perform and
comply with Sublessor's Remaining Obligations.
<PAGE>
8.3 Sublessor hereby irrevocably authorizes and directs
Sublessee upon receipt of any written notice form the Master Lessor stating that
a Default exists in the performance of Sublessor's obligations under the Master
Lease, to pay to Master Lessor in the Rent due and to become due under the
Sublease. Sublessor agrees that Sublessee shall have the right to rely upon any
such statement and request from Master Lessor, and that Sublessee shall pay such
Rent to Master Lessor without any obligation or right to inquire as to whether
such Default exists and notwithstanding any notice from or claim from Sublessor
to the contrary and Sublessor shall have no right or claim against Sublessee for
any such Rent so paid by Sublessee.
2
<PAGE>
8.4 No changes or modifications shall be made to this Sublease
without the consent of Master Lessor.
9. Consent of Master Lessor.
9.1 In the event that the Master Lease requires that Sublessor
obtain the consent of Master Lessor to any subletting by Sublessor then, this
Sublease shall not be effective unless, within ten days of the date hereof,
Master Lessor signs this Sublease thereby giving its consent to this Subletting.
9.2 In the event that the obligations of the Sublessor under
the Master Lease have been guaranteed by third parties then neither this
Sublease, nor the Master Lessor's consent, shall be effective unless, within 10
days of the date hereof, said guarantors sign this Sublease thereby giving their
consent to this Sublease.
9.3 In the event that Master Lessor does give such consent then:
(a) Such consent shall not release Sublessor of its obligations
or alter the primary liability of Sublessor to pay the Rent and perform and
comply with all of the obligations of Sublessor to be performed under the Master
Lease.
(b) The acceptance of Rent by Master Lessor from Sublessee or
anyone else liable under the Master Lease shall not be deemed a waiver by Master
Lessor of any provisions of the Master Lease.
(c) The consent to this Sublease shall not constitute a consent
to any subsequent subletting or assignment.
(d) In the event of any Default of Sublessor under the Master
Lease, Master Lessor may proceed directly against Sublessor, any guarantors or
anyone else liable under the Master Lease or this Sublease without first
exhausting Master Lessor's remedies against any other person or entity liable
thereon to Master Lessor.
(e) Master Lessor may consent to subsequent sublettings and
assignments of the Master Lease or this sublease or any amendments or
modifications thereto without notifying Sublessor or any one else liable under
the Master Lease and without obtaining their consent and such action shall not
relieve such persons from liability.
(f) In the event that Sublessor shall Default in its obligations
under the Master Lease, then Master Lessor, at its option and without being
obligated to do so, may require Sublessee to attorn to Master Lessor in which
event Master Lessor shall undertake the obligations of Sublessor under this
Sublease from the time of the exercise of said option to termination of this
Sublease but Master Lessor shall not be liable for any prepaid Rent nor any
Security Deposit paid by Sublessee, nor shall Master Lessor be liable for any
other Defaults of the Sublessor under the Sublease.
9.4 The signatures of the Master Lessor and any Guarantors of
Sublessor at the end of this document shall constitute their consent to the
terms of this Sublease.
9.5 Master Lessor acknowledges that, to the best of Master
Lessor's knowledge, no Default presently exists under the Master Lease of
obligations to be performed by Sublessor and that the Master Lease is in full
force and effect.
9.6 In the event that Sublessor Defaults under its obligations
to be performed under the Master Lease by Sublessor, Master Lessor agrees to
deliver to Sublessee a copy of any such notice of default. Sublessee shall have
the right to cure any Default of Sublessor described in any notice of default
within ten days after service of such notice of default on Sublessee. If such
Default is cured by Sublessee then Sublessee shall have the right of
reimbursement and offset from and against Sublessor.
10. Brokers Fee.
10.1 Upon execution hereof by all parties, Sublessor shall pay
to Matlow-Kennedy Commercial Real Estate Services, a licensed real estate broker
("Broker"), a fee as set forth in a separate agreement between Sublessor and
Broker, or in the event there is no such separate agreement, the sum of $986.85
for brokerage services rendered by Broker to Sublessor in this transaction.
<PAGE>
10.2 Sublessor agrees that if Sublessee exercises any option
or right of first refusal as granted by Sublessor herein, or any option or right
substantially similar thereto, either to extend the term of this sublease, to
renew this Sublease, to purchase the Premises, or to lease or purchase adjacent
property which Sublessor may own or in which Sublessor has an interest, then
Sublessor shall pay to Broker a fee in accordance with the schedule of Broker in
effect at the time of the execution of this Sublease. Notwithstanding the
foregoing, Sublessor's obligation under this Paragraph 10.2 is limited to a
transaction in which Sublessor is acting as a Sublessor, lessor or seller.
10.3 Master Lessor agrees that if Sublessee shall exercise any
option or right of first refusal granted to Sublessee by Master Lessor in
connection with this Sublease, or any option or right substantially similar
thereto, either to extend or renew the Master Lease, to purchase the Premises or
any part thereof, or to lease or purchase adjacent property which Master Lessor
may own or in which Master Lessor has an interest, or if Broker is the procuring
cause of any other lease or sale entered into between Sublessee and Master
Lessor pertaining to the Premises, any part thereof, or any adjacent property
which Master Lessor owns or in which it has an interest, then as to any of said
transactions, Master Lessor shall pay to Broker a fee, in cash, in accordance
with the schedule of Broker in effect at the time of the execution of this
Sublease.
3
<PAGE>
10.4 Any fee due from Sublessor or Master Lessor hereunder
shall be due and payable upon the exercise of any option to extend or renew,
upon the execution of any new lease, or, in the event of a purchase, at the
close of escrow.
10.5 Any transferee of Sublessor's interest in this Sublease,
or of Master Lessor's interest in the Master Lease, by accepting an assignment
thereof, shall be deemed to have assumed the respective obligations of Sublessor
or Master Lessor under this Paragraph 10. Broker shall be deemed to be a
third-party beneficiary of this paragraph 10.
11. Attorney's Fees. If any party or the Broker named herein brings an
action to enforce the terms hereof or to declare rights hereunder, the
prevailing party in any such action, on trial and appeal, shall be entitled to
his reasonable attorney's fees to be paid by the losing party as fixed by the
Court.
12. Additional Provisions. [If there are no additional
provisions, draw a line from this point to the next printed word after the space
left here. If there are additional provisions place the same here.]
4
<PAGE>
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY REAL ESTATE BROKER AS TO THE LEGAL
SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS SUBLEASE OR THE
TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO:
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS
SUBLEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE
PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE
PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PROPERTY, THE STRUCTURAL
INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY
OF THE PREMISES FOR SUBLESSEE'S INTENDED USE.
WARNING: IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA,
CERTAIN PROVISIONS OF THE SUBLEASE MAY NEED TO BE REVISED TO COMPLY WITH THE
LAWS OF THE STATE IN WHICH THE PROPERTY IS LOCATED.
Executed at:________________________________
on:_________________________________________
Address:____________________________________
BUDGET RENT-A-CAR OF SOUTHERN
CALIFORNIA By Reuben Bird
"Sublessor" (Corporate Seal)
Executed at: Long Beach
on:_________________________________________
Address:____________________________________
ADVANCED AERODYNAMICS & STRUCTURES, INC. OR
AASI AIRCRAFT
By Gene Comfort/Vice President and General Manager
"Sublessee" (Corporate Seal)
Executed at:________________________________
on:_________________________________________
Address:____________________________________
By__________________________________________
By__________________________________________
"Master Lessor" (Corporate Seal)
5
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD SUBLEASE
(Short-form to be used with post 1995 AIR leases)
1. Parties. This Sublease, dated, for reference purposes only, July
16, 1997, is made by and between Budget Rent-A-Car of Southern California
("Sublessor") and AASI Aircraft or Advanced Aerodynamics and Structures, Inc.
("Sublessee").
2. Premises. Sublessor hereby subleases to Sublessee and Sublessee
hereby subleases from Sublessor for the term, at the rental, and upon all of the
conditions set forth herein, that certain real property, including all
improvements therein, and commonly known by the street address of 3409 Lakewood
Boulevard located in the County of Los Angeles, State of California and
generally described as approximately 1,930 square feet of office space located
on the 2d floor of a two-story office building located at 3409 Lakewood
Boulevard, Long Beach, California ("Premises").
3. Term.
a. Term. The term of this Sublease shall be for eight (8) months
commencing on August 1, 1997 and ending on March 31,1998 unless sooner
terminated pursuant to any provision hereof.
b. Delay in Commencement. Sublessor agrees to use its best
commercially reasonable efforts to deliver possession of the Premises by the
commencement date. If, despite said efforts, Sublessor is unable to deliver
possession as agreed, the rights and obligations of Sublessor and Sublessee
shall be as set forth in Paragraph 3.3 of the Master Lease (as modified by
Paragraph 7.3 of this Sublease).
4. Rent.
a. Base Rent. Sublessee shall pay to Sublessor as Base Rent for
the Premises equal monthly payments of $1,351.00 in advance, on the 1st day of
each month of the term hereof. Sublessee shall pay Sublessor upon the execution
hereof $1,351.00 as Base Rent for August 1, 1997 -August 31, 1997. Base Rent for
any period during the term hereof which is for less than one month shall be a
pro rata portion of the monthly installment.
b. Rent Defined. All monetary obligations of Sublessee to
Sublessor under the terms of this Sublease (except for the Security Deposit) are
deemed to be rent ("Rent"). Rent shall be payable in lawful money of the United
States to Sublessor at the address stated herein or to such other persons or at
such other places as Sublessor may designate in writing.
5. Security Deposit. Sublessee shall deposit with Sublessor upon
execution hereof $1,351.00 as security for Sublessee's faithful performance of
Sublessee's obligations hereunder. The rights and obligations of Sublessor and
Sublessee as to said Security Deposit shall be as set forth in Paragraph 5 of
the Master Lease (as modified by Paragraph 7.3 of this Sublease).
6. Use.
a. Agreed Use. The Premises shall be used and occupied only for
general office use and for no other purpose.
b. Compliance. Sublessor warrants that the improvements on the
Premises comply with all applicable covenants or restrictions of record and
applicable building codes, regulations and ordinances ("Applicable
Requirements") in effect on the commencement date. Said warranty does not apply
to the use to which Sublessee will put
Page 1 of 6
<PAGE>
the Premises or to any alterations or utility installations made or to be made
by Sublessee. NOTE: Sublessee is responsible for determining whether or not the
zoning is appropriate for its intended use, and acknowledges that past uses of
the Premises may no longer be allowed. If the Premises do not comply with said
warranty, or in the event that the Applicable Requirements are hereafter
changed, the rights and obligations of Sublessor and Sublessee shall be as
provided in Paragraph 2.3 of the Master Lease (as modified by Paragraph 7.3 of
this Sublease).
c. Acceptance of Premises and Lessee. Sublessee acknowledges
that:
i. it has been advised by Brokers to satisfy itself with
respect to the condition of the Premises (including but not limited to the
electrical, HVAC and fire sprinkler systems, security, environmental aspects,
and compliance with Applicable Requirements), and their suitability for
Sublessee's intended use,
ii. Sublessee has made such investigation as it deems
necessary with reference to such matters and assumes all responsibility therefor
as the same relate to its occupancy of the Premises, and
iii. neither Sublessor, Sublessor's agents, nor any Broker
has made any oral or written representations or warranties with respect to said
matters other than as set forth in this Sublease.
In addition, Sublessor acknowledges that:
(a) Broker has made no representations, promises or warranties
concerning Sublessee's ability to honor the Sublease or suitability to occupy
the Premises, and
(b) It is Sublessor's sole responsibility to investigate the
financial capability and/or suitability of all proposed tenants.
7. Master Lease.
a. Sublessor is the lessee of the Premises by virtue of a lease,
hereinafter the "Master Lease", a copy of which is attached hereto marked
Exhibit 1, wherein City of Long Beach is the lessor, hereinafter the "Master
Lessor".
b. This Sublease is and shall be at all times subject and
subordinate to the Master Lease.
c. The terms, conditions and respective obligations of Sublessor
and Sublessee to each other under this Sublease shall be the terms and
conditions of the Master Lease except for those provisions of the Master Lease
which are directly contradicted by this Sublease in which event the terms of
this Sublease document shall control over the Master Lease. Therefore, for the
purposes of this Sublease, wherever in the Master Lease the word "Lessor" is
used it shall be deemed to mean the Sublessor herein and wherever in the Master
Lease the word "Lessee" is used it shall be deemed to mean the Sublessor herein
and wherever in the Master Lease the word "Lessee" is used it shall be deemed to
mean the Sublessee herein.
d. During the term of this Sublease and for all periods
subsequent for obligations which have arisen prior to the termination of this
Sublease, Sublessee does hereby expressly assume and agree to perform and comply
with, for the benefit of Sublessor and Master Lessor, each and every obligation
of Sublessor under the Master Lease except for the following paragraphs which
are excluded therefrom: N/A.
e. The obligations that Sublessee has assumed under paragraph 7.4
hereof are hereinafter referred to as the "Sublessee's Assumed Obligations". The
obligations that Sublessee has not assumed under paragraph 7.4 hereof are
hereinafter referred to as the "Sublessor's Remaining Obligations".
Page 2 of 6
<PAGE>
f. Sublessee shall hold Sublessor free and harmless from all
liability, judgments, costs, damages, claims or demands, including reasonable
attorneys fees, arising out of Sublessee's failure to comply with or perform
Sublessee's Assumed Obligations.
g. Sublessor agrees to maintain the Master Lease during the
entire term of this Sublease, subject, however, to any earlier termination of
the Master Lease without the fault of the Sublessor, and to comply with or
perform Sublessor's Remaining Obligations and to hold Sublessee free and
harmless from all liability, judgments, costs, damages, claims or demands
arising out of Sublessor's failure to comply with or perform Sublessor's
Remaining Obligations.
h. Sublessor represents to Sublessee that the Master Lease is in
full force and effect and that no default exists on the part of any Party to the
Master Lease.
8. Assignment of Sublease and Default.
a. Sublessor hereby assigns and transfers to Master Lessor the
Sublessor's interest in this Sublease, subject, however, to the provisions of
Paragraph 8.2 hereof.
b. Master Lessor, by executing this document, agrees that until a
Default shall occur in the performance of Sublessor's Obligations under the
Master Lease, that Sublessor may receive, collect and enjoy the Rent accruing
under this Sublease. However, if Sublessor shall Default in the performance of
its obligations to Master Lessor then Master Lessor may, at its option, receive
and collect, directly from Sublessee, all Rent owing and to be owed under this
Sublease. Master Lessor shall not, by reason of this assignment of the Sublease
nor by reason of the collection of the Rent from the Sublessee, be deemed liable
to Sublessee for any failure of the Sublessor to perform and comply with
Sublessor's Remaining Obligations.
c. Sublessor hereby irrevocably authorizes and directs Sublessee
upon receipt of any written notice form the Master Lessor stating that a Default
exists in the performance of Sublessor's obligations under the Master Lease, to
pay to Master Lessor in the Rent due and to become due under the Sublease.
Sublessor agrees that Sublessee shall have the right to rely upon any such
statement and request from Master Lessor, and that Sublessee shall pay such Rent
to Master Lessor without any obligation or right to inquire as to whether such
Default exists and notwithstanding any notice from or claim from Sublessor to
the contrary and Sublessor shall have no right or claim against Sublessee for
any such Rent so paid by Sublessee.
d. No changes or modifications shall be made to this Sublease
without the consent of Master Lessor.
9. Consent of Master Lessor.
a. In the event that the Master Lease requires that Sublessor
obtain the consent of Master Lessor to any subletting by Sublessor then, this
Sublease shall not be effective unless, within ten days of the date hereof,
Master Lessor signs this Sublease thereby giving its consent to this Subletting.
b. In the event that the obligations of the Sublessor under the
Master Lease have been guaranteed by third parties then neither this Sublease,
nor the Master Lessor's consent, shall be effective unless, within 10 days of
the date hereof, said guarantors sign this Sublease thereby giving their consent
to this Sublease.
c. In the event that Master Lessor does give such consent then:
i. Such consent shall not release Sublessor of its
obligations or alter the primary liability of Sublessor to pay the Rent and
perform and comply with all of the obligations of Sublessor to be performed
under the Master Lease.
ii. The acceptance of Rent by Master Lessor from Sublessee
or anyone else liable under the Master Lease shall not be deemed a waiver by
Master Lessor of any provisions of the Master Lease.
Page 3 of 6
<PAGE>
iii. The consent to this Sublease shall not constitute a
consent to any subsequent subletting or assignment.
iv. In the event of any Default of Sublessor under the
Master Lease, Master Lessor may proceed directly against Sublessor, any
guarantors or anyone else liable under the Master Lease or this Sublease without
first exhausting Master Lessor's remedies against any other person or entity
liable thereon to Master Lessor.
v. Master Lessor may consent to subsequent sublettings and
assignments of the Master Lease or this sublease or any amendments or
modifications thereto without notifying Sublessor or any one else liable under
the Master Lease and without obtaining their consent and such action shall not
relieve such persons from liability.
vi. In the event that Sublessor shall Default in its
obligations under the Master Lease, then Master Lessor, at its option and
without being obligated to do so, may require Sublessee to attorn to Master
Lessor in which event Master Lessor shall undertake the obligations of Sublessor
under this Sublease from the time of the exercise of said option to termination
of this Sublease but Master Lessor shall not be liable for any prepaid Rent nor
any Security Deposit paid by Sublessee, nor shall Master Lessor be liable for
any other Defaults of the Sublessor under the Sublease.
d. The signatures of the Master Lessor and any Guarantors of
Sublessor at the end of this document shall constitute their consent to the
terms of this Sublease.
e. Master Lessor acknowledges that, to the best of Master
Lessor's knowledge, no Default presently exists under the Master Lease of
obligations to be performed by Sublessor and that the Master Lease is in full
force and effect.
f. In the event that Sublessor Defaults under its obligations to
be performed under the Master Lease by Sublessor, Master Lessor agrees to
deliver to Sublessee a copy of any such notice of default. Sublessee shall have
the right to cure any Default of Sublessor described in any notice of default
within ten days after service of such notice of default on Sublessee. If such
Default is cured by Sublessee then Sublessee shall have the right of
reimbursement and offset from and against Sublessor.
10. Brokers Fee.
a. Upon execution hereof by all parties, Sublessor shall pay to
Matlow-Kennedy Commercial Real Estate Services, a licensed real estate broker
("Broker"), a fee as set forth in a separate agreement between Sublessor and
Broker, or in the event there is no such separate agreement, the sum of $648.48
for brokerage services rendered by Broker to Sublessor in this transaction.
b. Sublessor agrees that if Sublessee exercises any option or
right of first refusal as granted by Sublessor herein, or any option or right
substantially similar thereto, either to extend the term of this sublease, to
renew this Sublease, to purchase the Premises, or to lease or purchase adjacent
property which Sublessor may own or in which Sublessor has an interest, then
Sublessor shall pay to Broker a fee in accordance with the schedule of Broker in
effect at the time of the execution of this Sublease. Notwithstanding the
foregoing, Sublessor's obligation under this Paragraph 10.2 is limited to a
transaction in which Sublessor is acting as a Sublessor, lessor or seller.
c. Master Lessor agrees that if Sublessee shall exercise any
option or right of first refusal granted to Sublessee by Master Lessor in
connection with this Sublease, or any option or right substantially similar
thereto, either to extend or renew the Master Lease, to purchase the Premises or
any part thereof, or to lease or purchase adjacent property which Master Lessor
may own or in which Master Lessor has an interest, or if Broker is the procuring
cause of any other lease or sale entered into between Sublessee and Master
Lessor pertaining to the Premises, any part thereof, or any adjacent property
which Master Lessor owns or in which it has an interest, then as to any of said
transactions, Master Lessor shall pay to Broker a fee, in cash, in accordance
with the schedule of Broker in effect at the time of the execution of this
Sublease.
Page 4 of 6
<PAGE>
d. Any fee due from Sublessor or Master Lessor hereunder shall be
due and payable upon the exercise of any option to extend or renew, upon the
execution of any new lease, or, in the event of a purchase, at the close of
escrow.
e. Any transferee of Sublessor's interest in this Sublease, or of
Master Lessor's interest in the Master Lease, by accepting an assignment
thereof, shall be deemed to have assumed the respective obligations of Sublessor
or Master Lessor under this Paragraph 10. Broker shall be deemed to be a
third-party beneficiary of this paragraph 10.
11. Attorney's Fees. If any party or the Broker named herein brings an
action to enforce the terms hereof or to declare rights hereunder, the
prevailing party in any such action, on trial and appeal, shall be entitled to
his reasonable attorney's fees to be paid by the losing party as fixed by the
Court.
12. Additional Provisions. [If there are no additional provisions,
draw a line from this point to the next printed word after the space left here.
If there are additional provisions place the same here.]
Page 5 of 6
<PAGE>
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY REAL ESTATE BROKER AS TO THE LEGAL
SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS SUBLEASE OR THE
TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO:
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS SUBLEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE
PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE
PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PROPERTY, THE STRUCTURAL
INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY
OF THE PREMISES FOR SUBLESSEE'S INTENDED USE.
WARNING: IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA,
CERTAIN PROVISIONS OF THE SUBLEASE MAY NEED TO BE REVISED TO COMPLY WITH THE
LAWS OF THE STATE IN WHICH THE PROPERTY IS LOCATED.
Executed at:
on:
Address:
BUDGET RENT-A-CAR OF SOUTHERN
CALIFORNIA
By Reuben Bird
"Sublessor" (Corporate Seal)
Executed at: Long Beach
on:
Address:
ADVANCED AERODYNAMICS & STRUCTURES,
INC. OR AASI AIRCRAFT
By Gene Comfort/Vice President and General Manager
"Sublessee" (Corporate Seal)
Executed at:
on:
Address:
By:
By:
"Master Lessor" (Corporate Seal)
Page 6 of 6
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE-GROSS
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. Basic Provisions ("Basis Provisions")
1.1 Parties. This Lease ("Lease"), dated for reference purposes only,
March 12, 1997, is made by and between Golgolab Family Trust ("Lessor") and
Advanced Aerodynamics and Structures, Inc. ("Lessee"), (collectively, the
"Parties," or individually a "Party").
1.2 (a) Premises. That certain portion of the Building, including all
improvements therein or to be provided by Lessor under the terms of this Lease,
commonly known by the street address of 2235 Lemon Avenue, Unit E, located in
the City of Long Beach, County of Los Angeles, State of California, with zip
code 90806, as outlined on Exhibit ___ attached hereto ("Premises"). The
"Building" is that certain building containing the Premises and generally
described as (described briefly the nature of the Building): Approximately 7,750
square feet of industrial space. . In addition to Lessee's rights to use and
occupy the Premises as hereinafter specified, Lessee shall have non-exclusive
rights to the Common Areas (as defined in Paragraph 2.7 below) as hereinafter
specified, but shall not have any rights to the roof, exterior walls or utility
raceways of the Building or to any other buildings in the Industrial Center. The
Premises, the Building, the Common Areas, the land upon which they are located,
along with all other buildings and improvements thereon, are herein collectively
referred to as the "Industrial Center." (Also see Paragraph 2.)
(b) Parking. Four (4) unreserved vehicle parking spaces
("Unreserved Parking Spaces"); and 0 reserved vehicle parking spaces ("Reserved
Parking Spaces"). Also see Paragraph 2.6.)
1.3 Term. 1 year and 1/2 months ("Original Term") commencing March 15,
1997 ("Commencement Date") and ending March 31, 1998 ("Expiration Date"). Also,
see Paragraph 3.)
1.4 Base Rent. $2,000,00 per month ("Base Rent"), payable on the first
(1st) day of each month commencing May 1, 1996 (Also see Paragraph 4). See
Paragraph 1.6(a), Rent Due Upon Execution.
[ ] If this box is checked, this Lease provides for the
Base Rent to be adjusted per Addendum _________,
attached hereto
1.5 Base Rent Paid Upon Execution. $3,000.00 as Base Rent for the
period March 15, 1997 and the month of April.
1.6 Security Deposit. $2,000.00 ("Security Deposit"). (Also see
Paragraph 5.)
1.7 Permitted Use. Storage of aircraft parts ("Permitted Use") (Also
see Paragraph 6.)
1.8 Insuring Party. Lessor is the "Insuring Party." (Also see
Paragraph 8.)
1.9 (a) Real Estate Brokers. The following real estate broker(s)
(collectively, the "Broker(s)") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
[X] The Seeley Company represents Lessor exclusively ("Lessor's Broker");
[X] MACAP represents Lessee exclusively ("Lessee's Broker"), or
[ ] _________________________ represents both Lessor and Lessee ("Dual
Agency"). (Also see Paragraph 15.)
Initials: _________
---------
1
<PAGE>
(b) Payment to Brokers. Upon the execution of this Lease by
both Parties, Lessor shall pay to said Broker(s) jointly, or in such separate
shares as they may mutually designate in writing, a fee as set forth in a
separate written agreement between Lessor and said Broker(s) (or in the event
there is no separate written agreement between Lessor and said Broker(s), the
sum of $___________) for brokerage services rendered by said Broker(s) in
connection with this transaction.
1.10 Guarantor. The obligations of the lessee under this Lease are to
be_____________________ guaranteed by _______________________________
("Guarantor"). (Also see paragraph 37.)
2. Premises, Parking and Common Area.
2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used In calculating rental and/or Common Area Operating
Expenses, is an approximation which Lessor and Lessee agree is reasonable and
the rental and Lessee's Share (as defined in Paragraph 1.6(b)) based thereon is
not subject to revision whether or not the actual square footage is more or
less.
2.2 Condition. Lessor shall deliver the Premises to Lessee clean and
free of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, electrical systems, fire sprinkler system, lighting, air conditioning
and heating systems and loading doors, if any, in the Promises, other than those
constructed by Lessee, shall be In good operating condition an the Commencement
Date. If a non-compliance with said warranty exists as of the Commencement Date,
Lessor shall, except as otherwise provided in this Lease, promptly after receipt
of written notice from Lessee selling forth with specificity the nature and
extent of such noncompliance, rectify same at Lessor's expense. If Lessee does
not give Lessor written notice of a non-compliance with this warranty within
thirty (30) days after the Commencement Date, correction of that non-compliance
shall be the obligation of Lessee at Lessee's sole cost and expense.
2.3 Compliance with Covenants, Restrictions and Building Code. Lessor
warrants that any improvements (other than those constructed by Lessee or at
Lessee's direction) on or in the Premises which have been-constructed or
installed by Lessor or with Lessor's consent or at Lessor's direction shall
comply with all applicable covenants or restrictions of record and applicable
building codes, regulations and ordinances in effect on the Commencement Date.
Lessor further warrants to Lessee that Lessor has no knowledge of any claim
having been made by any governmental agency that a violation or violations of
applicable building codes, regulations, or ordinances exist with regard to the
Promises as of the Commencement Date. Said warranties shall not apply to any
Alterations or Utility Installations (defined in Paragraph 7.3(a)) made or to be
made by Lessee. If the Premises do not comply with said warranties, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee given within six (6) months following the
Commencement Date and setting forth with specificity the nature and extent of
such non-compliance, take such action, at Lessor's expense, as may be reasonable
or appropriate to rectify the non-compliance. Lessor makes no warranty that the
Permitted Use in Paragraph 1.8 is permitted for the Premises under Applicable
Laws (as defined in Paragraph 2.4).
2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that It has
been advised by the Broker(s) to satisfy itself with respect to the condition of
the Promises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, seismic and earthquake requirements,
and compliance with the Americans with Disabilities Act and applicable zoning,
municipal, county, state and federal laws, ordinances and regulations and any
covenants or restrictions of record (collectively, "Applicable Laws") and the
present and future suitability of the Premises for Lessee's intended use; lb)
that Lessee has made such investigation as ft deems necessary with reference to
such matters, is satisfied with reference thereto, and assumes all
responsibility therefore as the same relate to Lessee's occupancy of the
Promises and/or the terms of this Lease; and (c) that neither Lessor, nor any of
Lessor's agents, has made any oral or written representations or warranties with
respect to said matters other than as set forth in this Lease.
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2.5 Lessee as Prior Owner/Occupant. The warranties made by Lessor in
this Paragraph 2 shall be of no force or effect if immediately prior to the date
set forth in Paragraph 1.1 Lessee was the owner or occupant of the Promises. In
such event, Lessee shall, at Lessee's sole cost and expense, correct any
noncompliance of the Premises with said warranties.
2.6 Vehicle Parking. Lessee shall be entitled to use the number of
Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph
1.2(b) on those portions of the Common Areas designated from time to time by
Lessor for parking. Lessee shall not use more parking spaces than said number.
Said parking spaces shall be used for parking by vehicles no larger than
full-size passenger automobiles or pick-up trucks, herein called "Permitted Size
Vehicles." Vehicles other than Permitted Size Vehicles shall be parked and
loaded or unloaded as directed by Lessor in the Rules and Regulations (as
defined in Paragraph 40) issued by Lessor. (Also see Paragraph 2.9.)
(a) Lessee shall not permit or allow any vehicles that belong to
or are controlled by Lessee or Lessee's employees, suppliers, shippers,
customers, contractors or invites to be loaded, unloaded, or parked in areas
other than those designated by Lessor for such activities.
(b) If Lessee permits or allows any of the prohibited activities
described in this Paragraph 2.6, then Lessor shall have the right, without
notice, in addition to such other rights and remedies that it may have, to
remove or tow away the vehicle involved and charge the cost to Lessee, which
cost shall be immediately payable upon demand by Lessor.
(c) Lessor shall at the Commencement Date of this Lease, provide
the parking facilities required by Applicable Law.
2.7 Common Areas-Definition. The term "Common Areas" is defined as all
areas and facilities outside the Premises and within the exterior boundary line
of the Industrial Center and interior utility raceways within the Premises that
are provided and designated by the Lessor from time to time for the general
nonexclusive use of Lessor, Lessee and other lessees of the Industrial Center
and their respective employees, suppliers, shippers, customers, contractors-and
invites, Including parking areas, loading and unloading areas, trash areas,
roadways, sidewalks, walkways, parkways, driveways and landscaped areas.
2.8 Common Areas-Lessee's Rights. Lessor hereby grants to Lessee, for
the benefit of Lessee and its employees, suppliers, shippers, contractors,
customers and invites, during the term of this Lease, the non-exclusive right to
use, in common with others entitled to such use, the Common Areas as they exist
from time to time, subject to any rights, powers, and privileges reserved by
Lessor under the terms: hereof or under the terms of any rules and regulations
or restrictions governing the use of the Industrial Center. Under no
circumstances shall the right herein granted to use the Common Areas be deemed
to include the right to store any property, temporarily or permanently, in the
Common Areas. Any such storage shall be permitted only by the prior written
consent of Lessor or Lessor's designated agent, which consent may be revoked at
any time. In the event that any unauthorized storage shall occur then Lessor
shall have the right, without notice, in addition to such other rights and
remedies that it may have, to remove the property and charge the cost to Lessee,
which cost shall be immediately payable upon demand by Lessor.
2.9 Common Areas-Rules and Regulations. Lessor or such other person(s)
as Lessor may appoint shall have the exclusive control and management of the
Common Areas and shall have the right, from time to time, to establish, modify,
amend and enforce reasonable Rules and Regulations with respect thereto in
accordance with Paragraph 40. Lessee agrees to abide by and conform to all such
Rules and Regulations, and to cause its employees, suppliers, shippers,
customers, contractors and invites to so abide and conform. Lessor shall not be
responsible to Lessee for the non-compliance with said rules and regulations by
other lessees of the Industrial Center.
2.10 Common Area-Changes. Lessor shall ave the right, in Lessor's sole
discretion, from time to time:
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(a) To make changes to the Common Areas, including, without
limitation, changes in the location, size, shape and number of driveways,
entrances, parking spaces, parking areas, loading and unloading areas, ingress,
egress, direction of traffic, landscaped areas, walkways and utility raceways;
(b) To close temporarily, any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available;
(c) To designate other land outside the boundaries of the
Industrial Center to be a part of the Common Areas;
(d) To add additional buildings and improvements to the Common
Areas;
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the industrial Center, or any portion
thereof; and
(f) To do and perform such other acts and make such other changes
in, to or with respect to the Common Areas and Industrial Center as Lessor may,
in the exercise of sound business judgment, deem to be appropriate.
3. Term.
3.1 Term. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
3.2 Early Possession. If an Early Possession Date is specified in
Paragraph 1.4 and if Lessee totally or partially occupies the Premises after the
Early Possession Date but prior to the Commencement Date, the obligation to pay
Base Rent shall be abated for the period of such early occupancy. All other
terms of this Lease, however, (including but not limited to the obligations to
pay Lessee's Share of Common Area Operating Expenses and to carry the insurance
required by Paragraph 8) shall be in effect during such period. Any such early
possession shall not affect nor advance the Expiration Date of the Original
Term.
3.3 Delay In Possession. It for any reason Lessor cannot deliver
possession of the Premises to Lessee by the Early Possession Date, if one is
specified in Paragraph 1.4, or if no Early Possession Date is specified, by the
Commencement Date, Lessor shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Lease, or the obligations of
Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not,
except as otherwise provided herein, be obligated to pay rent or perform any
other obligation of Lessee under the terms of this Lease until Lessor delivers
possession of the Premises lo Lessee. If possession of the Premises is not
delivered to Lessee within sixty (60) days after the Commencement Date, Lessee
may, at its option, by notice in writing to Lessor within ten (10) days after
the end of said sixty (60) day period, cancel this Lease, in which event the
parties shall be discharged from all obligations hereunder; provided further,
however, that if such written notice of Lessee is not received by Lessor within
said ten (10) day period, Lessee's right to cancel this Lease hereunder shall
terminate arid be of no further force or effect. Except as may be otherwise
provided, and regardless of when the Original Term actually commences, if
possession is not tendered to Lessee when required by this Lease and Lessee does
not terminate this Lease, as aforesaid, the period free of the obligation to pay
Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the
date of delivery of possession and continue for a period equal to the period
during which the Lessee would have otherwise enjoyed under the terms hereof, bit
minus any days of delay caused by the acts, changes or omissions of Lessee.
4. Rent.
4.1 Base Rent. Lessee shall pay Base Rent and other rent or charges,
as the same may be adjusted from time to time, to Lessor in lawful money of the
United States, without offset or deduction, on or before the day on which it is
due under the terms of this Lease. Base Rent and all other rent and charges for
any period during the term hereof which is for
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less than one full month shall be prorated based upon the actual number of days
of the month involved. Payment of Base Rent and other charges shall be made to
Lessor at its address stated herein or to such other persons or at such other
addresses as Lessor may from time to time designate in writing to Lessee.
4.2 Common Area Operating Expenses. Lessee shall pay to Lessor during
the term hereof, in addition to the Base Rent, Lessee's Share (as specified in
Paragraph 1.6(b)) of all Common Area Operating Expenses, as hereinafter defined,
during each calendar year of the term of this Lease, in accordance with the
following provisions:
(a) "Common Area Operating Expenses" are defined, for purposes of
this Lease, as all costs incurred by Lessor relating to the ownership and
operation of the Industrial Center, including, but not limited to, the
following:
(i) The operation, repair and maintenance, in neat, clean,
good order and condition, of the following:
(aa) The Common Areas, including parking areas, loading
and unloading areas, trash areas, roadways, sidewalks, walkways, parkways,
drive-ways, landscaped areas, striping, bumpers, irrigation systems, Common Area
lighting facilities, fences and gates, elevators and roof.
(bb) Exterior signs and any tenant directories.
(cc) Fire detection and sprinkler systems.
(ii) The cost of water, gas, electricity and telephone to
service the Common Areas.
(iii) Trash disposal, property management and security
services and the costs of any environmental inspections.
(iv) Reserves set aside for maintenance and repair of Common
Areas.
(v) Any increase above the Base Real Property Taxes (as
defined in Paragraph 10.2(b)) for the Building and the Common Areas.
(vi) Any 'Insurance Cost Increase' (as defined in Paragraph
8.1).
(vii) The cost of insurance carried by Lessor with respect
to the Common Areas.
(viii) Any deductible portion of an insured loss concerning
the Building or the Common Areas.
(ix) Any other services to be provided by Lessor that are
stated elsewhere in this Lease to be a Common Area Operating Expense.
(b) Any Common Area Operating Expenses and Real Property Taxes
that are specifically attributable to the Building or to any other building In
the Industrial Center or to the operation, repair and maintenance thereof, shall
be allocated entirely to the Building or to such other building. However, any
Common Area Operating Expenses and Real Property Taxes that are not specifically
attributable to the Building or to any other building or to the operation,
repair and maintenance thereof; shall be equitably allocated by Lessor to all
buildings in the Industrial Center.
(c) The inclusion of the improvements, facilities and services
set forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation
Upon Lessor to either have said improvements or facilities or to provide those
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services unless the industrial Center already has the same, Lessor already
provides the services, or Lessor has agreed elsewhere in this Lease to provide
the same or some of them.
(d) Lessee's Share of Common Area Operating Expenses shall be
payable by Lessee within ten (10) days after a reasonably detailed statement of
actual expenses is presented to Lessee by Lessor. At Lessor's option, however,
an amount may be estimated by Lessor from time to time of Lessee's Share of
annual Common Area Operating Expenses and the same shall be payable monthly or
quarterly, as Lessor shall designate, during each 12-month period of the Lease
term, on the same day as the Base Rent is due hereunder. Lessor shall deliver to
Lessee within sixty (60) days after the expiration of each calendar year a
reasonably detailed statement showing Lessee's Share of the actual Common Area
Operating Expenses incurred during the preceding year. If Lessee's payments
under this Paragraph 4.2(d) during said preceding year exceed Lessee's Share as
indicated on said statement, Lessee shall be credited the amount of such over-
payment against Lessee's Share of Common Area Operating Expenses next becoming
due. If Lessee's payments under this Paragraph 4.2(d) during said preceding year
were less than Lessee's Share as indicated on said statement, Lessee shall pay
to Lessor the amount of the deficiency within ten (1 0) days after delivery by
Lessor to Lessee of said statement.
5. Security Deposit. Lessee shall deposit with Lessor upon Lessee's execution
hereof the Security Deposit set forth In Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee falls
to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults
under this Lease (as defined In Paragraph 13.1), Lessor may use, apply or retain
all or any portion of said Security Deposit for the payment of any amount due
Lessor or to reimburse or compensate Lessor for any liability, cost, expense,
loss or damage (including attorneys' fees) which Lessor may suffer or incur by
reason thereof. If Lessor uses or applies all or any portion of said Security
Deposit, Lessee shall within ten (10) days after written request therefore
deposit monies with Lessor sufficient to restore said Security Deposit to the
full amount required by this Lease. Any time the Base Rent Increases during the
term of this Lease, Lessee shall, upon written request from Lessor, deposit
additional monies with Lessor as an addition to the Security Deposit so that the
total amount of the Security Deposit shall at all times bear the same proportion
to the then current Base Rent as the Initial Security Deposit bears to the
initial Base Rent set forth in Paragraph 1.5. Lessor shall not be required to
keep all or any part of the Security Deposit separate from Its general accounts.
Lessor shall, at the expiration or earlier termination of the term hereof and
after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option,
to the last assignee, if any, of Lessee's Interest herein), that portion of the
Security Deposit not used or applied by Lessor. Unless otherwise expressly
agreed In writing by Lessor, no part of the Security Deposit shall be considered
to be hold in trust, to bear interest or other Increment for its use, or to be
prepayment for any monies to be paid by Lessee under this Lease.
6. Use.
6.1 Permitted Use.
(a) Lessee shall use and occupy the Premises only for the
Permitted Use set forth in Paragraph 1.8, or any other legal use which is
reasonably comparable thereto, and for no other purpose. Lessee shall not use or
permit the use of the Premises in a manner that is unlawful, creates waste or a
nuisance, or that disturbs owners and/or occupants of, or causes damage to the
Premises or neighboring premises or properties.
(b) Lessor hereby agrees to not unreasonably withhold or delay
consent to any written request by Lessee, Lessee's assignees or subtenants, and
by prospective assignees and subtenants of Lessee, its assignees and subtenants,
for a modification of said Permitted Use, so long as the same will not impair
the structural Integrity of the improvements on the Premises or in the Building
or the mechanical or electrical systems therein, does not conflict with uses by
other lessees, Is not significantly more burdensome to the Premises or the
Building and the improvements thereon, and is otherwise permissible pursuant to
this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall within
five (5) business days after such request give a written notification of same,
which notice shall include an explanation of Lessor's reasonable objections to
the change in use.
6.2 Hazardous Substances.
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(a) Reportable Uses Require Consent. The term "Hazardous
Substance" as used in this Lease shall mean any product, substance, chemical,
material or waste whose presence, nature, quantity and for intensity of
existence, use, manufacture, disposal, transportation, spill, release or effect,
either by itself or In combination with other materials expected to be on the
Premises, is either: (i) potentially injurious lo the public health, safety or
welfare, the environment. or the Premises; (ii) regulated or monitored by any
governmental authority; or (iii) a basis for potential liability of Lessor to
any governmental agency or third party under any applicable statute or common
law theory. Hazardous Substance shall include, but not be limited to,
hydrocarbons, petroleum, gasoline, crude oil or any products or by-products
thereof. Lessee shall not engage in any activity in or about the Premises which
constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances
without the express prior written consent of Lessor and compliance in a timely
manner (at Lessee's sole cost and expense) with all Applicable Requirements (as
defined in Paragraph 6.3). "Reportable Use" shall mean (i) the installation or
use of any above or below ground storage tank, (ii) the generation, possession,
storage, use, transportation, or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice, registration or
business plan is required to be filed with, any governmental authority, and
(iii) the presence in, on or about the Premises of a Hazardous Substance with
respect to which any Applicable Laws require that a notice be given to persons
entering or occupying the Premises or neighboring properties. Notwithstanding
the foregoing, Lessee may, without Lessor's prior consent, but upon notice to
Lessor and in compliance with all Applicable Requirements, use any ordinary and
customary materials reasonably required to be used by Lessee in the normal
course of the Permitted Use, so long as such use is not a Reportable Use and
does not expose the Premises or neighboring properties to any meaningful risk of
contamination or damage or expose Lessor to any liability therefor. In addition,
Lessor may (but without any obligation to do so) condition its consent to any
Reportable Use of any Hazardous Substance by Lessee upon Lessee's giving Lessor
such additional assurances as Lessor, in its reasonable discretion, deems
necessary to protect itself, the public, the Premises and the environment
against damage, contamination or injury and/or liability therefor, including but
not limited to the installation (and, at Lessor's option, removal on or before
Lease expiration or earlier termination) of reasonably necessary protective
modifications to the Premises (such as concrete encasements) and/or the deposit
of an additional Security Deposit under Paragraph 5 hereof.
(b) Duty to Inform Lessor. If Lessee knows, or has
reasonable cause to believe, that a Hazardous Substance has come to be located
in, on, under or about the Premises or the Building, other than as previously
consented to by Lessor, Lessee shall immediately give Lessor written notice
thereof, together with a copy of any statement, report, notice, registration,
application, permit, business plan, license, claim, action, or proceeding given
to, or received from, any governmental authority or private party concerning the
presence, spill, release, discharge of, or exposure to, such Hazardous Substance
including but not limited to all such documents as may be involved in any
Reportable Use involving the Premises. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under or about the
Premises (including, without limitation, through the plumbing or sanitary sewer
system).
(c) Indemnification. Lessee shall indemnify, protect, defend
and hold Lessor, its agents, employees, lenders and ground lessor, if any, and
the Premises harmless from and against any and all damages, liabilities,
judgments, costs, claims, liens, expenses, penalties, loss of permits and
attorneys' and consultants' fees arising out of or involving any Hazardous
Substance brought onto the Premises by or for Lessee or by anyone under Lessee's
control. Lessee's obligations under this Paragraph 6.2(c) shall include, but not
be limited to, the effects of any contamination or injury to person, property or
the environment created or suffered by Lessee, and the cost of investigation
(including consultants' and attorneys' fees and testing), removal, remediation,
restoration and/or abatement thereof, or of any contamination therein involved,
and shall survive the expiration or earlier termination of this Lease. No
termination, cancellation or release agreement entered into by Lessor and Lessee
shall release Lessee from its obligations under this Lease with respect to
Hazardous Substances, unless specifically so agreed by Lessor in writing at the
time of such agreement.
6.3 Lessee's Compliance with Requirements. Lessee shall, at
Lessee's sole cost and expense, fully, diligently and in a timely manner, comply
with all "Applicable Requirements," which term is used in this Lease to mean all
laws, rules, regulations, ordinances, directives, covenants, easements and
restrictions of record, permits, the requirements of any applicable fire
insurance underwriter or rating bureau, and the recommendations of Lessor's
engineers and/or consultants, relating in any manner to the Premises (including
but not limited to matters pertaining to (i) industrial hygiene, (ii)
environmental conditions on, in, under or about the Premises, including soil and
groundwater conditions, and (iii) the
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use, generation, manufacture, production, installation, maintenance, removal,
transportation, storage, spill, or release of any Hazardous Substance), now in
effect or which may hereafter come into effect. Lessee shall, within five (5)
days after receipt of Lessor's written request, provide Lessor with copies of
all documents and information, including but not limited to permits,
registrations, manifests, applications, reports and certificates, evidencing
Lessee's compliance with any Applicable Requirements specified by Lessor, and
shall immediately upon receipt, notify Lessor in writing (with copies of any
documents involved) of any threatened or actual claim, notice, citation,
warning, complaint or report pertaining to or involving failure by Lessee or the
Premises to comply with any Applicable Requirements.
6.4 Inspection; Compliance with Law. Lessor, Lessor's agents,
employees, contractors and designated representatives, and the holders of any
mortgages, deeds of trust or ground leases on the Premises ("Lenders") shall
have the right to enter the Premises at any time in the case of an emergency,
and otherwise at reasonable times, for the purpose of inspecting the condition
of the Premises and for verifying compliance by Lessee with this Lease and all
Applicable Requirements (as defined in Paragraph 6.3), and Lessor shall be
entitled to employ experts and/or consultants in connection therewith to advise
Lessor with respect to Lessee's activities, including but not limited to
Lessee's installation, operation, use, monitoring, maintenance, or removal of
any Hazardous Substance on or from the Premises. The costs and expenses of any
such inspections shall be paid by the party requesting same, unless a Default or
Breach of this Lease by Lessee or a violation of Applicable Requirements or a
contamination, caused or materially contributed to by Lessee, is found to exist
or to be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In such case, Lessee shall upon request reimburse Lessor or
Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.
7. Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations.
7.1 Lessee's Obligations.
(a) Subject to the provisions of Paragraphs 2.2 (Condition),
2.3 (Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's
Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at
Lessee's sole cost and expense and at all times, keep the Premises and every
part thereof In good order, condition and repair (whether or not such portion of
the Promises requiring repair, or the means of repairing the same, are
reasonably or readily accessible to Lessee, and whether or not the need for such
repairs occurs as a result of Lessee's use, any prior use, the elements or the
age of such portion of the Promises), Including, without limiting the generality
of the foregoing, all equipment or facilities specifically serving the Promises,
such as plumbing, heating, air conditioning, ventilating, electrical, lighting
facilities, boilers, fired or unfired pressure vessels, fire hose connections if
within the Premises, fixtures, interior walls, interior surfaces of exterior
walls, ceilings, floors, windows, doors, plate glass, and skylights, but
excluding any items which are the responsibility of Lessor pursuant to paragraph
7.2 below. Lessee, in keeping the Premises in good order, condition and repair,
shall exercise and perform good maintenance practices. Lessee's obligations
shall include restorations, replacements or renewals when necessary to keep the
Premises and all improvements thereon or a pan thereof in good order, condition
and state of repair.
(b) Lessee shall, at Lessee's sole cost and expense, procure
and maintain a contract, with copies to Lessor, in customary form and substance
for and with a contractor specializing and experienced in the inspection,
maintenance and service of the heating, air conditioning and ventilation system
for the Premises. However, Lessor reserves the right, upon notice to Lessee, to
procure and maintain the contract for the heating, air conditioning and
ventilating systems, and I( Lessor so elects, Lessee shall reimburse Lessor,
upon demand, for the cost thereof.
(c) If Lessee fails to perform Lessee's obligations under
this Paragraph 7.1, Lessor may enter upon the Premises after ton (10) days'
prior written notice to Lessee (except in the case of an emergency, in which
case no notice shall be required), perform such obligations on Lessee's behalf,
and sublet Premises In good order, condition and repair, in accordance with
Paragraph 13.2 below.
7.2 Lessor's Obligations. Subject to the provisions of
Paragraphs 2-2 (Condition), 2.3 (Compliance with Covenants, Restrictions and
Building Code), 4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's
Obligations),
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9 (Damage or Destruction) and 14 (Condemnation), Lessor, subject to
reimbursement pursuant to Paragraph 4,2, shall keep in good order, condition and
repair the foundations, exterior walls, structural condition of interior bearing
walls, exterior roof, fire sprinkler and/or standpipe and hose (it located in
the Common Areas) or other automatic fire extinguishing system including fire
alarm and/or smoke detection systems and equipment fire hydrants, parking lots,
walkways, parkways, driveways, landscaping, fences, signs and utility systems
serving the Common Areas and all parts thereof, as well as providing the
services for which there is a Common Area Operating expense pursuant to
Paragraph 4.2. Lessor shall not be obligated to paint the exterior or interior
surfaces, exterior walls nor shall Lessor be obligated to maintain, repair or
replace windows, doors or plate glass of the Premises. Lessee expressly waives
the ____ of any statute now or hereafter in effect which would otherwise afford
Lessee the right to make repairs at Lessor's expense or to terminate this Lease
because of Lessor's failure to keep the Building, Industrial Center or Common
Areas in good order, condition and repair.
7.3 Utility Installations, Trade Fixtures, Alterations.
(a) Definitions; Consent Required. The term "Utility
Installations" is used in this Lease to refer to all air lines, power panels,
electrical distribution, security, fire protection system, communications
systems, lighting fixtures, heating, ventilating and air conditioning equipment,
plumbing, and fencing in, on or about the Premises. The term Trade Fixtures
shall mean Lessee's machinery and equipment which can be removed without doing
material damage to the Premises. The term "Alterations" shall mean any
modification of the improvements on the Premises which are provided by Lessor
under the terms of this Lease, other than Utility Installations or Trade
Fixtures Fixtures. "Lessee-Owner Alterations and/or Utility Installations" are
defined as Alterations and/or Utility installations made by Lessee that are not
yet owned by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make nor
cause to be made any Alterations or Utility installations in or, under or about
the Presmises without Lessor's prior written consent. Lessee may, however, make
non-structural Utility Installations to the interior of the Premises (excluding
the road) without Lessor's consent but upon notice to Lessor, so long as they
are not visible from the outside of the Premises, do not involve puncturing,
relocating or removing the roof or any existing walls, or changing or
interfering with the fire sprinkler or fire detection systems and the cumulative
cost thereof during the terms of this Lease as extended does not exceed
$2,500.00.
(b) Consent. Any Alterations or Utility Installations that
Lessee shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with detailed plans. All consents given by
Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent,
shall be deemed conditioned upon (i) Lessee's acquiring all applicable permits
required by governmental authorities; (ii) the furnishing of copies of such
permits together with a copy of the plans and specifications for the Alteration
or Utility Installation to Lessor prior to commencement of the work thereon; and
(iii) the compliance by Lessee with all conditions and said permits in a prompt
and expeditious manner. Any Alterations or Utility Installations by Lessee
during the term of this Lease shall be done in a good and workmanlike manner
with good and sufficient materials, and be in compliance with all Applicable
Requirements. Lessee shall promptly upon completion thereof furnish Lessor with
as built plans and specifications therefor. Lessor may, (but without obligation
to do so) condition its consent to any requested Alteration or Utility
Installation that costs $2,500.00 or more upon Lessee's providing Lessor with a
lien and completion bond in an amount equal to one and one-half times the
estimated costs of such Alteration or Utility Installation.
(c) Lien Protection. Lessee shall pay when due all claims
for labor or materials furnished or alleged to have been furnished to or for the
Lessee at or for use of the Premises; which claims are or may be secured by any
mechanic's or materialmen's lien against the Premises or any interest therein.
Lessee shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in, on, or about the Premises, and Lessor shall have
the right to post notices of non-responsibility, in or on the Premises as
provided by law. If Lessee shall, in good faith, contest the validity of any
such lien, claim or demand, than Lessee shall, at its sole expense, defend and
protect itself, Lessor and the Premises against the same and shall pay and
satisfy any such adverse judgment that may be rendered thereon before the
enforcement thereof against the Lessor or the Premises. If Lessor shall require,
Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount
equal to one and one half times the amount of such contested lien claim or
demand, indemnifying Lessor against liability for the same, as required by law
from the holding of the Premises from the effect of such lien or claim. In
addition, Lessor may require Lessee to pay Lessor's attorneys' fees and costs in
participating in such action if Lessor shall decide it is to its best interest
to do so.
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7.4 Ownership, Removal, Surrender and Restoration.
(a) Ownership. Subject to Lessor's right to require their
removal and to cause Lessee to become the owner thereof as hereinafter provided
in this Paragraph 7.4, all Alterations and and Utility Installations made to the
Premises by Lessee shall be the property of and owned by Lessee, but considered
a part of the Premises. Lessor may, at any time and at its option, elect in
writing to Lessee to be the owner of all or any specified part of the
Lessee-Owned Alterations and Utility Installations. Unless otherwise instructed
per Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and Utility
Installations shall, at the expiration or earlier termination of this Lease,
become the property of Lessor and remain upon the Premises and be surrendered
with the Premises by Lessee.
(b) Removal. Unless otherwise agreed in writing, Lessor may
require that any or all Lessee-Owned Alteration or Utility Installations be
removed by the expiration on earlier termination of this Lease, notwithstanding
that their installation may ave been consented to by Lessor. Lessor may require
the removal at any time of all or any part of any Alterations or Utility
Installations made without the required consent of Lessor.
(c) Surrender Restoration. Lessee shall surrender the
Premises by the end of the last day of the Lease term or any earlier termination
date, clean and free of debris and in good operating order, condition and state
of repair, ordinary wear and tear excepted. Ordinary wear and tear shall not
include any damage or deterioration that would have been prevented by good
maintenance practice or by Lessee performing all of its obligations under this
Lease. Except as otherwise agreed or specified herein, the Premises, as
surrendered, shall include the Alterations and Utility Installations. The
obligation of Lessee shall include the repair of any damage occasioned by the
installation, maintenance or removal of Lessee's Trade Fixtures, furnishings,
equipment, and Lessee-Owned Alterations and Utility Installations, as well as
the removal of any storage tank installed by or for Lessee, and the removal,
replacement, or remediation of any soil, material or ground water contaminated
by Lessee, all as may then be required by Applicable Requirements and/or good
practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall
be removed by Lessee subject to its obligation to repair and restore the
Premises per this Lease.
8. Insurance, Indemnity.
8.1 Payment of Premium Increases.
(a) As used herein, the term "Insurance Cost Increase" is
defined as an increase in the actual cost of the insurance applicable to the
Building and required to be carried by Lessor pursuant to Paragraphs 8.2(b),
8.3(a) and 8.3(b), ("Required Insurance"), over and above the Base Premium, as
hereinafter defined, calculated on an annual basis. "Insurance Cost Increase"
shall include, but not be limited to, requirements of the holder of a mortgage
or deed of trust covering the Premises, increased value of the Premises, and/or
a general premium rate increase. The term "Insurance Cost Increase" shall not,
however, include any premium increases resulting from the nature of the
occupancy of any other lessee of the Building. If the parties insert a dollar
amount in Paragraph 1.9, such amount shall be considered the "Base Premium." If
a dollar amount has not been inserted in Paragraph 1.9 and if the Building has
been previously occupied during the twelve (12) month period immediately
preceding the Commencement Date, the "Base Premium" shall be the annual premium
applicable to such twelve (12) month period. If the Building was not fully
occupied during such twelve (12) month period, the "Base Premium" shall be the
lowest annual premium reasonably obtainable for the Required Insurance increases
of the Commencement Date, assuming the most nominal use possible of the
Building. In no event, however, shall Lessee be responsible for any portion of
the premium cost attributable to liability insurance coverage in excess of
$1,000,000 procured under Paragraph 8.2(b).
(b) Lessor shall pay any Insurance Cost Increase to Lessor
pursuant to Paragraph 4.2. Premiums for policy periods commencing prior to, or
extending beyond, the term of this Lease shall be shall be incorporated to
coincide with the corresponding Commencement Date or Expiration Date.
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8.2 Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and keep in force
during the term of this Lease a Commercial General Liability policy of insurance
protecting Lessee, Lessor and any lender(s) whose names have been provided to
Lessee in writing (as additional insureds) against claims for bodily injury,
personal injury and property damaged based upon, involving or arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on an occurrence basis providing
single limit coverage in an amount not less than $1,000,000 per occurrence with
an "Additional Insured-Managers or Lessors of the Premises endorsement and
contain the "Amendment of the Pollution Exclusion" endorsement for damage caused
by heat, smoke or fumes from a hostile fire. The policy shall not contain any
intra-insured exclusions as between insured persons or organizations, but shall
include coverage for liability assumed under this Lease as an "Insured contract"
for the performance of Lessee's indemnity obligation sunder this Lease. The
limits of said insurance liability assumed under this Lease or as carried by
Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of
any obligation hereunder. All insurance to be required by this Lease or as
carried by Lessee shall be primary to and not contributory with any similar
insurance carried by Lessor, whose insurance shall be considered excess
insurance only.
(b) Carried by Lessor. Lessor shall also maintain liability
insurance described in Paragraph 8.2(a) above, in addition to and not in lieu
of, the insurance required to be maintained by Lessee. Lessee shall not be named
as an additional insured therein.
8.3 Property Insurance Building, Improvements and Rental Value.
(a) Building and Improvements. Lessor shall obtain and keep
in force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and to any lender(s) insuring against loss
or damage to the Premises. Such insurance shall be for full replacement cost, as
the same shall exist form time to time, or the amount required by any Lender(s),
but in no event more than the commercially reasonable and available insurable
value thereof if, by reason of the unique nature or age of the improvements
involved, such latter amount is less than full replacement cost. Lessee-Owned
Alterations and Utility Installations, Trade Fixtures and Lessee's personal
property shall be insured by Lessee pursuant to Paragraph 8.4. If the coverage
is available and commercially appropriate, Lessor's policy or policies shall
insure against all risks of direct physical loss or damage (except the perils of
flood and/or earthquake unless required by a Lender or included in the Base
Premium), including coverage for any additional costs resulting from debris
removal and reasonable amount of coverage for the enforcement of any ordinance
or law regulating the reconstruction or replacement of any undamaged sections of
the Building required to be demolished or removed by reason of the enforcement
of any building, zoning, safety or land use laws as the result of a covered
loss, but not including plate glass insurance. Said policy or policies shall
also contain an agreed valuation provision in lieu of any co-insurance clause,
waiver of subrogation, and inflation guard protection causing an increase in the
annual property insurance coverage amount by a factor of not less than the
adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers
for the city nearest to where the Premises are located.
(b) Rental Value. Lessor shall also obtain and keep in force
during the term of this Lease a policy or policies in the name of Lessor, with
loss payable to Lessor and any Lender(s), insuring the loss of the full rental
and other charges payable by all lessees of the Building to Lessor for one year
(including all Real Property Taxes, insurance costs, all Common Area Operating
Expenses and any scheduled rental increases). Said insurance may provide that in
the event the Lease is terminated by reason of an insured loss, the period of
indemnity for such coverage shall be extended beyond the date of the completion
of repairs or replacement of the Premises, to provide for a full year's loss of
rental revenues form the date of any such loss. Said insurance shall contain an
agreed valuation provision in lieu of any co-insurance clause, and the amount of
coverage shall be adjusted annually to reflect the projected rental income, Real
Property Taxes, insurance premium costs and other expenses, if any, otherwise
payable, for the next 12-month period. Common Area Operating Expenses shall
include any deductible amount in the event of such losses.
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(c) Adjacent Premises. Lessee shall pay for any increase in
the premiums for the property insurance of the Building and for the Common Areas
or other buildings in the Industrial Center if said increase is caused by
Lessee's acts, omissions, use or occupancy of the Premises.
(d) Lessee's Improvements. Since Lessor Is the Insuring
Party, Lessor shall not be required to Insure Lessee-Owned Alterations and
Utility lnstallations unless the Item In question has become the property of
Lessor under the terms of this Lease.
8.4 Lessee's Property Insurance. Subject to the requirements of
Paragraph 8.5, Lessee at Its cost shall either by separate policy or, at
Lessor's option, by endorsement to a policy already carried, maintain insurance
coverage on all of Lessee's personal property, Trade Fixtures and Lessee-Owned
Alterations and Utility Installations in, on, or about the Premises similar In
coverage to that carried by Lessor as the Insuring Party under Paragraph 8.3(a).
Such Insurance shall be full replacement cost coverage with a deductible not to
exceed $1,000 per occurrence. The proceeds from any such Insurance shall be used
by Lessee for the replacement of personal property and the restoration of Trade
Fixtures and Lessee- Owned Alterations and Utility Installations. Upon request
from Lessor, Lessee shall provide Lessor with written evidence that such
Insurance is In force.
8.5 Insurance Policies. Insurance required hereunder shall be In
companies duly licensed to transact business in the state where the Premises are
located, and maintaining during the policy term a 'General Policyholders Rating'
of at least B+, V, or such other rating as may be required by a Lender, as set
forth In the most current Issue of 'Best's Insurance Guide.' Lessee shall not do
or permit to be done anything which shall invalidate the Insurance policies
referred to In this Paragraph 8. Lessee shall cause to be delivered to Lessor,
within seven (7) days after the earlier of the Early Possession Date or the
Commencement Date, certified copies of, or certificates evidencing the existence
and amounts of, the Insurance required under Paragraph 8.2(a) and 8.4. No such
policy shall be cancelable or subject to modification except after thirty (30)
days' prior written notice to Lessor. Lessee shall at least thirty (30) days
prior to the expiration of such policies, furnish Lessor with evidence of
renewals or 'Insurance binders' evidencing renewal thereof, or Lessor may order
such insurance and charge the cost thereof to Lessee, which amount shall be
payable by Lessee to Lessor upon demand.
8.6 Waiver of Subrogation. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and waive
their entire right to recover damages (whether In contract or in tort) against
the other, for loss or damage to their property arising out of or incident to
the perils required to be Insured against under Paragraph 8. The effect of such
releases and waivers of the right to recover damages shall not be limited by the
amount of Insurance carried or required, or by any deductibles applicable
thereto. Lessor and Lessee agree to have their respective insurance companies
issuing property damage Insurance waive any right to subrogation that such
companies may have against Lessor or Lessee, as the case may be, so long as the
insurance is not invalidated thereby.
8.7 Indemnity. Except for Lessor's negligence and/or breach of express
warranties, Lessee shall Indemnity, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, loss of permits, attorneys' and consultants'
fees, expenses and/or liabilities arising out of, Involving, or in connection
with, the occupancy of the Premises by Lessee, the conduct of Lessee's business,
any act, omission or neglect of Lessee, its agents, contractors, employees or
invites, and out of any Default or Breach by Lessee in the performance in a
timely manner of any obligation on Lessee's part to be performed cinder this
Lease. The foregoing shall include, but not be limited to, the defense or
pursuit of any claim or any action or proceeding involved therein, and whether
or not (in the case of claims made against Lessor) litigated and/or reduced to
judgment. In case any action or proceeding be brought against Lessor by reason
of any of the foregoing matters, Lessee upon notice from Lessor shall defend the
same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor
shall cooperate with Lessee In such defense. Lessor need not have first paid any
such claim in order to be so indemnified.
8.8 Exemption of Lessor from Liability. Lessor shall not be
liable for injury or damage to the person or goods, wares' merchandise or other
property of Lessee, Lessee's employees, contractors, invites, customers, or any
other
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person in or about the Promises, whether such damage or injury is caused by or
results from fire, steam. electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any other
cause, whether said injury or damage results from conditions arising upon the
Promises or upon other portions of the Building of which the Premises are a
part, from other sources or places, and regardless of whether the cause of such
damage or injury or the means of repairing the same is accessible or not. Lessor
shall not be liable for any damages arising from any act or neglect of any other
lessee of Lessor nor from the failure by Lessor to enforce the provisions of any
other lease in the Industrial Center. Notwithstanding Lessor's negligence or
breach of this Lease, Lessor shall under no circumstances be liable for injury
to Lessee's business or for any loss of income or profit therefrom.
9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Partial Damage" shall mean damage or
destruction to the Promises, other than Lessee-Owned Alterations and Utility
Installations, the repair cost of which damage or destruction is less than fifty
percent (50%) of the then Replacement Cost (as defined in Paragraph 9.1 (d)) of
the Promises (excluding Lessee-Owned Alterations and Utility Installations and
Trade Fixtures) immediately prior to such damage or destruction.
(b) "Premises Total Destruction" shall mean damage or
destruction to the Premises, other than Lessee-Owned Alterations and Utility
Installations, the repair cost of which damage or destruction is fifty percent
(50%) or more of the then Replacement Cost of the Premises (excluding
Lessee-Owned Alterations and Utility Installations and Trade Fixtures)
immediately prior to such damage or destruction. In addition, damage or
destruction to the Building, other than Lessee-Owned Alterations and Utility
Installations and Trade Fixtures of any lessees of the Building, the cost of
which damage or destruction is fifty percent (50%) or more of the then
Replacement Cost (excluding Lessee-Owned Alterations and Utility Installations
and Trade Fixtures of any lessees of the Building) of the Building shall, at the
option of Lessor, be deemed to be Premises Total Destruction.
(c) "Insured Loss" shall mean damage or destruction to the
Premises, other than Lessee-Owned Alterations and Utility Installations and
Trade Fixtures, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a) irrespective of any deductible amounts
or coverage limits involved.
(d) "Replacement Cost" shall mean the cost to repair or
rebuild the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of applicable building codes,
ordinances or laws, and without deduction for depreciation.
(e) "Hazardous Substance Condition" shall mean the
occurrence or discovery of a condition involving the presence of, or a
contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on,
or under the Premises.
9.2 Premises Partial Damage-Insured Loss. If Premises Partial Damage
that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair
such damage (but not Lessee's Trade Fixtures or Lessee-Owned Alterations and
Utility Installations) as soon as reasonably possible and this Lease shall
continue in full force and effect. In the event, however, that there is a
shortage of insurance proceeds and such shortage is due to the fact that, by
reason of the unique nature of the improvements in the Premises, full
replacement cost insurance coverage was not commercially reasonable and
available, Lessor shall have no obligation to pay for the shortage in insurance
proceeds or to fully restore the unique aspects of the Premises unless Lessee
provides Lessor with the funds to cover same, or adequate assurance thereof,
within ten (10) days following receipt of written notice of such shortage and
request therefor. If Lessor receives said funds or adequate assurance thereof
within said ten (1 0) day period, Lessor shall complete them as soon as
reasonably possible and this Lease shall remain in full force and effect. If
Lessor does not receive such funds or assurance within said period, Lessor may
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nevertheless elect by written notice to Lessee within ten (10) days thereafter
lo make such restoration and repair as is commercially reasonable with Lessor
paying any shortage in proceeds, in which case this Lease shall remain in full
force and effect. It Lessor does not receive such funds or assurance within such
ten (10) day period, and if Lessor does not so elect to restore and repair, then
this Lease shall terminate sixty (60) days following the occurrence of the
damage or destruction. Unless otherwise agreed, Lessee shall in no event have
any right to reimbursement from Lessor for any funds contributed by Lessee to
repair any such damage or destruction. Premises Partial Damage due to flood or
earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2,
notwithstanding that there may be some insurance coverage, but the not proceeds
of any such Insurance shall be made available for the repairs if made by either
Party.
9.3 Partial Damage-Uninsured Loss. If Premises Partial Damage that is
not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect), Lessor may at Lessor's
option, either (i) repair such damage as soon as reasonably possible at Lessor's
expense, in which event this Lease shall continue in full force and effect, or
(ii) give written notice to Lessee within thirty (30) days after receipt by
Lessor of knowledge of the occurrence of such damage of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the date of such
notice. In the event Lessor elects to give such notice of Lessors intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
lo pay for the repair of such damage totally at Lessee's expense and without
reimbursement from Lessor. Lessee shall provide Lessor with the required funds
or satisfactory assurance thereof within thirty (30) days following such
commitment from Lessee. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such repairs as soon as reasonably
possible after the required funds are available. If Lessee does not give such
notice and provide the funds or assurance thereof within the times specified
above, this Lease shall terminate as of the date specified in Lessor's notice of
termination.
9.4 Total Destruction. Notwithstanding any other provision hereof, if
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction Is an Insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 9.7.
9.5 Damage Near End of Term. If at any time during the last six (6)
months of the term of this Lease there is damage for which the cost to repair
exceeds one month's Base Rent, whether or not an Insured Loss, Lessor may, at
Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, it Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by (a) exercising such option, and (b) providing Lessor with any shortage
in insurance proceeds (or adequate assurance thereof) needed to make the repairs
on or before the earlier of (i) the date which Is ten (10) days after Lessee's
receipt of Lessor's written notice purporting to terminate this Lease, or (ii)
the day prior to the date upon which such option expires. If Lessee duly
exercises such option during such period and provides Lessor with funds (or
adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor
shall, at Lessor's expense repair such damage as soon as reasonably possible and
this Lease shall continue In full force and effect. If Lessee fails to exercise
such option and provide such funds or assurance during such period, then this
Lease shall terminate as of the date set forth In the first sentence of this
Paragraph 9.5.
9.6 Abatement of Rent; Lessee's Remedies.
(a) In the event of (i) Premises Partial Damage or (ii)
Hazardous Substance Condition for which Lessee is not legally responsible, the
Base Rent, Common Area Operating Expenses and other charges, if any, payable by
Lessee hereunder for the period during which such damage or condition, its
repair, remediation or restoration continues, shall be abated in -proportion to
the degree to which Lessee's use of the Premises is impaired, but not in excess
of proceeds from insurance required to be carried under Paragraph 8.3(b). Except
for abatement of Base Rent, Common Area Operating Expenses and other charges, if
any, as aforesaid, all other obligations of Lessee hereunder shall be performed
by Lessee, and
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Lessee shall have no claim against Lessor for any damage suffered by reason of
any such damage, destruction, repair, remediation or restoration.
(b) If Lessor shall be obligated to repair or restore the
Premises under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises within
ninety (90) days after such obligation shall accrue, Lessee may, at any time
prior to the commencement of such repair or restoration, give written notice to
Lessor and to any Lenders of which Lessee has actual notice of Lessee's election
to terminate this Lease on a date not less than sixty (60) days following the
giving of such notice. If Lessee gives such notice to Lessor and such lender and
such repair or restoration is not commenced within thirty (30) days after
receipt of such notice, this Lease shall terminate as of the date specified in
said notice. If Lessor or a Lender commences the repair or restoration of the
Premises within thirty (30) days after the receipt of such notice, this Lease
shall continue in full force and effect. "Commences" as used in this Paragraph
9.6 shall mean either the unconditional authorization of the preparation of the
required plans, or the beginning of the actual work on the Premises, whichever
occurs first.
9.7 Hazardous Substance Conditions. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable
Requirements and this Lease shall continue in full force and effect, but subject
to Lessor's rights under Paragraph 6.2(c) and Paragraph 13), Lessor may at
Lessor's option either (i) investigate and remediate such Hazardous Substance
Condition, if required, as soon as reasonably possible at Lessor's expense, in
which event this Lease shall continue in full force and effect, or (ii) if the
estimated cost to investigate and remediate such condition exceeds twelve (12)
time the then monthly Base Rent of $100,000 whichever is greater, give written
notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of
the occurrence of such Hazardous Substance Condition of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the date of such
notice. In the event Lessor elects to give such notice of lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
to pay for the excess costs of (a)investigation and remediation of such
Hazardous Substance Condition to the extent required by Applicable Requirements,
over (b) an amount equal to twelve (12) times the then monthly Base Rent or
$100,000, whichever is greater. Lessee shall provide Lessor with the funds
required of Lessee or satisfactory assurance thereof within thirty (30) days
following said commitment by Lessee. In such event this Lease shall continue in
full force and effect, and Lessor shall proceed to make such investigation and
remediation as soon as reasonably possible after the required funds are
available. If Lessee does not give such notice and provide the required funds or
assurance thereof within the time period specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.8 Termination-Advance Payments. Upon termination of this Lease
pursuant to this Paragraph 9, Lessor shall return to Lessee any advance payment
made by Lessee to Lessor and so much of Lessee's Security Deposit as has not
been, or is not then required to be, used by Lessor under the terms of this
Lease.
9.9 Waiver of Statutes. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
and the Building with respect to the termination of this Lease and hereby waive
the provisions of any present or future statute to the extent it is inconsistent
herewith.
10. Real Property Taxes.
10.1 Payment of Taxes. Lessor shall pay the Real Property Taxes, as
defined in Paragraph 10.2(a), applicable to the Industrial Center, and except as
otherwise provided in Paragraph 10.3, any increases in such amounts over the
Base Real Property Taxes shall be included in the calculation of Common Area
Operating Expenses in accordance with the provisions of Paragraph 4.2.
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10.2 Real Property Tax Definitions.
(a) As used herein, the term "Real Property Taxes" shall
include any form of real estate tax or assessment, general, special, ordinary or
extraordinary, and any license fee, commercial rental tax, improvement bond or
bonds, levy or tax (other than inheritance, personal income or estate taxes)
imposed upon the Industrial Center by any authority having the direct or
indirect power to tax, including any city, state or federal government, or any
school, agricultural, sanitary, fire, street, drainage, or other improvement
district thereof, levied against any legal or equitable interest of Lessor in
the Industrial Center or any portion thereof, Lessor's right to rent or other
income therefrom, and/or Lessor's business of leasing the Premises. The term
"Real Property Taxes" shall also include any tax, fee, levy, assessment or
charge, or any increase therein, imposed by reason of events occurring, or
changes in Applicable Law taking effect, during the term of this Lease,
including but not limited to a change in the ownership of the Industrial Center
or in the improvements thereof,, the execution of this Lease, or any
modification, amendment or transfer thereof, and whether or not contemplated by
the Parties.
(b) As used herein, the term "Base Real Property Taxes"
shall be the amount of Real Property Taxes, which are assessed against the
Premises, Building or Common Areas in the calendar year during which the Lease
is executed. In calculating Real Property Taxes for any calendar year, the Real
Property Taxes for any real estate tax year shall be included in the calculation
of Real Property Taxes for such calendar year based upon the number of days
which such calendar year and tax year have in common.
10.3 Additional Improvements. Common Area Operating Expenses shall not
include Real Property Taxes specified in the tax assessor's records and
worksheets as being caused by additional improvements placed upon the Industrial
Center by other lessees or by Lessor for the exclusive enjoyment of such other
lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to
Lessor at the time Common Area Operating Expenses are payable under Paragraph
4.2, the entirety of any increase in Real Property Taxes if assessed solely by
reason of Alterations, Trade Fixtures or Utility Installations placed upon the
Premises by Lessee or at Lessee's request.
10.4 Joint Assessment. If the Building is not separately assessed, Real
Property Taxes allocated to the Building shall be an equitable proportion of the
Real Property Taxes for all of the land and improvements included within the tax
parcel assessed, such proportion to be determined by Lessor from the respective
valuations assigned in the assessor's worksheets or such other information as
may be reasonably available. Lessor's reasonable determination thereof, in good
faith, shall be conclusive.
10.5 Lessee's Property Taxes. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or stored within the Industrial Center. When
possible, Lessee shall cause its Lessee- Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all other personal
property to the assessed and billed separately from the real property of Lessor.
If any of the Lessee's said property shall be assessed with Lessor's real
property, Lessee shall pay Lessor the taxes attributable to Lessee's property
within ten (10) days after receipt of a written statement setting forth the
taxes applicable to Lessee's property.
11. Utilities. Lessee shall pay directly for all utilities and services supplied
to the Premises, including but not limited to electricity, telephone, security,
gas and cleaning of the Premises, together with any taxes thereon. If any such
utilities or services are not separately metered to the Premises or separately
billed to the Premises, Lessee shall pay to Lessor a reasonable proportion to be
determined by Lessor of all such charges jointly metered or billed with other
premises in the Building, in the manner and within the time periods set forth in
Paragraph 4.2(d).
12. Assignment and Subletting.
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12.1 Lessor's Consent Required.
(a) Lessee shall not voluntarily or by operation of law
assign, mortgage or otherwise transfer or encumber (collectively, "assign") or
sublet all or any part of Lessee's interest in this Lease or in the Premises
without Lessor's prior written consent given under and subject to the terms of
Paragraph 36.
(b) A change in the control of Lessee shall constitute an
assignment requiring Lessor's consent. The transfer, on a cumulative basis, of
twenty-five percent (25%) or more of the voting control of Lessee shall
constitute a change in control for this purpose.
(c) The involvement of Lessee or its assets in any
transaction, or series of transactions by way of merger, sale, acquisition,
financing, refinancing, transfer, leveraged buy-out or otherwise), whether or
not a formal assignment or hypothecation of this Lease or Lessee's assets
occurs, which results or will result in a reduction of the Net Worth of Lessee,
as hereinafter defined, by an amount equal to or greater than twenty-five
percent (25%) of such Net Worth of Lessee as it was represented to Lessor at the
time of full execution and delivery of this Lease or at the time of the most
recent assignment to which Lessor has consented, or as it exits immediately
prior to said transactions constituting such reduction, at whichever time said
Net Worth of Lessee was or is greater, shall be considered an assignment of this
Lease by Lessee to which Lessor may reasonably withhold its consent. "Net Worth
of Lessee" for purposes of this Lease shall be the net worth of Lessee
(excluding any Guarantors) established under generally accepted accounting
principles consistently applied.
(d) An assignment or subletting of Lessee's interest in this
Lease without Lessor's specific prior written consent shall, at Lessor's option,
be a Default curable after notice per Paragraph 13.1 or a non-curable Breach
without the necessity of any notice and grace period. If Lessor elects to treat
such unconsented to assignment or subletting as a non-curable Breach, Lessor
shall have the right to either: (i) terminate this Lease, or (ii) upon thirty
(30) days' written notice ("Lessor's Notice"), increase the monthly Base Rent
for the Premises to the greater of the then fair market rental value for the
Premises, as reasonably determined by Lessor, or one hundred ten percent (110%
for the Base Rent then in effect. Pending determination of the new fair market
rental value, if disputed by Lessee, Lessee shall play the amount set forth in
Lessor's Notice, with any overpayment credited against the next installment(s)
of Base Rent coming due, and any underpayment for the period retroactively to
the effective date of the adjustment being due and payable immediately upon the
determination thereof. Further, in the event of such Breach and rental
adjustment, (i) the purchase price of any option to purchase the Premises held
by Lessee shall be subject to similar adjustment to the then fair market value
as reasonably determined by Lessor (without the Lease being considered an
encumbrance or any deduction for deprecation or obsolescence, and considering
the Premises at his highest and best use and in good condition) or one hundred
ten percent (110%) of the price previously in effect, (ii) any index-oriented
rental or price adjustment formulas contained in this Lease shall be adjusted to
require that the base index be determined with reference to the index applicable
to the time of such adjustment, and (iii) any fixed rental adjustments scheduled
during the remainder of the Lease term shall be increased in the same ratio as
the new rental bears to the Base Rent in effect immediately prior to the
adjustment specified in Lessor's Notice.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by
Lessor shall be limited to compensatory damages and/or injunctive relief.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, any assignment or
subletting shall not (i) be effective without the express written assumption by
such assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, nor (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's
obligations from any persons other than Lessee pending approval or disapproval
of an assignment. Neither a delay in the approval or disapproval of such
assignment
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nor the acceptance of any rent for performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting
shall not constitute a consent to any subsequent assignment or subletting by
Lessee or to any subsequent or successive assignment or subletting by the
assignee or sublessee. However, Lessor may consent to subsequent subletting and
assignments of the sublease or any amendment or modifications thereto without
notifying Lessee or anyone else liable under this Lease or the sublease and
without obtaining their consent, and such action shall not relieve such persons
from liability under this Lease or the sublease.
(d) In the event of any Default or Breach of Lessee's
obligation under this Lease, Lessor may proceed directly against Lessee, any
Guarantors or anyone else responsible for the performance of the Lessee's
obligations under this Lease, including any sublessee, without first exhausting
Lessor's remedies against any other person or entity responsible therefor to
Lessor, or any security held by Lessor.
(e) Each request for consent to an assignment or subletting
shall be In writing, accompanied by information relevant to Lessor's
determination as to the financial and operational responsibility and
appropriateness of the proposed assignee or sublessee, Including but not limited
to the intended use and/or required modification of the Premises, if any,
together with a non-refundable deposit of $1,000 or ten percent (10%) of the
monthly Base Rent applicable to the portion of the Premises which is the subject
of the proposed assignment or sublease, whichever is greater, as reasonable
consideration for Lessor's considering and processing the request for consent.
Lessee agrees to provide Lessor with such other or additional information and/or
documentation as may be reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall,
by reason of accepting such assignment or entering Into such sublease, be
deemed, for the benefit of Lessor, to have assumed and agreed to conform and
comply with each and every term, covenant, condition and obligation herein to be
observed or performed by Lessee during the term of said assignment or sublease,
other than such obligations as are contrary to or Inconsistent with provisions
of an assignment or sublease to which Lessor has specifically consented in
writing.
(g) The occurrence of a transaction described in Paragraph
12.2(c) shall give Lessor the right (but not the obligation) to require that the
Security Deposit be increased by an amount equal to six (6) times the then
monthly Bass Rent, and Lessor may make the actual receipt by Lessor of the
Security Deposit Increase a condition to Lessor's consent to such transaction.
(h) Lessor, as a condition to giving Its consent to any
assignment or subletting, may require that the amount and adjustment schedule of
the rent payable under this Lease be adjusted to what is then the market value
and/or adjustment schedule for property similar to the Premises as then
contributed, as. determined by Lessor.
12.3 Additional Terms and Conditions Applicable to Subletting. The
following terms and conditions shall apply to any subletting by Lessee of all or
airy part of the Premises and shall be deemed Included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of
Lessee's Interest in all rentals and Income arising from any sublease of all or
a portion of the Promises heretofore or hereafter made by Lessee, and Lessor may
collect such rent and income and apply same toward Lessee's obligations under
this Lease; provided, however, that until a Breach (as defined In Paragraph
13.1) shall occur in the performance of Lessee's obligations under this Lease,
Lessee may, except as otherwise provided in this Lease, receive, collect and
enjoy the rents accruing under such sublease. Lessor shall not, by reason of the
foregoing provision or any other assignment of such sublease to Lessor, nor by
reason of the collection of the rents from a sublessee, be deemed liable to the
sublessee for any failure of Losses to perform and comply with any of Lessee's
obligations to such subleases under such Sublease. Lessee hereby irrevocably
authorizes and directs any such subleases, upon receipt of a written notice from
Lessor stating that a Breach exists in the performance of Lessee's obligations
under this Lease, to pay to Lessor the rents and other charges due and to become
due under the sublease. Sublessee shall rely upon any such statement and request
from Lessor and shall pay such rents and other charges to Lessor without any
obligation or
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right to inquire as to whether such Breach exists and notwithstanding any notice
from or claim from Lessee to the contrary. Lessee shall have no right or claim
against such subleases, or, until the Breach has been cured, against Lessor, for
any such rents and other charges so paid by said subleases to Lessor.
(b) In the event of a Breach by Lessee in the performance of
its obligations under this Lease, Lessor, at its option and without any
obligation to do so, may require any subleases to attorn to Lessor, In which
event Lessor shall undertake the obligations of the sublessor under such
sublease from the time of the exercise of said option to the expiration of such
sublease; provided, however, Lessor shall not be liable for any prepaid rents or
security deposit paid by such sub lessee to such sublessor or for any other
prior defaults or breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the
sublessor under a sublease shall also require the consent of Lessor herein.
(d) No subleases under a sublease approved by Lessor shall
further assign or sublet all or any part of the Premises without Lessors prior
written consent.
(e) Lessor shall deliver a copy of any notice of Default or
Breach by Lessee to the subleases, who shall have the right to cure the Default
of Lessee within the grace period, if any, specified in such notice. The
subleases shall have a right of reimbursement and offset from and against Lessee
for any such Defaults cured by the subleases.
13. Default; Breach; Remedies.
13.1 Default; Breach. Lessor and Lessee agree that if an attorney
is consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in said
notice as rent due and payable to cure said default. A "Default" by Lessee is
defined as a failure by Lessee to observe, comply with or perform any of the
terms, covenants, conditions or rules applicable to Lessee under this Lease. A
"Breach" by Lessee is defined as the occurrence of any one or more of the
following Defaults, and, where a grace period for cure after notice is specified
herein, the failure by Lessee to cure such Default prior to the expiration of
the applicable grace period, and shall entitle Lessor to pursue the remedies set
forth in Paragraphs 13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to
reoccupy same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease,
the failure by Lessee to make any payment of Base Rent, Lessee's Share of Common
Area Operating Expenses, or any other monetary payment required to be made by
Lessee hereunder as and when due, the failure by Lessee to provide Lessor with
reasonable evidence of insurance or surety bond required under this Lease, or
the failure of Lessee to fulfill any obligation under this Lease which endangers
or threatens life or property, where such failure continues for a period of
three (3) days following written notice thereof by or on behalf of Lessor to
Lessee.
(c) Except as expressly otherwise provided in this Lease,
the failure by Lessee to provide Lessor with reasonable written evidence (in
duly executed original form, if applicable) of (i) compliance with Applicable
Requirements per Paragraph 6.3, (ii) the inspection, maintenance and service
contracts required under Paragraph 7.1 (b), (iii) the rescission of an
unauthorized assignment or subletting per Paragraph 12. 1, (iv) a Tenancy
Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of
this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's
obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the
execution of any document requested under Paragraph 42 (easements), or (viii)
any other documentation or information which Lessor may reasonably require of
Lessee under the terms of this lease, where any such failure continues for a
period of ten (10) days following written notice by or on behalf of Lessor to
Lessee.
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(d) A Default by Lessee as to the terms, covenants,
conditions or provisions of this Lease, or of the rules adopted under Paragraph
40 hereof that are to be observed, complied with or performed by Lessee, other
than those described in Subparagraphs 13.1 (a), (b) or (c), above, where such
Default continues for a period of thirty (30) days after written notice thereof
by or on behalf of Lessor to Lessee; provided, however, that if the nature of
Lessee's Default is such that more than thirty (30) days are reasonably required
for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee
if Lessee commences such cure within said thirty (30) day period and thereafter
diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the
making by Lessee of any general arrangement or assignment for the benefit of
creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code Section
101 or any successor statute thereto (unless, in the case of a petition filed
against Lessee, the same is dismissed within sixty (60) days); (iii) the
appointment of a trustee or receiver to take possession of substantially all of
Lessee's assets located at the Premises or of Lessee's interest in this Lease,
where possession is not restored to Lessee within thirty (30) days; or (iv) the
attachment, execution or other judicial seizure of substantially all of Lessee's
assets located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within thirty (30) days: provided, however, in the
event that any provision of this Subparagraph 13.1 (a) is contrary to any
applicable law, such provision shall be of no force or effect, and shall not
affect the validity of the remaining provisions.
(f) The discovery by Lessor that any financial statement of
Lessee or of any Guarantor, given to Lessor by Lessee or any Guarantor, was
materially false.
(g) If the performance of Lessee's obligations under this
Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a
Guarantor's liability with respect to this Lease other than in accordance with
the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the
subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the
guaranty, or (v) a Guarantor's breach of its guaranty obligation on an
anticipatory breach basis, and Lessee's failure, within sixty (60) days
following written notice by or on behalf of Lessor to Lessee of any such event,
to provide Lessor with written alternative assurances of security, which, when
coupled with the then existing resources of Lessee, equals or exceeds the
combined financial resources of Lessee and the Guarantors that existed at the
time of execution of this Lease.
13.2 Remedies. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written notice
to Lessee (or in case of an emergency, without notice), Lessor may at its option
(but without obligation to do so), perform such duty or obligation on Lessee's
behalf, including but not limited to the obtaining of reasonably required bonds,
insurance policies, or governmental licenses, permits or approvals. The costs
and expenses of any such performance by Lessor shall be due and payable by
Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee
shall not be honored by the bank upon which it Is drawn, Lessor, at its own
option, may require all future payments to be made under this Lease by Lessee to
be made only by cashier's check. In the event of a Breach of this Lease by
Lessee (as defined in Paragraph 13.1), with or without further notice or demand,
and without limiting Lessor in the exercise of any right or remedy which Lessor
may have by reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Promises
by any lawful means, in which case this Lease and the term hereof shall
terminate and Lessee shall immediately surrender possession of the Promises to
Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the
worth at the time of the award of the unpaid rent which had been earned at the
time of termination; (ii) the worth at the time of award of the amount by which
the unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Promises, expenses of retailing, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of any leasing commission paid by Lessor in connection with this Lease
applicable to the unexpired term of this Lease. The worth at the time of award
of the amount referred to in provision (iii) of the immediately preceding
sentence shall be computed by
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discounting such amount at the discount rate of the Federal Reserve Bank of San
Francisco or the Federal Reserve Bank District in which the Premises are located
at the time of award plus one percent (1%). Efforts by Lessor to mitigate
damages caused by Lessee's Default or Breach of this Lease shall not waive
Lessor's right to recover damages under this Paragraph 13.2. If termination of
this Lease is obtained through the provisional remedy of unlawful detainer,
Lessor shall have the right to recover in such proceeding the unpaid rent and
damages as are reconverable therein, or Lessor may reserve the right to recover
all or any part thereof in a separate suit for such rent and/or damages. If a
notice and grace period required under Subparagraph 13.1(b, (c) or (d).
(b) was not previously given, a notice to pay rent or quit,
or to perform or quit, as the case may be, given to Lessee under any statute
authorizing the forfeiture of leases, for unlawful detainer shall also
constitute the applicable notice for grace period purposes required by
Subparagraph 13.1(b), (c) or (d). In such case, the applicable grace period
under the unlawful detainer statute shall run concurrently after the one such
statutory notice, and the failure of Lessee to cure the Default within the
greater of the two (2) such grace periods shall constitute both an unlawful
detainer and a Breach of this Lease entitling Lessor to the remedies provided
for in this Lease and/or by said statute.
(c) Continue the Lease and Lessee's right to possession in
effect (in California Civil Code Section 1951.4) after Lessee's Breach and
recover the rent as it becomes due, provided Lessee has the right to sublet or
assign, subject only to reasonable limitations. Lessor and Lessee agree that the
limitations on assignment and subletting in this Lease are reasonable. Acts of
maintenance or preservation, efforts to relet the Premises, or the appointment
of a receiver to protect the Lessor's interest under this Lease, shall not
constitute a termination of the Lessee's right to possession.
(d) Pursue any other remedy now or hereafter available for
Lessor under the laws or judicial decisions of the state wherein the Premises
are located.
(e) The expiration or termination of the Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters occurring
during the term hereof or by reason of Lessee's occupancy of the Premises.
13.3 Inducement Recapture in Event of Breach. Any agreement by Lessor
for free and abated rent or other damages applicable to the Premises or for the
giving or paying by Lessor to or fore Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of which
concessions are hereinafter referred to as "Inducement Provisions" shall be
deemed conditioned upon Lessee's full and faithful performance of all of the
terms, covenants and conditions of this Lease to be performed or observed by
Lessee during the term hereof as the same may be extended. Upon the occurrence
of a Breach (as defined in Paragraph 13.1) of this Lease by Lessee, any such
Inducement Provision shall be immediately due and payable by Lessee to Lessor
and recoverable by Lessor as additional rent due under this Lease,
notwithstanding any subsequent cure of said Breach by Lessee. The acceptance to
lessor or rent or the cure of the Breach when initiated the operation of this
Paragraph 13.3 shall not be deemed a waiver by Lessor of the provisions of this
Paragraph 13.3 unless specifically so stated in writing by Lessor at the time of
such acceptance.
13.4 Late Charges. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed upon
Lessor by the terms of any ground lease, mortgage or deed of trust covering the
Premises. Accordingly, if any installment of rent or other sum due from Lessee
shall not be received by Lessor or Lessor's designee within ten (10) days after
such amount shall be due, then, without any requirement for notice to Lessee,
Lessee shall pay to Lessor a later charge equal to six percent (6%) of such
overdue amount. The parties hereby agree that such late charge by Lessor shall
in no event constitute a waiver of Lessee's Default or Breach with respect to
such overdue amount, nor prevent three (3) consecutive installments of Base
Rent, then notwithstanding Paragraph 4.1 or any other provision of this Lease to
the contract. Base Rent shall, at Lessor's option, become due and payable
quarterly in advance.
13.5 Breach by Lessor. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 13.5, a
reasonable time shall in no event be less than thirty (30) days after receipt by
Lessor, and by any Lender(s) whose name and
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address shall have been furnished to lessee in writing for such purpose, of
written notice specifying wherein such obligation of Lessor has not been
performed; provided, however, that if the nature of Lessor's obligation is such
that more than thirty (30) days after such notice are reasonably required for
its performance, then Lessor shall not be in breach of this Lease if performance
is commenced within such thirty (30) day period and thereafter diligently
pursued to completion.
14. Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than ten percent (10%) of the floor
area of the Premises, or ore than twenty-five percent (25%) of the portion of
the Common Areas designated for Lessee's parking, is taken by condemnation,
Lessee may, at Lessee's option, to be exercised in writing within ten (10) days
after Lessor shall have given Lessee written notice of such taking (or in the
absence of such notice, within ten (10) days after the condemning authority
shall have taken possession) terminate this Lease as of the date the condemning
authority takes such possession. If Lessee does not terminate this Lease in
accordance with the foregoing, this Lease shall remain in full force and effect
as to the portion of the Premises remaining, except that the Base Rent shall be
reduced in the same proportion as the rentable floor area of the Premises taken
bears to the total rentable floor area of the Premises. No reduction of Base
Rent shall occur if the condemnation does not apply to any portion of the
Premises. Any award for the taking of all or any part of the Premises under the
power of eminent domain or any payment made under threat of the exercise of such
power shall be the property of Lessor, whether such award shall be made as
compensation for diminution of value of the leasehold or for the taking of the
fee, or as severance damages; provided, however, that Lessee shall be entitled
to any compensation, separately awarded to Lessee for Lessee's relocation
expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is
not is not terminated by reason of such condemnation, Lessor shall to the extent
of its net severance damages received, over and above Lessee's Share of the
legal and other expenses incurred by Lessor in the condemnation matter, repair
any damage to the Premises caused by such condemnation authority. Lessee shall
be responsible for the payment of any amount in excess of such net severance
damages required to complete such repair.
15. Brokers' Fees.
15.1 Procuring Cause. The Broker(s) named in Paragraph 1.10
is/are the procuring cause of this Lease.
15.2 Additional Terms. Unless Lessor and Broker(s) have otherwise
agreed in writing, Lessor agrees that: (a) if Lessee exercises any Option (as
defined in Paragraph 39.1) granted under this Lease or any Option subsequently
granted, or (b) if Lessee acquires any rights to the Premises or other premises
in which Lessor has an interest, or (c) if lessee remains in possession of the
Premises with the consent of Lessor after the expiration of the term of this
Lease after having failed to exercise an Option, or (d) if said Brokers are the
procuring cause of any other lease or sale entered into between the Parties
pertaining to the Premises and/or any adjacent property in which Lessor has an
interest, or (e) if Base Rent is increased, whether by agreement or operation of
an escalation clause herein, then as to any of said transactions, Lessor shall
pay said Broker(s) a fee in accordance with the schedule of said Broker(s) in
effect at the time of the execution of this Lease.
15.3 Assumption of Obligations. Any buyer or transferee of
Lessor's interest in this Lease, whether such transfer is by agreement or by
operation of law, shall be deemed to have assumed Lessor's obligation under this
Paragraph 15. Each Broker shall be an intended third party beneficiary of the
provisions of Paragraph 1.10 and of this Paragraph 15 to the extent of its
interest in any commission arising from this Lease and may enforce that right
directly against Lessor and its successors.
15.4 Representations and Warranties. Lessee and Lessor each
represent and warrant to the other that it has had no dealings with any person,
firm, broker or index other than as named in Paragraph 1.10(a) in connection
with the negotiation of this Lease end/or the consummation of the transaction
contemplated hereby and that no broker or other person, firm or entity other
than said named Broker(s) is entitled to any commission or finders' fee in
connection with said transaction. Lessee and Lessor do each hereby agree to
indemnify, protect, defend and hold the other harmless from and against
liability for compensation or charges which may be claimed by any such unnamed
broker, finder or other similar party
Initials: _________
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22
<PAGE>
by reason of any dealings or actions of the indemnifying Party, including any
costs, expenses, and/or attorneys' fees reasonably incurred with respect
thereto.
16. Tenancy and Financial Statements.
16.1 Tenancy Statement. Each Party (as "Responding Party") shall
within ten (10) days after written notice from the other Party (the "Requesting
Party") execute acknowledge and deliver to the Requesting Party a statement in
writing in a form similar to the then most current "Tenancy Statement" form
published by the American Industrial Real Estate Association, plus such
additional information, confirmation and/or statements as may be reasonably
requested by the Requesting Party.
16.2 Financial Statement. If Lessor desires to finance,
refinance, or sell the Premises or the Building, or any part thereof, Lessee and
all Guarantors shall deliver to any potential lender or purchaser designated by
lessor such financial statements of Lessee and such Guarantors as may be
reasonably required by such lender or purchaser, including but not limited to
Lessee's financial statements for the past three (3) years. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner or
owners at the time in question of the fee title to the Premises. In the event of
a transfer of Lessor's title or interest in the Premises or in this Lease,
Lessor shall deliver to the transferee or assignee (in cash or by credit) any
unused Security Deposit held by Lessor at the time of such transfer or
assignment. Except s provided in Paragraph 15.3, upon such transfer or
assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor
shall be relieved of all liability with respect to the obligations and/or
covenants under this Lease thereafter to be performed by the Lessor. Subject to
the foregoing, the obligations and/or covenants in this Lease to be performed by
the Lessor shall be binding only upon the Lessor as hereinabove defined.
18. Severability. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
19. Interest on Past-Due Obligations. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within ten (10) days
following the date on which it was due, shall bear interest from the date due at
the prime rate charged by the largest state chartered bank in the state in which
the Premises are located plus four percent (4%) per annum, but not exceeding the
maximum rate allowed by law, in addition to the potential late charge provided
for in Paragraph 13.4.
20. Time of Essence. Time is of the essence with respect to the performance
of all obligations to be performed or observed by the Parties under this Lease.
21. Rent Defined. All monetary obligations of Lessee to Lessor under the
terms of this Lease are deemed to be rent.
22. No Prior or other Agreements; Broker Disclaimer. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior to contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party. Each Broker shall be an intended third party beneficiary
of the provisions of this Paragraph 22.
23. Notices.
23.1 Notice Requirements. All notices required ro permitted by this
Lease shall be in writing and may be delivered in person (by hand or by
messenger or courier service) or may be sent by regular, certified or registered
mail or
tials: _________
---------
23
<PAGE>
U.S. Postal Service Express Mail, with postage prepaid, or by facsimile
transmission during normal business hours, and shall be deemed sufficiently
given if served in a manner specified in this Paragraph 23. The addressee noted
adjacent to a Party's signature or this Lease shall be that Party's address for
delivery or mailing of notice purposes. Either Party may by written notice to
the other specify a different address for notice purposes, except that upon
Lessee's taking possession of the Premises, the Premises shall constitute
Lessee's address for the purpose of mailing or delivering notices to Lessee. A
copy of all notices required or permitted to be given to Lessee hereunder shall
be concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate by written notice to Lessee.
23.2 Date of Notice. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card, or if no delivery date is shown, the postmark thereon. If sent
by regular mail, the notice shall be deemed given forty-eight (48) hours after
the same is addressed as required herein and mailed with postage prepaid.
Notices delivered by United States Express Mail or overnight courier that
guarantees next day delivery shall be deemed given twenty-four (24) hours after
delivery of the same to the United States Express Mail or overnight courier that
guarantees next day delivery shall be deemed given twenty-four (24) hours after
delivery of the same in the United States Postal Services or courier. If any
notice is transmitted by facsimile transmission or similar means, the same shall
be deemed served or delivered upon telephone or facsimile confirmation of
receipt of the transmission thereof, provided a copy is also delivered via
delivery or mail. If notice is received on a Saturday or a Sunday or a legal
holiday, it shall be deemed received on the next business day.
24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by Lessee
of the same or any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any such act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. Regardless of Lessor's
knowledge of a Default or Breach at the time of accepting rent, the acceptance
of rent by Lessor shall not be a waiver of any Default or Breach by Lessee of
any provision hereof. Any payment given Lessor by Lessee may be accepted by
Lessor on account of moneys or damages due Lessor, notwithstanding any
qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
25. Recording. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. No Right to Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this lease. In the event that Lessee holds over in violation of this Paragraph
26 then the Base Rent payable from and after the time of the expiration or
earlier termination of this Lease shall be increased to two hundred percent
(200%) of the Base Rent applicable during the month immediately preceding such
expiration or earlier termination. Nothing contained herein shall be construed
as a consent by Lessor to any holding over by Lessee.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. Covenants and Conditions. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. Binding Effect; Choice of Law. This Lease shall be binding upon the Parties,
their personal representatives, successors and assigns and be governed by the
laws of the State in which the Premises are located. Any litigation between the
Parties hereto concerning this Lease shall be initiated in the county in which
the Premises are located.
30. Subordination; Attornment; Non-Disturbance.
Initials: _________
---------
24
<PAGE>
30.1 Subordination. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), nor or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing to such purpose notice of Lessor's default pursuant
to Paragraph 13.5. If any Lender shall elect to have this Lease and/or any
Option granted hereby superior to the lien of its Security Device and shall give
written notice thereof to Lessee, this Lease and such Options shall be deemed
prior to such Security Device, notwithstanding the relative dates of the
documentation or recordation thereof.
30.2 Attornment. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership, (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one month's rent.
30.3 Non-Disturbance. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "non-disturbance agreement") fro the
Lender that Lessee's possession and this Lease, including any options to extend
the term hereof, will not be disturbed so long as Lessee is not in Breach hereof
and attorns to the record owner of the Premises.
30.4 Self-Executing. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that upon written request from Lessor or a Lender in connection with a
sale, financing or refinancing of Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or non-disturbance agreement
as its provided for herein.
31. Attorneys' Fees. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party (as
hereafter defined) in any such proceeding, action or appeal thereon, shall be
entitled to reasonable attorneys' fees. Such fees may be awarded in the same
suit or recovered in a separate suit, whether or not such action or proceeding
is pursued to decision or judgment. The term "Prevailing Party" shall include,
without limitation, a Party or Broker who substantially obtains or defeats the
relief sought, as the case may be, whether by compromise, settlement, judgment
or the abandonment by the other Party or Broker of its claim or defense. The
attorneys' fees award shall not be computed in accordance with any court fee
schedule, but shall be such as to fully reimburse all attorneys' fees reasonably
incurred. Lessor shall be entitled to attorneys' fees, costs and expenses
incurred in preparation and service of notice of Default and consultations in
connection therewith, whether or not a legal action is subsequently commenced in
connection with such Default or resulting Breach. Broker(s) shall be intended
third party beneficiaries of this Paragraph 31.
32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents shall
have the right to enter the Premises at any time, in the case of an emergency,
and otherwise at reasonable times for the purpose of showing the same to
prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or to the Building, as Lessor
may reasonably deem necessary. Lessor may at any time place on or about the
Premises or Building any ordinary "For Sale" signs and Lessor may at any time
during the last one hundred eighty (180) days of the term hereof place on or
about the Premises any ordinary "For Lease" signs. All such activities of Lessor
shall be without abatement of rent or liability to Lessee.
33. Auction. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining wither to grant such consent.
Initials: _________
---------
25
<PAGE>
34. Signs. Lessee shall not place any sign upon the exterior of the Premises of
the Building, except that Lessee may, with Lessor's prior written consent,
install (but not on the roof) such signs as are reasonably required to advertise
Lessee's own business so long as such signs are in a location designated by
Lessor and comply with Applicable Requirements and the signage criteria
established for the Industrial Center by Lessor. The installation of any sign on
the Premises by or for Lessee shall be subject to the provisions of Paragraph 7
(Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations).
Unless otherwise expressly agreed herein, Lessor reserves all rights to the use
of the roof of the Building, and the right to install advertising signs on the
Building, including the roof, which do not unreasonably interfere with the
conduct of Lessee's business; Lessor shall be entitled to all revenues from such
advertising signs.
35. Termination; Merger. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by lessee shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one of all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. Consents.
36.1 Except for Paragraph 33 hereof (Auctions) or as otherwise provided
herein, wherever in this Lease the consent of a Party is required to an act by
or for the other Party, such consent shall not be unreasonably withheld or
delayed. Lessor's actual reasonable costs and expenses (including but not
limited to architects', attorneys', engineers' and other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment a subletting or the presence of use of a
Hazardous Substance, shall be paid by Lessee to Lessor upon receipt of an
invoice and supporting documentation therefor. In addition to the deposit
described in paragraph 12.2(a), Lessor may, as a condition to considering any
such request by Lessee, require that Lessees deposit with lessor an amount of
money (in addition to the Security Deposit held under Paragraph 5) reasonably
calculated by Lessor to represent the cost lessor will incur in considering and
responding to lessee's request. Any unused portion of said deposit shall be
refunded to Lessee without interest. Lessee's consent to any act, assignment of
this Lease or subletting of the Premises by Lessee shall not constitute an
acknowledgment that no Default or Breach by Lessee of this Lease exists, nor
shall such consent be deemed a waiver of any then existing Default or Breach,
except as may be otherwise specifically stated in writing by Lessor at the time
for such consent.
36.2 All conditions to Lessor's consent authorized by the Lease are
acknowledged by lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the impositions by
lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given.
37. Guarantor.
37.1 Form of Guaranty. If there are to be any Guarantors of this Lease
per Paragraph 1.11, the form of the guaranty to be executed by each such
Guarantor shall be in the form recently published by the American Industrial
Real Estate Association, and each such Guarantor shall have the same obligations
as Lessee under this lease, including but not limited to the obligation to
provide the Tenancy Statement and information required in Paragraph 16.
37.2 Additional Obligations of Guarantor. It shall constitute a Default
of the Lessee under this Lease ff any such Guarantor fails or refuses, upon
reasonable request by Lessor to give: (a) evidence of the due execution of the
guaranty called for by this Lease, including the authority of the Guarantor (and
of the party signing on Guarantor's behalf) to obligate such Guarantor on said
guaranty, and resolution of Its board of directors authorizing the making of
such guaranty, together with a certificate of incumbency showing the signatures
of the persons authorized to sign on Its behalf, (b) current financial
Initials: _________
---------
26
<PAGE>
statements of Guarantor as may from time to time be requested by Lessor, (c) a
Tenancy Statement, or (d) written confirmation that the guaranty is still in
affect.
38. Quiet Possession. Upon payment by Lessee of the rent for the Promises and
the performance of all of the covenants, conditions and provisions on Lessee's
part to be observed and performed under this Lease, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease.
39. Options.
39.1 Definition. As used in this Lease, the word "Option" has the
following meaning: (a) the right to extend the term of this Lease or to renew
this Lease of to extend or renew any lease that Lessee has on other property of
Lessor; (b) the right of first refusal to lease the Premises or the right of
first offer to lease the Premises or the right of first refusal to lease other
property of Lessor or the right of first offer to lease other properly of
Lessor; (c) the right to purchase the Premises, or the right of first refusal to
purchase the Premises, or the right of first offer to purchase the Promises, or
the right to purchase other property of Lessor, or the right of first refusal to
purchase other property of Lessor, or the right of first offer lo purchase other
property of Lessor. 39.2 Options Personal to Original Lessee. Each Option
granted to Lessee in this Lease is personal to the original Lessee named in
Paragraph 1.1 hereof, and cannot be voluntarily or involuntarily assigned or
exercised by any person or entity other than said original Lessee while the
original Lessee is in full and actual possession of the Premises and without the
intention of thereafter assigning or subletting. The Options, if any, herein
granted to Lessee are not assignable, either as a part of an assignment of this
Lease or separately or apart therefrom, and no Option may be separated from this
Lease in any manner, by reservation or otherwise.
39.2 Multiple Options. In the event that Lessee has any multiple
Options to extend or renew this Lease, a later option cannot be exercised unless
the prior Options to extend or renew this Lease have been validly exercised.
39.3 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary: (i) during
the period commencing with the giving of any notice of Default under Paragraph
13.1 and continuing until the noticed Default is cured, or (ii) during the
period of time any monetary obligation due Lessor from Lessee is unpaid (without
regard to whether notice thereof is given Lessee), or (iii) during the time
Lessee is in Breach of this Lease, or (iv) In the event that Lessor has given to
Lessee three (3) or more notices of separate Defaults under Paragraph 13.1
during the twelve (12) month period immediately preceding the exercise of the
Option, whether or not the Defaults are cured.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a)
(c) All rights of Lessee under the provisions of an Option
shall terminate and be of no further force or effect, notwithstanding Lessee's
due and timely exercise of the Option, if, after such exercise and during the
term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of
Lessee for a period of thirty (30) days after such obligation becomes due
(without any necessity of Lessor to give notice thereof to Lessee), or (ii)
Lessor gives to Lessee three (3) or more notices of separate Defaults under
Paragraph 13.1 during any twelve (1 2) month period, whether or not the Defaults
are cured, or (iii) if Lessee commits a Breach of this Lease.
40. Rules and Regulations. Lessee agrees that it will abide by, and keep and
observe all reasonable rules and regulations ("Rules and Regulations') which
Lessor may make from time to time for the management, safety, care, and
cleanliness of the grounds, the parking and unloading of vehicles and the
preservation of good order, as well as for the convenience of other occupants or
tenants of the Building and the Industrial Center and their invites.
41. Security Measures. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Initials: _________
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27
<PAGE>
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invites and their property from the acts of third parties.
42. Reservations. Lessor reserves the right, from time to time, to grant,
without the consent or joinder of Lessee, such easements, rights of way, utility
raceways, and dedications that Lessor deems necessary, and to cause the
recordation of parcel maps and restrictions, so long as such easements, rights
of way, utility raceways, dedications, maps and restrictions do not reasonably
interfere with the use of the Premises by Lessee. Lessee agrees to sign any
documents reasonably requested by Lessor to effectuate any such easement rights,
dedications map or restrictions.
43. Performance Under Protest. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment 'under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay under the provisions of this
Lease.
44. Authority. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver lo Lessor evidence satisfactory to Lessor of such authority.
45. Conflict. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwt!tten provisions.
46. Offer. Preparation of this Lease by either Lessor or Lessee or Lessor's
agent or Lessee's agent and submission of same to Lessee or Lessor shall not be
deemed an offer to lease. This Lease is not intended to be binding until
executed and delivered by all Parties hereto.
47. Amendments. This Lease may be modified only in writing, signed by the
parties in interest at the time of the modification. The Parries shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional Insurance company or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.
48. Multiple Parties. Except as otherwise expressly provided herein, it more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such multiple parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
49. Disclosure. Steve Golgolab is Trustee of The Golgolab Family Trust,
"Lessor," and a licensed real estate agent acting as a principal in this
transaction.
Initials: _________
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28
<PAGE>
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR ATTORNEYS'
REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE
CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF ASBESTOS, UNDERGROUND
STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS
MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE
BROKERS OR THEIR CONTRACTORS, AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY,
LEGAL EFFECT, 08 TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT
RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS
TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS IN A
STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS
LOCATED SHOULD BE CONSULTED,
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at Long Beach on March 15, 1997
BY LESSOR:
GOLGOLAB FAMILY TRUST
By:
Name Printed: Steve Golgolab
Title: Trustee
Address: 501 Pierside Circle
Huntington Beach, CA 92648
Telephone: (714) 969-9169
Facsimile: (714) 374-2210
Execute at Long Beach on March 15, 1997.
BY LESSEE:
ADVANCED AERODYNAMICS AND
STRUCTURES, INC.
By:
Name Printed: Gene Comfort
Title: Executive Vice President & Director
Address: 3501 Lakewood Boulevard
Long Beach, CA 90808
Telephone:
Facsimile:
NOTE: These forms are often modified lo meet changing requirements of law and
needs of the industry. Always write or call to make sure you are utilizing the
most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 South Flower
Street, Suite 600, Los Angeles, CA 90017. (213) 687-8777.
Initials: _________
_________
29
ADVANCED AERODYNAMICS & STRUCTURES, INC.
FORM SB-2
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
For the For the
For the year ended For the year ended three months ended three months ended
December 31, 1995 December 31, 1996 March 31, 1996 March 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loss before extraordinary item..... $(1,688,000) $(2,466,000) $(341,000) $(519,000)
Extraordinary loss on retirement
of Bridge Notes................. (942,000)
------------ ------------ ---------- ----------
Net loss........................... (1,688,000) $(3,388,000 $(341,000) $(519,000)
=========== ============ ========== ==========
Weighted average number of
Class B common stock shares
outstanding..................... 2,000,000 2,000,000 2,000,000 2,000,000
Common stock equivalents from
the issuance of Bridge Warrants
computed using the treasury
stock method.................... 1,400,000 1,047,000 1,400,000 __________
Weighted average number of
Class A Common Stock
Shares outstanding............. 499,000 6,900,000
----------- ----------- ---------- -----------
Weighted average number of
shares outstanding.............. 3,400,000 3,546,000 3,400,000 8,900,000
========= ========= ========= =========
Loss per share before extra-
ordinary item.................. $(0.50) $(0.69) $(0.10) $(0.06)
Extraordinary loss per share
on retirement of Bridge
Notes........................... $(0.27)
---------- ---------- ---------- ---------
Net loss per share................ $(0.50) $(0.96) $(0.10) $(0.06)
======= ======= ======= =======
</TABLE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of
this Post-Effective Amendment No. 1 to Registration Statement on Form SB-2 of
our report dated March 26, 1997 relating to the financial statements of Advanced
Aerodynamics & Structures, Inc., which appears in such Prospectus. We also
consent to the references to us under the heading "Experts" in such Prospectus.
Price Waterhouse LLP
Los Angeles, California
July 18, 1997
August 5, 1997
Advanced Aerodynamics & Structures, Inc.
3501 Lakewood Boulevard
Long Beach, California 90806
Re: Post-Effective Amendment No. 1. to the Registration Statement on Form SB-2
Ladies/Gentlemen:
We are special regulatory counsel for Advanced Aerodynamics & Structures,
Inc., a Delaware corporation (the "Company"), in connection with the preparation
of Post-Effective No. 1 to the Registration Statement on Form SB-2 (the
"Registration Statement"), filed with the Securities and Exchange Commission
(the "Commission") on August 5, 1997 for the sale of 7,255,721 units ("Units"),
each consisting of one share of Class A Common Stock and one Class B Warrant
issuable upon the exercise of outstanding Class A Warrants, 14,155,721 shares of
Class A Common Stock issuable upon the exercise of outstanding Class B Warrants
and Class B Warrants issuable upon the exercise of outstanding Class A Warrants,
600,000 Unit purchase options (the "Unit Purchase Options"), 600,000 Units
issuable upon the exercise of the Unit Purchase Options, each such Unit
consisting of one share of Class A Common Stock, one Class A Warrant and one
Class B Warrant, 600,000 Units issuable upon the exercise of the Class A
Warrants underlying the Unit Purchase Options, 1,200,000 shares of Class A
Common Stock issuable upon exercise of the Class B Warrants underlying the Unit
Purchase Options, 3,144,279 Class A Warrants for certain selling security
holders, each of whom was an investor in the Company's private placement prior
to its initial public offering (the "Remaining Selling Securityholders"),
3,144,279 Units issuable upon the exercise of Class A Warrants registered for
the resale by the Remaining Selling Securityholders, and 3,144,279 shares of
Class A Common Stock issuable upon the exercise of Class B Warrants underlying
the Class A Warrants, registered for the resale by the Remaining Selling
Securityholders.
We hereby consent to the reference to this firm under the caption
"Legal Matters" in the Prospectus included in the Registration Statement,
stating as follows: "The statements herein relating to federal aviation
regulatory matters will be passed upon by Boros & Garofalo, P.C., Washington,
D.C."
Very truly yours,
BOROS & GAROFALO, P.C.
By: /s/ Gary B. Garofalo
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Gary B. Garofalo, President
