SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
X ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
_____ TRANSITION REPORT PURSUANT TO SECTION 13 or
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-21749
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(Name of Small Business Issue as specified in its charter)
Delaware 95-4257380
(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization Identification No.)
3501 Lakewood Boulevard, Long Beach, California 90808
(Address of Principal Executive Offices) (Zip Code)
(562) 938-8618
Registrant's Telephone Number, including Area Code
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Units
Class A Common Stock, par value $.0001 per share
Class A Warrants and the underlying Class A Common Stock, par value $.0001 per
share, and Class B Warrants
Class B Warrants and the underlying Class A Common Stock, par value $.0001 per
share
Check whether the Registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No ___.
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosures will be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K-SB or any amendment to this Form 10-K-SB ___
The Registrant's revenues for the fiscal year ended December 31, 1996 were
$133,000.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 27, 1997 was $21,562,500. For purposes of this
computation, it has been assumed that the shares beneficially held by directors
and officers of Registrant were "held by affiliates;" this assumption is not to
be deemed to be an admission by such persons that they are affiliates of
Registrant.
As of March 27, 1997, the registrant had 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.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement relating to its 1997 Annual Meeting of
Shareholders are incorporated by reference in Part III.
Specified exhibits listed in Part III of this report are incorporated by
reference to the Registrant's previously filed Registration Statement on Form
SB-2 (333-12273).
Transitional Small Business Disclosure Format: Yes ___ No X
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
CROSS-REFERENCE SHEET
The following items in Part III of Registrant's Annual Report on Form
10-KSB for its fiscal year ended December 31, 1996 are incorporated herein by
reference to Registrant's Proxy Statement and appear therein under the section
headings indicated below:
Item Form Heading Section Heading
9. Directors, Executive Officers, Proxy Statement - Election of
Promoters and Control Persons; Directors- Information with
Compliance With Section 16(a)of respect to Nominees, Directors,
the Exchange Act and Executive Officers
10. Executive Compensation Proxy Statement - Management -
Compensation of Executive
Officers
11. Security Ownership of Certain Proxy Statement - Principal
Beneficial Owners and Stockholders
Management
12. Certain Relationships and Related Proxy Statement - Management -
Transactions Certain Relationships and
Related Transactions
<PAGE>
PART I
ITEM 1. 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. 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.
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 within approximately the 14 to 20 months
following the date of this Report and obtain a production certificate and
commence commercial production of such aircraft within the same time frame.
There can be no assurance, however, that obtaining the amendment will not take
longer that anticipated, that the Company will not be required to obtain a new
type certificate for the JETCRUZER 500, or that the Company will not experience
unforeseen expense or delay in certifying and commercializing its proposed
aircraft.
Industry Background
The general aviation industry comprises essentially all nonmilitary
aviation activity other than scheduled and charter commercial airlines licensed
by the FAA and the Department of Transportation. General aviation aircraft are
frequently classified by their type and number of engines and include aircraft
with fewer than 20 seats. There are three different types of engines: piston,
propjet and turbofan (jet). Piston aircraft use an internal combustion engine to
drive a propeller. There may be one or two engines and propellers. Propjet
aircraft combine a jet turbine powerplant with a propeller geared to the main
shaft of the turbine. There may be one or two engines and propellers. Turbofan
aircraft use jet propulsion to power the aircraft. There are generally two
engines on general aviation turbofan aircraft, although there may also be one or
three.
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
1
<PAGE>
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.
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 1,077 units in 1995 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. 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
2
<PAGE>
Company believes that it was able to obtain its Type Certificate for the
JETCRUZER 450 at a significantly lower cost than its competitors with regard to
comparable aircraft due, in part, to the Company's smaller size as compared to
its competitors, resulting in the Company's ability to contain administrative
costs and the overhead expenses allocable to the development process.
Additionally, the Company's Southern California location is home to a number of
workers from recently downsized defense and aerospace companies who the Company
was able to hire to assist in the certification of the JETCRUZER 450. These
employees provided the Company with experience in testing, certifying, tool and
jig manufacturing and other aspects of the certification process that would not
otherwise have been available to the Company. The Company expects that many of
these key employees will return to the Company as development of the JETCRUZER
500 proceeds.
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.
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
3
<PAGE>
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 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 approximately 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 a larger fuselage, pressurization, environmental systems,
de-icing capability, test retractable landing gear and autopilot certification,
all of which will be necessary to produce the JETCRUZER 500 for commercial sale.
The Company currently anticipates obtaining the amendment to its Type
Certificate within approximately the next 14 to 20 months. The Company has
submitted its application for amendment to the FAA. The FAA has assigned a
project manager to the Company, and the Company has scheduled a meeting with the
FAA to set an anticipated schedule for the amendment process. There can be no
assurance, however, that obtaining such an amendment will not take longer than
anticipated, that any of the FAA limitations will be removed or that such
removal will not, in the FAA's judgment, necessitate a new type certificate,
thereby causing unforeseen expense and delay in certifying the JETCRUZER 500.
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 initially at a base
price of approximately $1,300,000. 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 base purchase price could change materially.
The Company has made only limited test marketing attempts to sell its
aircraft. Notwithstanding these limitations, the Company has received more than
30 written indications of interest to purchase the JETCRUZER 500. Generally,
written indications of interest are supported by a $10,000 deposit. However,
each such deposit is refundable at the request of the purchaser at any time
until the commencement of construction of the purchaser's particular aircraft.
Accordingly, there can be no assurance that any such indications of interest
will lead to the sale of an aircraft.
Other Proposed Aircraft
JETCRUZER (TM)650. The Company currently intends to develop the JETCRUZER
650. This aircraft will be based on the JETCRUZER 450/500 design and will have
the same engine and components as the JETCRUZER 500. However, it is intended to
have a longer fuselage which will accommodate up to twelve passengers plus a
pilot. To
4
<PAGE>
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 those the Company currently has. 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 the Company currently has. Therefore, there can be no assurance
that the Company will obtain the resources necessary to continue the development
of the STRATOCRUZER or, if such resources are obtained, successfully develop and
certify the STRATOCRUZER. Accordingly, the Company cannot predict when, if ever,
the STRATOCRUZER will be available for commercial sale.
Manufacturing
The Company has designed and produced or procured most of the equipment
necessary for production of the JETCRUZER 450 and has used that equipment to
certify the aircraft. The Company is in the process of obtaining and producing
additional sets of the equipment necessary for production of the JETCRUZER 500.
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
5
<PAGE>
given that former employees of the Company or other personnel with the required
skills will in fact be available to the Company.
The equipment and procedures used by the Company for manufacturing must be
certified, and are subject to inspection and continuing oversight by the FAA.
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 limited
marketing activity through advertisements and news releases in trade
publications. The Company is developing an in-house sales organization and
intends to market its aircraft in a number of different territories in the
United States and abroad through trade publications, aircraft trade shows, and
independent distributors and agents.
The Company's efforts will emphasize aircraft trade shows, from which it
believes a significant amount of new aircraft sales are generated. The Company
intends to participate in, among others, the Paris Air Show, the National
Business Aircraft Association USA Show and the Singapore Aerospace Show.
Management believes that, in addition to sales generated directly from such
events, participation in trade shows will help introduce the Company's aircraft
to other potential purchasers and help increase overall awareness of the
Company's products. The Company also intends to promote general knowledge of the
Company's products by issuing press releases to aviation magazines and
newspapers. The Company will also use paid advertising in trade magazines,
general interest flying magazines and international business magazines to
promote its products.
Management anticipates that most of the Company's aircraft will be sold to
corporations for transportation of their personnel, guests and company property.
The Company intends to develop direct marketing programs to target such
corporations. The Company believes that its aircraft will also be attractive to
customers other than corporations and intends to address these markets. These
markets include current owners of single and twin engine aircraft who operate
their own aircraft for business purposes, governmental entities that use
aircraft for surveillance or mapping photography, forest fire detection, and
other purposes, and fractional use entities who purchase one or more aircraft
and sell interests in each aircraft to several persons or entities. The Company
believes that the relatively low purchase price, performance, safety and cost of
operations of its aircraft will make them attractive to such purchasers. Other
potential specialty markets may include air freight and delivery services,
on-demand air taxi services and/or charter and air ambulance use.
6
<PAGE>
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.
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.
7
<PAGE>
<TABLE>
High Cruise
NAME AND MODEL Approximate Speed-Miles Per
(Number and type of engines noted in parenthesis) Seats Base Price Hour
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
JETCRUZER 500 (1) (Propjet) 6 $1,295,000 350
Cessna Caravan 208B(1) (Propjet) 9 $1,493,000 210
Socata TBM 700 (1) (Propjet) 6 $2,607,000 345
Pilatus PC - 12 (1) (Propjet) 10 $2,315,000 310
Raytheon/Beech King Air C-90B (2) (Propjet) 7 $2,488,000 284
Piper Malibu Mirage (1) (Piston) 6 $755,000 267
</TABLE>
There are currently only three single engine propjet aircraft on the market
in the JETCRUZER 500 category: the Socata TBM 700, the Pilatus PC-12 and the
Cessna Caravan. The TBM 700 is a pressurized, single engine propjet of
conventional design with a Pratt & Whitney engine. It is made in France and has
passenger capacity and performance similar to the JETCRUZER 500. Its base price
is approximately $2,607,000. The Pilatus PC-12 is also a single engine propjet
of conventional design with a Pratt & Whitney engine. The Pilatus PC-12 is made
in Switzerland, has an airspeed of 310 mph and has a base price of approximately
$2,315,000. The Cessna Caravan 208B has a base price of approximately $1,493,000
and is designed primarily for hauling freight at low altitude. Its high speed is
210 mph, its landing gear does not retract, and it is not pressurized. Each of
these competitive products is a standard, one lifting-wing aircraft built
primarily from aircraft aluminum, rather than graphite.
Additional competition to the JETCRUZER 500 may be provided by the Malibu
Mirage. The Malibu Mirage is a single engine piston powered aircraft, rather
than a propjet. It is manufactured in the United 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 the aircraft meet certain FAA certification, proficiency,
maintenance and additional equipment and airworthiness requirements.
Most of the Company's competitors are substantially larger in size and have
far greater financial, technical, marketing, and other resources than the
Company. Certain of the Company's actual and potential competitors may have
technological capabilities, or other resources that would allow them to modify
existing aircraft or develop alternative new aircraft which could compete with
the Company's aircraft. Therefore, there can be no assurance that the Company's
ability to market its proposed aircraft will not be materially adversely
affected by future technological changes or marketing initiatives on the part of
its competitors.
Additionally, indirect competition and potential sales will come from the
used aircraft market, both propjets and jets, which have sales prices near that
anticipated for the JETCRUZER 500. As the prices of new aircraft have increased,
buyers have turned in greater numbers to the used aircraft market. The Company,
however, believes that it may be able to attract purchasers who might otherwise
acquire a used aircraft by emphasizing the price, performance, technology, fuel
efficiency and operational costs advantages of the Company's aircraft.
Product Liability and Insurance. The failure of an aircraft manufactured by
the Company or any other mishap involving such an aircraft may result in
physical injury or death to the occupants of the aircraft or others, and
therefore, the Company could be subject to lawsuits involving product liability
claims. The Company intends to obtain product liability insurance with regard to
aircraft purchased by customers commencing on the delivery of the first
customer's
8
<PAGE>
aircraft. However, such insurance is expensive, subject to various exclusions
and, although the product liability insurance for manufacturers of general
aviation aircraft has become somewhat more available and less costly over the
last two years, there can be no assurance that such coverage will be available
to the Company on acceptable terms or at all. Further, should the Company become
involved in product liability litigation, the expenses and damages awarded could
be large and the scope of any coverage may be inadequate. In the past it has
obtained other insurance as needed, including flight test insurance for the
pilots and aircraft used during the FAA certification process.
Government Regulation
The manufacture of aircraft is subject to extensive regulation by the
Federal Aviation Administration ("FAA"). Both the finished product and the
process of manufacturing itself must be certified by the FAA, as must the type
design. Failure to obtain or maintain all required FAA certifications would have
a material adverse effect on the Company's operations.
Certification. On June 14, 1994, the Company obtained a Type Certificate
from the FAA for the JETCRUZER 450. For an aircraft model to be manufactured for
sale, the FAA must issue a type certificate and production certificate for that
model; for an individual aircraft to be operated, the FAA must issue an
airworthiness certificate for that aircraft. Type certificates are issued by the
FAA when an aircraft model is determined to meet applicable performance, safety,
environmental, and other technical criteria. In the case of aircraft such as the
Company's which have one or more unconventional design characteristics for which
there are no applicable criteria, such criteria are developed and applied in the
course of the type certification process. More stringent airworthiness criteria
and additional equipment requirements become applicable if the aircraft will be
used in commercial passenger operations, whether on-demand charter or scheduled.
Production certificates are issued by the FAA after it determines that the type
certificate holder (or its licensee) has the facilities and quality control
capability to manufacture aircraft that will meet the design provisions of the
applicable type certificate. An airworthiness certificate is issued by the FAA
for a particular aircraft when it is certified to have been built in accordance
with specifications approved under the type certificate for that model; the
airworthiness certificate remains in effect so long as required maintenance,
repairs and upkeep are performed.
The Company intends to amend its Type Certificate with respect to the
JETCRUZER 450 to include the JETCRUZER 500, although there can be no assurance
that the FAA will not require application for a new type certificate for the
JETCRUZER 500. In addition, the Company will be required to obtain a further
amendment to its Type Certificate or a new type certificate if and when it
proceeds with development of the JETCRUZER 650. The Company will be required to
obtain a new type certificate if and when it proceeds with development of the
STRATOCRUZER 1250.
Obtaining a new or amended FAA type certificate can be difficult, costly,
and time consuming. In either case, the Company must accomplish, to the extent
deemed necessary by the FAA, among other things, (a) the filing of an
appropriate application with the FAA, (b) development and submission to the FAA
of an appropriate design and substantiating data and receipt of FAA approval
that such design and data comply with applicable FAA airworthiness standards,
(c) development and receipt of FAA approval of a flight test plan, (d)
successful completion of conformity inspections requested by the FAA from time
to time to ensure compliance of the aircraft with the type design, (e)
modification and reassembly of an existing JETCRUZER 450 for use for initial
flight testing, (f) modification and reassembly of an additional existing
JETCRUZER 450 for flight and static testing, (g) completion of Company flight
tests and receipt of precertification approval from the FAA, (h) completion of
additional flight tests under FAA supervision, (i) development and receipt of
FAA approval of an airplane flight manual, and (j) development and receipt of
FAA approval of maintenance and inspection requirements for the aircraft.
Although the time required to obtain a new or amended type certificate may vary,
the Company believes that it can obtain a new or amended certificate for the
JETCRUZER 500 within the 15 to 21 months following the date of this report.
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
9
<PAGE>
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 within the 14 to 20 months following the date
of this report.
There can be no assurance that the Company will not encounter a delay in
obtaining a production certificate for its planned aircraft models, or
airworthiness certificates for individual aircraft.
The Company will also be subject to the risk of modification, suspension or
revocation of any FAA certificate it holds. Such modification, suspension, or
revocation could occur if, in the FAA's judgement, compliance with airworthiness
or safety standards by the Company was in doubt. If the FAA were to suspend or
revoke the Company's type or production certificates for an aircraft model,
sales of that model would be adversely affected or terminated. If, in the FAA's
judgement, an unsafe condition developed or was discovered after one or more of
the Company's aircraft had entered service, the FAA could issue an
"Airworthiness Directive," which could result in a regulatory obligation upon
the Company to develop appropriate design changes at the Company's expense.
Foreign authorities could impose similar obligations upon the Company as to
aircraft within their jurisdiction. Any or all of the above occurrences could
expose the Company to substantial additional costs and/or liability.
Government Assistance. The Company has negotiated with local and state
governments regarding incentives for locating the Company's facilities in a
certain state or locality, including facility construction, tax incentives and
employee training. One city in which the Company may locate its facilities has
informed the Company that the city would assist the Company by providing
coordinated permit processing and possibly matching funds for federal job
training subsidies. The city has also informed the Company that the potential
site being considered by the Company would cause the Company to be eligible for
enterprise zone, state revitalization zone and manufacturers' investment tax
credits. If the Company is able to obtain such assistance or financing, the
Company may be subject to certain restrictions on its operations, including an
inability to relocate or to obtain certain types of financing.
Product Liability. In 1994, the United States Congress passed and the
President signed the General Aviation Revitalization Act of 1994 ("GARA"). GARA
provides protection for manufacturers of general aviation aircraft against
certain lawsuits for wrongful death or injuries resulting from an aircraft
accident. Except as set forth in GARA, and provided a period of 18 years has
passed from the date of delivery of the aircraft to the original purchaser or
retailer, no claim for damages resulting from personal injury or wrongful death
may be brought against the manufacturer of a general aviation aircraft. Although
GARA will not directly affect the Company until eighteen years from the date it
delivers its first aircraft, management believes that GARA will indirectly
benefit the Company immediately, in that it may encourage increased
manufacturing 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.
10
<PAGE>
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.
Employees
As of March 12, 1997 the Company had twenty six full-time employees. The
Company believes that its relations with its employees are good. The Company is
not a party to any collective bargaining agreement.
ITEM 2. PROPERTIES.
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 one year lease which commenced
January 1, 1997, at a monthly rent of $15,000. The Company intends to establish
a larger facility to enable the Company to expand its manufacturing capabilities
as soon as a suitable location is found. The Company is currrently in
negotiations with the City of Long Beach with regard to such a location. The
Company presently has no other facilities.
ITEM 3. LEGAL PROCEEDINGS.
As of March 12, 1997, there were no material pending legal proceedings to
which the Company was a party or to which any of its properties were subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the Company
during the fourth quarter of 1996.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Since December 3, 1996, the Company's Class A Common Stock has been traded
on the Nasdaq National Market under the symbol "AASI". The following table sets
forth the range of high and low last sale prices per share for the Class A
Common Stock as quoted on the Nasdaq National Market, for the periods indicated.
High Low
---------------- --------------
Year Ended December 31, 1996
Fourth Quarter (from December 3, 1996) 5-1/4 3-1/2
At March 26, 1997, there were approximately 13 holders of record of the
Company's Class A Common Stock, 4 holders of record of the Company's Class B
Common Stock and Class E-1 Common Stock and 5 holders of record of the Company's
Class E-2 Common Stock. The Company believes that there are significant number
of beneficial owners of its Class A Common Stock whose shares are held in
"street name."
The Company has not paid cash dividends on its Common Stock and does not
anticipate that it will do so in the near future. The present policy of the
Company is to retain earnings to finance the development of its operations.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Certain statements contained in this report, 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, including without
limitation those rights and uncertainties set forth in the Company's
Registration Statement on Form SB-2 (Commission File No. 333-12273) under the
heading "Risk Factors."
PLAN OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in this report.
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.
12
<PAGE>
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
use $1,100,000 of the proceeds from the its recent initial public offering
("IPO") for this purpose and to finance the remaining portion through mortgage
financing and/or other similar means. The Company also intends to use
approximately $900,000 of the proceeds of the Offering for sale and marketing of
the aircraft.
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.
During the next 14 to 20 months, the Company intends to focus its efforts
in the following areas:
* To complete the development of the JETCRUZER 500, including, among
other things, adding a larger engine, pressurization, environmental
systems, de-icing capability and autopilot certification.
* 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.
* 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.
* To obtain a production certificate from the FAA and commence
commercial production of the JETCRUZER 500.
* To expand its sales and marketing staff and increase its marketing
efforts with respect to the JETCRUZER 500.
* To increase its engineering, manufacturing and administrative staff in
anticipation of increased development and production activities.
The Company believes that the net proceeds from its recent IPO will be
sufficient to finance its plan of operations for at least the 14 to 20 months
following the date of this report, 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.
13
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, certain
operating amounts and results.
Period from January 26, 1990
(inception) to December 31,
Years Ended December 31 1996
----------------------- ----------------------------
1995 1996
------------------------
Income $ 27,000 $ 133,000 $ 880,000
Research and general
and administrative 1,453,000 1,927,000 22,426,000
expenses
Interest expense 262,000 652,000 1,840,000
Extraordinary Loss -- 942,000 942,000
Net Loss 1,688,000 3,388,000 24,328,000
The Company has not generated any revenues from operations. For the period
from inception (January 26, 1990) through December 31, 1996 the Company incurred
a net loss of $24,328,000, $1,688,000 and $3,388,000 of which was incurred
during the years ended December 31, 1995 and December 31, 1996, respectively.
These losses have resulted primarily from expenditures made in connection with
the research and development of the Company's proposed aircraft and general and
administrative activities. During 1996 the Company incurred an extraordinary
loss of $942,000, resulting from the retirement of debt at the time of its IPO.
Research and development expenses have consisted primarily of the costs of
personnel, facilities and materials and equipment required to conduct the
Company's development activities. Such expenses aggregated $13,636,000 from
inception through December 31, 1996. Such expenses were incurred to develop the
JETCRUZER 450, to obtain a Type Certificate with respect thereto, and to begin
the design of the JETCRUZER 500, the JETCRUZER 650 and the STRATOCRUZER.
Research and development expenses will increase in 1997 as the Company
accelerates the development of the JETCRUZER 500 and amends its Type Certificate
with respect thereto.
General and administrative expenses have consisted primarily of
administrative salaries and benefits, rent, marketing expenses, insurance and
other administrative costs. Such expenses aggregated $7,390,000 from inception
through December 31, 1996, $1,453,000 and $1,927,000 of which were incurred in
1995 and 1996, respectively. General and administrative expenses have increased
since 1995 primarily due to increased compensation expenses payable to the
Company's executive officers who were engaged principally in capital raising and
marketing activities. Such increases were partially offset by decreases in rent,
insurance, employee payroll and other administrative costs occasioned by the
Company's limited development activities during the period. General and
administrative expenses are expected to increase substantially in 1997 due to
the addition of personnel and other resources to support increased
administrative, marketing, and development activities.
Interest expense has consisted primarily of interest expended by the
Company for bank and private financing. Interest expense aggregated $1,840,000
from inception through December 31, 1996, $262,000 and $652,000 of which were
incurred in 1995 and 1996, respectively.
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." The
Company has incurred net losses in each year since its inception and
consequently has paid no federal or state income taxes.
At December 31, 1996, the Company had a federal tax net operating loss
carryforward of approximately $22,000,000 which, if unused, will expire in
varying amounts in the years 2004 through 2010 and a state tax net operating
loss carryforward of approximately $4,000,000 which, if unused, will expire in
various amounts in the years 1997 through 2000.
14
<PAGE>
At December 31, 1996, the Company had federal and state 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 state R&D credit carryforwards can be carried
forward indefinitely. See Note 4 of Notes to Financial Statements.
Liquidity and Capital Resources
At December 31, 1996, the Company had working capital of $26,112,000 and
stockholders' equity of $27,798,000. Since its inception in January 1990, the
Company has experienced continuing negative cash flow from operations, which,
prior to its IPO, resulted in the Company's inability to pay certain existing
liabilities in a timely manner. The Company has financed its operations through
private fundings of equity and debt and most recently, its IPO.
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.
In the second half of 1994, the Company's expenditures decreased because
capital constraints required a reduction of the Company's development
activities. The Company's capital requirements during that period were satisfied
primarily by a loan from General Bank in the principal amount of approximately
$550,000, bearing interest at the prime rate plus 1 1/2%, which loan was
guaranteed by the Small Business Administration, the California Export Finance
Office and Dr. Chen and secured by substantially all of the Company's assets.
The Company also received an additional $50,000 loan from SIDA.
During 1995 and 1996, the Company's capital requirements were met by
additional advances of $350,000 pursuant to the bank loan described above and
loans by Dr. Chen, bearing interest at a rate of 12%, in the aggregate principal
amount of $562,000. In June 1996, $336,000 of indebtedness owed by the Company
to Dr. Chen was converted into 187,118 shares of Class B Common Stock, 374,236
shares of Class E-1 Common Stock, and 374,236 shares of Class E-2 Common Stock.
In September 1996, the bank loan, in the aggregate principal amount of
$900,000 plus $15,000 in accrued interest, $226,000 of the principal amount owed
to Dr. Chen, together with interest thereon of $36,000, and the loan from SIDA,
in the aggregate principal amount of $110,000 plus $31,000 in accrued interest,
were repaid with the proceeds of the Bridge Financing described below.
In August 1996, the Company completed the Bridge Financing of $7,000,000
principal amount of Bridge Notes and 3,500,000 Bridge Warrants (which were
automatically converted to Class A Warrants upon completion of the IPO). 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. The Company used a portion of the
net proceeds of its IPO to repay the Bridge Notes. Additionally, in 1996, the
Company recognized a extraordinary loss 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.
15
<PAGE>
The Company expects its cash requirements to increase in the future due to
higher expenses associated with product development, the scale-up of production
(including capital investment in production equipment), implementation of a
sales and marketing program, the hiring of personnel and other anticipated
operating activities. The Company also expects to continue to incur losses until
such time, if ever, as it obtains regulatory approval for the JETCRUZER 500 and
related production processes and market acceptance for its proposed aircraft at
selling prices and volumes which provide adequate gross profit to cover
operating costs and generate positive cash flow. The Company's working capital
requirements will depend upon numerous factors, including the level of resources
devoted by the Company to the scale-up of manufacturing and the establishment of
sales and marketing capabilities and the progress of the Company's research and
development program for the JETCRUZER 500 and other proposed aircraft.
The Company expects that the net proceeds of the IPO will enable it to meet
its liquidity and capital requirements for the next 14 to 20 months, by which
time the Company expects to have received a type certificate and a production
certificate for the JETCRUZER 500 and commenced commercial production and sale
of the JETCRUZER 500. During this period such proceeds will be used primarily
for amendment of the Type Certificate, the purchase of equipment and tooling,
the establishment of a manufacturing facility, and sales and marketing. The
Company's capital requirements are subject to numerous contingencies associated
with development stage companies. Specifically, in the event that the FAA
determines that a new type certificate is required, or if delays are encountered
in amending the current Type Certificate, the time and cost of obtaining such
certification may be substantial, may render it impossible for the Company to
complete such new or amended certification and may therefore have a material and
adverse effect on the Company's operations. Further, following such 14 to 20
month period, if the Company has not completed the development of the JETCRUZER
500, received the required regulatory approvals and successfully commenced
commercial sales of its aircraft, the Company may require additional funding to
fully implement its proposed business plan. The Company has no commitments from
any third parties for any future funding, and there can be no assurance that the
Company will be able to obtain financing in the future from bank borrowings,
debt or equity financings or other sources on terms acceptable to the Company or
at all. In the event necessary financing were not obtained, the Company would be
materially and adversely affected and might have to cease or substantially
reduce operations.
The Company had no material capital commitments at December 31, 1996. 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 25 employees
over the next six months and 150 employees over the next 20 months, including
engineers and manufacturing technicians necessary to produce its aircraft.
Additionally, the Company plans to acquire, build and/or improve a larger
manufacturing facility. The Company estimates that the total cost of such
facility will be approximately $7,000,000 and has allocated approximately
$1,100,000 to fund a portion of such cost. The Company anticipates funding the
remaining portion of such cost through mortgage financing and/or other similar
means. There can be no assurance, however, that such funding will be available
on terms acceptable to the Company or at all. In the event the Company is unable
to fund fully the costs of the facility from such sources, it may utilize a
portion of the proceeds from the Offering allocated to working capital for such
purpose or it may lease a facility until adequate funds become available.
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.
16
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A Development Stage Enterprise)
INDEX TO FINANCIAL STATEMENTS
Page
Number
Report of Independent Accountants 18
Balance Sheet 19
Statement of Operations 20
Statement of Stockholders' Equity 21
Statement of Cash Flows 23
Notes to Financial Statements 24
17
<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, 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
18
<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.
19
<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.
20
<PAGE>
Advanced Aerodynamics & Structures, Inc.
(A Development Stage Enterprise)
Statement of Stockholders' Equity
<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 (Note 6) 595,283 -- 1,190,566 -- 1,190,566 --
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.
21
<PAGE>
Advanced Aerodynamics & Structures, Inc.
(A Development Stage Enterprise)
Statement of Stockholders' Equity (Continued)
<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
stockholder (Note 5) 776,000 776,000
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 (Note 6) 1,507,000 1,507,000
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.
22
<PAGE>
Advanced Aerodynamics & Structures, Inc.
(A Development Stage Enterprise)
Statement of Cash Flows
<TABLE>
Period from January 26,
1990 (inception) to
Year Ended December 31, 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.
23
<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.
24
<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
25
<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.
26
<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 years.
27
<PAGE>
Advanced Aerodynamics & Structures, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements
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:
Class B Class E-1 Class E-2
-------------------------------------
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
28
<PAGE>
Advanced Aerodynamics & Structures, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements
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.
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.
29
<PAGE>
Advanced Aerodynamics & Structures, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements
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.
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.
30
<PAGE>
Advanced Aerodynamics & Structures, Inc.
(A Development Stage Enterprise)
Notes to Financial Statements
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
----------------------------------------
31
<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.
32
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Information regarding directors and executive officers of the Company will
appear in the Proxy Statement of the Annual Meeting of Stockholders and is
incorporated herein by this reference. The Proxy Statement will be filed with
the SEC within 120 days following December 31, 1996.
ITEM 10. EXECUTIVE COMPENSATION
Information regarding executive compensation will appear in the Proxy
Statement for the Annual Meeting of Stockholders and is incorporated herein by
this reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management will appear in the Proxy Statement for the Annual Meeting of
Stockholders and is incorporated herein by this reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions will
appear in the Proxy Statement for the Annual Meeting of Stockholders and is
incorporated herein by this reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Description
- -------------------------------------------------------------------------------
*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 form of Class A and Class B
Warrant Certificates
*4.3 Form of Underwriter's Unit Purchase Option
*10.1 Form of Indemnification Agreement
10.2 Amended 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 Lease dated December 19, 1996 between Olen Properties Corp., a
Florida corporation, and the Company
11.1 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule
* Incorporated by reference to the Company's Registration Statement on Form
SB-2 (333-12273) declared effective by the Securities and Exchange Commission on
December 3, 1996.
33
<PAGE>
Reports on Form 8-K:
During the quarter ended December 31, 1996, the Company did not file any
reports on Form 8-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 31, 1997 ADVANCED AERODYNAMICS &
STRUCTURES, INC.
By:/s/ Carl L. Chen
---------------------------------
Carl L. Chen, President
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Carl L. Chen President, Chief Executive March 31, 1997
Carl L. Chen Officer, and Chairman of
the Board
/s/ Gene Comfort Executive Vice President, March 31, 1997
Gene Comfort Secretary and Director
/s/ Dave Turner Vice President - Finance March 31, 1997
Dave Turner and Chief Financial Officer
/s/ C.M. Cheng Director March 31, 1997
C.M. Cheng
/s/ Steve Gorlin Director March 31, 1997
Steve Gorlin
/s/ Jim Lovell Director March 31, 1997
Jim Lovell
34
ADVANCED AERODYNAMICS & STRUCTURES, INC.
* * * * *
B Y L A W S
* * * * *
ARTICLE I
OFFICES
Section 1. The registered office shall be in the City of Wilmington, County
of New Castle, State of Delaware.
Section 2. The corporation may also have offices at such other places both
within and without the State of Delaware as the board of directors may from time
to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election of directors
shall be held at the principal executive office of the corporation in the City
of Long Beach, State of California, or at such place as may be fixed from time
to time by the board of directors, or at such other place either within or
without the State of Delaware as shall be designated from time to time by the
board of directors and stated in the notice of the meeting. Meetings of
<PAGE>
stockholders for any other purpose may be held at such time and place, within or
without the State of Delaware, as shall be stated in the notice of the meeting
or in a duly executed waiver of notice thereof.
Section 2. Annual meetings of stockholders, commencing with the year 1997,
shall be held on or before the fifteenth day of August of each year at such date
and time as shall be designated from time to time by the board of directors and
stated in the notice of the meeting, at which they shall elect by plurality
vote, a board of directors, and transact such other business as may properly be
brought before the meeting.
Section 3. The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
1
Section 4. Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute or by the certificate of
incorporation, may be called by the president and shall be called by the
president or secretary at the request in writing of a majority of the board of
directors, or by the chairman of the board, or by the president, or at the
request in writing of stockholders owning at least ten percent of the entire
capital stock of the corporation issued and outstanding and entitled to vote.
Such request shall state the purpose or purposes of the proposed meeting.
Section 5. Business transacted at any special meeting of stockholders shall
be limited to the purposes stated in the notice.
Section 6. Written notice of any meeting of stockholders stating the place,
date and hour of the meeting and the purpose or purposes for which the meeting
is called, shall be given not less than ten (10) nor more than sixty (60) days
before the date of the meeting, to each stockholder entitled to vote at such
meeting. Any notice of stockholders' meeting or report to stockholders shall be
deemed to have been given at the time when delivered personally or deposited in
the mail (first class, postage pre-paid) or sent by other means of written
communication. An affidavit of mailing of any notice or report in accordance
with the provisions of the General Corporation Law of Delaware (DGCL), executed
by the Secretary, assistant secretary or any transfer agent, shall be prima
facie evidence of the giving of the notice or report.
Section 7. Upon request in writing, delivered to such officers by any
persons entitled to call a meeting of stockholders, it shall be the duty of the
chairman of the board, the president, a vice president or the secretary, to
cause notice to be given to the stockholders entitled to vote that a meeting
will be held at a time requested by the person or persons calling the meeting,
not less than thirty-five (35) nor more than sixty (60) days after receipt of
the request. If such notice shall not be given within twenty (20) days after the
date of receipt of such request, the person of persons entitled to call the
meeting may give notice of the meeting in the manner provided in Section 8 of
Article II of these Bylaws.
Section 8. Notice of each annual or special meeting of stockholders shall
be given in writing and shall specify the place, the date and the hour of the
meeting, and (1) in the case of a special meeting, the general nature of the
business to be transacted at the meeting, or (2) in the case of the annual
meeting, those matters which the board of directors, at the time of the mailing
of the notice, intends to present for action by the stockholders, but, any
proper matter may be presented at the annual meeting for such action.
Section 9. Notice of a stockholders' meeting or any report to he
stockholders shall be given either personally, or by sending a copy thereof
through the mail, or by telegram, or by other means of written communication,
charges prepaid, to the stockholder's address appearing on the
2
<PAGE>
books of the corporation, or given by the stockholder to the corporation for the
purposes of notice; or, if no such address appears or is given, notice shall be
deemed to have been given if addressed to the stockholder at the place where the
principal executive office of the corporation is located or if published at
least once in a newspaper having general circulation in the county in which the
principal executive office is located. If any notice or report addressed to the
stockholder at the address of such stockholder appearing on the books of the
corporation is returned to the corporation by the United States Postal Service
marked to indicate that the United States Postal Service is unable to deliver
the notice or report to the stockholder at such address, all future notices or
reports shall be deemed to have been duly given without further mailing if the
same shall be available for the stockholder upon written demand of the
stockholder at the principal executive office of the corporation for a period of
one year from the date of the giving of the notice or report to all other
stockholders.
Section 10. The holders of a majority of the stock issued and outstanding
and entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the certificate of
incorporation. Whenever under the DGCL, shares are disqualified from voting on
any matter, they shall not be considered outstanding for the determination of a
quorum at any meeting to act upon that matter. The stockholders present at a
duly called or held meeting at which a quorum is present may continue to
transact business until adjournment notwithstanding the withdrawal of enough
stockholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
Section 11. When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes or of
the certificate of incorporation, a different vote is required in which case
such express provision shall govern and control the decision of such question.
Section 12. Unless otherwise provided in the certificate of incorporation
each stockholder shall at every meeting of the stockholders be entitled to one
vote in person or by proxy for each share of the capital stock having voting
power held by such stockholder, but in the election of directors, cumulative
voting shall prevail, that is to say, each stockholder shall have the right to
cast as many votes in the aggregate as shall equal the number of voting shares
so held by him, multiplied by the number of directors to be elected at such
election, and he may cast the whole
3
<PAGE>
number of such votes for one or more candidates. Directors shall not be elected
in any other manner, unless such cumulative voting be unanimously waived by all
stockholders present, in person or by proxy, and such waiver is permitted by
law. No proxy shall be voted on after three years from its date, unless the
proxy provides for a longer period.
Section 13. Unless otherwise provided in the certificate of incorporation,
any action required to be taken at any annual or special meeting of stockholders
of the corporation, or any action which may be taken at any annual or special
meeting of such stockholders, may be taken without a meeting, without prior
notice and without a vote, if a consent in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted. Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those stockholders who
have not consented in writing.
Section 14. The stockholders shall have the power by a vote of the holders
of shares at any regular meeting or special meeting expressly called for that
purpose, to remove any director from office with or without cause. Such meeting
shall be held at any place prescribed by law or at any other place which may be
permissible under law, and which is designated in the notice of the special
meeting. If less than the entire board is to be removed, no one of the directors
may be removed if the votes cast against his removal would be sufficient to
elect him if then cumulatively voted at an election of the entire board of
directors.
ARTICLE III
DIRECTORS
Section 1. Each director shall be a natural person who is at least
twenty-one years of age. A director need not be a stockholder, a citizen of the
United States, or a resident of the State of Delaware unless required by law or
the Certificate of Incorporation.
Section 2. The number of directors which shall constitute the whole board
shall be not less than three (3) nor more than seven (7). The first board shall
consist of five (5) directors. Thereafter, within the limits above specified,
the number of directors shall be determined by resolution of the board of
directors or by a majority of the outstanding shares of the corporation. The
directors shall be elected at the annual meeting of the stockholders, except as
provided in Section 3 of this Article, and each director elected shall hold
office until his successor is elected and qualified. Directors need not be
stockholders.
Section 3. Any director may resign effective upon giving written notice to
the chairman of the board, the president, the secretary or the board of
directors of the corporation, unless the notice specifies a later time for
effectiveness of such resignation. If a resignation of a director is
4
<PAGE>
effective at a future time, a successor may be elected to take office when the
resignation becomes effective.
Section 4. Vacancies and newly created directorships resulting from any
increase in the authorized number of directors may be filled by a majority of
the directors then in office, though less than a quorum, or by a sole remaining
director, and the directors so chosen shall hold office until the next annual
election and until their successors are duly elected and shall qualify, unless
sooner displaced. If there are no directors in office, then an election of
directors may be held in the manner provided by statute. If, at the time of
filling any vacancy or any newly created directorship, the directors then in
office shall constitute less than a majority of the whole board (as constituted
immediately prior to any such increase), the Court of Chancery may, upon
application of any stockholder or stockholders holding at least ten percent of
the total number of the shares at the time outstanding having the right to vote
for such directors, summarily order an election to be held to fill any such
vacancies or newly created directorships, or to replace the directors chosen by
the directors then in office.
Section 5. The business of the corporation shall be managed by or under the
direction of its board of directors which may exercise all such powers of the
corporation and do all such lawful acts and things as are not by statute or by
the certificate of incorporation or by these bylaws directed or required to be
exercised or done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
Section 6. The board of directors of the corporation may hold meetings,
both regular and special, either within or without the State of Delaware.
Section 7. Immediately following each annual meeting of the stockholders,
the newly elected board of directors shall hold a regular meeting at the place
where said annual meeting has been held or at such other place as shall be fixed
by the board of directors. No notice of such meeting shall be necessary to the
newly elected directors in order legally to constitute the meeting, provided a
quorum shall be present. In the event such meeting is not held at the time and
place so fixed by the board of directors, the meeting may be held at such time
and place as shall be specified in a notice given as hereinafter provided for
special meetings of the board of directors, or as shall be specified in a
written waiver signed by all of the directors.
Section 8. Regular meetings of the board of directors may be held without
notice at such time and at such place as shall from time to time be determined
by the board.
Section 9. Special meetings of the board may be called by the president on
five (5) days' notice delivered by mail or 48 hours' notice delivered
personally, by telephone or by facsimile communication. Special meetings shall
be called by the chairman of the board or president, or
5
<PAGE>
by the president or secretary in like manner and in like notice on the written
request of any two directors.
Section 10. Notice of a meeting need not be given to any director who signs
a written waiver of notice, whether before or after the meeting, or who attends
the meeting without protesting, prior thereto or at its commencement, the lack
of notice to such director. No director who so protests shall be considered
present at any such meeting. The transactions of any meeting of the board of
directors, however called and noticed or wherever held, are as valid as though
had at a meeting duly held after regular call and notice if a quorum is present,
and if, either before or after the meeting, each of the directors not present
(including each director who protested lack of notice) signs a written waiver of
notice, a consent to holding the meeting or an approval of the minutes thereof.
All such waivers, consents and approvals shall be filed with the corporate
records or made a part of the minutes of the meeting.
Section 11. At all meetings a majority of the board of directors shall
constitute a quorum for the transaction of business and the act of a majority of
the directors present at any meeting at which there is a quorum shall be the act
of the board of directors, except as may be otherwise specifically provided by
statute or by the certificate of incorporation. A meeting at which a quorum is
initially present may continue to transact business notwithstanding the
withdrawal of directors, so long as any action taken is approved by at least a
majority of the required quorum for such meeting. If a quorum shall not be
present at any meeting of the board of directors the directors present thereat
may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present; provided, however,
if the meeting is adjourned for more than two days, at least two (2) days'
notice by mail or 24 hours' notice delivered personally or by telephone or
telegraph, stating the time and place at which the meeting will reconvene, shall
be given to each director who was not present at the time of the adjournment.
Section 12. Unless otherwise restricted by the certificate of incorporation
or these bylaws, any action required or permitted to be taken at any meeting of
the board of directors or of any committee thereof may be taken without a
meeting, if all members of the board or committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the board or committee.
Section 13. Unless otherwise restricted by the certificate of incorporation
or these bylaws, members of the board of directors, or any committee designated
by the board of directors, may participate in a meeting of the board of
directors, or any committee, by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
6
<PAGE>
COMMITTEES OF DIRECTORS
Section 14. The board of directors may, by resolution passed by a majority
of the whole board, designate one or more committees, each committee to consist
of one or more of the directors of the corporation. The board may designate one
or more directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of the committee.
In the absence or disqualification of a member of a committee, the member
or members thereof present at any meeting and not disqualified from voting,
whether or not he or they constitute a quorum, may unanimously appoint another
member of the board of directors to act at the meeting in the place of any such
absent or disqualified member.
Any such committee, to the extent provided in the resolution of the board
of directors, shall have and may exercise all the powers and authority of the
board of directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to amending the certificate of incorporation, (except
that a committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the board of directors
as provided in Section 151(a) fix any of the preferences or rights of such
shares relating to dividends, redemption, dissolution, any distribution of
assets of the corporation or the conversion into, or the exchange of such shares
for, shares of any other class or classes or any other series of the same or any
other class or classes of stock of the corporation) adopting an agreement of
merger or consolidation, recommending to the stockholders the sale, lease or
exchange of all or substantially all of the corporation's property and assets,
recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the bylaws of the corporation; and,
unless the resolution or the certificate of incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock or to adopt a certificate of ownership and
merger. Such committee or committees shall have such name or names as may be
determined from time to time by resolution adopted by the board of directors.
Section 15. Each committee shall keep regular minutes of its meetings and
report the same to the board of directors when required.
COMPENSATION OF DIRECTORS
Section 16. Unless otherwise restricted by the certificate of incorporation
or these bylaws, the board of directors shall have the authority to fix the
compensation of directors. The directors may be paid their expenses, if any, of
attendance at each meeting of the board of directors and may be paid a fixed sum
for attendance at each meeting of the board of directors or a stated salary as
director. No such payment shall preclude any director from serving the
corporation in any
7
<PAGE>
other capacity and receiving compensation therefor. Members of special or
standing committees may be allowed like compensation for attending committee
meetings.
REMOVAL OF DIRECTORS
Section 17. Unless otherwise restricted by the certificate of incorporation
or by law, any director or the entire board of directors may be removed, with or
without cause, by the holders of a majority of shares entitled to vote at an
election of directors.
ARTICLE IV
NOTICES
Section 1. Whenever, under the provisions of the statutes or of the
certificate of incorporation or of these bylaws, notice is required to be given
to any director or stockholder, it shall not be construed to mean personal
notice, but such notice may be given in writing, by mail, addressed to such
director or stockholder, at his address as it appears on the records of the
corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Notice to directors may also be given by facsimile telecommunication.
Section 2. Whenever any notice is required to be given under the provisions
of the statutes or of the certificate of incorporation or of these bylaws, a
waiver thereof in writing, signed by the person or persons entitled to said
notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
Section 1. The officers of the corporation shall be chosen by the board of
directors and shall be a chairman of the board or a president, or both, a
secretary and a chief financial officer. The board of directors may also choose
one or more vice-presidents, and one or more assistant secretaries and assistant
financial officers. Any number of offices may be held by the same person, unless
the certificate of incorporation or these bylaws otherwise provide.
Section 2. The board of directors at its first meeting after each annual
meeting of stockholders shall choose a chairman of the board or a president, or
both, a secretary and a chief financial officer.
8
<PAGE>
Section 3. The board of directors may appoint such other officers and
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the board.
Section 4. The salaries of all officers and agents of the corporation shall
be fixed by the board of directors, but this power may, unless prohibited by
law, be delegated by the board to the chairman of the board (if any) or to the
president (except as to their own compensation), or to a committee. Salaries and
compensation of all other appointed officers and agents, and employees of the
corporation, may be fixed, increased or decreased by the board of directors or a
committee thereof, but until action is taken with respect thereto by the board
of directors or a committee thereof, the same may be fixed, increased or
decreased by the chairman of the board, the president or by such other officer
or officers as may be empowered by the board of directors or a committee thereof
to do.
Section 5. The officers of the corporation shall hold office until their
successors are chosen and qualify. Any officer elected or appointed by the board
of directors may be removed at any time by the affirmative vote of a majority of
the board of directors. Any vacancy occurring in any office of the corporation
shall be filled by the board of directors. Any officer may resign at any time
upon written notice to the corporation without prejudice to the rights, if any,
of the corporation under any contract to which the officer is a party.
CHAIRMAN OF THE BOARD
Section 6. The chairman of the board, if there be such officer, shall, if
present, preside at all meetings of the board of directors and shall exercise
and perform such other powers and duties as may be assigned from time to time to
the chairman of the board by the board of directors. Whenever there is no
president of the corporation, the chairman of the board shall have the powers
and duties of the president.
THE PRESIDENT
Section 7. Subject to such supervisory powers, if any, as may be given by
the board of directors to the chairman of the board, if there be such an
officer, the president shall be the general manager and chief executive officer
of the corporation, shall preside at all meetings of the stockholders and,
provided the president is also a director, in the absence of the chairman of the
board, if there be such an officer, the president shall preside at all meetings
of the board of directors. The president shall have general and active
management of the business of the corporation and shall see that all orders and
resolutions of the board of directors are carried into effect.
9
<PAGE>
Section 8. He shall execute bonds, mortgages and other contracts requiring
a seal, under the seal of the corporation, except where required or permitted by
law to be otherwise signed and executed and except where the signing and
execution thereof shall be expressly delegated by the board of directors to some
other officer or agent of the corporation.
Section 9. The president, when authorized to do so by the board, may
execute powers of attorney form, for, and in the name of the corporation, to
such proper person or persons as he may deem fit, in order that thereby the
business of the corporation may be furthered or action taken as may be deemed by
him necessary or advisable in furtherance of the interests of the corporation.
Section 10. The president shall, unless the board otherwise provides, be ex
officio a member of all standing committees. The president shall have such other
or further duties and authority as may be prescribed elsewhere in these bylaws
or form time to time by the board of directors, and the board may from time to
time divide the responsibilities, duties, and authority between them to such
extent as it may deem advisable.
THE VICE-PRESIDENTS
Section 11. In the absence of the president or in the event of his
inability or refusal to act, the vice-president (or in the event there be more
than one vice-president, the vice-presidents in the order designated by the
directors, or in the absence of any designation, then in the order of their
election) shall perform the duties of the president, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
president. The vice-presidents shall perform such other duties and have such
other powers as the board of directors may from time to time prescribe.
THE SECRETARY AND ASSISTANT SECRETARY
Section 12. The secretary shall attend all meetings of the board of
directors and all meetings of the stockholders and record all the proceedings of
the meetings of the corporation and of the board of directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. He shall give, or cause to be given, notice of all meetings of
the stockholders and special meetings of the board of directors, and shall
perform such other duties as may be prescribed by the board of directors or
president, under whose supervision he shall be. He shall have custody of the
corporate seal of the corporation and he, or an assistant secretary, shall have
authority to affix the same to any instrument requiring it and when so affixed,
it may be attested by his signature or by the signature of such assistant
secretary. The board of directors may give general authority to any other
officer to affix the seal of the corporation and to attest the affixing by his
signature.
10
<PAGE>
Section 13. The assistant secretary, or if there be more than one, the
assistant secretaries in the order determined by the board of directors (or if
there be no such determination, then in the order of their election) shall, in
the absence of the secretary or in the event of his inability or refusal to act,
perform the duties and exercise the powers of the secretary and shall perform
such other duties and have such other powers as the board of directors may from
time to time prescribe.
CHIEF FINANCIAL OFFICER AND ASSISTANT FINANCIAL OFFICERS
Section 14. The chief financial officer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the corporation in such depositories as may be designated by the board of
directors.
Section 15. He shall disburse the funds of the corporation as may be
ordered by the board of directors, taking proper vouchers for such
disbursements, and shall render to the president and the board of directors, at
its regular meetings, or when the board of directors so requires, an account of
all his transactions as treasurer and of the financial condition of the
corporation.
Section 16. If required by the board of directors, he shall give the
corporation a bond (which shall be renewed every six years) in such sum and with
such surety or sureties as shall be satisfactory to the board of directors for
the faithful performance of the duties of his office and for the restoration to
the corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the corporation.
Section 17. The assistant financial officer, or if there shall be more than
one, the assistant financial officers, in the order determined by the board of
directors (or if there be no such determination, then in the order of their
election) shall, in the absence of the chief financial officer or in the event
of his inability or refusal to act, perform the duties and exercise the powers
of the chief financial officer and shall perform such other duties and have such
other powers as the board of directors may from time to time prescribe.
ADDITIONAL DUTIES
Section 18. In addition to the foregoing powers and duties specifically
prescribed for the respective officers, the board of directors may from time to
time impose or confer upon any of the officers such additional duties and powers
as the board of directors may see fit, and the board of directors may from time
to time impose or confer any or all of the foregoing duties and powers
specifically prescribed for any officer upon any other officer or officers.
11
<PAGE>
ARTICLE VI
CERTIFICATES FOR SHARES
Section 1. The corporation shall not issue shares of stock except for money
paid, labor done or property actually received; provided, however, that shares
may be issued in consideration of valid bona fide antecedent debts. No note or
obligation given by any stockholder, whether secured by deed of trust, mortgage
or otherwise shall be considered as payment of any part of any share or shares.
Section 2. The certificates for shares of stock of the corporation shall be
numbered, shall be in such form as may be prescribed by the board of directors
in conformity with law, and shall be entered in the stock books of the
corporation or association to whom each certificate is issued. Each certificate
shall have printed, typed or written thereon the name of the person, firm,
partnership, corporation or association to whom it is issued, and number of
shares represented thereby and shall be signed by the chairman of the board (if
any) or the president or a vice president, and the treasurer or an assistant
treasurer or the secretary or an assistant secretary of the corporation and
sealed with the seal of the corporation, which seal may be facsimile, engraved
or printed. If the corporation has a registrar, a transfer agent, or a transfer
clerk who actually signs such certificates, the signature of any of the other
officers above mentioned may be facsimile, engraved or printed. In case any such
officer who has signed or whose shall have ceased to be such officer before such
certificate is issued, such certificate may nevertheless be issued by the
corporation with the same effect as if such officer were an officer at the date
of its issue.
LOST CERTIFICATES
Section 3. In case of the loss or destruction of any certificate for shares
of stock of the corporation, upon due proof of the registered owner thereof or
his representatives, by affidavit of such loss or otherwise, the president and
secretary may issue a duplicate certificate (plainly marked "duplicate") in its
place, upon the corporation being fully indemnified therefor. Either of such
officer may request the posting of an indemnity bond in favor of the corporation
whenever and to the extent that they deem appropriate as a precondition to the
issuance of any duplicate certificate.
TRANSFER OF STOCK
Section 4. Transfers of shares of stock shall be made on the stock record
or transfer books of the corporation only by the person named in the stock
certificate, or by his attorney lawfully constituted in writing, and upon
surrender of the certificate therefor. The stock record book and other transfer
records shall be in the possession of the secretary (or other person appointed
and empowered by the board to do so) or of a transfer agent or clerk for the
corporation. The
12
<PAGE>
corporation, by resolution of the board, may from time to time appoint a
transfer agent, and, if desired, a registrar, under such arrangements and upon
such terms and conditions as the board deems advisable; but until and unless the
board appoints some other person, firm or corporation as its transfer agent (and
upon the revocation of any such appointment, thereafter until a new appointment
is similarly made) the secretary of the corporation (or other person appointed
and empowered by the board) shall be the transfer agent or clerk of the
corporation, without the necessity of any formal action of the board, and the
secretary or other person shall perform all of the duties thereof.
FIXING RECORD DATE
Section 5. In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the board of directors may fix, in advance, a record date,
which shall not be more than sixty nor less than ten days before the date of
such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting: provided,
however, that the board of directors may fix a new record date for the adjourned
meeting. If the board of directors does not set a record date for the
determination of the stockholders entitled to notice of, and to vote at, the
meeting, and any adjournment of the meeting, the record date shall be the date
that is twenty days previous to the meeting; except that, if prior to the
meeting written waivers of notice of the meeting are signed and delivered to the
corporation by all of the stockholders of record at the time the meeting is
convened, only the stockholders who are stockholders of record at the time the
meeting is convened shall be entitled to vote at the meeting, and any
adjournment of the meeting.
FRACTIONAL SHARE INTEREST
Section 6. The corporation may issue fractions of a share and it may issue
a certificate for a fractional share, or by action of the board of directors,
may issue in lieu thereof scrip or other evidence of ownership which shall
entitle the holder to receive a certificate for a full share upon the surrender
of such scrip or other evidence of ownership aggregating a full share. A
certificate for a fractional share shall (but scrip or other evidence of
ownership shall not, unless otherwise provided by resolution of the board of
directors) entitle the holder to all of the rights of a stockholder, including
without limitation the right to exercise any voting right, or to receive
dividends thereon or to participate in any of the assets of the corporation in
the event of liquidation. The board of directors may cause such scrip or
evidence of ownership (other than a certificate for a fractional share) to be
issued subject to the condition that the shares for which such scrip or evidence
of ownership is exchangeable may be sold by the corporation and the
13
<PAGE>
proceeds thereof distributed to the holders of such scrip or evidence of
ownership, or subject to any other condition which the board of directors may
deem advisable.
REGISTERED STOCKHOLDERS
Section 7. The corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE VII
INDEMNIFICATION
Section 1. Each person who is or was a director or officer of the
corporation or is or was serving at the request of the corporation as a director
or officer of another corporation (including the heirs, personal
representatives, or estate of such person) shall be indemnified by the
corporation as a matter of right to the full extent permitted or authorized by
the laws of the State of Delaware, as now in effect and as hereafter amended,
against any liability, judgment, fine, amount paid in settlement, cost and
expense (including attorneys' fees) asserted or threatened against and incurred
by such person (other than in an action by or in right of the corporation) in
his capacity as or arising out of his status as a director or officer of the
corporation or, if serving at the request of the corporation, as a director or
officer of another corporation, if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
corporation, and, with respect to any criminal action or proceeding, he had no
reason to believe his conduct was unlawful. The termination of any action, suit
or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
the person did not act in good faith and in a manner which he reasonably
believed to be in, or not opposed to, the best interests of the corporation,
and, with respect to any criminal action or proceeding, he had no reason to
believe his conduct was unlawful.
Section 2. The corporation shall also indemnify any person who was or is a
party, or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is nor was a director or
officer of the corporation or, if serving at the request of the corporation, as
a director or officer of another corporation, against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection with the
defense or settlement of such action or suit, if he acted in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best interests of
the corporation. Notwithstanding the foregoing, no such indemnification shall be
14
<PAGE>
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable for negligence or misconduct in the performance of
his duty to the corporation, unless, and only to the extent that the court in
which such action or suit was brought shall determine upon application that,
despite the adjudication of liability, but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses as the court shall deem proper.
Section 3. The indemnification provided by this Article shall not be
exclusive of any other rights to which those indemnified may be entitled under
any other by-law provision or under any agreement, vote or stockholders or
disinterested directors or otherwise, and shall not limit in any way right which
the corporation may have to make different or further indemnifications with
respect to the same or different persons or classes of persons.
Section 4. Any indemnification provided by this Article (unless ordered by
a Court) shall be made by the corporation only upon a determination that
indemnification of the director or officer is proper in the circumstances
because he has met the applicable standard of conduct set forth herein. Such
determination shall be made: (1) by the board of directors upon a majority vote
of a quorum consisting of directors who were not parties to such action, suit or
proceeding; or (2) if such a quorum is not obtainable, or even if so obtainable,
a majority of directors who were not parties to such action, suit or proceeding
so directs, by independent legal counsel in a written opinion; or (3) by the
stockholders.
Section 5. Expenses incurred by an officer or director of the corporation
in defending a civil or criminal action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding, as authorized in the manner set forth in the immediately preceding
paragraph, upon receipt of a written promise by or on behalf of the director or
officer to repay such amount in the event it shall ultimately be determined that
he is not entitled to be indemnified by the corporation under the provisions of
this Article.
Section 6. The corporation may purchase and maintain insurance on behalf of
any person who is or was a director or officer of the corporation or, if serving
at the request of the corporation, who is or was serving as a director or
officer of another corporation, against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under the provisions of this Article.
Section 7. No person shall be liable to the corporation for any loss,
damage, liability or expense suffered by it on account of any action taken or
omitted to be taken by him as a director or officer of the corporation or of any
other corporation which he serves as a director or officer at the request of the
corporation, if such person (i) exercised the same degree of care and skill as a
prudent man would have exercised under the circumstances in the conduct of his
own affairs, or (ii) took or omitted to take such action in reliance upon advice
of counsel for the corporation, or of such other corporation, which he had no
reasonable grounds to disbelieve.
15
<PAGE>
Section 8. To the extent that the foregoing provisions concerning
indemnification and liability conflict with any provisions of the Certificate of
Incorporation, the said Certificate shall control.
ARTICLE VIII
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the capital stock of the corporation, subject to
the provisions of the certificate of incorporation, if any, may be declared by
the board of directors at any regular or special meeting, pursuant to law.
Dividends may be paid in cash, in property, or in shares of the capital stock,
subject to the provisions of the certificate of incorporation.
Section 2. Before payment of any dividend, there may be set aside out of
any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purpose as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
EXECUTION OF CONTRACTS
Section 3. The board of directors, except as in these bylaws otherwise
provided, may authorize any officer or officers or agent or agents to enter into
any contract or execute any instrument in the name of and on behalf of the
corporation. Such authority may be generally, or confined to specific instances.
Unless so authorized by the board of directors, no officer, agent or employee
shall have any power or authority to bind the corporation by any contract or
engagement or to pledge its credit, or to render it liable for any purpose or in
any amount; provided, however, that nothing contained in this section 3 shall be
construed to prevent any officer of the corporation from performing his regular
duties in the ordinary course of business pursuant to the authority granted to
said officer by Article V of these Bylaws.
Section 4. All shares of any other corporation standing in the name of this
corporation shall be voted, represented, and all rights incidental thereto
exercised as directed by written consent or resolution of the board of directors
expressly referring thereto. In general, such rights shall be delegated by the
board of directors, under express instructions from time to time as to such
exercise thereof, the president, or any vice president, and the secretary or any
assistant secretary of this corporation, or any other person expressly appointed
by the board of directors. Such authority may be exercised by the designated
officers in person, or by any other person authorized so to do by proxy, or
power of attorney, duly executed by such officers.
16
<PAGE>
TRANSFER AGENTS AND REGISTRARS
Section 5. The board of directors may appoint one or more transfer agents
or transfer clerks, and one or more registrars, who may be the same person, and
may be the secretary of the corporation, or an incorporated bank or trust
company, either domestic or foreign, who shall be appointed at such times and
places as the requirements of the corporation may necessitate and the board of
directors may designate.
ANNUAL STATEMENT
Section 6. The board of directors shall present at each annual meeting, and
at any special meeting of the stockholders when called for by vote of the
stockholders, a full and clear statement of the business and condition of the
corporation.
CHECKS
Section 7. All checks or demands for money and notes of the corporation
shall be signed by such officer or officers or such other person or persons as
the board of directors may from time to time designate.
FISCAL YEAR
Section 8. The fiscal year of the corporation shall be fixed by resolution
of the board of directors.
SEAL
Section 9. The corporate seal shall have inscribed thereon the name of the
corporation, the year of its organization and the words "Corporate Seal,
Delaware". The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
FIXING OF CAPITAL, TRANSFER OF SURPLUS
Section 10. Except as may be specifically otherwise provided in the
Articles of Incorporation, the board of directors is expressly empowered to
exercise all authority conferred upon it or the corporation by any law or
statute, and in conformity therewith, relative to:
1. The determination of what part of the consideration received for
shares of the corporation shall be capital;
17
<PAGE>
2. Increasing capital;
3. Transferring surplus to capital;
4. The consideration to be received by the corporation for its shares;
and
5. All similar or related matters;
provided that any concurrent action or consent by or of the corporation and its
stockholders required to be taken or given pursuant to law, shall be duly taken
or given in connection therewith.
ARTICLE IX
AMENDMENTS
Section 1. These bylaws may be altered, amended or repealed or new bylaws
may be adopted by the stockholders or by the board of directors, when such power
is conferred upon the board of directors by the certificate of incorporation at
any regular meeting of the stockholders or of the board of directors or at any
special meeting of the stockholders or of the board of directors if notice of
such alteration, amendment, repeal or adoption of new bylaws be contained in the
notice of such special meeting. If the power to adopt, amend or repeal bylaws is
conferred upon the board of directors by the certificate of incorporation it
shall not divest or limit the power of the stockholders to adopt, amend or
repeal bylaws.
18
ADVANCED AERODYNAMICS & STRUCTURES, INC.
AMENDED 1996 STOCK OPTION PLAN
(as amended on March 4, 1997)
1. PURPOSE. This Stock Option Plan (the "Plan") is intended to serve as an
incentive to, and to encourage stock ownership by, certain eligible participants
rendering services to Advanced Aerodynamics & Structures, Inc., a Delaware
corporation, and certain affiliates as set forth below (the "Corporation"), so
that they may acquire or increase their proprietary interest in the Corporation
and to encourage them to remain in the service of the Corporation.
2. ADMINISTRATION.
2.1 Committee. The Plan shall be administered by a committee of one or
more outside directors appointed by the Board of Directors of the Corporation
(the "Committee"). The Committee shall select one of its members as Chairman and
shall appoint a Secretary, who need not be a member of the Committee. The
Committee shall hold meetings at such times and places as it may determine and
minutes of such meetings shall be recorded. Acts by a majority of the Committee
in a meeting at which a quorum is present and acts approved in writing by a
majority of the members of the Committee shall be valid acts of the Committee.
2.2 Formula Grants to Non-Employee Directors. Notwithstanding the
other provisions of this Plan regarding the grant of options, options shall be
granted to non-employee Directors of the Corporation as follows:
2.2.1 Options to acquire 25,000 shares of Stock (as defined
below) shall be granted to each such Director of the Corporation within six
months after taking office as a member of the Board of Directors of the
Corporation. Such options shall vest and become exercisable in 5,000 share
intervals on each anniversary of the date of grant commencing on the first such
anniversary.
2.2.2 The exercise price for options granted pursuant to this
Section 2.2 shall be the fair market value of the Stock, as determined by the
Committee, on the date of grant, unless a higher price is required by applicable
securities or tax laws.
2.2.3 This Section 2.2 shall not be modified more often than once
every six months, except as may be necessary or advisable to comport with the
requirements of any applicable law or regulation.
2.3 Term. If the Board of Directors selects a Committee, the members
of the Committee shall serve on the Committee for the period of time determined
by the Board of Directors and shall be subject to removal by the Board of
Directors at any time. The Board of Directors may terminate the function of the
Committee at any time and resume all powers and authority previously delegated
to the Committee.
1
<PAGE>
2.4 Authority. The Committee shall have sole discretion and authority
to grant options under the Plan to eligible participants rendering services to
the Corporation or any "parent" or "subsidiary" of the Corporation, as defined
in Section 424 of the Internal Revenue Code of 1986, as amended (the "Code")
("Parent or Subsidiary"), at such times, under such terms and in such amounts as
it may decide. For purposes of this Plan and any Stock Option Agreement (as
defined below), the term "Corporation" shall include any Parent or Subsidiary,
if applicable. Subject to the express provisions of the Plan, the Committee
shall have complete authority to interpret the Plan, to prescribe, amend and
rescind the rules and regulations relating to it, to determine the details and
provisions of any Stock Option Agreement, to accelerate any options and to make
all other determinations necessary and advisable for the administration of the
Plan.
2.5 Type of Option. The Committee shall have full authority and
discretion to determine, and shall specify, whether the eligible individual will
be granted options intended to qualify as incentive options under Section 422 of
the Code ("Incentive Options") or options which are not intended to qualify
under Section 422 of the Code ("Non-Qualified Options"); provided, however, that
Incentive Options shall only be granted to employees of the Corporation, or a
Parent or Subsidiary thereof, and shall be subject to the special limitations
set forth herein attributable to Incentive Options.
2.6 Interpretation. The interpretation and construction by the
Committee of any provisions of the Plan or of any option granted under the Plan
shall be final and binding on all parties having an interest in the Plan or any
option granted hereunder. No member of the Committee shall be liable for any
action or determination made in good faith with respect to the Plan or any
option granted under the Plan.
3. ELIGIBILITY.
3.1 General. All directors, officers, employees of and certain persons
rendering services to the Corporation relative to the Corporation's management,
operation or development shall be eligible to receive options under the Plan.
The selection of recipients of options shall be within the sole and absolute
discretion of the Committee. No person shall be granted an Incentive Option
under this Plan unless such person is an employee of the Corporation on the date
of grant. No person shall be granted an option under this Plan unless such
person has executed the grant representation letter set forth on Exhibit "A," as
such Exhibit may be amended by the Committee from time to time.
2
<PAGE>
3.2 Termination of Eligibility.
3.2.1 If an optionee ceases to be employed by the Corporation, is
no longer an officer or member of the Board of Directors of the Corporation, or
no longer performs services for the Corporation for any reason (other than for
"cause," as hereinafter defined, or such optionee's death), any vested option
granted hereunder to such optionee shall expire on the 90th day after the
occurrence giving rise to such termination of eligibility (or 1 year in the
event an optionee is "disabled," as defined in Section 22(e)(3) of the Code) or
upon the date it expires by its terms, whichever is earlier. Any option that has
not vested in the optionee as of the date of such termination shall immediately
expire and shall be null and void. The Committee shall, in its sole and absolute
discretion, decide whether an authorized leave of absence or absence for
military or governmental service, or absence for any other reason, shall
constitute termination of eligibility for purposes of this Section.
3.2.2 If an optionee ceases to be employed by the Corporation, is
no longer an officer or member of the Board of Directors of the Corporation, or
no longer performs services for the Corporation and such termination is as a
result of "cause," as hereinafter defined, then all options granted hereunder to
such optionee shall expire on the date of the occurrence giving rise to such
termination of eligibility or upon the date it expires by its terms, whichever
is earlier, and such optionee shall have no rights with respect to any
unexercised options. For purposes of this Plan, "cause" shall mean an optionee's
personal dishonesty, misconduct, breach of fiduciary duty, incompetence,
intentional failure to perform stated obligations, willful violation of any law,
rule, regulation or final cease and desist order, or any material breach of any
provision of this Plan, any Stock Option Agreement or any employment agreement.
3.3 Death of Optionee and Transfer of Option. In the event an optionee
shall die, an option may be exercised (subject to the condition that no option
shall be exercisable after its expiration and only to the extent that the
optionee's right to exercise such option had accrued at the time of the
optionee's death) at any time within six months after the optionee's death by
the executors or administrators of the optionee or by any person or persons who
shall have acquired the option directly from the optionee by bequest or
inheritance. Any option that has not vested in the optionee as of the date of
death or termination of employment, whichever is earlier, shall immediately
expire and shall be null and void. No option shall be transferable by the
optionee other than by will or the laws of intestate succession.
3.4 Limitation on Incentive Options. No person shall be granted any
Incentive Option to the extent that the aggregate fair market value of the Stock
(as defined below) to which such options are exercisable for the first time by
the optionee during any calendar year (under all plans of the Corporation as
determined under Section 422(d) of the Code) exceeds $100,000.
3
<PAGE>
4. IDENTIFICATION OF STOCK. The Stock, as defined herein, subject to the
options shall be shares of the Corporation's authorized but unissued or acquired
or reacquired Class A Common Stock (the "Stock"). The aggregate number of shares
subject to outstanding options shall not exceed 500,000 shares of Stock (subject
to adjustment as provided in Section 6). If any option granted hereunder shall
expire or terminate for any reason without having been exercised in full, the
unpurchased shares subject thereto shall again be available for purposes of this
Plan.
5. TERMS AND CONDITIONS OF OPTIONS. Any option granted pursuant to the Plan
shall be evidenced by an agreement ("Stock Option Agreement") in such form as
the Committee shall from time to time determine, which agreement shall comply
with and be subject to the following terms and conditions:
5.1 Number of Shares. Each option shall state the number of shares of
Stock to which it pertains.
5.2 Option Exercise Price. Each option shall state the option exercise
price, which shall be determined by the Committee; provided, however, that (i)
the exercise price of any Incentive Option shall not be less than the fair
market value of the Stock, as determined by the Committee, on the date of grant
of such option, (ii) the exercise price of any Incentive Option granted to an
employee who owns more than 10% of the total combined voting power of all
classes of the Corporation's stock, as determined for purposes of Section 422 of
the Code, shall not be less than 110% of the fair market value of the Stock, as
determined by the Committee, on the date of grant of such option, and (iii) the
exercise price of any Non-Qualified Option shall not be less than the fair
market value of the Stock, as determined by the Committee, on the date of grant
of such option.
5.3 Term of Option. The term of an option granted hereunder shall be
determined by the Committee at the time of grant, but shall not exceed ten years
from the date of the grant. The term of any Incentive Option granted to an
employee who owns more than 10% of the total combined voting power of all
classes of the Corporation's stock, as determined for purposes of Section 422 of
the Code, shall in no event exceed five years from the date of grant. All
options shall be subject to early termination as set forth in this Plan. In no
event shall any option be exercisable after the expiration of its term.
5.4 Method of Exercise. An option shall be exercised by written notice
to the Corporation by the optionee (or successor in the event of death) and
execution by the optionee of an exercise representation letter in the form set
forth on Exhibit "B," as such Exhibit may be amended by the Committee from time
to time. Such written notice shall state the number of shares with respect to
which the option is being exercised and designate a time, during normal business
hours of the Corporation, for the delivery thereof ("Exercise Date"), which time
shall be at least 30 days after the giving of such notice unless an earlier date
shall have been mutually agreed upon. At the time specified in the written
notice, the Corporation shall deliver to the
4
<PAGE>
optionee at the principal office of the Corporation, or such other appropriate
place as may be determined by the Committee, a certificate or certificates for
such shares. Notwithstanding the foregoing, the Corporation may postpone
delivery of any certificate or certificates after notice of exercise for such
reasonable period as may be required to comply with any applicable listing
requirements of any securities exchange. In the event an option shall be
exercisable by any person other than the optionee, the required notice under
this Section shall be accompanied by appropriate proof of the right of such
person to exercise the option.
5.5 Medium and Time of Payment. The option exercise price shall be
payable in full on or before the option Exercise Date in any one of the
following alternative forms:
5.5.1 Full payment in cash or certified bank or cashier's check;
5.5.2 A Promissory Note (as defined below);
5.5.3 Full payment in shares of Stock or other securities of the
Corporation having a fair market value on the Exercise Date in the amount equal
to the option exercise price;
5.5.4 A combination of the consideration set forth in Sections
5.4.1, 5.4.2 and 5.4.3 equal to the option exercise price; or
5.5.5 Any other method of payment complying with the provisions
of Section 422 of the Code with respect to Incentive Options, provided the terms
of payment are established by the Committee at the time of grant and any other
method of payment established by the Committee with respect to Non-Qualified
Options.
5.6 Fair Market Value. The fair market value of a share of Stock on
any relevant date shall be determined in accordance with the following
provisions:
5.6.1 If the Stock or other security of the Corporation at the
time is neither listed nor admitted to trading on any stock exchange nor traded
in the over-the-counter market, then the fair market value shall be determined
by the Committee after taking into account such factors as the Committee shall
deem appropriate.
5.6.2 If the Stock or other security of the Corporation is not at
the time listed or admitted to trading on any stock exchange but is traded in
the over-the-counter market, the fair market value shall be the mean between the
highest bid and lowest asked prices (or, if such information is available, the
closing selling price) of one share of Stock or other security of the
Corporation on the date in question in the over-the-counter market, as such
prices are reported by the National Association of Securities Dealers through
its NASDAQ system or any successor system. If there are no reported bid and
asked prices (or closing selling price) for
5
<PAGE>
the Stock or other security of the Corporation on the date in question, then the
mean between the highest bid price and lowest asked price (or the closing
selling price) on the last preceding date for which such quotations exist shall
be determinative of fair market value.
5.6.3 If the Stock or other security of the Corporation is at the
time listed or admitted to trading on any stock exchange, then the fair market
value shall be the closing selling price of one share of Stock or other security
of the Corporation on the date in question on the stock exchange determined by
the Committee to be the primary market for the Stock or other security of the
Corporation, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no reported sale of Stock or other
security of the Corporation on such exchange on the date in question, then the
fair market value shall be the closing selling price on the exchange on the last
preceding date for which such quotation exists.
5.7 Promissory Note. Subject to the requirements of applicable state
or Federal law or margin requirements, and if provided in the Stock Option
Agreement, payment of all or part of the purchase price of the Stock may be made
by delivery of a full recourse promissory note ("Promissory Note"). The
Promissory Note shall be executed by the optionee, made payable to the
Corporation and bear interest at such rate as the Committee shall determine, but
in no case less than the minimum rate which will not cause under the Code (i)
interest to be imputed, (ii) original issue discount to exist, or (iii) any
other similar results to occur. Unless otherwise determined by the Committee,
interest on the Note shall be payable in quarterly installments on March 31,
June 30, September 30 and December 31 of each year. A Promissory Note shall
contain such other terms and conditions as may be determined by the Committee;
provided, however, that the full principal amount of the Promissory Note and all
unpaid interest accrued thereon shall be due not later than five years from the
date of exercise. The Corporation may obtain from the optionee a security
interest in all shares of Stock issued to the optionee under the Plan for the
purpose of securing payment under the Promissory Note and may retain possession
of the stock certificates representing such shares in order to perfect its
security interest.
5.8 Rights as a Shareholder. An optionee or successor shall have no
rights as a shareholder with respect to any Stock underlying any option until
the date of the issuance to such optionee of a certificate for such Stock. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property) or distributions or other rights for which
the record date is prior to the date such Stock certificate is issued, except as
provided in Section 6.
5.9 Modification, Extension and Renewal of Options. Subject to the
terms and conditions of the Plan, the Committee may modify, extend or renew
outstanding options granted under the Plan, or accept the surrender of
outstanding options (to the extent not exercised) and authorize the granting of
new options in substitution therefor.
6
<PAGE>
5.10 Vesting and Restrictions. The Committee shall have complete
authority and discretion to set the terms, conditions, restrictions, vesting
schedules and other provisions of any option in the applicable Stock Option
Agreement. In addition, the Committee shall have complete authority to require
conditions and restrictions on any Stock issued pursuant to this Plan.
5.11 Other Provisions. The Stock Option Agreements shall contain such
other provisions as the Committee shall deem advisable.
6. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
6.1 Subdivision or Consolidation. Subject to any required action by
shareholders of the Corporation, the number of shares of Stock covered by each
outstanding option, and the exercise price thereof, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Stock of
the Corporation resulting from a subdivision or consolidation of shares or the
payment of a stock dividend (but only on the Stock) or any other increase or
decrease in the number of such shares effected without receipt of consideration
by the Corporation. Any fraction of a share subject to option that would
otherwise result from an adjustment pursuant to this Section shall be rounded
downward to the next full number of shares without other compensation or
consideration to the holder of such option.
6.2 Capital Transactions. Upon a sale or exchange of all or
substantially all of the assets of the Corporation, a merger or consolidation in
which the Corporation is not the surviving corporation, a merger, reorganization
or consolidation in which the Corporation is the surviving corporation and
shareholders of the Corporation exchange their stock for securities or property,
a liquidation of the Corporation, or similar transaction ("Capital
Transaction"), this Plan and each option issued under this Plan, whether vested
or unvested, shall terminate, unless such options are assumed by a successor
corporation in a merger or consolidation or otherwise determined by the
Committee, 15 days prior to such Capital Transaction; provided, however, that
unless the outstanding options are assumed by a successor corporation in a
merger or consolidation, subject to terms approved by the Committee, all
optionees will have the right, until 15 days prior to such Capital Transaction,
to exercise all vested options. Notwithstanding the foregoing, in the event
there is a merger or consolidation where the Corporation is not the surviving
corporation, all options granted under this Plan shall vest 30 days prior to
such merger or consolidation unless such options are assumed by the successor
corporation in such merger or consolidation. The Committee may (but shall not be
obligated to) (i) accelerate the vesting of any option or (ii) apply the
foregoing provisions, including but not limited to termination of this Plan and
options granted pursuant to the Plan, in the event there is a sale of 51% or
more of the stock of the Corporation in any two year period or a transaction
similar to a Capital Transaction.
6.3 Adjustments. To the extent that the foregoing adjustments relate
to stock or securities of the Corporation, such adjustments shall be made by the
Committee, whose determination in that respect shall be final, binding and
conclusive.
7
<PAGE>
6.4 Ability to Adjust. The grant of an option pursuant to the Plan
shall not affect in any way the right or power of the Corporation to make
adjustments, reclassifications, reorganizations or changes of its capital or
business structure or to merge, consolidate, dissolve, liquidate, sell or
transfer all or any part of its business or assets.
6.5 Notice of Adjustment. Whenever the Corporation shall take any
action resulting in any adjustment provided for in this Section, the Corporation
shall forthwith deliver notice of such action to each optionee, which notice
shall set forth the number of shares subject to the option and the exercise
price thereof resulting from such adjustment.
6.6 Limitation on Adjustments. Any adjustment, assumption or
substitution of an Incentive Option shall comply with Section 425 of the Code,
if applicable.
7. NONASSIGNABILITY. Options granted under this Plan may not be sold,
pledged, assigned or transferred in any manner other than by will or by the laws
of intestate succession, and may be exercised during the lifetime of the
optionee only by such optionee. Any transfer in violation of this provision
shall void such option, and any Stock Option Agreement entered into by the
optionee and the Corporation regarding such option shall be void and have no
further force or effect. No option shall be pledged or hypothecated in any way,
nor shall any option be subject to execution, attachment or similar process.
8. NO RIGHT OF EMPLOYMENT. Neither the grant nor exercise of any option nor
anything in this Plan shall impose upon the Corporation or any other corporation
any obligation to employ or continue to employ any optionee. The right of the
Corporation and any other corporation to terminate any employee shall not be
diminished or affected because an option has been granted to such employee.
9. TERM OF PLAN. This Plan is effective on the date the Plan is adopted by
the Board of Directors and options may be granted pursuant to the Plan from time
to time within a period of ten (10) years from such date, or the date of any
required shareholder approval required under the Plan, if earlier. Termination
of the Plan shall not affect any option theretofore granted.
10. AMENDMENT OF THE PLAN. The Board of Directors of the Corporation may,
subject to any required shareholder approval, suspend, discontinue or terminate
the Plan, or revise or amend it in any respect whatsoever with respect to any
shares of stock at that time not subject to options.
11. APPLICATION OF FUNDS. The proceeds received by the Corporation from the
sale of Stock pursuant to options may be used for general corporate purposes.
12. RESERVATION OF SHARES. The Corporation, during the term of this Plan,
shall at all times reserve and keep available such number of shares of Stock as
shall be sufficient to satisfy the requirements of the Plan.
8
<PAGE>
13. NO OBLIGATION TO EXERCISE OPTION. The granting of an option shall not
impose any obligation upon the optionee to exercise such option.
14. APPROVAL OF BOARD OF DIRECTORS AND SHAREHOLDERS. The Plan shall not
take effect until approved by the Board of Directors of the Corporation. This
Plan shall be approved by a vote of the shareholders within 12 months from the
date of approval by the Board of Directors. In the event such shareholder vote
is not obtained, all options granted hereunder, whether vested or unvested,
shall be null and void.
15. WITHHOLDING TAXES. Notwithstanding anything else to the contrary in
this Plan or any Stock Option Agreement, the exercise of any option shall be
conditioned upon payment by such optionee in cash, or other provisions
satisfactory to the Committee, of all local, state, federal or other withholding
taxes applicable, in the Committee's judgment, to the exercise or to later
disposition of shares acquired upon exercise of an option (including any
repurchase of an option or Stock).
16. PARACHUTE PAYMENTS. Any outstanding option under the Plan may not be
accelerated to the extent any such acceleration of such option would, when added
to the present value of other payments in the nature of compensation which
becomes due and payable to the optionee would result in the payment to such
optionee of an excess parachute payment under Section 280G of the Code. The
existence of any such excess parachute payment shall be determined in the sole
and absolute discretion of the Committee.
17. SECURITIES LAWS COMPLIANCE. Notwithstanding anything contained herein,
the Corporation shall not be obligated to grant any option under this Plan or to
sell, issue or effect any transfer of any Stock unless such grant, sale,
issuance or transfer is at such time effectively (i) registered or exempt from
registration under the Securities Act of 1933, as amended (the "Act"), and (ii)
qualified or exempt from qualification under the California Corporate Securities
Law of 1968 and any other applicable state securities laws. As a condition to
exercise of any option, each optionee shall make such representations as may be
deemed appropriate by counsel to the Corporation for the Corporation to use any
available exemption from registration under the Act or qualification under any
applicable state securities law.
18. RESTRICTIVE LEGENDS. The certificates representing the Stock issued
upon exercise of options granted pursuant to this Plan will bear the following
legends giving notice of restrictions on transfer under the Act and this Plan,
as follows:
(a) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ISSUED
OR TRANSFERRED IN A TRANSACTION WHICH WAS NOT REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, IN RELIANCE
UPON AN EXEMPTION AFFORDED BY SUCH ACT. NO SALE OR TRANSFER
OF THESE SHARES SHALL
9
<PAGE>
BE MADE, NO ATTEMPTED SALE OR TRANSFER SHALL BE VALID, AND
THE ISSUER SHALL NOT BE REQUIRED TO GIVE ANY EFFECT TO ANY
SUCH TRANSACTION UNLESS (A) SUCH TRANSACTION SHALL HAVE BEEN
DULY REGISTERED UNDER THE ACT OR (B) THE ISSUER SHALL HAVE
FIRST RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO IT THAT
SUCH REGISTRATION IS NOT REQUIRED.
(b) Any other legends required by applicable state securities
laws as determined by the Committee.
19. NOTICES. Any notice to be given under the terms of the Plan shall be
addressed to the Corporation in care of its Secretary at its principal office,
and any notice to be given to an optionee shall be addressed to such optionee at
the address maintained by the Corporation for such person or at such other
address as the optionee may specify in writing to the Corporation.
As adopted by the Board of Directors on March 4, 1997.
ADVANCED AERODYNAMICS &
STRUCTURES, INC.,
a Delaware corporation
By: /s/ Dr. Carl L. Chen
Dr. Carl. L. Chen, Chairman
10
<PAGE>
EXHIBIT A
____________, 199__
_____________________________
_____________________________
_____________________________
Re: 1996 Stock Option Plan
To Whom It May Concern:
This letter is delivered to Advanced Aerodynamics & Structures, Inc., a
Delaware corporation (the "Corporation"), in connection with the grant to (the
"Optionee") of an option (the "Option") to purchase _________ shares of common
stock of the Corporation (the "Stock") pursuant to the Advanced Aerodynamics &
Structures, Inc. 1996 Stock Option Plan dated July 16, 1996 (the "Plan"). The
Optionee understands that the Corporation's receipt of this letter executed by
the Optionee is a condition to the Corporation's willingness to grant the Option
to the Optionee.
The Optionee acknowledges that the grant of the Option by the Corporation
is in lieu of any and all other promises of the Corporation to the Optionee,
whether written or oral, express or implied, regarding the grant of options or
other rights to acquire Stock. Accordingly, in anticipation of the grant of the
Option, the Optionee hereby relinquishes all rights to such other rights, if
any, to acquire stock of the Corporation.
In addition, the Optionee makes the following representations and
warranties with the understanding that the Corporation will rely upon them in
the Corporation's determination of whether the grant of the Option meets the
requirements of the "private offering" exemption provided in Section 25102(f) of
the California Corporations Code and certain exemptions provided under the
Securities Act of 1933, as amended.
1. The Optionee acknowledges receipt of a copy of the Plan and Agreement.
The Optionee has carefully reviewed the Plan and Agreement.
Exhibit A - Page 1
<PAGE>
2. The Option and the Stock will be acquired by the Optionee for investment
only, for the Optionee's own account, and not with a view to or for sale in
connection with any distribution of the Option or the Stock. The Optionee will
not take, or cause to be taken, any action which would cause the Optionee, or
any entity or person affiliated with the Optionee, to be deemed an underwriter
with respect to the Option or the Stock.
3. The Optionee either:
a. has a preexisting personal or business relationship with the
Corporation or any of its officers, directors or controlling persons of a nature
and duration as would allow the Optionee to be aware of the character, business
acumen, general business and financial circumstances of the Corporation or of
the person with whom such relationship exists; or
b. by reason of the Optionee's business or financial experience, or
the business or financial experience of the Optionee's professional advisor who
is unaffiliated with and is not compensated by the Corporation or any affiliate
or selling agent of the Corporation, directly or indirectly, the Optionee has
the capacity to protect the Optionee's interests in connection with the grant of
the Option and the purchase of the Stock.
4. The Optionee acknowledges that an investment in the Corporation
represents a speculative investment and a high degree of risk. The Optionee
acknowledges that the Optionee has had the opportunity to obtain and review all
information from the Corporation necessary to make a reasonably informed
investment decision and that the Optionee has had all questions asked of the
Corporation answered to the reasonable satisfaction of the Optionee. The
Optionee is able to bear the economic risk of an investment in the Option and
the Stock.
5. The grant of the Option has not been accompanied by the publication of
any advertisement.
6. The Optionee understands and acknowledges that the Stock has not been,
and will not be, registered under the Securities Act of 1933, as amended, or
qualified under the California Corporate Securities Law of 1968. The Optionee
understands and acknowledges that the Stock may not be sold without compliance
with the registration requirements of federal and applicable state securities
laws unless an exemption from such laws is available. The Optionee understands
that the Certificate representing the Stock shall bear the legends set forth in
the Plan.
7. The Optionee understands and acknowledges that the Option and the Stock
are subject to the terms and conditions of the Plan.
Exhibit A - Page 2
<PAGE>
8. The Optionee understands and agrees that, at the time of exercise of any
part of the Option for Stock, the Optionee may be required to provide the
Corporation with additional representations, warranties and/or covenants similar
to those contained in this letter.
9. The Optionee is a resident of the State of __________.
10. The Optionee will notify the Corporation immediately of any change in
the above information which occurs before the Option is exercised in full by the
Optionee.
The foregoing representations and warranties are given on ______________,
199__ at ____________________.
OPTIONEE:
Exhibit A - Page 3
<PAGE>
EXHIBIT B
____________, 199__
_________________________
_________________________
_________________________
Re: 1996 Stock Option Plan
To Whom It May Concern:
I (the "Optionee") hereby exercise my right to purchase _____ shares of
common stock (the "Stock") of Advanced Aerodynamics & Structures, Inc., a
Delaware corporation (the "Corporation"), pursuant to, and in accordance with,
the Advanced Aerodynamics & Structures, Inc. Stock Option Plan dated July 16,
1996 (the "Plan") and Stock Option Agreement (the "Agreement") dated , 1996. As
provided in such Plan, I deliver herewith payment as set forth in the Plan in
the amount of the aggregate option exercise price. Please deliver to me at my
address as set forth above stock certificates representing the subject shares
registered in my name (and (spouse) , as (style of vesting)).
The Optionee hereby represents as follows:
1. The Optionee acknowledges receipt of a copy of the Plan and Agreement.
The Optionee has carefully reviewed the Plan and Agreement.
2. The Optionee either:
(a) has a preexisting personal or business relationship with the
Corporation or any of its officers, directors or controlling persons of a nature
and duration as would allow the undersigned to be aware of the character,
business acumen, general business and financial circumstances of the Corporation
or of the person with whom such relationship exists; or
(b) by reason of the Optionee's business or financial experience or
the business or financial experience of the Optionee's professional advisor(s)
who is (are) unaffiliated with and is (are) not compensated by the Corporation
or any affiliate or selling agent of the Corporation, directly or indirectly,
has the capacity to protect the Optionee's interests in connection with the
purchase of nonqualified stock options of the Corporation and Stock issuable
upon the exercise thereof.
Exhibit B - Page 1
<PAGE>
3. The Optionee is able to bear the economic risk of his investment in
the stock options of the Corporation and an investment in the Stock issuable
upon exercise thereof.
4. The Optionee acknowledges that an investment in the Corporation
represents a speculative investment and a high degree of risk. The Optionee
acknowledges that the Optionee has had the opportunity to obtain and review all
information from the Corporation necessary to make a reasonably informed
investment decision and that the Optionee has had all questions asked of the
Corporation answered to the reasonable satisfaction of the Optionee.
5. The grant of Options for Stock and the exercise of the Options has
not been accompanied by the publication of any advertisement.
6. The Optionee understands and acknowledges that the Stock has not,
and will not, be registered under the Securities Act of 1933, as amended, or
qualified under the California Securities Law of 1968. The Optionee understands
and acknowledges that the Stock may not be sold without compliance with the
registration and qualification requirements of federal and applicable state
securities laws unless exemptions from such laws are available. The Optionee
understands that the certificates representing the Stock shall bear the legends
set forth in the Plan.
7. The Optionee is a resident of the State of __________.
8. The Optionee hereby is purchasing for the Optionee's own account
and not with a view to or for sale in connection with any distribution of the
nonqualified stock options of the Corporation or any Stock issuable upon
exercise thereof.
The foregoing representations and warranties are given on
______________, 199___ at ______________________.
OPTIONEE:
Exhibit B - Page 2
STANDARD INDUSTRIAL LEASE -- GROSS
American Industrial Real Estate Association
1. Parties. This Lease, dated, for reference purposes only, December 19, 1996,
is made by and between OLEN PROPERTIES CORP., A Florida Corporation (herein
called "Lessor") and, ADVANCED AERODYNAMICS & STRUCTURES, INC., a Delaware
Corporation (herein called "Lessor").
2. Premises. Lessor hereby leases to Lessee and Lessee leases from Lessor for
the term, at the rental, and upon all of the conditions set forth herein, that
certain real property situated in the County of Los Angeles, State of
California, commonly known as 3499-3501 Lakewood Blvd., Long Beach, California
and described as the improved building and a portion of the airport tarmac and
parking lot. Said real property, including the land and all improvements
therein, is herein called the "Premises."
3. Term.
3.1. Term. The term of this Lease shall be for one (1) year commencing on
January 1, 1997 and ending on December 31, 1997 unless sooner terminated
pursuant to any provision hereof.
3.2. Delay in Possession. Notwithstanding said commencement date, if for
any reason Lessor cannot deliver possession of the Premises to Lessee on said
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 be obligated to
pay rent until possession of the Premises is tendered to Lessee; provided,
however, that if Lessor shall not have delivered possession of the Promises
within sixty (60) days from said commencement date, Lessee may, at Lessee's
option, by notice in writing to Lessor within ten (10) days thereafter, 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 and be of no further force or effect.
3.3. Early Possession. If Lessee occupies the Premises prior to said
commencement date, such occupancy shall be subject to all provisions hereof,
such occupancy shall not advance the termination date, and Lessee shall pay rent
for such period at the initial monthly rates set forth below except for Early
Possession period.
4. Rent Lessee shall pay to Lessor as rent for the Premises, monthly payments of
$15,000.00, in advance, on the first day of each month of the term hereof.
Lessee shall pay Lessor upon the execution hereof $30,000.00 as rent for
January, 1997 plus a Security Deposit equal to one month's rent pursuant to
Article 5 herein. 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. Rent
shall be payable in lawful money of the United States to Lessor at the address
stated herein or to such other persons or at such other places as Lessor may
designate in writing. 5. Security Deposit. Lessee shall deposit with Lessor upon
execution hereof $15,000.00 as security for Lessee's faithful performance of
Lessee's obligations hereunder. If Lessee fails to pay rent or other charges due
hereunder, or otherwise defaults with respect to any provision of this Lease,
- 1 -
<PAGE>
Lessor may use, apply or retain all or any portion of said deposit for the
payment of any rent or other charge in default or for the payment of any other
sum to which Lessor may become obligated by reason of Lessee's default, or to
compensate Lessor for any loss or damage which Lessor may suffer thereby. If
Lessor so uses or applies all or any portion of said deposit, Lessee shall
within ten (10) days after written demand therefor deposit cash with Lessor in
an amount sufficient to restore said deposit to the full amount hereinabove
stated and Lessee's failure to do so shall be a material breach of this Lease.
If the monthly rent shall, from time to time, increase during the term of this
Lease, Lessee shall thereupon deposit with Lessor additional security deposit so
that the amount of security deposit held by Lessor shall at all times bear the
same proportion to current rent as the original security deposit bears to the
original monthly rent set forth in paragraph 4 hereof. Lessor shall not be
required to keep said deposit separate from its general accounts. If Lessee
performs all of Lessee's obligations hereunder, said deposit, or so much thereof
as has not theretofore been applied by Lessor, shall be returned, without
payment of interest or other increment for its use, to Lessee (or, at Lessor's
option, to the last assignee, if any, of Lessee's interest hereunder) at the
expiration of the term hereof, and after Lessee has vacated the Premises. No
trust relationship is created herein between Lessor and Lessee with respect to
said Security Deposit.
NOTE: SECURITY DEPOSIT SHALL NOT BE APPLIED TOWARD THE LAST MONTH'S RENT.
6. Use:
6.1. Use. The premises shall be used and occupied only for general office,
aviation services and assembly as approved by the City of Long Beach and the
Long Beach Airport Authority or any other use which is reasonably comparable and
for no other purpose.
6.2. Compliance with Law.
(a) Lessor warrants to Lessee that the Premises, in its state existing
on the date that the Lease term commences, but without regard to the use for
which Lessee will use the Premises, does not violate any covenants or
restrictions of record, or any applicable building code, regulation or ordinance
in effect on such Lease term commencement date. In the event it is determined
that this warranty has been violated, then it shall be the obligation of the
Lessor, after written notice from Lessee, to promptly, at Lessor's sole cost and
expense, rectify any such violation. In the event Lessee does not give to Lessor
written notice of the violation of this warranty within six months from the date
that the Lease term commences, the correction of same shall be the obligation of
the Lessee at Lessee's sole cost. The warranty contained in this paragraph
6.2(a) shall be of no force or effect if, prior to the date of this Lease,
Lessee was the owner or occupant of the Premises, and, is such event, Lessee
shall correct any such violation at Lessee's sole cost.
(b) Except as provided in paragraph 6.2(a), Lessee shall, at Lessee's
expense, comply promptly with all applicable statutes, ordinances, rules,
regulations, orders, covenants and restrictions of record, and requirements in
effect during the term or any part of the term hereof, regulating the use by
Lessee of the Premises. Lessee shall not use nor permit the use of the Premises
in any manner that will tend to create waste or a nuisance or, if there shall be
more than one tenant in the building containing the Premises, shall tend to
disturb such other tenants.
- 2 -
<PAGE>
6.3. Condition of Premises.
(a) Lessor shall deliver the Premises to Lessee clean and free of
debris on Lease commencement date (unless Lessee is already in possession) and
Lessor further warrants to Lessee that the plumbing, lighting, air conditioning,
heating, and loading doors in the Premises shall be in good operating condition
on the Lease commencement date. In the event that it is determined that this
warranty has been violated, then it shall be the obligation of Lessor, after
receipt of written notice from Lessee setting forth with specificity the nature
of the violation, to promptly, at Lessor's sole cost, rectify such violation.
Lessee's failure to give such written notice to Lessor within thirty (30) days
after the Lease commencement date shall cause the conclusive presumption that
Lessor has complied with all of Lessor's obligation hereunder. The warranty
contained in this paragraph 6.3(a) shall be of no force or effect if prior to
the date of this Lease, Lessee was the owner or occupant of the Premises.
(b) Except as otherwise provided in this Lease, Lessee hereby accepts
the Premises in their condition existing as of the Lease commencement date or
the date that Lessee takes possession of the Premises, whichever is earlier,
subject to all applicable zoning, municipal, county and state laws, ordinances
and regulations governing and regulating the use of the Premises, and any
covenants or restrictions of record, and accepts this Lease subject thereto and
to all matters disclosed thereby and by any exhibits attached hereto. Lessee
acknowledges that neither Lessor nor Lessor's agent has made any representation
or warranty as to the present or future suitability of the Premises for the
conduct of Lessee's business.
7. Maintenance, Repairs and Alternations.
7.1. Lessor's Obligations. Subject to the provisions of Paragraphs 6, 7.2
and 9 and except for damage caused by any negligent or intentional act or
omission of Lessee, Lessee's agents, employees, or invitees in which event
Lessee shall repair the damage, Lessor, at Lessor's expense, shall keep in good
order, condition and repair the foundations, exterior walls and the exterior
roof of the Premises. Lessor shall not, however, be obligated to paint such
exterior, nor shall Lessor be required to maintain the interior surface of
exterior walls, windows, doors or plate glass. Lessor shall have no obligation
to make repairs under this Paragraph 7.1 until a reasonable time after receipt
of written notice of the need for such repairs. Lessee expressly waives the
benefits 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 the Lease
because of Lessor's failure to keep the Premises in good order, condition and
repair.
7.2. Lessee's Obligations.
(a) Subject to the provisions of Paragraph 6, 7.1 and 9, Lessee, at
Lessee's expense, shall keep in good order, condition and repair the Premises
and every part thereof (whether or not the damaged portion of the Premises or
the means of repairing the same are reasonably or readily accessible to Lessee)
including, without limiting the generality of the foregoing, all plumbing,
heating, air conditioning, (Lessee shall procure and maintain, at Lessee's
expense, an air conditioning system maintenance contract) ventilating,
electrical and lighting facilities and equipment within the Premises, fixtures,
interior walls and interior surface of exterior walls, ceilings, windows, doors,
plate glass, and skylights, located within the Premises, and all landscaping,
driveways, parking lots, fences
- 3 -
<PAGE>
and signs located in the Premises and all sidewalks and parkways adjacent to the
Premises. Lessee expressly waives the benefit of any statute now or hereinafter
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 Premises in good order, condition and repair.
(b) If Lessee fails to perform Lessee's obligations under this
Paragraph 7.2 or under any other paragraph of this Lease, Lessor may at Lessor's
option enter upon the Premises after 10 days' prior written notice to Lessee
(except in the case of emergency, in which case no notice shall be required),
perform such obligations on Lessee's behalf and put the Premises in good order,
condition and repair, and the cost thereof together with interest thereon at the
maximum rate then allowable by law shall be due and payable as additional rent
to Lessor together with Lessee's next rental installment.
(c) On the last day of the term hereof, or on any sooner termination,
Lessee shall surrender the Premises to Lessor in the same condition as received,
ordinary wear and tear excepted, clean and free of debris. Lessee shall repair
any damage to the Premises occasioned by the installation or removal of its
trade fixtures, furnishings and equipment. Notwithstanding anything to the
contrary otherwise stated in this Lease, Lessee shall leave the air lines, power
panels, electrical distribution systems, lighting fixtures, space heaters, air
conditioning, plumbing and fencing on the premises in good operating condition.
(except for rear exterior storage shed).
7.3. Alterations and Additions.
(a) Lessee shall not, without Lessor's prior written consent, make any
alternations, improvements, additions, or Utility Installations in, on or about
the Premises, except for nonstructural alterations not exceeding $2,500 in
cumulative costs during the term of this Lease. In any event, whether or not in
excess of $2,500 in cumulative costs, Lessee shall make no change or alteration
to the exterior of the Premises nor the exterior of the building(s) on the
Premises without Lessor's prior written consent. As used in this Paragraph 7.3
the term "Utility Installation" shall mean carpeting, window coverings, air
lines, power panels, electrical distribution systems, lighting fixtures, space
heaters, air conditioning, plumbing, and fencing. Lessor may require that Lessee
remove any or all of said alterations, improvements, additions or Utility
Installations at the expiration of the term, and restore the Premises to their
prior condition. Lessor may require Lessee to provide Lessor, at Lessee's sole
cost and expense, a lien and completion bond in an amount equal to one and
one-half times the estimated cost of such improvements, to insure Lessor against
any liability for mechanic's and materialmen's liens and to insure completion of
the work. Should Lessee make any alterations, improvements, additions or Utility
Installations without the prior approval of Lessor, Lessor may require that
Lessee remove any or all of the same.
(b) Any alterations, improvements, additions or Utility Installations
in, or about the Premises that Lessee shall desire to make and which requires
the consent of the Lessor shall be presented to Lessor in written form, with
proposed detailed plans. If Lessor shall give its consent, the consent shall be
deemed conditioned upon Lessee acquiring a permit to do so from appropriate
governmental agencies, the furnishing of a copy thereof to Lessor prior to the
commencement of the work and the compliance by Lessee of all conditions of said
permit in a prompt and expeditious manner.
- 4 -
<PAGE>
(c) Lessee shall pay, when due, all claims for labor or materials
furnished or alleged to have been furnished to or for Lessee at or for use in
the Premises, which claims are or may be secured by any mechanics' 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 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, then Lessee
shall, at its sole expense defend itself and Lessor 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, upon the condition
that if Lessor shall require Lessee shall furnish to Lessor a surety bond
satisfactory to Lessor in an amount equal to such contested lien claim or demand
indemnifying Lessor against liability for the same and holding the Premises free
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 bests interest to do so.
(d) Unless Lessor requires their removal, as set forth in Paragraph
7.3(a), all alterations, improvements, additions and Utility Installations
(whether or not such Utility Installations constitute trade fixtures of Lessee),
which may be made on the Premises, shall become the property of Lessor and
remain upon and be surrendered with the Premises at the expiration of the term.
Notwithstanding the provisions of this Paragraph 7.3(d) Lessee's machinery and
equipment, other than that which is affixed to the Premises so that it cannot be
removed without material damage to the Premises, shall remain the property of
Lessee and may be removed by Lessee subject to the provisions of Paragraph
7.2(c).
8. Insurance; Indemnity.
8.1. Liability Insurance - Lessee. Lessee shall, at Lessee's expense,
obtain and keep in force during the term of this Lease a policy of Combined
Single Limit Bodily Injury and Property Damage insurance insuring Lessee and
Lessor against any liability arising out of the use, occupancy or maintenance of
the Premises and all other areas appurtenant thereto. Such insurance shall be in
an amount not less than $1,000,000 per occurrence. The policy shall insure
performance by Lessee of the indemnity provisions of this Paragraph 8. The
limits of said insurance shall not, however, limit the liability of Lessee
hereunder.
8.2. Liability Insurance - Lessor. Lessor shall obtain and keep in force
during the term of this Lease a policy of Combined Single Limit Bodily Injury
and Property Damage Insurance, insuring Lessor, but not Lessee, against any
liability arising out of the ownership, use, occupancy or maintenance of the
Premises and all areas appurtenant thereto in an amount not less than $1,000,000
per occurrence.
8.3. Property Insurance. Lessor shall obtain and keep in force during the
term of this Lease a policy or policies of insurance covering loss or damage to
the Premises, but not Lessee's fixtures, equipment or tenant improvements in an
amount not to exceed the full replacement value thereof, as the same may exist
from time to time, providing protection against all perils included within the
classification of fire, extended coverage, vandalism, malicious mischief, flood
(in the event same is required by a lender having a lien on the Premises),
special extended perils ("all risk" as such term is used in the insurance
industry) but not plate glass insurance. In addition, the Lessor shall obtain
and keep in force, during the term of this Lease, a policy of rental value
insurance covering
- 5 -
<PAGE>
a period of one year, with loss payable to Lessor, which insurance shall also
cover all real estate taxes and insurance costs for said period.
8.4. Payment of Premium Increase.
(a) Lessee shall pay to Lessor, during the term hereof, in addition to
the rent, the amount of any increase in premiums for the insurance required
under Paragraphs 8.2 and 8.3 over and above such premiums paid during the Base
Period, as hereinafter defined, whether such premium increase shall be the
result of the nature of Lessee's occupancy, any act or omission of Lessee,
requirements of the holder of a mortgage or deed of trust covering the Premises,
increased valuation of the Premises, or general rate increases. In the event
that the Premises have been occupied previously, the words "Base Period" shall
mean the last twelve months of the prior occupancy. In the event that the
Premises have never been previously occupied, the premiums during the "Base
Period" shall be deemed to be the lowest premiums reasonably obtainable for said
insurance assuming the most nominal use of the Premises. Provided, however, in
lieu of the Base Period, the parties may insert a dollar amount at the end of
this sentence which figure shall be considered as the insurance premium for the
Base Period - $1997 Base Year Budget. 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) Lessee shall pay any such premium increases to Lessor within 30
days after receipt by Lessee of a copy of the premium statement or other
satisfactory evidence of the amount due. If the insurance policies maintained
hereunder cover other improvements in addition to the Premises, Lessor shall
also deliver to Lessee a statement of the amount of such increase attributable
to the Premises and showing in reasonable detail, the manner in which such
amount was computed. If the term of this Lease shall not expire concurrently
with the expiration of the period covered by such insurance, Lessee's liability
for premium increases shall be prorated on an annual basis.
(c) If the Premises are part of a larger building, then Lessee shall
not be responsible for paying any increase in the property insurance premium
caused by the acts or omissions of any other tenant of the building of which the
Premises are a part.
8.5. Insurance Policies. Insurance required hereunder shall be in companies
holding a "General Policyholders Rating" of at least B plus or such other rating
as may be required by a lender having a lien on the Premises, as set forth in
the most current issue of "Best Insurance Guide." Lessee shall deliver to Lessor
copies of policies of liability insurance required under Paragraph 8.1 or
certificates evidencing the existence and amounts of such insurance. No such
policy shall be cancelable or subject to reduction of coverage or other
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 renewals or "binders" thereof, or Lessor may order
such insurance and charge the cost thereof to Lessee, which amount shall be
payable by Lessee upon demand. Lessee shall not do or permit to be done anything
which shall invalidate the insurance policies referred to in Paragraph 8.3.
8.6. Waiver of Subrogation. Lessee and Lessor each hereby release and
relieve the other, and waive their entire right of recovery against the other
for loss or damage arising out of or incident to the perils insured against
under paragraph 8.3, which perils occur in, on or about the Premises,
- 6 -
<PAGE>
whether due to the negligence of Lessor or Lessee or other agents, employees,
contractors and/or invitees. Lessee and Lessor shall, upon obtaining the
policies of insurance required hereunder, give notice to the insurance carrier
or carriers that the foregoing mutual waiver of subrogation is contained in this
Lease.
8.7. Indemnity. Lessee shall indemnify and hold harmless Lessor from and
against any and all claims arising from Lessee's use of the Premises, or from
the conduct of Lessee's business or from any activity, work or things done,
permitted or suffered by Lessee in or about the Premises or elsewhere and shall
further indemnify and hold harmless Lessor from and against any and all claims
arising from any breach or default in the performance of any obligation on
Lessee's part to be performed under the terms of this Lease, or arising from any
negligence of the Lessee, or any of Lessee's agents, contractors, or employees,
and from and against all costs, attorney's fees, expenses and liabilities
incurred in the defense of any such claim or any action or proceeding brought
thereon; and in case any action or proceeding be brought against Lessor by
reason of any such claim, Lessee upon notice from Lessor shall defend the same
at Lessee's expense by counsel satisfactory to Lessor. Lessee, as a material
part of the consideration to Lessor, hereby assumes all risk of damage to
property or injury to persons, in, upon or about the Premises arising form any
cause and Lessee hereby waives all claims in respect thereof against Lessor.
8.8. Exemption of Lessor from Liability. Lessee hereby agrees that Lessor
shall not be liable for injury to Lessee's business or any loss of income
therefrom or for damage to the goods, wares, merchandise or other property of
Lessee, Lessee's employees, invitees, customers, or any other person in or about
the Premises, nor shall Lessor be liable for injury to the person of Lessee,
Lessee's employees, agents or contractors, 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, sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any other
cause, whether the said damage or injury results from conditions arising upon
the Premises or upon other places and regardless of whether the cause of such
damage or injury or the means of repairing the same is inaccessible to Lessee,
Lessor shall not be liable for any damages arising from any act or neglect of
any other tenant, if any, of the building in which the Premises are located.
9. Damage or Destruction.
9.1. Definitions
(a) "Premises Partial Damage" shall herein mean damage or destruction
to the Premises to the extent that the cost of repair is less than 50% of the
fair market value of the Premises immediately prior to such damage or
destruction. "Premises Building Partial Damage" shall herein mean damage or
destruction to the building of which the Premises are a part to the extent that
the cost of repair is less than 50% of the fair market value of such building as
a whole immediately prior to such damage or destruction.
(b) "Premises Total Destruction" shall herein mean damage or
destruction to the Premises to the extent that the cost of repair is 50% or more
of the fair market value of the Premises immediately prior to such damage or
destruction. "Premises Building Total Destruction" shall herein mean damage or
destruction to the building of which the Premises are a part to the extent that
the
- 7 -
<PAGE>
cost of repair is 50% or more of the fair market value of such building as a
whole immediately prior to such damage or destruction.
(c) "Insured Loss" shall herein mean damage or destruction which was
caused by an event required to be covered by the insurance described in
paragraph 8.
9.2. Partial Damage - Insured Loss. Subject to the provisions of paragraphs
9.4, 9.5 and 9.6, if at any time during the term of this Lease there is damage
which is an Insured Loss and which falls into the classification of Premises
Partial Damage or Premises Building Partial Damage, then Lessor shall, at
Lessor's sole cost, repair such damage, but not Lessee's fixtures, equipment or
tenant improvements, as soon as reasonably possible and this Lease shall
continue in full force and effect.
9.3. Partial Damage - Uninsured Loss. Subject to the provisions of
Paragraphs 9.4, 9.5 and 9.6, if at any time during the term of this Lease there
is damage which is not an Insured Loss and which falls within the classification
of Premises Partial Damage or Premises Building Partial Damage, unless caused by
a negligent or willful act of Lessee (in which event Lessee shall make the
repairs at Lessee's expense), 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 the date of the occurrence of such
damage of Lessor's intention to cancel and terminate this Lease, as of the date
of the occurrence of such damage. In the event Lessor elects to give such notice
of Lessor's intention to cancel and 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 intention to repair such damage at Lessee's
expense, without reimbursement from Lessor, in which event this Lease shall
continue in full force and effect, and Lessee shall proceed to make such repairs
as soon as reasonably possible. If Lessee does not give such notice within such
10-day period this Lease shall be canceled and terminated as of the date of the
occurrence of such damage.
9.4. Total Destruction. If at any time during the term of this Lease there
is damage, whether or not an Insured Loss, (including destruction required by
any authorized public authority), which falls into the classification of
Premises Total Destruction or Premises Building Total Destruction, this Lease
shall automatically terminate as of the date of such total destruction.
9.5. Damage Near End of Term.
(a) If at any time during the last six months of the term of this
Lease there is damage, whether or not an Insured Loss, which falls within the
classification of Premises Partial Damage, Lessor may at Lessor's option cancel
and terminate this Lease as of the date of occurrence of such damage by giving
written notice to Lessee of Lessor's election to do so within 30 days after the
occurrence of such damage.
(b) Notwithstanding paragraph 9.5(a), in the event that Lessee has an
option to extend or renew this Lease, and the time within which said option may
be exercised has not yet expired, Lessee shall exercise such option, if it is to
be exercised at all, no later than 20 days after the occurrence of an Insured
Loss falling within the classification of Premises Partial Damage during the
last six months of the term of this Lease. If Lessee duly exercises such option
during said 20 day period, Lessor shall, at Lessor's expense, repair such damage
as soon as reasonably possible and this
- 8 -
<PAGE>
Lease shall continue in full force and effect. If Lessee fails to exercise such
option during said 20 day period, then Lessor may at Lessor's option terminate
and cancel this Lease as of the expiration of said 20 day period by giving
written notice to Lessee of Lessor's election to do so within 10 days after the
expiration of said 20 day period, notwithstanding any term or provision in the
grant of option to the contrary.
9.6. Abatement of Rent; Lessee's Remedies.
(a) In the event of damage described in paragraphs 9.2 or 9.3, and
Lessor or Lessee repairs or restores the Premises pursuant to the provisions of
this Paragraph 9, the rent payable hereunder for the period during which such
damage, repair or restoration continues shall be abated in proportion to the
degree to which Lessee's use of the Premises is impaired. Except for abatement
of rent, if any, Lessee shall have no claim against Lessor for any damage
suffered by reason of any such damage, destruction, repair 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 such repair or
restoration within 90 days after such obligations shall accrue, Lessee may at
Lessee's option cancel and terminate this Lease by giving Lessor written notice
of Lessee's election to do so at any time prior to the commencement of such
repair or restoration. In such event this Lease shall terminate as of the date
of such notice.
9.7. Termination - Advance Payments. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made concerning
advance rent and any advance payments made by Lessee to Lessor. Lessor shall, in
addition, return to Lessee so much of Lessee's security deposit as has not
theretofore been applied by Lessor.
9.8. Waiver. Lessor and Lessee waive the provisions of any statutes which
relate to termination of leases when leased property is destroyed and agree that
such event shall be governed by the terms of this Lease.
10. Real Property Taxes.
10.1. Payment of Tax Increase. Lessor shall pay the real property tax, as
defined in paragraph 10.3, applicable to the Premises; provided, however, that
Lessee shall pay, in addition to rent, the amount, if any, by which real
property taxes applicable to the Premises increase (unless such increase is due
to Lessor's construction of additional improvements over the fiscal real estate
tax year 1996 1997. Such payment shall be made by Lessee within thirty (30) days
after receipt of Lessor's written statement setting forth the amount of such
increase and the computation thereof. If the term of this Lease shall not expire
concurrently with the expiration of the tax fiscal year, Lessee's liability for
increased taxes for the last partial lease year shall be prorated on an annual
basis.
10.2. Additional Improvements. Notwithstanding paragraph 10.1 hereof,
Lessee shall pay to Lessor upon demand therefor the entirety of any increase in
real property tax if assessed solely by reason of additional improvements placed
upon the Premises by Lessee or at Lessee's request.
10.3. Definition of "Real Property Tax". As used herein, the term "real
property tax" shall include any form of real estate tax or assessment, general,
special, ordinary or extraordinary, and any
- 9 -
<PAGE>
license fee, commercial rental tax, improvement bond or bonds, levy or tax and
any other real property taxes, such as traffic taxes (other than inheritance,
personal income or estate taxes) imposed on the Premises 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, as against any legal or equitable interest
of Lessor in the Premises or in the real property of which the Premises are a
part, as against Lessor's right to rent other income therefrom, and as against
Lessor's business of leasing the Premises. The term "real property tax" shall
also include any tax, fee, levy, assessment of charge (i) in substitution of,
partially or totally, any tax, fee, levy, assessment or charge hereinabove
included within the definition of "real property tax", or (ii) the nature of
which was hereinabove included within the definition of "real property tax," or
(iii) which is imposed for a service or right not charged prior to June 1, 1978,
or, if previously charged, has been increased since June 1, 1978, or (iv) which
is imposed as a result of a transfer, either partial or total, of Lessor's
interest in the Premises or which is added to a tax or charge hereinbefore
included within the definition of real property tax by reason of such transfer,
or (v) which is imposed by reason of this transaction, any modification or
changes hereto, or any transfers hereof.
10.4. Joint Assessment. If the Premises are not separately assessed,
Lessee's liability 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 work sheets or such other information as may be
reasonably available. Lessor's reasonable determination thereof, in good faith,
shall be conclusive.
10.5. Personal Property Taxes.
(a) Lessee shall pay prior to delinquency all taxes assessed against
and levied upon trade fixtures, furnishings, equipment and all other personal
property of Lessee contained in the Premises or elsewhere. When possible, Lessee
shall cause said trade fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of Lessor.
(b) If any of Lessee's said personal property shall be assessed with
Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee
within 10 days after receipt of a written statement setting forth the taxes
applicable to Lessee's property.
11. Utilities. Lessee shall pay for all water, gas, heat, light, power,
telephone and other utilities and services supplied to the Premises, together
with any taxes thereon. If any such services are not separately metered to
Lessee, Lessee shall pay a reasonable proportion to be determined by Lessor of
all charges jointly metered with other premises.
12. Assignment and Subletting.
12.1. Lessor's Consent Required. Lessee shall not voluntarily or by
operation of law assign, transfer, mortgage, sublet, or otherwise transfer or
encumber all of any part of Lessee's interest in this Lease or in the Premises,
without Lessor's prior written consent, which Lessor shall not unreasonably
withhold. Lessor shall respond to Lessee's request for consent hereunder in a
timely manner and any attempted assignment, transfer, mortgage, encumbrance or
subletting without such consent shall be void, and shall constitute a breach of
this Lease.
- 10 -
<PAGE>
12.2. Lessee Affiliate. Notwithstanding the provisions of paragraph 12.1
hereof, Lessee may assign or sublet the Premises, or any portion thereof,
without Lessor's consent, to any corporation which controls, is controlled by or
is under common control with Lessee, or to any corporation resulting form the
merger or consolidation with Lessee, or to any person or entity which acquires
all the assets of Lessee as a going concern of the business that is being
conducted on the Premises, provided that said assignee assumes, in full, the
obligations of Lessee under this Lease. Any such assignment shall not, in any
way, affect or limit the liability of Lessee under the terms of this Lease even
if after such assignment or subletting the terms of this Lease are materially
changed or altered without the consent of Lessee, the consent of whom shall not
be necessary.
12.3. No Release of Lessee. Regardless of Lessor's consent, no subletting
or assignment shall release Lessee of Lessee's obligation or alter the primary
liability of Lessee to pay the rent and to perform all other obligations to be
performed by Lessee hereunder. The acceptance of rent by Lessor from any other
person shall not be deemed to be a waiver by Lessor of any provision hereof.
Consent to one assignment or subletting shall not be deemed consent to any
subsequent assignment or subletting. In the event of default by any assignee of
Lessee or any successor of Lessee, in the performance of any of the terms
hereof, Lessor may proceed directly against Lessee without the necessity of
exhausting remedies against said assignee. Lessor may consent to subsequent
assignments or subletting of this Lease or amendments or modifications to this
Lease with assignees of Lessee, without notifying Lessee, or any successor of
Lessee, and without obtaining its or their consent thereto and such action shall
not relieve Lessee of liability under this Lease.
12.4. Attorneys's Fees. In the event Lessee shall assign or sublet the
Premises or request the consent of Lessor to any assignment or subletting or if
Lessee shall request the consent of Lessor for any act Lessee proposes to do
then Lessee shall pay Lessor's reasonable attorneys fees incurred in connection
therewith, such attorneys fees not to exceed $350.00 for each such request.
13. Defaults; Remedies.
13.1. Defaults. The occurrence of any one or more of the following events
shall constitute a material default and breach of this Lease by Lessee:
(a) The vacating or abandonment of the Premises by Lessee.
(b) The failure by Lessee to make any payment of rent or any other
payment required to be made by Lessee hereunder, as and when due, where such
failure shall continue for a period of three days after written notice thereof
from Lessor to Lessee. In the event that Lessor serves Lessee with a Notice to
Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes such Notice
to Pay Rent or Quit shall also constitute the notice required by this
subparagraph.
(c) The failure by Lessee to observe or perform any of the covenants,
conditions or provisions of this Lease to be observed or performed by Lessee,
other than described in paragraph (b) above, where such failure shall continue
for a period of 30 days after written notice hereof from Lessor to Lessee;
provided, however, that if the nature of Lessee's default is such that more than
30 days are reasonably required for its cure, then Lessee shall not be deemed to
be in default if Lessee commenced such cure within said 30-day period and
thereafter diligently prosecutes such cure to completion.
- 11 -
<PAGE>
(d) (i) The making by Lessee of any general arrangement or assignment
for the benefit of creditors; (ii) Lessee becomes a "debtor" as defined in 11
U.S.C. Section 101 or any successor statute thereto (unless, in the case of a
petition filed against Lessee, the same is dismissed within 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 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 30 days. Provided, however, in the event that
any provision of this paragraph 13.1(d) is contrary to any applicable law, such
provision shall be of no force or effect.
(e) The discovery by Lessor that any financial statement given to
Lessor by Lessee, any assignee of Lessee, any subtenant of Lessee, any successor
in interest of Lessee or any guarantor of Lessee's obligation hereunder, and any
of them, was materially false.
13.2. Remedies. In the event of any such material default or breach by
Lessee, Lessor may at any time thereafter, with or without notice or demand and
without limiting Lessor in the exercise of any right or remedy which Lessor may
have by reason of such default or breach:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession of the Premises to Lessor. In such event Lessor
shall be entitled to recover from Lessee all damages incurred by Lessor by
reason of Lessee's default including, but not limited to, the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorney's fees, and any
real estate commission actually paid; the worth at the time of award by the
court having jurisdiction thereof of the amount by which the unpaid rent for the
balance of the term after the time of such award exceeds the amount of such
rental loss for the same period that Lessee proves could be reasonably avoided;
that portion of the leasing commission paid by Lessor pursuant to Paragraph 15
applicable to the unexpired term of this Lease.
(b) Maintain Lessee's right to possession in which case this Lease
shall continue in effect whether or not Lessee shall have abandoned the
Premises. In such event, Lessor shall be entitled to enforce all of Lessor's
rights and remedies under this Lease, including the right to recover the rent as
it becomes due hereunder.
(c) Pursue any other remedy now or hereafter available to Lessor under
the laws or judicial decisions of the state wherein the Premises are located.
Unpaid installments of rent and other unpaid monetary obligations of Lessee
under the terms of this Lease shall bear interest from the date due at the
maximum rate then allowable by law.
13.3. Default by Lessor. Lessor shall not be in default unless Lessor fails
to perform obligations required of Lessor within a reasonable time, but in no
event later than thirty (30) days after written notice by Lessee to Lessor and
to the holder of any first mortgage or deed of trust covering the Premises whose
name and address shall have theretofore been furnished to Lessee in writing,
specifying wherein Lessor has failed to perform such obligation; provided
however, that if the nature of Lessor's obligation is such that more than thirty
(30) days are required for performance
- 12 -
<PAGE>
then Lessor shall not be in default if Lessor commences performance within such
30-day period and thereafter diligently prosecutes the same to completion.
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 on Lessor by the
terms of any mortgage or trust deed covering the Premises. Accordingly, if any
installment of rent or any 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
late charge equal to 6% of such overdue amount. The parties hereby agree that
such late charge represents a fair and reasonable estimate of the costs Lessor
will incur by reason of late payment by Lessee. Acceptance of such late charge
by Lessor shall in no event constitute a waiver of Lessee's default with respect
to such overdue amount, nor prevent Lessor from exercising any of the other
rights and remedies granted hereunder. In the event that a late charge is
payable hereunder, whether or not collected, for three (3) consecutive
installments of rent, then rent shall automatically become due and payable
quarterly in advance, rather than monthly, notwithstanding paragraph 4 of any
other provision of this Lease to the contrary.
13.5. Impounds. In the event that a late charge is payable hereunder,
whether or not collected, for three (3) installments of rent or any other
monetary obligation of Lessee under the terms of this Lease, Lessee shall pay to
Lessor, if Lessor shall so request, in addition to any other payments required
under this Lease, a monthly advance installment, payable at the same time as the
monthly rent, as estimated by Lessor, for real property tax and insurance
expenses on the Premises which are payable by Lessee under the terms of this
Lease. Such fund shall be established to insure payment when due, before
delinquency, of any or all such real property taxes and insurance premiums. If
the amounts paid to Lessor by Lessee under the provisions of this paragraph are
insufficient to discharge the obligations of Lessee to pay such real property
taxes and insurance premiums as the same become due. Lessee shall pay to Lessor,
upon Lessor's demand, such additional sums necessary to pay such obligations.
All moneys paid to Lessor under this paragraph may be intermingled with other
moneys of Lessor and shall not bear interest. In the event of a default in the
obligations of Lessee to perform under this Lease, then any balance remaining
from funds paid to Lessor under the provisions of this paragraph may, at the
option of Lessor, be applied to the payment of any monetary default of Lessee in
lieu of being applied to the payment of real property tax and insurance
premiums.
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 10% of the floor area of the
building on the Premises, or more than 25% of the land area of the Premises
which is not occupied by any building, is taken by condemnation, Lessee may, at
Lessee's option, to be exercised in writing only 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 rent shall be reduced in
- 13 -
<PAGE>
the proportion that the floor area of the building taken bears to the total
floor area of the building situated on the Premises. No reduction of rent shall
occur if the only area taken is that which does not have a building located
thereon. 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 in value of the leasehold or for the taking of the
fee, or as severance damages; provided, however, that Lessee shall be entitled
to any award for loss of or damage to Lessee's trade fixtures and removable
personal property. In the event that this Lease is not terminated by reason of
such condemnation, Lessor shall to the extent of severance damages received by
Lessor in connection with such condemnation, repair any damage to the Premises
caused by such condemnation except to the extent that Lessee has been reimbursed
therefor by the condemning authority. Lessee shall pay any amount in excess of
such severance damages required to complete such repair.
15. Broker's Fee.
(a) Upon execution of this Lease by both parties, Lessor shall pay to
N/A Licensed real estate broker(s), a fee as set forth in a separate agreement
between Lessor and said broker(s), or in the event there is no separate
agreement between Lessor and said broker(s), the sum of $per agreement, for
brokerage services rendered by said broker(s) to Lessor in this transaction.
(b) Lessor further agrees that if Lessee exercises any Option as
defined in paragraph 39.1 of this Lease, which is granted to Lessee under this
Lease, Lessor shall pay said broker(s) a fee in accordance with the schedule of
said broker(s) in effect at the time of execution of this Lease.
(c) Lessor agrees to pay said fee not only on behalf of Lessor but
also on behalf of any person, corporation, association, or other entity having
an ownership interest in said real property or any part thereof, when such fee
is due hereunder. Any transferee of Lessor's interest in this Lease, whether
such transfer is by agreement or by operation lf law, shall be deemed to have
assumed Lessor's obligation under this Paragraph 15. Said broker shall be a
third party beneficiary of the provisions of this Paragraph 15.
16. Estoppel Certificate.
(a) Lessee shall at any time upon not less than ten (10) days' prior
written notice from Lessor execute, acknowledge and deliver to Lessor a
statement in writing (i) certifying that this Lease is unmodified and in full
force and effect (or, if modified, stating the nature of such modification and
certifying that this Lease, as so modified, is in full force and effect) and the
date to which the rent and other charges are paid in advance, if any, and
(ii) acknowledging that there are not, to Lessee's knowledge, any uncured
defaults on the part of Lessor hereunder, or specifying such defaults if any are
claimed. Any such statement may be conclusively relied upon by any prospective
purchaser or encumbrancer of the Premises.
(b) At Lessor's option, Lessee's failure to deliver such statement
within such time shall be a material breach of this Lease or shall be conclusive
upon Lessee (i) that this Lease is in full force and effect, without
modification except as may be represented by Lessor, (ii) that there are no
uncured defaults in Lessor's performance, and (iii) that no more than one
month's rent has been paid in advance or such failure may be considered by
Lessor as a default by Lessee under this Lease.
- 14 -
<PAGE>
(c) If Lessor desires to finance, refinance, or sell the Premises, or
any part thereof, Lessee hereby agrees to deliver to any lender or purchaser
designated by Lessor such financial statements of Lessee as may be reasonably
required by such lender or purchaser. Such statements shall include the past
three years' financial statements of Lessee. 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 only the
owner or owners at the time in question of the fee title or a lessee's interest
in a ground lease of the Premises, and except as expressly provided in
Paragraph 15, in the event of any transfer of such title or interest, Lessor
herein named (and in case of any subsequent transfers then the grantor) shall be
relieved from and after the date of such transfer of all liability as respects
Lessor's obligations thereafter to be performed, provided that any funds in the
hands of Lessor or the then grantor at the time of such transfer, in which
Lessee has an interest, shall be delivered to the grantee. The obligations
contained in this Lease to be performed by Lessor shall, subject as aforesaid,
be binding on Lessor's successors and assigns, only during their respective
periods of ownership.
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. Except as expressly herein provided, any
amount due to Lessor not paid when due shall bear interest at the maximum rate
then allowable by law from the date due. Payment of such interest shall not
excuse or cure any default by Lessee under this Lease, provided, however, that
interest shall not be payable on late charges incurred by Lessee nor on any
amounts upon which late charges are paid by Lessee.
20. Time of Essence. Time is of the essence.
21. Additional Rent. Any monetary obligations of Lessee to Lessor under the
terms of this Lease shall be deemed to be rent.
22. Incorporation of Prior Agreements; Amendments. This Lease contains all
agreements of the parties with respect to any matter mentioned herein. No prior
agreement or understanding pertaining to any such matter shall be effective.
This Lease may be modified in writing only, signed by the parties in interest at
the time of the modification. Except as otherwise stated in this Lease, Lessee
hereby acknowledges that neither the real estate broker listed in Paragraph 15
hereof nor any cooperating broker on this transaction nor the Lessor or any
employees or agents of any of said persons has made any oral or written
warranties or representations to Lessee relative to the condition or use by
Lessee of said Premises and Lessee acknowledges that Lessee assumes all
responsibility regarding the Occupational Safety Health Act, the legal use and
adaptability of the Premises and the compliance thereof with all applicable laws
and regulations in effect during the term of this Lease except as otherwise
specifically stated in this Lease.
23. Notices. Any notice required or permitted to be given hereunder shall be in
writing and may be given by personal delivery or by certified mail, and if given
personally or by mail, shall be deemed sufficiently given if addressed to Lessee
or to Lessor at the address noted below the signature of the
- 15 -
<PAGE>
respective parties, as the case may be. Either party may by 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
notice purposes. A copy of all notices required or permitted to be given to
Lessor hereunder shall be concurrently transmitted to such party or parties at
such addresses as Lessor may from time to time hereafter designate by notice to
Lessee.
24. Waivers. No waiver by Lessor or any provision hereof shall be deemed a
waiver of any other provision hereof or of any subsequent breach by Lessee of
the same or any other provision. Lessor's consent to, or approval of any act,
shall not be deemed to render unnecessary the obtaining of Lessor's consent to
or approval of any subsequent act by Lessee. The acceptance of rent hereunder by
Lessor shall not be a waiver of any preceding breach by Lessee of any provision
hereof, other than the failure of Lessee to pay the particular rent so accepted,
regardless of Lessor's knowledge of such preceding breach at the time of
acceptance of such rent.
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.
26. Holding Over. If Lessee, with Lessor's consent, remains in possession of the
Premises or any part thereof after the expiration of the term hereof, such
occupancy shall be a tenancy from month to month upon all the provisions of this
Lease pertaining to the obligations of Lessee, but all options and rights of
first refusal, if any, granted under the terms of this Lease shall be deemed
terminated and be of no further effect during said month to month tenancy.
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. Each provision of this Lease performable by Lessee
shall be deemed both a covenant and a condition.
29. Binding Effect; Choice of Law. Subject to any provisions hereof restricting
assignment or subletting by Lessee and subject to the provisions of
Paragraph 17, this Lease shall bind the parties, their personal representatives,
successors and assigns. This Lease shall be governed by the laws of the State
wherein the Premises are located.
30. Subordination.
(a) This Lease, at Lessor's option, shall be subordinate to any ground
lease, mortgage, deed of trust, or any other hypothecation or security now or
hereafter placed upon the real property of which the Premises are a part and to
any and all advances made on the security thereof and to all renewals,
modifications, consolidations, replacements and extensions thereof.
Notwithstanding such subordination, Lessee's right to quiet possession of the
Premises shall not be disturbed if Lessee is not in default and so long as
Lessee shall pay the rent and observe and perform all of the provisions of this
Lease, unless this Lease is otherwise terminated pursuant to its terms. If any
mortgagee, trustee or ground lessor shall elect to have this Lease prior to the
lien of its mortgage, deed of trust or ground lease, and shall give written
notice thereof to Lessee, this Lease shall be deemed prior to such mortgage,
deed of trust, or ground lease, whether this Lease is dated prior or
- 16 -
<PAGE>
subsequent to the date of said mortgage, deed of trust or ground lease or the
date of recording thereof.
(b) Lessee agrees to execute any documents required to effectuate an
attornment, a subordination or to make this Lease prior to the lien of any
mortgage, deed of trust or ground lease, as the case may be. Lessee's failure to
execute such documents within 10 days after written demand shall constitute a
material default by Lessee hereunder, or, at Lessor's option, Lessor shall
execute such documents on behalf of Lessee as Lessee's attorney-in-fact. Lessee
does hereby make, constitute and irrevocably appoint Lessor as Lessee's
attorney-in-fact and in Lessee's name, place and stead, to execute such
documents in accordance with this paragraph 30(b).
31. Attorney's Fees. If either party or the broker named herein brings an action
to enforce the terms hereof or declare rights hereunder, the prevailing party in
any such action, on trial or appeal, shall be entitled to his reasonable
attorney's fees to be paid by the losing party as fixed by the court. The
provisions of this paragraph shall inure to the benefit of the broker named
herein who seeks to enforce a right hereunder.
32. Lessor's Access. Lessor and Lessor's agents shall have the right to enter
the Premises at reasonable times for the purpose of inspecting the same, showing
the same to prospective purchasers, lenders, or lessees, and making such
alterations, repairs, improvements or additions to the Premises or to the
building of which they are a part as Lessor may deem necessary or desirable.
Lessor may at any time place on or about the Premises any ordinary "For Sale"
signs and Lessor may at any time during the last 120 days of the term hereof
place on or about the Premises any ordinary "For Lease" signs, all without
rebate of rent or liability to Lessee.
33. Auctions. 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 whether to grant such consent.
34. Signs. Lessee shall not place any sign upon the Premises without Lessor's
prior written consent except that Lessee shall have the right, without the prior
permission of Lessor to place ordinary and usual for rent or sublet signs
thereon.
35. Merger. The voluntary or other surrender of this Lease by Lessee, or a
mutual cancellation thereof, or a termination by Lessor, shall not work a
merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to Lessor
of any or all such subtenancies.
36. Consents. Except for paragraph 33 hereof, wherever in this Lease the consent
of one party is required to an act of the other party, such consent shall not be
unreasonably withheld.
37. Guarantor. In the event that there is a guarantor of this Lease, said
guarantor shall have the same obligations as Lessee under this Lease.
38. Quiet Possession. Upon Lessee paying the rent for the Premises and observing
and performing all of the covenants, conditions and provisions on Lessee's part
to be observed and
- 17 -
<PAGE>
performed hereunder, Lessee shall have quiet possession of the Premises for the
entire term hereof subject to all of the provisions of this Lease. The
individuals executing this Lease on behalf of Lessor represent and warrant to
Lessee that they are subject to all of the provisions of this Lease. The
individuals executing this Lease on behalf of Lessor represent and warrant to
Lessee that they are fully authorized and legally capable of executing this
Lease on behalf of Lessor and that such execution is binding upon all parties
holding an ownership interest in the Premises.
39. Options.
39.1 Definition. As used in this paragraph the word "Options" has the
following meaning: (1) the right or option to extend the term of this Lease or
to renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (2) the option or 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 property of Lessor; (3) the right or option to purchase the Premises, or
the right of first refusal to purchase the Premises, or the right of first offer
to purchase the Premises of the right or option to purchase other property of
Lessor, or the right of first refusal to purchase other property of Lessor or
the right of first offer to purchase other property of Lessor.
39.2 Options Personal. Each Option granted to Lessee in this Lease are
personal to Lessee and may not be exercised or be assigned, voluntarily or
involuntarily, by or to any person or entity other than Lessee, provided,
however, the Option may be exercised by or assigned to any Lessee Affiliate as
defined in paragraph 12.2 of this Lease. The Options herein granted to Lessee
are not assignable separate and apart from this Lease.
39.3 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
option to extend or renew this Lease has been so exercised.
39.4 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 time
commencing from the date Lessor gives to Lessee a notice of default pursuant to
paragraph 13.1(b) or 13.1(c) and continuing until the default alleged in said
notice of default is cured, or (ii) during the period of time commencing on the
date after a monetary obligation to Lessor is due from Lessee and unpaid
(without any necessity for notice thereof to Lessee) continuing until the
obligation is paid, or (iii) at any time after an event of default described in
paragraphs 13.1(a), 13.1(d), or 13.1(e) (without any necessity of Lessor to give
notice of such default to Lessee), or (iv) in the event that Lessor has given to
Lessee three or more notices of default under paragraph 13.1(b), where a late
charge becomes payable under paragraph 13.4 for each of such defaults, or
paragraph 13.1(c), whether or not the defaults are cured, during the 12 month
period prior to the time that Lessee intends to exercise the subject Option.
(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).
- 18 -
<PAGE>
(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 30 days after such obligation becomes due (without any necessity
of Lessor to give notice thereof to Lessee), or (ii) Lessee fails to commence to
cure a default specified in paragraph 13.1(c) within 30 days after the date that
Lessor gives notice to Lessee of such default and/or Lessee fails thereafter to
diligently prosecute said cure to completion, or (iii) Lessee commits a default
described in paragraph 13.1(a), 13.1(d) or 13.1(e) (without any necessity of
Lessor to give notice of such default to Lessee), or (iv) Lessor gives to Lessee
three or more notices of default under paragraph 13.1(b), where a late charge
becomes payable under paragraph 13.4 for each such default, or paragraph
13.1(c), whether or not the defaults are cured.
40. Multiple Tenant Building. In the event that the Premises are part of a
larger building or group of buildings, then Lessee agrees that it will abide by,
keep and observe all reasonable rules and regulations which Lessor may make from
time to time for the management, safety, care, and cleanliness of the building
and grounds, the parking of vehicles and the preservation of good order therein
as well as for the convenience of other occupants and tenants of the building.
The violations of any such rules and regulations shall be deemed a material
breach of this Lease by Lessee.
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.
Lessee assumes all responsibility for the protection of Lessee, its agents and
invitees from acts of third parties.
42. Easements. Lessor reserves to itself the right, from time to time, to grant
such easements, rights and dedications that Lessor deems necessary or desirable,
and to cause the recordation of Parcel Maps and restrictions, so long as such
easements, rights, dedications, Maps and restrictions do not unreasonably
interfere with the use of the Premises by Lessee. Lessee shall sign any of the
aforementioned documents upon request of Lessor and failure to do so shall
constitute a material breach of this Lease.
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 Lessee 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 behalf of said entity. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after execution of this
Lease, deliver to Lessor evidence of such authority satisfactory to Lessor.
- 19 -
<PAGE>
45. Conflict. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
46. Addendum. See Addenda A, B, and C and Exhibit A attached hereto and made a
part hereof.
47. Rent Payments. Rent payments are due on the first of each month. Please
remit to Olen Properties Corp., 7 Corporate Plaza, Newport Beach, California
92660. LESSOR DOES NOT INVOICE ON A MONTHLY BASIS.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH
TERM AND PROVISION CONTAINED HEREIN AND, BY 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 SUBMISSION
TO YOUR ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION
IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE
REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL
SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE
TRANSACTION RELATING THERETO; THE PARTIES SHALL RELY SOLELY UPON THE
ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES
OF THIS LEASE.
- 20 -
<PAGE>
The parties hereto have executed this Lease at the place on the dates specified
immediately adjacent to their respective signature.
Executed at: Newport Beach on December 23, 1996
Address: 7 Corporate Plaza, Newport
Beach, CA 92660
OLEN PROPERTIES CORP., a Florida
corporation
By: /s/ Charles C. Aufhammer
Charles C. Aufhammer
Director of Marketing
"LESSOR" (Corporate seal)
Executed at: ___________________________________
On:______________________________________________
Address:_________________________________________
ADVANCED AERODYNAMICS &
STRUCTURES, INC. a Delaware
corporation
By: /s/ Gene Comfort
Gene Comfort
Executive Vice President
"LESSEE" (Corporate seal)
- 21 -
<PAGE>
ADDENDUM "A"
BY AND BETWEEN: OLEN PROPERTIES CORP.
A FLORIDA CORPORATION
AS LESSOR; AND: ADVANCED AERODYNAMICS &
STRUCTURES, INC., A DELAWARE
CORPORATION
AS LESSEE
TO LEASE DATED: DECEMBER 19, 1996
______________________________________________________________________________
1. EXTERIOR STORAGE:
Except for aircraft, Lessee shall neither store nor permit to be
stored, any goods, machinery, merchandise, equipment, or any other
items whatsoever, on the exterior of the building or parking lot,
other than wholly within a closed building, without the prior written
consent of the City of Long Beach.
2. PARKING:
Deleted in its entirety.
3. SIGN CRITERIA:
These regulations are established in order to assure that all signs
comply with the signage ordinances in the City of Long Beach, the Long
Beach Airport Complex, and in order to maintain a continuity in
appearances throughout the project. Conformance to the regulations
will be strictly enforced.
A. GENERAL REQUIREMENTS
1. The signs shall be constructed and installed at Lessee's
expense.
2. No electrical or audible signs shall be permitted.
3. Except as provided herein, no advertising placards, banners,
pennants, names, insignia, trademarks, or other descriptive
material shall be affixed or maintained upon the glass panes or
exterior walls of the building.
B. SPECIFICATIONS
1. Placement of the sign on the building shall be in the specific
location and installation shall be by the method designated by
Lessor.
<PAGE>
2. The materials, colors, and dimensions of the signs are subject
to the City of Long Beach, the Long Beach Airport authority
requirements and shall meet Lessor's reasonable approval in
advance of installation.
4. COMMON AREA CHARGES:
Lessee acknowledges a portion of its base rent includes Lessee's
prorata share of the 1997 base year common are budget. The budget
includes, but is not limited to Lessor's estimated costs of landscape
maintenance, parking lot sweeping, maintenance and repair, trash
removal, management fees, utilities which are not separately metered,
and all other costs or expenses incurred by Lessor under this Lease
which are not otherwise reimbursed by tenants of the project. Should
Lessor's common area budget increase in 1997 or thereafter, then
Lessee's prorata share of such increases shall be passed on to Lessee
annually beginning January 1, 1998, pursuant to Articles 7.2 and 11 of
this Lease. Should Lessor's common area budget decrease, then Lessor
shall credit the difference to Lessee's next monthly installment of
rent. Lessee's prorata share of the project is: 70%.
Lessee's $15,000.00 per month rent includes the above "Common Area
Charges" for 1997.
In no event shall Lessee have increases in taxes, insurance and common
area expenses for the first twelve months of this lease term.
5. DECLARATION OF COVENANTS AND RESTRICTIONS:
Lessee acknowledges that his leasehold estate is part of a Development
subject to Covenants, Conditions, and Restrictions of a land lease
held by the City of Long Beach. Lessee agrees to accept its leasehold
estate subject to the aforementioned Land Lease and agrees to perform
and comply with any and all restrictions set forth by the City of Long
Beach or to make adequate provisions to permit entry and other actions
by Lessor for the purpose of performing and complying with these
restrictions.
6. Lessee is leasing the Building and grounds in "as is" condition.
7. Lessee shall be responsible for its own trash pick-up.
8. Lessee acknowledges that the area marked in blue on Exhibit "A" which
includes the outside shed, exterior electrical panel and exterior area
for compressor hook-up are available for Lessee's use for the entire
lease term. Commencing with the first day of the Option Period, should
Lessee exercise same, Lessor shall have the right to remove said shed,
panel and compressor pad to allow for construction of an addition to
the building. Lessor will give Lessee a minimum of thirty (30) days
notice of its intent to remove these and Lessee will promptly relocate
its personal property to accommodate Lessor.
9. HAZARDOUS SUBSTANCES:
Reportable Uses Requires Consent. The term "Hazardous Substance" as
used in this Lease shall mean any product, substance, chemical
material or waste whose presence, nature,
<PAGE>
quantity and/or 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 to the public health safety or
welfare, the environment or the Premises, (ii) regulated or monitored
by any governmental authority, or (iii) a basis for 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, by-products or fractions thereof. Lessee shall not engage in
any activity in, on 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 law. "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. Reportable Use shall also include
Lessee being responsible for the presence in, on or about the Premises
of a Hazardous Substance with respect to which any applicable law
requires that a notice be given to persons entering or occupying the
Premises or neighboring properties. "Reportable Use" does not include
the possession, storage or use of gasoline, lubricating oil or other
petroleum products reasonably required to be used by Lessee in the
normal course of Lessee's business. Notwithstanding the foregoing,
Lessee may without Lessor's prior consent, but in compliance with all
applicable law, use any ordinary and customary materials reasonably
required to be used by Lessee in the normal curse of Lessee's business
permitted on the Premises, 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 the use or presence of
any Hazardous Substance activity or storage tank 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 therefrom or therefor, including, but not
limited to, the installation (and removal on or before Lease
expiration or earliest removal on or before Lease expiration or
earliest termination) of reasonably necessary protective modifications
to the Premises (such as concrete encasement) and/or the deposit of an
additional Security Deposit.
Duty to Inform Lessor. If Lessee knows, or has reasonable cause to
believe, that a Hazardous Substance, or a condition involving or
resulting from same, has come to be located in, on, under or about the
Premises, other than as previously consented to by Lessor, Lessee
shall immediately give written notice of such fact to Lessor. Lessee
shall also immediately give Lessor 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, or persons entering or
occupying the Premises, concerning the presence, spill, release,
discharge of, or exposure to, any Hazardous Substance or contamination
in, on, or about the Premises, including but not limited to all such
documents as may be involved in any Reportable Uses involving the
Premises.
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
<PAGE>
and all loss of rents and/or damages, liabilities, judgements, costs,
claims, liens, expenses, penalties, permits, and attorney's and
consultant's fees arising out of or involving any Hazardous Substance
or storage tank brought onto the Premises by or for Lessee or under
Lessee's control. Lessee's obligations under this Paragraph 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 consultant's and
attorney's 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 or storage tanks, unless
specifically so agreed by Lessor in writing at the time of such
agreement.
10. EARLY POSSESSION AGREEMENT:
Lessor agrees to grant Lessee early occupancy of said Premises, the
date to be December 24, 1996. Lease payments shall not commence until
January 1, 1997. Lessor shall have no liability or responsibility for
damages to the personal property of, or any loss suffered by Lessee
through vandalism, theft, or destruction of the property by fire or
other causes. It is agreed by Lessee and Lessor that all the terms and
conditions of the lease are to be in full force and effect, except as
to rent, as of the date of Lessee's possession of subject Premises.
<PAGE>
ADDENDUM "B"
BY AND BETWEEN OLEN PROPERTIES CORP.
A FLORIDA CORPORATION
AS LESSOR; AND ADVANCED AERODYNAMICS &
STRUCTURES, INC., A DELAWARE
CORPORATION
AS LESSEE
TO LEASE DATED: DECEMBER 19, 1996
______________________________________________________________________________
1. No sign, placard, picture, advertisement, name or notice shall be
inscribed, displayed or printed or affixed on or to any part of the outside
or inside of the building without the written consent of Lessor first had
and obtained and Lessor shall have the right to remove and destroy any such
sign, placard, picture, advertisement, name or notice without notice to and
at the expense of Lessee.
All approved signs or lettering on doors shall be printed, painted, affixed
or inscribed at the expense of Lessee by a person approved by the Lessor.
Lessee shall not place anything or allow anything to be placed near the
glass of any window, door, partition or wall which may appear unsightly
from outside the Premises; provided, however, that the Lessor may furnish
and install a building standard window covering at all exterior windows.
Lessee shall not without prior written consent of Lessor cause or otherwise
install sunscreen on any window.
2. The sidewalks, halls, passages, exists, entrances, elevators and stairways,
driveways, and parking areas shall not be obstructed by Lessees or used by
them for any purpose other than for ingress and egress from their
respective Premises.
3. Lessee shall be solely responsible for all existing locks or installation
of any new or additional locks or bolts on any doors or windows of the
Premises and agrees to provide keys to Lessor for all such locks upon
vacation of Premises.
4. The toilet rooms, urinals, wash bowls and other apparatus shall not be used
for any purpose other than that for which they were constructed and no
foreign substance of any kind whatsoever shall be thrown therein and the
expense of any breakage, stoppage, or damage resulting from the violation
of this rule shall be borne by the Lessee who, or whose employees or
invitees shall have caused it.
5. Lessee shall not overload the floor of the Premises or in any way deface
the Premises or any part thereof.
<PAGE>
6. Lessee shall not use, keep or permit to be used or kept any foul or noxious
gas (excluding aviation fuel) or substances in the Premises, or permit or
suffer the Premises to be occupied or used in a manner offensive or
objectionable to the Lessor or other occupants of the Building by reason of
noise, odors and/or vibrations, or interfere in any way with other Lessees
or those having business therein, nor shall any animals or birds be brought
in or kept in or about the Premises or the Building.
7. No cooking shall be done or permitted by any Lessee on the Premises, nor
shall the premises be used for washing clothes, for lodging, or for any
improper, objectionable or immoral purpose.
8. Lessee shall not keep in the Premises or the Building any kerosene,
gasoline or inflammable or combustible fluid or material, or use any method
of heating or air conditioning other than that supplied or approved in
writing by the Lessor, except as same is approved to be stored or used in
accordance with the regulations of all applicable codes of the City of Long
Beach and the Long Beach Airport Authority.
9. Lessor will direct electricians as to where and how telephone and telegraph
wires are to be introduced. No boring or cutting for wires will be allowed
without the consent of the Lessor. The locations of telephones, call boxes
and other office equipment affixed to the premises shall be subject to the
approval of Lessor.
10. Lessor reserves the right to exclude or expel from the Building any person
who, in the judgment of Lessor, is intoxicated or under the influence of
liquor or drugs, or who shall in any manner do any act in violation of any
of the rules and regulations of the Building.
11. Lessee shall not disturb, solicit, or canvass any occupant of the Building
and shall cooperate to prevent same.
12. Without the written consent of Lessor, Lessee shall not use the name of the
Building in connection with or in promoting or advertising the business of
Lessee except as Lessee's address.
13. Lessor shall have the right to control and operate the public portions of
the Building, and the public facilities, and heating and air conditioning,
as well as facilities furnished for the common use of the Lessees, in such
manner as it deems best for the benefit of the Lessees generally.
14. All garbage and refuse shall be placed by Lessee in the containers at the
location prepared by Lessor for refuse collection, in the manner and at the
times and places specified by Lessor. Lessee shall not burn any trash or
garbage of any kind in or about the Leased premises or the business Park.
All cardboard boxes must be "broken down" prior to being placed in the
trash container. All styrofoam chips must be bagged or other wise contained
prior to placement in the trash container, so as not to constitute a
nuisance. Pallets may
<PAGE>
not be disposed of in the trash bins or enclosures. It is the Lessee's
responsibility to dispose of pallets by alternative means.
Should any garbage or refuse not be deposited in the manner specified by
Lessor, Lessor may after three (3) hours verbal notice to Lessee, take
whatever action necessary to correct the infracture at Lessee's expense.
15. No aerial antenna shall be erected on the roof or exterior walls of the
Leased Premises, or on the grounds, without in each instance, the written
consent of Lessor first being obtained. Any aerial or antenna so installed
without such written consent shall be subject to removal by Lessor at any
time without notice.
16. No loud speakers, televisions, phonographs, radios or other devises shall
be used in a manner so as to be heard or seen outside of the Leased
Premises or in neighboring space without the prior written consent of
Lessor.
17. The outside areas immediately adjoining the Leased Premises shall be kept
clean and free from dirt and rubbish by the Lessee, to the satisfaction of
the Lessor, and Lessee shall not place or permit any obstruction or
materials in such areas.
18. Lessee shall use at Lessee's cost such pest extermination contractors as
Lessor may direct and at such intervals as Lessor may require.
19. These common types of damages will be charged back to the Lessee if they
are not corrected prior to vacating the premises:
- - Keys not returned to Lessor for ALL locks, requiring the service of a
locksmith and rekeying.
- - Removal of all decorator painting, wallpapering and paneling, or Lessor's
prior consent to remain.
- - Electrical conduit and receptacles on the surface of walls.
- - Phone outlets, wiring, or phone equipment added on wall surfaces.
- - Security tape/magnetic tape switches for burglar alarm systems added to
windows and door surfaces.
- - Penetration of roof membrane in any manner.
- - Holes in walls, doors, and ceiling surfaces.
- - Addition or change of standard door hardware.
<PAGE>
- - Painting or gluing of carpet or tile on warehouse floors.
- - Glass damage.
- - Damage to warehouse ceiling insulation.
- - Stains or damage to carpeting beyond normal wear-and-tear.
- - Damage to warehouse ceiling insulation.
- - Stains or damage to carpeting beyond normal wear-and-tear.
- - Damaged, inoperative, or missing electrical, plumbing, or HVAC equipment.
- - Debris and furniture requiring disposal.
- - Damaged or missing mini-blinds, draperies, and baseboards.
- - Installation of additional improvements without lessor's prior written
approval or obtainment of required City building permits.
Lessee agrees to comply with all such rules and regulations upon notice
from Lessor. Should Lessee not abide by these Rules and Regulations, Lessor
may serve a three (3) day notice to correct deficiencies. If Lessee has not
corrected deficiencies by the end of the notice period, Lessee will be in
default of lease.
Lessor reserves the right to amend or supplement the foregoing rules and
regulations and to adopt and promulgate additional rules and regulations
applicable to the leased premises. Notice of such rules and regulations and
amendments and supplements thereto, if any, shall be given to the Lessee.
<PAGE>
ADDENDUM "C"
BY AND BETWEEN: OLEN PROPERTIES CORP.
A FLORIDA CORPORATION
AS LESSOR; AND: ADVANCED AERODYNAMICS &
STRUCTURES, INC., A DELAWARE
CORPORATION
AS LESSEE
TO LEASE DATED: DECEMBER 19, 1996
______________________________________________________________________________
OPTION TO RENEW/LEASE EXTENSION
Providing Lessee is not in default under any of the terms of this Lease, Lessee
shall have the Option to Extend the terms of this Lease for ONE (1) FOUR-MONTH
period on all the same terms and conditions as contained in this Lease, and the
minimum base monthly rent and security deposit as set forth in Article 4 and 5
shall remain as follows:
Beginning on January 1, 1998, through April 30, 1998, the minimum base rent
shall be $15,000.00 and the security deposit shall be $15,000.00.
To exercise this Option to Extend, Lessee must give notice IN WRITING to Lessor
by Certified Mail, return receipt requested, at least SIXTY (60) DAYS prior to
the expiration of the original term.
ALL TERMS AND CONDITIONS OF ARTICLES 39 OF THE LEASE SHALL REMAIN IN FULL FORCE
AND EFFECT.
_________ _________
Lessor's Initials Lessee's Initials
Advanced Aerodynamics & Structures, Inc.
Form 10K-SB
Statement Re: Computation of Per Share Earnings
For the Year Ended For the Year Ended
December 31, 1995 December 31, 1996
Loss before extraordinary item ($1,688,000) ($2,446,000)
Extraordinary loss on retirement
of Bridge Notes (942,000)
Net loss ($1,688,000) ($3,388,000)
Weighted average number of Class B
Common Stock shares outstanding 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
Weighted average number of Class A
Common Stock shares outstanding 499,000
3,400,000 3,546,000
Loss per share before extraordinary ($0.50) ($0.69)
item
Extraordinary loss per share on
retirement of Bridge Notes (0.27)
Net loss per share ($0.50) ($0.96)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 24,222,000
<SECURITIES> 2,038,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 26,415,000
<PP&E> 3,192,000
<DEPRECIATION> (1,506,000)
<TOTAL-ASSETS> 28,101,000
<CURRENT-LIABILITIES> 303,000
<BONDS> 0
0
0
<COMMON> 1,000
<OTHER-SE> 27,797,000
<TOTAL-LIABILITY-AND-EQUITY> 28,101,000
<SALES> 0
<TOTAL-REVENUES> 133,000
<CGS> 0
<TOTAL-COSTS> 1,927,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 652,000
<INCOME-PRETAX> (2,446,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,446,000)
<DISCONTINUED> 0
<EXTRAORDINARY> (942,000)
<CHANGES> 0
<NET-INCOME> (3,388,000)
<EPS-PRIMARY> (.96)
<EPS-DILUTED> (.96)
</TABLE>
