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, 1997
_____
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 (I.R.S. Employer Identification No.)
Incorporation or Organization)
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 generated no operating revenues for the fiscal year
ended December 31, 1997.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of December 31, 1997 was $17,681,250. 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 December 31, 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 1998 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, 1997 are incorporated herein by
reference to Registrant's Proxy Statement and appear therein under the section
headings indicated below:
<TABLE>
Item Form Heading Section Heading
<S> <C> <C>
9. Directors, Executive Officers Proxy Statement - Election of Directors -
Promoters and Control Persons; Information with respect to Nominees,
Compliance with Section 16(a) Directors and Executive Officers
of the Exchange Act
10. Executive Compensation Proxy Statement - Management - Compensation
of Executive Officers
11. Security Ownership of Certain Proxy Statement - Principal Stockholders
Beneficial Owners and Management
12. Certain Relationships and Related Proxy Statement - Management - Certain
Transactions Relationships and Related Transactions
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS.
Overview
The Company is a development stage enterprise 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 360 mph and
a range of approximately 1,500 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 (non flight) 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 during the fourth quarter of 1998, and obtain
a production certificate and commence commercial production of such aircraft
within the same time frame. There can be no assurance, however, that obtaining
the amendment will not take longer than anticipated, 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 Federal Aviation Administration (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.
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Purchasers of general aviation aircraft include (i) corporations, (ii)
governments, (iii) the military, (iv) the general public and (v) fractional
interest entities. A corporation may purchase a general aviation aircraft for
transporting its employees and property. Many companies use an aircraft in their
line of business, including on-demand air taxi services, air ambulance services
and freight and delivery services. Governments and military organizations may
purchase an aircraft for the transportation of personnel, freight and equipment.
Members of the general public may purchase an aircraft for personal and/or
business transportation and pleasure use. Fractional interest entities purchase
one or more aircraft and then sell interests in each aircraft to several persons
or entities. Each entity pays for its share of maintenance and operating costs
and its access to and use of the aircraft. Increased corporate earnings may
encourage corporations to acquire an aircraft. An aircraft must qualify under
FAA regulations in order to be used for certain purposes, and the ability of an
aircraft to so qualify will have a material affect on the potential market for
such aircraft.
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,
aircraft deliveries by United States manufacturers generated approximately $3.1
billion. In 1997, deliveries by United States manufacturers generated
approximately $4.76 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, to 1,569 units in 1997.
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
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design and manufacture of its proposed aircraft. For example, the Company
believes that certain design features of the JETCRUZER 500, such as the canard
wing, will make the aircraft spin resistant and that the absence of wing flaps
will make the operation of the aircraft less susceptible to pilot error. In
addition, the Company believes that the reliability of the Company's component
suppliers, such as Pratt & Whitney, will be viewed favorably by potential
customers.
The Company believes that it will be able to offer aircraft at a
comparatively low price by containing the costs of obtaining FAA certification
and amendments to such certification as well as the costs of manufacturing. The
Company believes that it was able to obtain its Type Certificate for the
JETCRUZER 450 at a significantly lower cost than its competitors with regard to
comparable aircraft due, in part, to the Company's smaller size as compared to
its competitors, resulting in the Company's ability to contain administrative
costs and the overhead expenses allocable to the development process.
Additionally, the Company's Southern California location is home to a number of
workers from recently downsized defense and aerospace companies who the Company
was able to hire to assist in the certification of the JETCRUZER 450. These
employees provided the Company with experience in testing, certifying, tool and
jig manufacturing and other aspects of the certification process that would not
otherwise have been available to the Company.
The Company 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.
Aircraft
General. The Company's 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 500 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 500 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 500, 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 500 does not stall, it does not lose lift on one side
before the other and thus the aircraft is resistant to spins. The JETCRUZER 500
has increased lift in part because the graphite composite fuselage of the
JETCRUZER 500 is lighter than a fuselage made of aluminum, 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 500 provides increased ride comfort, and a quieter
ride, than aircraft of a conventional design. The JETCRUZER 500 will not require
pilot licensing beyond that required for other single-engine propjet aircraft.
The fuselage of each aircraft is 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 500 is constructed of aircraft aluminum. 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 500
because of
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the design and high lift capabilities of the canard and the main wing. The
engine and propeller of the Company's JETCRUZER 500 aircraft are located at the
rear of the fuselage, thus providing passengers with a quieter ride.
JETCRUZER (TM)500. The JETCRUZER 500 is a six-seat (including pilot),
high performance single engine propjet with conventionally constructed wings
made from aluminum attached to a fuselage formed from a high-strength graphite
nomex honeycomb composite material. The aircraft has a canard configuration with
two lift-producing surfaces and no conventional wing flaps. The JETCRUZER 500 is
powered by a Pratt & Whitney PT6A-66A propjet engine located at the rear of the
aircraft. The JETCRUZER 500 is 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 360 mph design speed of the JETCRUZER
500. The Company is amending the Type Certificate to remove these limitations in
the certification of the JETCRUZER 500.
In order to amend the Type Certificate to include the JETCRUZER 500,
additional work is being performed on the aircraft by the Company, including
adding a larger fuselage, pressurization, environmental systems, de-icing
capability, retractable landing gear and autopilot certification, all of which
will be necessary to produce the JETCRUZER 500 for commercial sale. The Company
currently anticipates obtaining the amendment to its Type Certificate during the
fourth quarter of 1998. The Company has submitted its application for amendment
to the FAA. The FAA has assigned a project manager and the Company has held a
meeting with the FAA to set a schedule for the amendment process. There can be
no assurance, however, that obtaining such an amendment will not take longer
than anticipated.
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 360 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 1,500 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.
The JETCRUZER 500 will be available for commercial sale initially at a
base price of approximately $1,400,000. However, the Company has not yet
received the amended Type Certificate for the JETCRUZER 500 and has not yet
completed a facility for manufacturing it on a commercial scale (currently under
construction), both of which may be subject to unforeseen delays, the estimated
date of October 16, 1998 which the JETCRUZER 500 is actually available for
delivery could change materially.
Other Aircraft
STRATOCRUZER (R)1250. The Company currently intends to develop a twin
engine jet aircraft to be called the STRATOCRUZER 1250. The STRATOCRUZER 1250,
if developed, is expected to be a canard aircraft with three flying surfaces
powered by two Williams/Rolls Royce FJ44-2 fanjets. It will seat up to 12
passengers, plus the pilot. Based on its design and preliminary testing, it is
anticipated that the STRATOCRUZER 1250 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 1250 will be able to
takeoff in less than 3,200 feet and land in less than 3,000 feet. The
instrumentation of the STRATOCRUZER 1250 will consist of digital electronic
avionics, including EFIS (an Electronic Flight Instrumentation System, which
includes color
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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 1250's comparatively light weight, combined with,
among other things, its additional lifting surfaces, fuel efficient engines and
aerodynamic design, will give the STRATOCRUZER 1250 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 1250.
The STRATOCRUZER 1250 is in a very early stage of development, and the
completion of such development will also require substantial capital resources
beyond those which the Company currently possesses. Therefore, there can be no
assurance that the Company will obtain the capital resources necessary to
continue the development of the STRATOCRUZER 1250 or, if such resources are
obtained, successfully develop and certify the STRATOCRUZER 1250. Accordingly,
the Company cannot predict when, if ever, the STRATOCRUZER 1250 will be
available for commercial sale.
JETCRUZER (TM)650. The Company also currently intends to develop the
JETCRUZER 650. This aircraft will be based on the JETCRUZER 450/500 design and
will have the same engine and components as the JETCRUZER 500. However, it is
intended to have a longer fuselage which will accommodate up to twelve
passengers plus a pilot. To produce the JETCRUZER 650, the Company will need
either to amend its Type Certificate or obtain a new type certificate, as
determined by the FAA.
The Company anticipates that the cruise speed of the JETCRUZER 650 will
be approximately 300 miles per hour, that it will takeoff in approximately 1,800
feet, climb at a rate of 1,200 to 1,600 feet per minute and have a maximum range
of approximately 1,250 miles. The Company currently plans to offer two versions
of the JETCRUZER 650: a pressurized corporate and on-demand charter passenger
aircraft, which will cruise at approximately 30,000 feet above sea level and
have a maximum passenger seating capacity of twelve, and a non-pressurized
version for use as a utility/freight aircraft which will cruise at a lower
altitude than the pressurized version.
Although it incorporates certain components and systems approved as
part of the JETCRUZER 450 certification process, the JETCRUZER 650 is in a very
early stage of engineering and design, and the completion of the development of
the JETCRUZER 650 and the certification of such aircraft will require
substantial capital resources in addition to those which the Company currently
possesses. There can be no assurance that the Company will obtain the capital
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.
Manufacturing
The Company has designed, 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 will produce in-house substantially all of the tooling necessary for
the production of its aircraft, from master models to major jigs and fixtures.
The Company believes it has and will continue to achieve cost savings by
manufacturing tooling in-house. 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 believes that a number of such skilled individuals are
available in Southern California in general, and in Long Beach in particular.
However, no assurance can be given that these individuals will in fact be
available to the Company.
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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 will 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. 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 because, unlike metal construction, 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. The Company has developed an in-house sales
organization and is marketing its aircraft in the United States and abroad
through trade have publications, news releases, attendance at aircraft trade
shows, and independent distributors and agents.
The Company's marketing and sales efforts to date have emphasized
aircraft trade shows, from which a significant amount of new aircraft orders
have been generated. The Company participates in numerous air shows, including
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 introduces the
Company's aircraft to potential purchasers and increases overall awareness of
the Company's products. The Company also promotes general knowledge of the
Company's products by issuing press releases to aviation magazines and
newspapers. The Company also uses 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 developed direct marketing programs to target such
corporations. The Company believes that its aircraft will also be attractive to
customers other than corporations and is addressing these markets as well. 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,
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 operating its
aircraft will make them attractive to such purchasers. Other potential specialty
markets may include air freight and delivery services, on-demand air taxi
services and/or charter and air ambulance use.
The Company intends to provide referral 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 through
several domestic banks. Additionally, EXIM may provide low-cost working capital
loans to the Company upon the receipt of evidence of export sales commitments.
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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 relies on various suppliers of materials and components
which are necessary to manufacture its aircraft. In particular, the engines and
the avionics are provided by outside manufacturers. These suppliers also produce
equipment for aircraft manufacturers other than the Company. Engines for the
JETCRUZER 500 are manufactured by Pratt & Whitney. Engines for the STRATOCRUZER
1250, if developed, will be manufactured by Williams/Rolls Royce. The Company
has no contractual right to obtain any specified number of engines from Pratt &
Whitney or any other manufacturer. Should the Company's ability to obtain the
requisite number of engines be limited for any lengthy period of time or the
cost of such engines increase, the Company's ability to produce and sell
aircraft could be materially and adversely affected. In addition, the failure of
other suppliers or subcontractors to meet the Company's performance
specifications, quality standards or delivery standards or schedules could have
a material adverse effect on the Company's operations. Moreover, the Company's
ability to significantly increase its production rate following the introduction
of the JETCRUZER 500 could be limited by the ability or willingness of its key
suppliers to increase their delivery rates.
Competition
The JETCRUZER 500 will compete against several other types of aircraft,
including new and used single and multi-engine propjets and high-end piston
powered aircraft. Management believes that competition will be based primarily
on the aircraft's price, performance and operating cost. Single engine propjets
have only recently come into use in the general aviation industry, and there are
not many competitors in this category. Twin engine propjets are far more common
and vary significantly in size.
The following table lists the number of seats (including pilot),
estimated price and high cruise speed of the aircraft which the Company
considers to be the principal competitors of the JETCRUZER 500.
<TABLE>
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 $1,400,000 360
Cessna Caravan 208B(1) (Propjet) 9 $1,400,000 210
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 $780,000 267
</TABLE>
There are currently 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
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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 $780,000. 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 such as the JETCRUZER 500 due to the perception of
additional safety associated with twin-engine aircraft.
Pursuant to new FAA resolutions approved August 6, 1997, effective as
of May 3, 1998, single-engine aircraft may be used for commercial passenger
revenue-paying flights (whether on-demand charter or scheduled) in instrument
conditions. 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 future
technological changes or marketing initiatives on the part of its competitors
will not have a material adverse effect on the Company's ability to market its
aircraft.
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 cost 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 for
aircraft purchased by customers before the delivery of the first customer's
aircraft. However, such insurance is expensive, subject to various exclusions
and, although the product liability insurance for manufacturers of general
aviation aircraft has become somewhat more available and less costly over the
last two years, there can be no assurance that such coverage will be available
to the Company on acceptable terms or at all. Further, should the Company become
involved in product liability litigation, the expenses and damages awarded could
be large and the scope of any coverage may be inadequate. The Company has
obtained other insurance as needed, including flight test insurance for its
pilots and aircraft used during the FAA certification process.
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Government Regulation
The manufacture of aircraft is subject to extensive regulation by the
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 is in the process of amending its Type Certificate with
respect to the JETCRUZER 450 to include the JETCRUZER 500. In addition, the
Company will be required to obtain a further amendment to its Type Certificate
or a new type certificate if and when it proceeds with development of the
JETCRUZER 650. The Company will be required to obtain a new type certificate if
and when it proceeds with development of the STRATOCRUZER 1250.
Obtaining an amended FAA type certificate can be difficult, costly, and
time consuming. To date, the Company has accomplished, 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) modification and reassembly of an existing JETCRUZER 450 for use
in initial flight testing. The Company must accomplish the following before
receiving an amendment to its Type Certificate for the JETCRUZER 500: (a)
successful completion of conformity inspections requested by the FAA from time
to time to ensure compliance of the aircraft with the type design, (b)
completion of the JETCRUZER 500 fuselage for static tests and the completion of
the JETCRUZER 500 for flight tests, (c) completion of Company flight tests and
receipt of precertification approval from the FAA, (d) completion of additional
flight tests under FAA supervision, (e) development and receipt of FAA approval
of an airplane flight manual, and (f) development and receipt of FAA approval of
maintenance and inspection requirements for the aircraft. Although the time
required to obtain a new or amended type certificate may vary, the Company
believes that it can obtain a new or amended certificate for the JETCRUZER 500
during the fourth quarter of 1998.
The Company will need to obtain a 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
its quality assurance manual or the manufacturing process, or both. While
production will 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
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<PAGE>
be five to six months in the case of the JETCRUZER 500. The Company expects to
obtain the production certificate during the fourth quarter of 1998.
There can be no assurance that the Company will not encounter a delay
in obtaining a production certificate for its planned aircraft models, or
airworthiness certificates for individual aircraft.
The Company will also be subject to the risk of modification,
suspension or revocation of any FAA certificate it holds. Such modification,
suspension, or revocation could occur if, in the FAA's judgement, compliance
with airworthiness or safety standards by the Company was in doubt. If the FAA
were to suspend or revoke the Company's type or production certificates for an
aircraft model, sales of that model would be adversely affected or terminated.
If, in the FAA's judgement, an unsafe condition developed or was discovered
after one or more of the Company's aircraft had entered service, the FAA could
issue an "Airworthiness Directive," which could result in a regulatory
obligation upon the Company to develop appropriate design changes at the
Company's expense. Foreign authorities could impose similar obligations upon the
Company as to aircraft within their jurisdiction. Any or all of the above
occurrences could expose the Company to substantial additional costs and/or
liability.
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.
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 10, 1998 the Company had eighty-five 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.
On October 17, 1997 the Company entered into a Lease Agreement with the
City of Long Beach, for approximately 10 acres of land located on the Long Beach
Airport. The purpose of the lease is to effectuate the construction of an
approximately 200,000 square foot manufacturing and headquarters facility (the
"New Facility"). The lease commenced on January 14, 1998 and has a term of 30
years with an option to renew for an additional 10 years. The lease also
contains options to lease other airport properties. The monthly rent under the
lease is $4,500, which escalates to approximately $15,600 after 5 years.
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<PAGE>
The Company entered into an agreement with Commercial Developments
International/West (Design/Builder) whereby Design/Builder will design and build
the New Facility. The contract sum for this project is "Cost plus Fixed Fees"
with a Guaranteed Maximum Price of $6,300,000, subject to the cost of change
orders, if any. Any savings realized upon completion and acceptance of the New
Facility will be shared by the Design/Builder and the Company. The Company
believes that the New Facility will be completed in the third quarter of 1998.
The Company leases its current office, manufacturing, and warehouse
facilities for $18,351 per month with leases expiring at various dates during
1998.
ITEM 3. LEGAL PROCEEDINGS.
As of March 10, 1998, 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 1997.
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<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
Year Ended December 31, 1997
First Quarter 4-3/4 2-1/2
Second Quarter 4-5/16 2-3/8
Third Quarter 5-1/4 2-13/16
Fourth Quarter 5-3/8 2-1/32
At March 30, 1998, there were approximately 39 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, but not limited
to, 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 risks and uncertainties set forth in the
Company's Registration Statement on Form SB-2 (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,
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and 278,815 shares of Class E-2 Common Stock. In connection with this exchange,
the Company assumed liabilities of ASI in the amount of approximately $400,000.
In March 1990, the Company made application to the FAA for a Type Certificate
for the JETCRUZER 450, which Certificate was ultimately granted in June 1994. As
a result, the Company has not generated any operating revenues to date and has
incurred losses from such activities. The Company believes it will continue to
experience losses until such time as it commences the sale of aircraft on a
commercial scale.
Prior to commencing commercial sales, the Company will need to, among
other things, complete the development of the JETCRUZER 500, obtain the
requisite regulatory approvals, establish an appropriate manufacturing facility,
hire additional engineering and manufacturing personnel and expand its sales and
marketing efforts. The Company estimates that the cost to complete development
of the JETCRUZER 500 and obtain an amendment of its FAA Type Certificate will be
approximately $5,000,000. This amount includes the cost of equipment and
tooling, static and flight testing of the aircraft, and the employment of the
necessary personnel to build and test the aircraft.
At such time, if ever, as the Company commences the commercial sale of
its 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's policy is to collect progress payments during the
construction of aircraft and final payments upon the delivery of aircraft.
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 1998 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 complete a 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 increase its engineering, manufacturing and administrative
staff in anticipation of increased development and production
activities.
The Company believes that the net proceeds from its December 1996
initial public offering ("IPO") of stock will be sufficient to finance its plan
of operations at least through the first quarter of 1999, 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.
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<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, certain
operating amounts and results.
<TABLE>
Period from January 26, 1990
Years Ended December 31 (inception) to December 31,
-----------------------------------------------------------------------
1996 1997 1997
-----------------------------------------------------------------------
<S> <C> <C> <C>
Interest and other Income $ 133,000 $1,378,000 $ 2,258,000
Research, general and
administrative, and
preoperating expenses 1,927,000 7,457,000 29,526,000
Interest expense 652,000 161,000 2,001,000
Loss and disposal of assets -- 385,000 742,000
Extraordinary Loss 942,000 -- 942,000
Net Loss 3,388,000 6,625,000 30,953,000
</TABLE>
The Company has not generated any revenues from operations. For the
period from inception (January 26, 1990) through December 31, 1997 the Company
incurred a net loss of $30,953,000, $3,388,000 and $6,625,000 of which was
incurred during the years ended December 31, 1996 and December 31, 1997,
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.
Interest income consisted primarily of earnings derived from the unused
proceeds of the December 1996 IPO. Interest income aggregated $1,443,000 from
inception through December 31, 1997, $110,000 and $1,273,000 of which were
earned in 1996 and 1997, respectively.
Research and development expenses have consisted primarily of the costs
of personnel, facilities, materials and equipment required to conduct the
Company's development activities. Such expenses aggregated $18,449,000 from
inception through December 31, 1997. 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 1250.
Research and development expenses increased in 1997 as the Company accelerated
the development of the JETCRUZER 500 and amended 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 $10,034,000 from inception
through December 31, 1997, $1,927,000 and $2,644,000 of which were incurred in
1996 and 1997, respectively. General and administrative expenses have increased
since 1996 primarily due to the addition of personnel and other resources needed
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 $2,001,000
from inception through December 31, 1997, $652,000 and $161,000 of which were
incurred in 1996 and 1997, 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, 1997, the Company had a United States federal and
California state tax net operating loss carryforward of approximately
$27,000,000 and $6,000,000, respectively, which, if unused, will expire in
varying amounts in the years 1998 through 2017.
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<PAGE>
At December 31, 1997, 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, 1997, the Company had working capital of $9,065,000 and
stockholders' equity of $21,095,000. Since its inception in January 1990, the
Company has experienced continuing negative cash flow from operations, which,
prior to the December 1996 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 its December 1996
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 the IPO to repay the Bridge Notes.
Additionally, in 1996, the Company recognized a extraordinary loss of
approximately $942,000,
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<PAGE>
representing the combined unamortized debt discount and issuance costs arising
from the Bridge Financing, in the quarter in which the Bridge Notes were repaid.
The Company 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 December 1996 IPO will
enable it to meet its liquidity and capital requirements at least through the
first quarter of 1999, by which time the Company expects to have received a type
certificate and a production certificate for the JETCRUZER 500 and commenced
commercial production and sale of the JETCRUZER 500. Such proceeds will be used
primarily for amendment of the Type Certificate, the purchase of equipment and
tooling, the completion of a manufacturing facility, and sales and marketing.
The Company's capital requirements are subject to numerous contingencies
associated with development stage companies. Specifically if 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 amended certification and may therefore have a
material and adverse effect on the Company's operations. Further, if the Company
has not completed the development of the JETCRUZER 500, received the required
regulatory approvals and successfully commenced commercial production of its
aircraft by the first quarter of 1999, 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 is in the process of constructing an approximately 200,000
square foot manufacturing and headquarters facility (the "New Facility"). The
primary financing for this project is the Company's obligation under a loan
agreement related to proceeds received from $8,500,000 in the issuance of
industrial development bonds by the California Economic Development Financing
Authority (the "Authority"). The Company was required to provide cash collateral
to the Bank in the amount of $8,500,000 for a stand-by letter of credit in favor
of the holders of the IBDs which will expire on August 5, 2002, if not
terminated earlier by the Company or the Bank.
On October 17, 1997 the Company entered into a Lease Agreement with the
City of Long Beach, for approximately 10 acres of land located on the Long Beach
Airport. The purpose of the lease is to effectuate the construction of the New
Facility. The lease commenced on January 14, 1998 and has a term of 30 years
with an option to renew for an additional 10 years. The lease also contains
options to lease other airport properties. The monthly rent under the lease is
$4,500, which escalates to approximately $15,600 after 5 years.
The Company entered into an agreement with Commercial Developments
International/West (Design/Builder) whereby Design/Builder will design and build
the New Facility. The contract sum for this project is "Cost plus Fixed Fees"
with a Guaranteed Maximum Price of $6,300,000, subject to the cost of change
orders, if any. Any savings realized upon completion and acceptance of the New
Facility will be shared by the Design/Builder and the Company. The Company
believes that the New Facility will be completed in the third quarter of 1998.
The Company is in the process of purchasing new integrated
manufacturing, production and cost control computer systems to replace its
existing systems to achieve and support future Company growth and production
requirements. Systems being considered have all been certified as year 2000
compliant. Management expects to have the new system installed and running by
the end of fiscal 1998 and estimates the associated costs to be
16
<PAGE>
immaterial to the Company's operations. While the Company is addressing and
solving such issues, it is unaware of any problems which its suppliers or
customers may be addressing.
The Company had no material capital commitments at December 31, 1997
other than discussed in this report. The Company intends to hire a number of
additional employees and to complete the New Facility, both of which will
require substantial capital resources. The Company anticipates that it will hire
up to 200 employees over the next twelve months. including engineers and
manufacturing technicians necessary to produce its aircraft.
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.
17
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A Development Stage Enterprise)
INDEX TO FINANCIAL STATEMENTS
Page
Number
Report of Independent Auditors 19
Report of Independent Accountants 20
Balance Sheet 21
Statement of Operations 22
Statement of Stockholders' Equity 23
Statement of Cash Flows 25
Notes to Financial Statements 26
18
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Advanced Aerodynamics & Structures, Inc.
We have audited the accompanying balance sheet of Advanced Aerodynamics &
Structures, Inc. (a development stage enterprise) as of December 31, 1997, and
the related statements of operations, shareholders' equity, and cash flows for
the year then ended, and for the period January 26, 1990 (inception) through
December 31, 1997. 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. The financial statements as of
December 31, 1996, and for the period January 26, 1990 (inception) through
December 31, 1996, were audited by other auditors whose report dated March 26,
1997 expressed an unqualified opinion on those statements. The financial
statements for the period January 26, 1990 (inception) through December 31, 1996
include total income and net loss of $880,000 and $24,328,000, respectively. Our
opinion on the statements of operations, shareholders' equity, and cash flows
for the period January 26, 1990 (inception) through December 31, 1997, insofar
as it relates to amounts for prior periods through December 31, 1996, is based
solely on the report of other auditors.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Advanced Aerodynamics & Structures, Inc., at December
31, 1997, and the results of its operations and its cash flows for the year then
ended and the period from January 26, 1990 (inception) through December 31,
1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Long Beach, California
March 3, 1998
19
<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 statements of operations, of stockholders'
equity and of cash flows of Advanced Aerodynamics & Structures, Inc. (a
Development Stage Enterprise) present fairly, in all material respects, the
results of its operations and its cash flows for the year ended December 31,
1996 and for the period from January 26, 1990 (inception) to December 31, 1996,
in conformity with generally accepted accounting princples. 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
20
<PAGE>
Advanced Aerodynamics & Structures, Inc.
(A Development Stage Enterprise)
Balance Sheet
<TABLE>
December 31, 1997
--------------------
<S> <C>
Assets
Current Assets:
Cash and cash equivalents $5,277,000
Short term investments 4,156,000
Prepaid expenses and other current assets 432,000
------------
Total current assets 9,865,000
Certificate of deposit 1,061,000
Long-term investments 357,000
Restricted cash 16,963,000
Property and equipment, net 1,716,000
Construction in progress 446,000
Other assets 417,000
-------------
Total assets $30,825,000
-------------
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $535,000
Accrued liabilities 265,000
-------------
Total current liabilities 800,000
Long-term debt 8,500,000
Deferred revenue 430,000
--------------
Total liabilities 9,730,000
Stockholders' equity
Preferred Stock, par value $.0001 per share;
5,000,000 shares authorized; no shares issued and outstanding --
Class A common, par value $.0001 per share; 60,000,000
shares authorized; 6,900,000 shares issued and outstanding 1,000
Class B Common Stock, par value $.0001 per share;
10,000,000 shares authorized; 2,000,000 shares issued and
outstanding --
Class E-1 Common Stock; par value $.0001 per share;
4,000,000 shares authorized; 4,000,000 shares issued and
outstanding --
Class E-2 Common Stock; par value $.0001 per share;
4,000,000 shares authorized; 4,000,000 shares issued and
outstanding --
Warrants to purchase common stock
Public Warrants 473,000
Class A Warrants 11,290,000
Class B Warrants 4,632,000
Additional paid-in capital 35 ,652,000
Deficit accumulated during the development stage (30,953,000)
-------------
Total stockholders' equity 21,095,000
-------------
Total liabilities and stockholder's equity $30,825,000
-------------
</TABLE>
See accompanying notes to financial statements
21
<PAGE>
Advanced Aerodynamics & Structures, Inc.
(A Development Stage Enterprise)
Statement of Operations
<TABLE>
Period from
January 26, 1990
Year Ended (inception) to
December 31, December 31,
---------------------------------------------------------
1996 1997 1997
---------------------------------------------------------
<S> <C> <C> <C>
Interest income $110,000 $1,273,000 $1,443,000
Other income 23,000 105,000 815,000
---------------------------------------------------------
133,000 1,378,000 2,258,000
Cost and expenses:
Research and development costs -- 4,813,000 18,449,000
Preoperating costs -- -- 282,000
General and administrative
expenses 1,927,000 2,644,000 10,034,000
Loss on disposal of assets -- 385,000 742,000
Interest expense 652,000 161,000 2,001,000
In-process research and development
acquired -- -- 761,000
---------------------------------------------------------
2,579,000 8,003,000 32,269,000
---------------------------------------------------------
Loss before extraordinary item (2,446,000) (6,625,000) (30,011,000)
Extraordinary loss on retirement of
Bridge Notes (942,000) -- (942,000)
---------------------------------------------------------
Net Loss $(3,388,000) $(6,625,000) $(30,953,000)
---------------------------------------------------------
Loss per share before extraodinary item $(.98) $(.74)
Extraordinary loss per share on
retirement of Bridge Notes (.38) --
-----------------------------------
Net loss per share $(1.36) $(.74)
-----------------------------------
Weighted average number of shares
outstanding 2,499,000 8,900,000
-----------------------------------
</TABLE>
See accompanying notes to financial statements.
22
<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 6)
Net loss from inception
to December 31, 1995
----------------------------------------------------------------------------------------
Balance at December
31, 1995 619,588 -- 1,239,177 -- 1,239,177 --
Conversion of
stockholder advances
(Note 6) 598,011 -- 1,196,021 -- 1,196,021 --
Conversion of officer
loans (Note 6) 187,118 -- 374,236 -- 374,236 --
Stock issued in
consideration for
services in 1994,
1995, and 1996 595,283 -- 1,190,566 -- 1,190,566 --
(Note 7)
Imputed interest on
advances from
stockholder (Note 6)
Net proceeds from initial
public offering of
Units (Note 9) 6,000,000 1,000
Net proceeds from
exercise of over-
allotment option
(Note 9) 900,000 --
Warrants issued in
connection with
issuance of Bridge
Notes (Note 9)
Net loss
-----------------------------------------------------------------------------------------
Balance at December
31, 1996 -- -- 6,900,000 1,000 2,000,000 -- 4,000,000 -- 4,000,000 --
Adjustment to proceeds
from initial public
offering and exercise of
overallotment option
Net Loss
-----------------------------------------------------------------------------------------
Balance at December
31, 1997 -- $-- 6,900,000 $1,000 2,000,000 $-- 4,000,000 $-- 4,000,000 $--
-----------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
23
<PAGE>
Advanced Aerodynamics & Structures, Inc.
(A Development Stage Enterprise)
Statement of Stockholders' Equity (Continued)
<TABLE>
Deficit
Accumulated
Additional During the
Public Class A Class B Paid-In Development
Warrants Warrants Warrants 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 6) 799,000 799,000
Net loss from inception to
December 31, 1995 (20,940,000) (20,940,000)
----------------------------------------------------------------------------------------
Balance at December
31, 1995 8,660,000 (20,940,000) (12,280,000)
Conversion of
stockholder advances
(Note 6) 10,728,000 10,728,000
Conversion of officer
loans (Note 6) 336,000 336,000
Stock issued in
consideration for
services in 1994,
1995, and 1996
(Note 7) 1,507,000 1,507,000
Imputed interest on
advances from
stockholder (Note 6) 11,000 11,000
Net proceeds from initial
public offering of
Units (Note 9) 9,583,000 4,166,000 12,566,000 26,316,000
Net proceeds from
exercise of over-
allotment option
(Note 9) 1,707,000 466,000 1,922,000 4,095,000
Warrants issued in
connection with
issuance of Bridge
Notes (Note 9) 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
Adjustment to proceeds
from initial public
offering and exercise of
overallotment option (78,000) ( 78,000)
Net Loss ( 6,625,000) ( 6,625,000)
-----------------------------------------------------------------------------------------
Balance at December
31, 1997 $473,000 $11,290,000 $4,632,000 $35,652,000 $(30,953,000) $ 21,095,000
-----------------------------------------------------------------------------------------
</TABLE>
24
<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,
--------------------------------------------------------------
1996 1997 1997
--------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(3,388,000) $(6,625,000) $(30,953,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Noncash stock compensation expense 590,000 -- 1,207,000
Noncash interest expense 336,000 -- 336,000
Cost of in-process research and development
acquired -- -- 761,000
Imputed interest on advances from stockholder 11,000 -- 810,000
Interest income from restricted cash invested -- (136,000) (136,000)
Extraordinary loss on retirement of Bridge Notes 942,000 -- 942,000
Depreciation and amortization 327,000 386,000 2,200,000
Loss on disposal of assets -- 385,000 742,000
Changes in assets and liabilities:
Increase in prepaid expenses and other current
assets (5,000) (104,000) (259,000)
Increase in other assets -- (417,000) (417,000)
Increase (decrease) in accounts payable (107,000) 390,000 535,000
Increase (decrease) in accrued liabilities (403,000) 107,000 165,000
Increase (decrease) in interest payable (235,000) -- --
Increase in deferred revenue -- 430,000 430,000
------------------------------------------------------------
Net cash used in operating activities (1,932,000) (5,584,000) (23,637,000)
------------------------------------------------------------
Cash flows from investing activities:
Increase in construction in progress -- (446,000) (446,000)
Proceeds from insurance claims upon loss of aircraft -- -- 30,000
Proceeds from disposal of assets -- 3,000 3,000
Capital expenditures (6,000) (804,000) (4,651,000)
Purchase of certificate of deposit (2,000) (1,049,000) (1,061,000)
Purchase of investments (2,026,000) (6,611,000) (8,637,000)
Proceeds from sale of investments -- 4,124,000 4,124,000
Restricted cash from long term debt -- (8,500,000) (8,500,000)
-----------------------------------------------------------
Net cash used in investing activities (2,034,000) (13,283,000) (19,138,000)
-----------------------------------------------------------
Cash flows from financing activities:
Adjustment to net proceeds from initial public offering and
exercise of over-allotment option -- (78,000) (78,000)
Proceeds from long term debt -- 8,500,000 8,500,000
Restricted cash collateral for long term debt -- (8,500,000) (8,500,000)
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 (19,000) -- (40,000)
Proceeds from loans from officer 176,000 -- 336,000
Repayment of bank notes (900.000) -- --
Repayment of loans from SIDA Corporation (110,000) -- --
Repayment of other short-term loans (565,000) -- --
----------------------------------------------------------
Net cash provided (used in) by financing activities 28,188,000 ( 78,000) 48,052,000
----------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 24,222,000 (18,945,000) 5,277,000
Cash and cash equivalents at beginning of period -- 24,222,000 --
----------------------------------------------------------
Cash and cash equivalents at end of period $24,222,000 $ 5,277,000 $ 5,277,000
----------------------------------------------------------
Supplemental cash flow information:
Cash paid for interest 540,000 161,000 855,000
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
</TABLE>
25
<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
8); 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 9) 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 9), 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.
26
<PAGE>
2. Summary of significant accounting policies
Reclassification
Certain previously reported amounts have been reclassified to conform
to the 1997 presentation.
Research and development costs
All costs incurred in the design, testing, and certification of
aircraft being developed by the Company (including cost of in-process
research and development acquired) are expensed as incurred.
Preoperating costs
Preoperating costs are expensed as incurred.
Advertising expense
Advertising 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, short term government funds, and short term commercial
paper. The cost of such investments approximates fair value at December
31, 1997.
Fair Value of Financial Instruments
The fair value of substantially all financial instruments of the
Company approximates their carrying value in the aggregate due to their
short-term maturity and/or prevailing market interest rates.
Investments
Management determines the appropriate classification of debt securities
at the time of purchase and reevaluates such designation as of each
balance sheet date. Debt securities are classified as held-to-maturity
when the Company has the positive intent and ability to hold the
securities to maturity. Held-to-maturity securities are stated at
amortized cost, adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization is included in investment
income. Interest on securities classified as held-to-maturity is
included in investment income.
The Company's equity securities are classified as "available-for-sale"
and are reported at their fair market value as determined by the quoted
market price. 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.
Due to the relative short term nature of the equity securities, the
fair market value approximates cost at December 31,1997 and no
unrealized gains or losses have been reported in stockholders equity.
The cost of investments sold is determined on the specific
identification method.
27
<PAGE>
Property and equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over their estimated useful lives of ten years for
machinery and equipment and 3-5 years for office furniture and
equipment. 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.
Per share information
In February 1997, the FASB issued Statement 128, Disclosures about
Earnings per Share, which establishes standards for computing and
presenting earnings per share (EPS) and applies to entities with
publicly held common stock or potential common stock. It replaces the
presentation of primary EPS with a presentation of basic EPS which
excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding for the period. The statement is effective for financial
statements issued for periods ending after December 15, 1997.
Previously reported net losses per share were reported based on
weighted average common stock outstanding and therefore the amounts are
the same as under FAS No. 128.
The following table sets forth the computation of basic loss per share:
1996 1997
----------------------------
Numerator
Loss before extraordinary item $(2,446,000) $(6,625,000)
----------------------------
Denominator
Weighted average shares of Class
B Shares 2,000,000 2,000,000
Weighted average shares of Class
A shares 499,000 6,900,000
----------------------------
Denominator for basic loss per
share - weighted average shares 2,499,000 8,900,000
----------------------------
Basic loss per share $ (0.98) $ (0.74)
----------------------------
Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 98, loss per share in 1996 has been restated to exclude
the effect of Bridge warrants because their inclusion is anti-dilutive.
Accounting Pronouncements.
The financial Accounting Standards Board has issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income," which is effective for fiscal years begninning after December
15, 1997; and SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," which is effective for fiscal
years beginning after December 15, 1997.
28
<PAGE>
SFAS No. 130 requirest that all items that are requried to be
recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the
same prominence as other financial statements. Currently, the changes
in unrealized gains and losses from investments would be the Company's
only component of comprehensive income. The Company currently plans to
adopt this standard in fiscal 1998.
SFAS No. 131 requires a public enterprise to report financial and
descriptive information about its reportable operating segments based
upon the way management organizes segments within the enterprise for
making operating decisions and assessing performances. The Company has
only one segment and plans to adopt the standard in fiscal 1998.
In March 1998, the AICPA issued SOP 98-1, Accounting For the Costs of
Computer Software Developed For or Obtained For Internal-Use. The SOP
is effective for the Company beginning on January 1, 1999. The SOP will
require the capitalization of certain costs incurred after the date of
adoption in connection with developing or obtaining software for
internal-use. The Company currently expenses such costs as incurred.
The Company has not yet assessed what the impact of the SOP will be on
the Company's future earnings or financial position.
3. Property and equipment
Property and equipment consist of the following:
December 31, 1997
-----------------
Office furniture and equipment $571,000
Machinery and equipment 2,556,000
----------------
Gross property and equipment 3,127,000
Accumulated depreciation and amortization (1,411,000)
-----------------
Property and equipment, net $1,716,000
-----------------
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
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial statements purposes and the amounts used for income tax
purposes.
Significant components of the Company's deferred tax liabilities and
assets as of December 31, 1997 are as follows:
Deferred tax assets:
Federal net operating loss $9,320,000
State net operating loss 643,000
Research & Development Credits 1,898,000
Other 16,000
-----------
Total deferred tax assets 11,877,000
Deferred tax liabilities:
Tax over book depreciation 388,000
-----------
Total net deferred tax assets 11,489,000
Valuation allowance (11,489,000)
-----------
$ --
-----------
29
<PAGE>
At December 31, 1997, the Company had U.S. Federal and California state
net operating loss ("NOL") carryforwards of approximately $27 million
and $6 million, respectively. Federal NOLs will, if unused, expire in
varying amounts in the years 1998through 2017. California NOLs, if
unused, will expire in varying amounts from 1998 through 2002.
At December 31, 1997, 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.
The provision for income taxes are as follows:
December 31,
----------------
1997
----------------
Deferred:
Federal (2,199,000)
State 177,000
----------------
Total deferred (2,022,000)
Change in valuation allowance (2,022,000)
----------------
$ --
-----------------
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 in 1996.
5. Investments
The contractual maturities of debt securities classified as
held-to-maturity, which consist of United States corporation bonds, as
of December 31, 1997 are as follows:
Maturities Fair Value
Within one year $4,156,000
After one year through five years 357,000
----------
$4,513,000
----------
Debt and equity securities classified as cash equivalents as of
December 31, 1997 are as follows:
Short Term Government Fund $2,999,000
Commercial Paper 1,506,000
----------
4,505,000
----------
6. Debt and related party transactions
In 1993 and 1994, the Company obtained loans from SIDA Corporation
(Note 7) 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 9).
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 9).
30
<PAGE>
In 1994 and 1995, the Company obtained loans from a bank in the
aggregate principal amount of $900,000, bearing interest at the prime
rate plus 1.5%. These loans, together with accrued interest of $15,000,
were repaid with the proceeds of the Bridge Notes (Note 9).
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 9).
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, 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.
The Company is in the process of constructing it's new manufacturing
and administrative facility in Long Beach, California. The financing
for this project is the Company's obligation under a loan agreement in
connection with industrial development bonds issued by the California
Economic Development Financing Authority. The principal balance
outstanding at December 31, 1997 is $8,500,000. The loan bears interest
at a floating rate (4.25% at December 31, 1997) with a maximum rate of
12%, set weekly, until conversion to a fixed rate, at the option of the
Company for the remaining term of the agreement. As of December 31,
1997, the Company has not exercised that option. The Company also has
an option to redeem the bonds prior to maturity at the redemption price
of 100% of the principal amount plus any accrued interest outstanding.
At December 31, 1997, the Company has established in the trustee's
favor a bank letter of credit for the principal amount of $8,500,000,
plus 45 days accrued interest on the bonds, which is secured by
$8,500,000 of Company restricted cash. The portion of the borrowings
not yet expended for construction at December 31, 1997 ($8,327,000) and
accrued interest on the unused borrowings ($136,000) was held in trust
and classified as restricted cash on the balance sheet. The bonds
mature August 1, 2027 at which time all outstanding amounts become due
and payable.
7. 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 9).
In January 1995, the 1990 Agreement expired and was replaced by a new
management services agreement (the "1995 Agreement") entered into with
the Company's President on December 29, 1994 for an original term of
ten years. The 1995 Agreement 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.
31
<PAGE>
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
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.
On October 17, 1997 the Company entered into a Lease Agreement with the
City of Long Beach, for approximately 10 acres of land located on the
Long Beach Airport. The purpose of the lease is to effectuate the
construction of an approximately 200,000 square foot manufacturing and
headquarters facility. The lease commenced on January 14, 1998 and has
a term of 30 years with an option to renew for an additional 10 years.
The lease also contains options to lease other airport properties. The
monthly rent under the lease is $4,500, which escalates to
approximately $15,600 after 5 years. The aggregate minimum payments
under the lease have been included in the table below.
The Company leases its current office, manufacturing, and warehouse
facilities for $18,351 on a monthly renewal basis.
Future minimum rental payments applicable to non-cancelable operating
leases as of December 31, 1997, are as follows:
1998 $ 199,000
1999 71,000
2000 89,000
2001 109,000
2002 187,000
Thereafter 4,669,000
--------------
Net future minimum lease payments $5,324,000
--------------
In the ordinary course of business, the Company is generally subject to
claims, complaints, and legal actions. At December 31, 1997, the
Company is not a party to any action which would have a material impact
on its financial condition, operations or cash flows.
The Company entered into an agreement with Commercial Developments
International/West (Design/Builder) whereby Design/Builder shall design
and build an approximately 200,000 square foot manufacturing and
headquarters facility. The contract sum for this project is "Cost plus
Fixed Fees" with a Guaranteed Maximum Price of $6,300,000, subject to
the cost of change orders, if any. Any savings realized upon completion
and acceptance of the project will be shared by the Design/Builder and
the Company. The Company believes that the project will be completed in
the third quarter of 1998.
32
<PAGE>
8. 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, $45.00 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 33, 1996 and ending 36
months thereafter, the bid price averages $18.50 per share for 30
consecutive business days. Class E-2 Common Stock shares may be
converted if commencing at December 3, 1996 and ending 18 months
thereafter, the bid price of the Company's Class A Common Stock
averages in excess of $18.00 per share for 30 consecutive business days
or commencing 18 months after December 3, 1996 and ending 36 months
thereafter, the bid price averages in excess of $23.00 for 30
consecutive business days.
All Performance Shares that have not been converted by March 31, 2004
may be redeemed by the Company for $.01 per share. For accounting
purposes, the Performance Shares are treated in a manner similar to a
variable stock option award. As a consequence, a compensation charge
will be recorded in an amount equal to the then fair value of any
Performance Shares that are ultimately converted into Class B Common
Stock.
Stock options
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.
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because,
as discussed below, the alternative fair value accounting provided for
under FASB Statement No. 123 (Statement 123), "Accounting for Stock
Based Compensation", requires the use of option valuation models that
were not developed for use in valuing employee stock options. Under APB
25, because the exercise price of the Company's employee stock opions
equals or exceeds the market price of the underlying stock on the date
of grant, no compensation expense is recognized.
33
<PAGE>
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company
had accounted for its employee stock options under the fair value
method of that Statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions: risk-free
interest rates of 6.5% and 6.8% for 1997 and 1996, respectively;
dividend yields of 0% for 1997 and 1996; volatility factors of the
expected market price of the Company's common stock of .88 and .001 for
1997 and 1996, respectively; and a weighted average expected life of
the option of 10 years and 5 years, for 1997 and 1996, respectively.
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.
Had the Company accounted for stock options granted in 1997 and 1996,
using the fair value method at the date of grant, additional
compensation expense would have been recorded and the pro forma effect
would have been as follows:
Years Ended December 31,
1997 1996
---------------------------------
Pro forma net loss $ 6,748,000 $ 3,393,000
Pro forma net loss per share: $ .76 $ 1.36
The weighted average fair value of options granted during 1996 and 1997
was $.73 and $2.57, per option, respectively. The weighted average
exercise price for 1996 and 1997 was $5.00. The weighted average
remaining contractual life of options outstanding is 9.20 years and
9.67 years for 1997 and 1996, respectively.
At December 31, 1997, options to purchase 80,000 shares of Class A
Common Stock were available for future grants and 420,000 shares of
Class A Common Stock were reserved for the exercise of options.
Transactions under the Plan during the year ended December 31, 1996 and
December 31, 1997 are summarized as follows:
Weighted
Shares Average Exercise
Price
Outstanding at December 31, 1995 --- ---
Granted 110,000 $5.00
Exercised --- ---
Canceled --- ---
Outstanding at December 31, 1996 110,000 $5.00
Granted 315,000 $5.00
Exercised --- ---
Canceled (5,000) $5.00
Outstanding at December 31, 1997 420,000 $5.00
As of December 31, 1997 and 1996 21,000 and 0 options were exercisable
at a weighted average exercise price of $5.00 per option.
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
34
<PAGE>
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.
10. Employee Benefit Plan
The Company has a 401(k) savings plan and a profit sharing plan,
covering substantially all full time employees. The Company may make
discretionary contributions, under the profit sharing plan, as
authorized by the Board of Directors. The Company has not made any
profit sharing contributions to the Plan.
35
<PAGE>
PART III
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
During the quarter ended December 31, 1997, the Company filed a report
on Form 8-K relating to the change of the Company's independent accountants.
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, 1999.
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 File
* 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., a
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
*** 10.6 Standard Sublease dated June 27, 1997 with Budget
Rent-a-Car of Southern California
*** 10.7 Standard Sublease dated July 16, 1997 with Budget
Rent-a-Car of Southern California
*** 10.8 Standard Industrial/Commercial Multi-Tenant Lease-
Gross dated March 12, 1997 with the Golgolab
Family Trust
***** 10.9 Loan Agreement dated as of August 1, 1997 between
the Company and the California Economic
Development Authority
***** 10.10 Indenture of Trust dated as of August 1,
1997 between the Company and the California
Economic Development Authority and First
Trust of California, National Association
**** 10.11 Official Statement dated August 5, 1997
***** 10.12 Letter of Credit issued by The Sumitomo Bank,
Limited
36
<PAGE>
***** 10.13 Reimbursement Agreement dated as of August 1, 1997
between the Company and the Sumitomo Bank, Limited
***** 10.14 Purchase Contract dated August 1, 1997 by and
among Rauscher Pierce Refnes, Inc., the
California Economic Development Authority and the
Treasurer of the State of California, and
approved by the Company
***** 10.15 Remarketing Agreement dated as of August 1, 1997
between the Company and Rauscher Pierce Refnes,
Inc.
***** 10.16 Blanket Letters of Representations of the
California Economic Development Authority and
First Trust of California, National Association
***** 10.17 Tax Regulatory Agreement dated as of August 1,
1997 by and among the California Economic
Development Authority, the Company and
First Trust of California, National Association
***** 10.18 Custody, Pledge and Security Agreement dated as of
August 1, 1997 between the Company and The
Sumitomo Bank, Limited
***** 10.19 Investment Agreement dated August 5, 1997 by and
between the Company and the Sumitomo Bank, Limited
***** 10.20 Specimen Direct Obligation Note between the
Company and the Sumitomo Bank, Limited
**** 10.21 Lease Agreement dated October 17, 1997 between the
Company and the City of Long Beach
**** 10.22 Construction Agreement dated October 29, 1997
between the Company and Commercial Developments
International/West
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.
** Incorporated by reference to the Company's Report on Form 10-KSB
filed with the Securities and Exchange Commission on March 31,
1997.
*** Incorporated by reference by the Company's Post-Effective
Amendment No. 1 to Form SB-2 Registration Statement filed with
the Securities and Exchange Commission on August 5, 1997.
**** Filed by paper pursuant to the Company's request for a temporary
hardship exemption relating to this report.
***** Incorporated by reference to the Company's Report on Form 10-QSB
filed with the Securities and Exchange Commission on November 14,
1997
Reports on Form 8-K:
During the quarter ended December 31, 1997, the Company filed a report
on Form 8-K relating to the change of the Company's independent
accountants.
37
<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, 1998 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 Officer, March 31, 1998
- ----------------------- and Chairman of the Board
Carl L. Chen
/s/ Gene Comfort Executive Vice President, March 31, 1998
- ----------------------- Secretary and Director
Gene Comfort
/s/ Dave Turner Vice President - Finance and Chief March 31, 1998
- ----------------------- Financial Officer
Dave Turner
/s/ C.M. Cheng Director March 31, 1998
- -----------------------
C.M. Cheng
/s/ Steve Gorlin Director March 31, 1998
- -----------------------
Steve Gorlin
/s/ Jim Lovell Director March 31, 1998
- -----------------------
Jim Lovell
/s/ S.B. Lai Director March 31, 1998
- -----------------------
S.B. Lai
38
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
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<PP&E> 1,716,000
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