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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, 1998
[_] 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
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3205 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 [_] No [X].
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 [X]
The Registrant generated no operating revenues for the fiscal year ended
December 31, 1998.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of December 31, 1998 was $19,859,281. 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, 1998, the registrant had outstanding 6,999,676 shares of
Class A Common Stock, 1,900,324 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 1999 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]
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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, 1998 are incorporated herein by
reference to Registrant's Proxy Statement and appear therein under the section
headings indicated below:
Item Form Heading Section Heading
- ---- --------------------------------- -------------------------------------
9. Directors, Executive Officers Proxy Statement - Election of
Promoters and Control Persons; Directors - Information with respect
Compliance with Section 16(a) to Nominees, Directors and
of the Exchange Act Executive Officers
10. Executive Compensation Proxy Statement - Management -
Compensation of Executive Officers
11. Security Ownership of Certain Proxy Statement - Principal
Beneficial Owners and Management Stockholders
12. Certain Relationships and Related Proxy Statement - Management - Certain
Transactions Relationships and Related Transactions
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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 is modifying 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 2,000 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 capability of
flying from Los Angeles to New York with only one stop.
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 would 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 decided to amend the Type
Certificate to develop the JETCRUZER 500 for commercial sale. The JETCRUZER 500
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 last half of 1999 and obtain a
production certificate and commence commercial production of such aircraft
within the same time frame. There can be no assurance, however, that obtaining
the amendment will not take longer than anticipated or that the Company will not
experience unforeseen expense or delay in certifying and commercializing its
proposed aircraft.
INDUSTRY BACKGROUND
The general aviation industry comprises essentially all nonmilitary
aviation activity other than scheduled and charter commercial airlines licensed
by the FAA and the Department of Transportation. General aviation aircraft are
frequently classified by their type and number of engines and include aircraft
with fewer than 20 seats. There are three different types of engines: piston,
propjet and turbofan (jet). Piston aircraft use an internal combustion engine to
drive a propeller and 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 and there may be one or two engines and propellers.
Turbofan aircraft use jet propulsion to power the aircraft. Although there are
usually two engines on general aviation turbofan aircraft, 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.
In 1998 deliveries by United States manufacturers generated approximately $5.87
billion.
STRATEGY
The Company's objective is to become a worldwide market leader in the sale
and manufacture of small business aircraft. To achieve this objective, the
Company intends to focus on the performance, efficiency and safety of its
proposed aircraft. The Company's strategy is to capitalize on a perceived
current lack in the marketplace of low-priced, high-performance aircraft. The
Company believes that its ability to offer an aircraft which outperforms
competitive aircraft at a reduced cost will enable the Company to penetrate the
business, private and government aircraft markets. Additionally, the Company
intends to expend substantial resources on a worldwide sales and marketing
program to position itself with potential customers.
The Company believes that aircraft sales are heavily dependent on the
quality and safety of a company's products. Accordingly, the Company intends to
maintain high quality and safety standards in all aspects of the design and
manufacture of its proposed aircraft. For example, the Company believes that
certain design features of the JETCRUZER 500, such as the canard wing, will
make the aircraft spin resistant and that the absence of wing flaps will make
the operation of the aircraft less susceptible to pilot error. In addition, the
Company believes that the reliability of the Company's component suppliers,
such as Pratt & Whitney, will be viewed favorably by potential customers.
The Company believes that it will be able to offer aircraft at a
comparatively low price by containing the costs of obtaining FAA certification
and amendments to such certification as well as the costs of manufacturing. The
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 aerospace and defense 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.
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The Company believes that it will be able to control manufacturing costs by
producing in-house most of the tooling, jigs, dies and molds required for the
manufacture of its aircraft. 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
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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 will be 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 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 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
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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
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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. Two model
500's have already been produced and flown with the third anticipated to be
completed in the second quarter of 1999. The entire JETCRUZER program has almost
a thousand hours of flight testing. Approximately 300 to 400 additional hours of
testing will be required to obtain the amendment of the Type Certificate. The
Company anticipates the certification amendment will be received in the second
half of 1999. There can be no assurance, however, that obtaining the 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 the 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
and travel from Los Angeles to New York with only one stop. 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.
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OTHER AIRCRAFT
STRATOCRUZER(R)1250. The Company currently intends to develop a twin
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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 fan jets. 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 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.
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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 achieved, 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.
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. 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
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organization and is marketing its aircraft in the United States and abroad
through trade 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.
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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 has 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 or forest fire detection, and fractional use
entities who purchase one or more aircraft and sell interests in each aircraft
to several persons or entities. The Company believes that the relatively low
purchase price, performance, safety and cost of 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.
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
Flight Rules (IFR) conditions, provided the pilot and the aircraft meet certain
FAA certification, proficiency, maintenance and additional equipment and
airworthiness requirements. The Company believes that the affect of this FAA
resolution will be to open up new markets for the JETCRUZER 500.
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.
SERVICE. The Company's aircraft will be serviced primarily by fixed base
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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 contractual rights to engines from Pratt & Whitney. 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.
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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.
Single engine propject competition for the JETCRUZER consists of just three
aircraft. The Cessna Caravan is all metal and sells for $1.4 million and has a
high speed of only 160 kts, a landing gear that does not retract, no
pressurization and is designed basically for low altitude freight use. Cessna
delivered 500 Caravans in 5 years and received an order for 100 additional
aircraft from one customer. The Company also expects competition from the TBM
700. Made in France from metal, it has the same passenger capacity and similar
performance to the JETCRUZER, but its $2.6 million price tag is double that of
the JETCRUZER. Year to date sales for the TBM exceed 100 aircraft. The last
competitor is the Pilatus PC-12. Made in Switzerland from metal, it has a lower
airspeed of only 260 kts and sells for almost double the price of the JETCRUZER
at $2.4 million. One hundred and fifty PC-12's have been delivered. All
competitive aircraft are based on conventional designs, which are more than 30
years old, and are made from metal. JETCRUZER's prime advantage is its design,
light weight graphite composites, high performance and the lowest price for
propjets in the world.
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.
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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
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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, and (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 an amended type certificate may vary, the Company believes
that it can obtain an amended certificate for the JETCRUZER 500 during the
fourth quarter of 1999.
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.
10
<PAGE>
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 be five to six months in the case of the JETCRUZER 500. The Company expects
to obtain the production certificate during the last half of 1999.
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 is 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 a foreign country 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 9, 1999 the Company had eighty-four 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.
11
<PAGE>
ITEM 2. PROPERTIES.
The Company leases approximately 10 acres of land located on the Long Beach
Airport in Long Beach, California. The lease commenced on January 14, 1998 and
has a term of 30 years with an option to renew for an additional 10 year term.
The lease also contains options to lease other airport properties. The current
monthly rent under the lease is $4,500. An escalation clause in the lease
increases the monthly rent to $7,500 beginning July of 1999. The lease contains
incremental increases which escalate the monthly rent to approximately $15,600
after 5 years.
The Company contracted Commercial Developments International/West
(Design/Builder) to design and build their approximately 200,000 square foot
manufacturing and headquarters facility (the "New Facility") on the above
mentioned leased property. The facility was substantially completed during 1998,
and on November 16, 1998, the Company moved into the New Facility. The total
cost for the New Facility, including its design, construction, licenses, fees
and change orders was approximately $9,000,000. The Company believes the new
facility will provide adequate capacity for the foreseeable future. See
"Subsequent Events".
ITEM 3. LEGAL PROCEEDINGS.
As of March 30, 1999, 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 1998.
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.
Year Ended December 31, 1997 High Low
- ---------------------------- ------------------------------
First Quarter 4.750 2.500
Second Quarter 4.313 2.375
Third Quarter 5.250 2.813
Fourth Quarter 5.375 2.031
Year Ended December 31, 1998
- ----------------------------
First Quarter 5.250 2.563
Second Quarter 7.000 4.000
Third Quarter 5.563 2.313
Fourth Quarter 4.375 2.500
12
<PAGE>
At March 30, 1999, there were approximately 40 holders of record of the
Company's Class A Common Stock, 3 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 raise additional capital, 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."
13
<PAGE>
PLAN OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in this report.
GENERAL
The Company is a development stage enterprise organized to design, develop,
manufacture and market propjet and jet aircraft intended primarily for business
use. Since its inception, the Company has been engaged principally in research
and development of its proposed aircraft. In January 1990, the Company acquired
the assets of Aerodynamics & Structures, Inc. ("ASI"), a New Jersey corporation
engaged in the design of an aircraft prototype, in exchange for 139,407 shares
of Class B Common Stock, 278,815 shares of Class E-1 Common Stock, and 278,815
shares of Class E-2 Common Stock. In connection with this exchange, the Company
assumed liabilities of ASI in the amount of approximately $400,000. In March
1990, the Company made application to the FAA for a Type Certificate for the
JETCRUZER 450, which Certificate was ultimately granted in June 1994. The
Company decided to amend the Type Certificate and is in the process of
developing 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.
The Company has not generated any operating revenues to date and has
incurred losses from its operating 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, 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. There
can be no assurances, however, that the Company's cost to complete development
of the JETCRUZER 500 will not exceed $5,000,000.
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 1999 the Company intends to focus its efforts in the following
areas:
. Completion of the development of the JETCRUZER 500, including, among
other things, adding a larger engine, pressurization, environmental
systems, de-icing capability and autopilot certification.
. Obtaining 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.
14
<PAGE>
. Establishing a production line in the Company's new manufacturing
facility and acquiring production inventory and additional items of
equipment, tooling and computer hardware and software systems.
. Obtaining a production certificate from the FAA and commencing
commercial production of the JETCRUZER 500.
. Increasing its engineering, manufacturing and administrative staff in
anticipation of increased development and production activities.
The Company believes that the remaining net proceeds from its December 1996
initial public offering ("IPO"), and the expected proceeds of the sale and lease
back (See "Subsequent Events") of the New Facility, if completed, will be
sufficient to finance its plan of operations for at least the next twelve
months, based upon the current status of its business operations, its current
plans and current economic and industry conditions. If the Company is unable to
complete the sale and lease-back of the New Facility, or its estimates prove to
be incorrect, then during such period the Company may have to seek additional
sources of financing, reduce operating costs and/or curtail growth plans.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
operating amounts and results.
<TABLE>
<CAPTION>
Period from January 26, 1990
Years Ended December 31 (inception) to December 31,
------------------------------ ----------------------------
1997 1998 1998
------------------------------ ----------------------------
<S> <C> <C> <C>
Interest and other Income $1,378,000 $1,374,000 $3,632,000
Research, general and
administrative, and
preoperating expenses 7,457,000 11,127,000 40,653,000
Interest expense 161,000 352,000 2,353,000
Loss on disposal of assets 385,000 13,000 755,000
Extraordinary Loss -- 942,000
Net Loss 6,625,000 10,118,000 41,071,000
</TABLE>
The Company has not generated any revenues from operations. For the period
from January 26, 1990 (inception) through December 31, 1998 the Company incurred
a net loss of $41,071,000, $6,625,000 and $10,118,000 of which was incurred
during the years ended December 31, 1997 and December 31, 1998, 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
December 1996 IPO.
Interest income consisted primarily of earnings derived from the unused
proceeds of the December 1996 IPO. Interest income aggregated $2,370,000 from
inception through December 31, 1998, $1,273,000 and $927,000 of which were
earned in 1997 and 1998, 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
15
<PAGE>
aggregated $24,918,000 from inception through December 31, 1998. 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 1998
as the Company accelerated the development of the JETCRUZER 500.
General and administrative expenses have consisted primarily of
administrative salaries and benefits, rent, marketing expenses, insurance and
other administrative costs. Such expenses aggregated $14,692,000 from inception
through December 31, 1998, $2,644,000 and $4,658,000 of which were incurred in
1997 and 1998, respectively. General and administrative expenses have increased
since 1997 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 $2,353,000
from inception through December 31, 1998, $161,000 and $352,000 of which were
incurred in 1997 and 1998, 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, 1998, the Company has a United States federal and
California state tax net operating loss carryforwards of approximately
$37,000,000 and $11,000,000, respectively, which, if unused, will expire in
varying amounts in the years 1999 through 2018.
At December 31, 1998, 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, 1998, the Company had working capital of $508,000 and
stockholders' equity of $11,224,000. 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 funding 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.
16
<PAGE>
In the second half of 1994, the Company's expenditures decreased because
capital constraints required a reduction of the Company's development
activities. The Company's capital requirements during that period were
satisfied primarily by a loan from General Bank in the principal amount of
approximately $550,000, bearing interest at the prime rate plus 1 1/2%,
which loan was guaranteed by the Small Business Administration, the
California Export Finance Office and Dr. Chen and secured by substantially all
of the Company's assets. The Company also received an additional $50,000 loan
from SIDA.
During 1995 and 1996, the Company's capital requirements were met by
additional advances of $350,000 pursuant to the bank loan described above and
loans by Dr. Chen, bearing interest at a rate of 12%, in the aggregate principal
amount of $562,000. In June 1996, $336,000 of indebtedness owed by the Company
to Dr. Chen was converted into 187,118 shares of Class B Common Stock, 374,236
shares of Class E-1 Common Stock, and 374,236 shares of Class E-2 Common Stock.
In September 1996, the bank loan, in the aggregate principal amount of
$900,000 plus $15,000 in accrued interest, $226,000 of the principal amount owed
to Dr. Chen, together with interest thereon of $36,000, and the loan from SIDA,
in the aggregate principal amount of $110,000 plus $31,000 in accrued interest,
were repaid with the proceeds of the Bridge Financing described below.
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, 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 remaining net proceeds of the December 1996
IPO, and the expected proceeds of the sale and lease back (See "Subsequent
Events") of the New Facility, if completed, will enable it to meet its liquidity
and capital requirements for at least the next twelve months, by which time the
Company expects to have received a Type Certificate amendment and a production
certificate for the JETCRUZER 500 and to have 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 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 third quarter of 2000, the Company may require
additional funding to fully implement its proposed business plan. Other than the
arrangements described above, the Company has no commitments from any third
parties for any
17
<PAGE>
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 substantially reduce operations.
The Company has moved into 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 (IDB) by the California Economic Development Financing
Authority (the "Authority"). The Company was required to provide cash collateral
to The Sumitomo Bank, Limited (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.
The Company leases approximately 10 acres of land located on the Long Beach
Airport in Long Beach, California. 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
currently under the lease is $4,500. An escalation clause in the lease increases
the monthly rent to $7,500 beginning July 1999. The lease contains incremental
increases which escalate the monthly rent to approximately $15,600 after 5
years.
The Company contracted with Commercial Developments International/West
(Design/Builder) to design and build their approximately 200,000 square foot
manufacturing and headquarters facility (the "New Facility") on the above
mentioned leased property. The facility was substantially completed during 1998,
and on November 16, 1998, the Company moved in. The total cost for the New
Facility, including its design, construction, licenses, fees and change orders
was approximately $9,000,000.
The Company has purchased a new integrated manufacturing, production and
cost control computer system, to support future Company growth and production
requirements. The system has been certified as Year 2000 compliant. Management
expects to have the new system installed and running by mid-1999 and estimates
the associated costs to be immaterial to the Company's operations.
The Company had no material capital commitments at December 31, 1998, other
than discussed in this report. The Company intends to hire a number of
additional employees 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.
YEAR 2000 COMPLIANCE
Management believes it has an effective program in place to resolve the
Year 2000 issue in a timely manner. As noted below, the Company has not yet
completed all necessary phases of the Year 2000 program.
<TABLE>
<CAPTION>
ASSESSMENT REMEDIATION TESTING IMPLEMENTATION
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Information 100% Complete 70% Complete 70% Complete 65% Complete
TECHNOLOGY Expected Expected Expected completion
completion date completion date Date June 1999
May 1999 May 1999
- -----------------------------------------------------------------------------------------------------------
OPERATING EQUIPMENT 100% Complete 90% Complete 50% Complete 50% Complete
WITH EMBEDDED CHIPS Expected Expected Expected
OR SOFTWARE completion date completion date completion date
June 1999 July 1999 Aug 1999
- -----------------------------------------------------------------------------------------------------------
PRODUCTS 100% Complete N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------
3RD PARTY 100% Complete N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
In May 1998, the Company signed a contract with Baan Business Systems of
California for license and implementation of the Baan ERP system. In 1998 the
Company purchased 15 licenses for $50,000, with an agreement to purchased 25
additional licenses in the 1st quarter and 20 licenses in the second quarter of
1999 for $75,000 and $60,000, respectively. The Company has received assurances
from Baan that the hardware and software is Year 2000 compliant. Training and
implementation began in the 3rd quarter of 1998 and is scheduled to be completed
in the 2rd quarter of 1999. Although the Company does not perceive any problems
with its new computer system, the failure of the new hardware and software
package to be Year 2000 compliant might result in significant unexpected costs
which would have a material adverse effect on the Company's results of
operations. The Company has completed its assessment of its major vendors and
has concluded there is no significant Year 2000 problem with such vendors or
their products.
The Company is currently assessing various other vendors which it plans to
utilize when production of the JETCRUZER 500 begins. The process of evaluation
includes both the significance of the vendor to the Company's operation and
their exposure to the Year 2000 problem. The Company does not anticipate any
material costs in completing its Year 2000 program.
The Company currently has no contingency plans in place in the event it does
not complete all phases of the Year 2000 program. The Company plans to evaluate
the status of completion in May 1999 and determine whether such a plan is
necessary.
Subsequent Events
- -----------------
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.
ISSUANCE OF CONVERTIBLE PREFERRED STOCK
In March 1999, the Company executed a non-binding term sheet with an
institutional investor for the issuance of approximately 4,000 shares of
Convertible Preferred Stock at a price per share of $1,000. If the offering was
completed, the proceeds from the issuance of the Convertible Preferred Stock
would be approximately $5,000,000, before deducting commissions and expenses
associated with the offering. The Company is currently negotiating the specific
terms of the transaction agreements, but the Company has not entered into any
binding agreements for the offering.
19
<PAGE>
SALE AND LEASE-BACK OF NEW FACILITY
In April 1999, the Company signed a Letter of Intent to sell its 200,000
square-foot building and lease it back. The purchase price of the building is
$9,800,000 and the term of the lease is twenty years plus an option to extend
the lease for an additional ten years. In accordance with the Letter of Intent,
the purchaser has deposited $100,000 into an escrow account.
If the transaction is completed, monthly payments under the terms of the
lease-back will be $106,167 and will be adjusted annually, after the first year,
for changes in the Consumers' Price Index, not to exceed 3% per annum. The rent
for periods after the twentieth year would be at fair market rental value.
20
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
INDEX TO FINANCIAL STATEMENTS
Page
Number
------
Report of Independent Auditors 22
Report of Independent Accountants 23
Balance Sheet 24
Statement of Operations 25
Statement of Stockholders' Equity 26
Statement of Cash Flows 27
Notes to Financial Statements 28
21
<PAGE>
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, 1998, and
the related statements of operations, stockholders' equity, and cash flows for
the two years then ended, and for the period January 26, 1990 (inception)
through December 31, 1998. 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 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. 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, 1998, 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, 1998, and the results of its operations and its cash flows for the two years
then ended and the period from January 26, 1990 (inception) through December 31,
1998, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming Advanced
Aerodynamics & Structures, Inc. will continue as a going concern. As more fully
described in Note 2, the Company has incurred recurring losses and its working
capital at December 31, 1998 has been substantially depleted. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
Ernst & Young LLP
Long Beach, California
March 31, 1999
22
<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 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 period from January 26, 1990 (inception)
to December 31, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
The financial statements referred to above have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses and its working
capital at December 31, 1998 has been substantially depleted. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
March 26, 1997, except as to Note 2,
which is as of March 31, 1999
23
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
December 31,
1998
-----------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,153,000
Short term investments 828,000
Prepaid expenses and other current assets 88,000
-----------
Total current assets 3,069,000
Restricted cash 9,001,000
Property, Plant and equipment, net 11,331,000
Other assets 187,000
-----------
Total assets $23,588,000
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 263,000
Accrued payable to contractor 1,207,000
Capital lease obligation current portion 37,000
Other accrued liabilities 1,054,000
-----------
Total current liabilities 2,561,000
-----------
Long-term debt 8,500,000
Capital lease obligation, long term 210,000
Deferred revenue 1,340,000
-----------
Total liabilities 12,611,000
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; 6,999,676
shares issued and outstanding 1,000
Class B Common Stock, par value $.0001 per share;
10,000,000 shares authorized; 1,900,324 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 (41,071,000)
-----------
Total stockholders' equity 10,977,000
-----------
Total liabilities and stockholder's equity $23,588,000
===========
See accompanying notes to financial statements
24
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Period from
January 26,
Year Ended 1990
December 31, (inception) to
------------------------------ December 31,
1997 1998 1998
----------------------------- -----------------
<S> <C> <C> <C>
Interest income $ 1,273,000 $ 927,000 $ 2,370,000
Other income 105,000 447,000 1,262,000
----------------------------- -----------------
1,378,000 1,374,000 3,632,000
Cost and expenses:
Research and development costs 4,813,000 6,469,000 24,918,000
Preoperating costs -- -- 282,000
General and administrative expenses 2,644,000 4,658,000 14,692,000
Loss on disposal of assets 385,000 13,000 755,000
Interest expense 161,000 352,000 2,353,000
In-process research and development acquired -- -- 761,000
----------------------------- -----------------
8,003,000 11,492,000 43,761,000
----------------------------- -----------------
Loss before extraordinary item (6,625,000) (10,118,000) (40,129,000)
Extraordinary loss on retirement of
Bridge Notes -- -- (942,000)
----------------------------- -----------------
Net loss and comprehensive loss $(6,625,000) $(10,118,000) $(41,071,000)
============================= =================
Loss per share before extraordinary item $(.74) $(1.14)
-----------------------------
Net loss and comprehensive loss per share $(.74) $(1.14)
=============================
Weighted average number of shares outstanding 8,900,000 8,900,000
=============================
</TABLE>
See accompanying notes to financial statements.
25
<PAGE>
<TABLE>
<CAPTION>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
Statement of Stockholders' Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock
Preferred Stock Class A Class B Class E-1 Class E-2
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
--------- ------ ------------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common stock issued $ -- $ -- 418,094 $ -- 836,189 $ -- 836,189 $ --
Common stock issued in
exchange for in-
process research and
development 201,494 -- 402,988 -- 402,988 --
Imputed interest on
advances from
stockholder (Note 5)
Conversion of
stockholder advances
(Note 5) 598,011 -- 1,196,021 -- 1,196,021 --
Conversion of officer
loans (Note 5) 187,118 -- 374,236 -- 374,236 --
Stock issued in
consideration for
services in 1994,
1995, and 1996
(Note 6) 595,283 -- 1,190,566 -- 1,190,566 --
Imputed interest on
advances from
stockholder (Note 5)
Net proceeds from
initial public
offering of Units
(Note 8) 6,000,000 $1,000
Net proceeds from
exercise of over-
allotment option
(Note 8) 900,000 --
Warrants issued in
connection with
issuance of Bridge
Notes (Note 8)
Net loss from inception
to December 31, 1996
--------- ------ --------- ------- -------- ----- --------- ----- --------- -----
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 --
Conversion of Class B
to A Common Stock 99,676 (99,676)
Net Loss
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December
31, 1998 -- $ -- 6,999,676 $1,000 1,900,324 $ -- 4,000,000 $ -- 4,000,000 $ --
=================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
During the
Public Class A Class B Additional Development
Warrants Warrants Warrants Paid-In Capital Stage Total
-------- ---------- ----------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Common stock issued $ -- $ -- $ -- $ 7,500,000 $ -- $ 7,500,000
Common stock issued in
exchange for in-
process research and
development 361,000 361,000
Imputed interest on
advances from
stockholder (Note 5)
Conversion of 799,000 799,000
stockholder advances
(Note 5)
Conversion of officer 10,728,000 10,728,000
loans (Note 5)
Stock issued in 336,000 336,000
consideration for
services in 1994,
1995, and 1996
(Note 6) 1,507,000 1,507,000
Imputed interest on
advances from
stockholder (Note 5) 11,000 11,000
Net proceeds from
initial public
offering of Units
(Note 8) 9,583,000 4,166,000 12,566,000 26,316,000
Net proceeds from
exercise of over-
allotment option
(Note 8) 1,707,000 466,000 1,922,000 4,095,000
Warrants issued in
connection with
issuance of Bridge
Notes (Note 8) 473,000 473,000
Net loss from inception
to December 31, 1996 24,328,000 24,328,000
-------- ----------- ----------- --------------- ------------ ----------
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
Conversion of Class B
to A Common Stock
Net Loss (10,118,000) (10,118,000)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December
31, 1998 $ 473,000 $11,290,000 $ 4,632,000 $ 35,652,000 $(41,071,000) $ 10,977,000
================================================================================================================================
</TABLE>
26
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 26,
1990
(INCEPTION)
YEAR ENDED DECEMBER 31, TO DECEMBER 31,
---------------------------
1997 1998 1998
------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,625,000) $(10,118,000) $(41,071,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Noncash stock compensation expense - - 1,207,000
Noncash interest expense - - 336,000
Cost of in-process research and development acquired - - 761,000
Imputed interest on advances from stockholder - - 810,000
Interest income from restricted cash invested (136,000) (328,000) (464,000)
Extraordinary loss on retirement of Bridge Notes - - 942,000
Depreciation and amortization 386,000 440,000 2,640,000
Loss on disposal of assets 385,000 13,000 755,000
Changes in assets and liabilities:
Increase in prepaid expenses and other current assets (104,000) 344,000 85,000
Increase in other assets (417,000) 230,000 (187,000)
Increase (decrease) in accounts payable 390,000 (272,000) 263,000
Increase (decrease) in accrued liabilities 107,000 1,996,000 2,161,000
Increase in deferred revenue 430,000 910,000 1,340,000
------------------------------------------------
Net cash used in operating activities (5,584,000) (6,785,000) (30,422,000)
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 (804,000) (1,081,000) (5,732,000)
Purchase of certificate of deposit (1,049,000) (1,061,000)
Proceeds from redemption of certificate of deposit 1,061,000 1,061,000
Purchase of investments (6,611,000) (3,021,000) (11,658,000)
Proceeds from sale of investments 4,124,000 6,706,000 10,830,000
Restricted cash from long term debt (8,500,000) (8,500,000)
------------------------------------------------
Net cash (used in) provided by investing activities (13,283,000) 3,665,000 (15,473,000)
------------------------------------------------
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
Net proceeds from bridge financing - - 6,195,000
Net proceeds from loans from officers - - 336,000
Payment of obligation under Capital Lease Obligations - (4,000) (44,000)
Repayment of bridge financing - - (7,000,000)
-----------------------------------------------
Net cash (used in) provided by financing activities (78,000) (4,000) 48,048,000
-----------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (18,945,000) (3,124,000) 2,153,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 24,222,000 5,277,000 -
-----------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,277,000 $ 2,153,000 $ 2,153,000
===============================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest 161,000 316,000 1,171,000
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Stockholder advances converted to common stock 10,728,000
Loans from officer converted to common stock 336,000
Common stock issued for noncash consideration and compensation 1,507,000
Liabilities assumed from ASI 400,000
Common stock issued for in-process research and development acquired 361,000
Equipment acquired under capital leases 40,000
Deposit surrendered as payment for rents due 80,000
Construction in progress acquired with restricted cash 446,000 7,845,000 8,291,000
</TABLE>
27
<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.
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; 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 and there is no assurance
that the Company will ultimately be successful in obtaining its Federal
Aviation Administration ("FAA") Type Certificate for technical revisions to
its aircraft. On December 3, 1996 the Company successfully completed an
initial public offering to finance the continued development, manufacture
and marketing of its product to achieve commercial viability. The net
proceeds of the offering were and will be used to amend its Federal
Aviation Administration ("FAA") Type Certificate for technical revisions to
its product, to obtain a FAA Production Certificate for its product, to
repay borrowings under a bridge loan, to expand the Company's sales and
marketing efforts, to establish a new manufacturing facility, and to
acquire production materials and additional tooling and equipment.
28
<PAGE>
2. FINANCIAL RESULTS AND LIQUIDITY
The Company is currently in the process of developing their product and
obtaining appropriate certification from the Federal Aviation
Administration. To date, the Company has generated no sales revenue and
none is projected until the certification process is complete and the
Company can begin commercial production of their product. Current working
capital has been substantially depleted and will not meet the Company's
requirements for the next fiscal year unless additional financing is
secured. Because the required additional financing has not been obtained,
substantial doubt exists as to the Company's ability to continue its
development activities for the next fiscal year.
The Company's management team has been developing a financial plan to
address its working capital requirements. The Company is currently seeking
additional financing but no agreements have been signed or any funds
secured as of the date of this report. Management is exploring all
financing alternatives and expects to secure additional financing in the
near future. The Company is also considering the sale and subsequent lease-
back of its approximately 200,000 square foot manufacturing and
headquarters facility in Long Beach, California as a strategy to improve
its cash position. Construction of the facility was completed in 1998 at a
total cost of approximately $9,000,000.
Going forward, significant amounts of additional cash will be needed to
continue the Company's development activities and ultimately production.
While there is no assurance that additional financing will be available,
the Company's management believes that it has developed a financial plan
that, if executed successfully, will substantially improve the Company's
ability to meet its working capital requirements.
The Company's Independent public accountants have included a "going
concern" emphasis paragraph in their audit report accompanying the 1998
financial statements. The paragraph states that the recurring losses and
working capital depletion of Advanced Aerodynamics & Structures, Inc.
raises substantial doubt about the Company's ability to continue as a going
concern and cautions that the financial statements do not include any
adjustments that might result from the outcome of this uncertainty. See
Note 15, "Events (unaudited) Subsequent to the Date of the Report of
Independent Auditors."
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RESEARCH AND DEVELOPMENT COSTS
All costs incurred in the design, testing, and certification of aircraft
being developed by the Company (including cost of in-process research and
development acquired) are expensed as incurred.
PREOPERATING COSTS
Preoperating costs are expensed as incurred.
ADVERTISING EXPENSE
Advertising costs are expensed as incurred Advertising expense was $75,000
and $316,000 for the years ended December 31, 1998 and 1997, respectively.
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, 1998.
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 shares, the fair market
value approximates cost at December 31, 1998 and no unrealized gains or
losses have been reported in stockholders equity. The cost of investments
sold is determined on the specific identification method.
29
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT, AND EQUIPMENT
Property, Plant, and equipment are stated at cost and are depreciated using
the straight-line method over their estimated useful lives of 5-10 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. Included in depreciation
expense is the amortization of assets acquired under capital leases.
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.
NEW STANDARDS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," and
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information and SFAS No. 132 "Employers' Disclosures about Persons and
other Post Retirement Benefits."
SFAS No. 130 requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be
reported in a financial statements that is displayed with the same
prominence as other financial statements. The adoption of this statement
had no impact on the Company's net income or shareholders' equity.
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 thus adoption of this standard had no impact on the Company.
SFAS No. 132 revises the disclosures of SFAS No. 87 and SFAS No. 106
relating to Persons and other postretirement benefits. The Company does
not have any pensions or other postretirement benefits, and this adoption
of this standard had no impact on the Company.
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.
30
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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:
<TABLE>
<CAPTION>
1997 1998
--------------------------------------
<S> <C> <C>
Numerator
Loss before extraordinary item $(6,625,000) $(10,118,000)
--------------------------------------
Denominator
Weighted average shares of Class B Shares 2,000,000 1,924,629
Weighted average shares of Class A Shares 6,900,000 6,975,371
--------------------------------------
Denominator for basic loss per share-weighted
average shares 8,900,000 8,900,000
--------------------------------------
Basic loss per share $ (0.74) $ (1.14)
======================================
</TABLE>
ACCOUNTING PRONOUNCEMENTS
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.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-
up Activities," which is effective for fiscal years beginning after
December 15, 1998. SOP 98-5 provides guidance on the financial reporting of
start-up cost and organization costs and require such costs to be expensed
as incurred. Management believes that the adoption of SOP 98-5 will not
have a material effect on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal years
beginning after June 15, 1999. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments. The statement requires that
every derivative instrument be recorded in the balance sheet as either an
asset or liability measured at its fair value, and that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. The Company does not have any derivative
instruments as of December 31, 1998. Management believes that the adoption
of SFAS No. 133 will not have a material effect on the Company's financial
statements.
4. PROPERTY, PLANT, AND EQUIPMENT
Property and equipment consist of the following:
Building $ 9,418,000
Office furniture and equipment 1,069,000
Machinery and equipment 2,683,000
-----------
Gross property and equipment 13,170,000
Accumulated depreciation and amortization (1,839,000)
-----------
Property, Plant, and equipment $11,331,000
===========
Included in office furniture and equipment are assets acquired under
capital leases in the amount of $251,000.
31
<PAGE>
5. 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, 1998 are as follows:
Deferred tax assets:
Federal net operating loss $ 12,760,000
State net operating loss 1,031,000
Research & Development Credits 1,898,000
Other 44,000
------------
Total deferred tax assets 15,733,000
Deferred tax liabilities:
Tax over book depreciation 486,000
------------
Total net deferred tax assets 15,247,000
Valuation allowance (15,247,000)
------------
$ -0-
============
At December 31, 1998, the Company had U.S. Federal and California state net
operating loss ("NOL") carryforwards of approximately $37 million and $11
million, respectively, Federal NOLs could, if unused, expire in varying
amounts in the years 2006 through 2018. California NOLs, if unused, could
expire in varying amounts from 1999 through 2003.
At December 31, 1998, 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.
32
<PAGE>
5. INCOME TAXES (CONTINUED)
The provision for income taxes are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
Deferred:
Federal $(2,199,000) $(3,380,000)
State 177,000 (378,000)
------------ ------------
Total deferred (2,022,000) (3,758,000)
Increase in valuation allowance 2,022,000 3,758,000
------------ ------------
$ -- $ --
============ ============
</TABLE>
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 1997 and 1998.
6. INVESTMENTS
The contractual maturities of debt securities ($828,000) classified as
held-to-maturity, which consist of United States corporation bonds, as of
December 31, 1998, mature within one year and are recorded at their fair
value.
Debt and equity securities classified as cash equivalents as of December
31, 1998 consisted of $1,687,000 in Short Term Government Fund.
7. DEBT AND RELATED PARTY TRANSACTIONS
In 1993 and 1994, the Company obtained loans from SIDA Corporation 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.
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.
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.
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.
33
<PAGE>
7. DEBT AND RELATED PARTY TRANSACTIONS (CONTINUED)
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 completing the construction 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, 1998 is $8,500,000. The loan bears interest at a floating rate
(4.25% at December 31, 1998) 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, 1998, 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, 1998, 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 bonds mature
August 1, 2027 at which time all outstanding amounts become due and
payable.
8. 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.
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.
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
34
<PAGE>
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.
In the ordinary course of business, the Company is generally subject to
claims, complaints, and legal actions. At December 31, 1998, the Company
is not a party to any action which would have a material impact on its,
financial condition, operations, or cash flows.
9. LEASES
The Company leases approximately 10 acres of land located on the Long Beach
Airport in Long Beach, California. The lease commenced on January 14, 1998
and has a term of 30 years with an option to renew for an additional 10
year term. The lease also contains options to lease other airport
properties. The current monthly rent under the lease is $4,500. An
escalation clause in the lease increases the monthly rent to $7,500
beginning July 1999. The lease contains incremental increases which
escalate the monthly rent to approximately $15,600 after 5 years. The
aggregate minimum payments under the lease have been included in the table
below.
Future minimum lease payments applicable to non-cancelable operating leases
and capital leases as of December 31, 1998, are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------------------------------
<S> <C> <C>
1999 66,000 72,000
2000 66,000 89,000
2001 66,000 109,000
2002 66,000 187,000
2003 60,000 187,000
Thereafter 4,482,000
--------- ----------
Net future minimum lease payments 324,000 $5,126,000
--------- ==========
Amount representing interest 77,000
---------
Present value of minimum lease payments $ 247,000
=========
</TABLE>
The Company incurred rent expense of $383,000 and for the year ended
December 31, 1998 and 1997, respectively.
35
<PAGE>
10. 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.
In February of 1998 a shareholder of the Company converted 99,676 shares of
Class B common Stock to 99,676 shares of Class A Common Stock. The
conversion resulted in an increase in Class A Common Stock to 6,999,676 and
a decrease in the number of outstanding shares of Class B Common Stock to
1,900,324. This transaction had no impact on losses per common share as
both classes of shares are included in the calculation of weighted average
number of common stock outstanding.
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 $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, $28.125 million in 1999, $35.625 million in 2000, $45.0 million in
2001, $56.25 million in 2002 or $69.5 million in 2003. With respect to
market price levels, the Class E-1 Common Stock shares may be converted
if, commencing on December 3, 1996 and ending 18 months thereafter, the
bid price of the Company's Class A Common Stock averages in excess of
$14.00 per share for 30 consecutive business days, or commencing 18
months after December 3, 1996 and ending 36 months thereafter, the bid
price averages $18.50 per share for 30 consecutive business days.
Class E-2 Common Stock shares may be converted if commencing at
December 3, 1996 and ending 18 months thereafter, the bid price of
the Company's Class A Common Stock averages in excess of $18.00 per
share for 30 consecutive business days or commencing 18 months after
December 3, 1996 and ending 36 months thereafter, the bid price averages in
excess of $23.00 for 30 consecutive business days.
All Performance Shares that have not been converted by March 31, 2004
may be redeemed by the Company for $.01 per share. For accounting
purposes, the Performance Shares are treated in a manner similar to a
variable stock option award. As a consequence, a compensation charge
will be recorded in an amount equal to the then fair value of any
Performance Shares that are ultimately converted into Class B Common
Stock.
STOCK 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.
36
<PAGE>
10. STOCKHOLDERS' EQUITY (CONTINUED)
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 options equals or
exceeds the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
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 5.02%
for 1997 and 1998, respectively; dividend yields of 0% for 1997 and 1998;
volatility factors of the expected market price of the Company's common
stock of .88 and .878 for 1997 and 1998, respectively; and a weighted
average expected life of the option of 10 years and 5 years, for 1997 and
1998, 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 1998, 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 1998
------------ ------------
Pro forma net loss $6,748,000 $10,356,000
Pro forma net loss per share: $ .76 $ 1.16
The weighted average fair value of options granted during 1997 and 1998 was
$3.62 and $.73, per option, respectively. The weighted average exercise
price for 1997 and 1998 was $5.00. The weighted average remaining
contractual life of options outstanding is 9.20 years and 8.75 years for
1997 and 1998, respectively.
37
<PAGE>
10. STOCKHOLDERS' EQUITY (CONTINUED)
At December 31, 1998, 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, 1997 and December 31, 1998 are
summarized as follows:
WEIGHTED
AVERAGE EXERCISE
SHARES PRICE
------- ----------------
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
Granted 268,000 $5.00
Exercised -- --
Canceled (95,000) $5.00
Outstanding at December 31, 1998 593,000 $5.00
As of December 31, 1997 and 1998 21,000 and 87,000 options were exercisable
at a weighted average exercise price of $5.00 per option.
11. INITIAL PUBLIC OFFERING
On December 3, 1996, the Company completed an initial public offering of
6,000,000 units (the "Units) at an initial public offering price of $5 per
Unit. Each Unit is composed of one share of the Company's Class A Common
Stock, one Class A Warrant and one Class B Warrant. The Company realized
net proceeds of $26,316,000 from this offering. Upon exercise, the Class A
Warrants entitle the holder to purchase one share of Class A Common Stock
and one Class B Warrant. Each Class B Warrant entitles 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.
38
<PAGE>
11. INITIAL PUBLIC OFFERING (CONTINUED)
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.
12. INDUSTRIAL DEVELOPMENT BONDS
On August 5, 1997, the company entered into a loan agreement in connection
with industrial development bonds (IDB) issued by the California Economic
Development financing Authority. The Company has established in the
trustee's favor a bank letter of credit for the principle 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 bonds mature August 1, 2027 at
which time all outstanding amounts become due and payable. The Company has
used the proceeds for the IDBs to finance the construction and installation
of the 200,000 square foot manufacturing facility which the Company moved
into on November 16, 1998.
13. 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.
14. YEAR 2000 COMPLIANCE (UNAUDITED)
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted below, the
Company has not yet completed all necessary phases of the Year 2000
program.
39
<PAGE>
14. YEAR 2000 COMPLIANCE (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
ASSESSMENT REMEDIATION TESTING IMPLEMENTATION
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INFORMATION 100% Complete 70% Complete 70% Complete 65% Complete
TECHNOLOGY Expected completion date Expected completion Expected completion
May 1999 date May 1999 Date June 1999
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING EQUIPMENT WITH 100% Complete 90% Complete 50% Complete 50% Complete
EMBEDDED CHIPS Expected completion date Expected completion Expected completion
OR SOFTWARE June 1999 date July 1999 date Aug 1999
- ----------------------------------------------------------------------------------------------------------------------------
PRODUCTS 100% Complete N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------
3RD PARTY 100% Complete N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
In May 1998, the Company signed a contract with Baan Business Systems of
California for license and implementation of the Baan ERP system. In 1998
the Company purchased 15 licenses for $50,000, with an agreement to
purchased 25 additional licenses in the 1st quarter and 20 licenses in the
second quarter for $75,000 and $60,000, respectively. The Company has
received assurances from Baan that the hardware and software is Year 2000
compliant. Training and implementation began in the 3rd quarter of 1998 and
is scheduled to be completed in the 2rd quarter of 1999. Although the
Company does not perceive any problems with its new computer system, the
failure of the new hardware and software package to be Year 2000 compliant
might result in significant unexpected costs which would have a material
adverse effect on the Company's results of operations. The Company has
completed its assessment of major vendors and has concluded there is no
significant Year 2000 problem with such vendors or their products.
The Company is currently assessing various other vendors which it plans to
utilize when production of the JETCRUZER 500 begins. The process of
evaluation includes both the significance of the vendor to the Company's
operation and their exposure to the Year 2000 problem. The Company does not
anticipate any material costs in completing its Year 2000 program.
The Company currently has no contingency plans in place in the event it
does not complete all phases of the Year 2000 program. The Company plans to
evaluate the status of completion in May 1999 and determine whether such a
plan is necessary.
15. EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT
AUDITORS
ISSUANCE OF CONVERTIBLE PREFERRED STOCK
In March 1999, the Company executed a non-binding term sheet with an
institutional investor for the issuance of approximately 4,000 shares of
Convertible Preferred Stock at a price per share of $1,000. If the offering
was completed, the proceeds from the issuance of the Convertible Preferred
Stock would be approximately $5,000,000, before deducting commissions and
expenses associated with the offering. The Company is currently negotiating
the specific terms of the transaction agreements, but the Company has not
entered into any binding agreements for the offering.
40
<PAGE>
13. SUBSEQUENT EVENTS (CONTINUED) (UNAUDITED)
SALE AND LEASE-BACK OF NEW FACILITY
In April 1999, the Company signed a Letter of Intent to sell its 200,000 square-
foot building and lease it back. The purchase price of the building is
$9,800,000 and the term of the lease is twenty years plus an option to extend
the lease for an additional ten years. In accordance with the terms of the
letter of intent, the purchaser has deposited $100,000 into an escrow account.
If the transaction is completed, monthly payments under the terms of the lease-
back will be $106,167 and will be adjusted annually, after the first year, for
changes in the Consumer's Price index, not to exceed 3% per annum. The rent for
periods after the twentieth year would be at fair market rental value.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
During the quarter ended December 31, 1998, the Company did not file any
reports on Form 8-K.
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, 1998.
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.
41
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
* 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., 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
***** 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
</TABLE>
42
<PAGE>
* 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, 1998, the Company did not file any
reports on Form 8-K.
43
<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: April 15, 1999 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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- -----
<S> <C> <C>
/s/ CARL L. CHEN President, Chief Executive April 15, 1999
- ------------------------------------------- Officer, and Chairman of the Board
Carl L. Chen
/s/ GENE COMFORT Executive Vice President, April 15, 1999
- ------------------------------------------- Secretary and Director
Gene Comfort
/s/ DAVE TURNER Vice President - Finance and Chief April 15, 1999
- -------------------------------------------- Financial Officer
Dave Turner
/s/ C.M. CHENG Director April 15, 1999
- --------------------------------------------
C.M. Cheng
/s/ STEVE GORLIN Director April 15, 1999
- --------------------------------------------
Steve Gorlin
/s/ JIM LOVELL Director April 15, 1999
- --------------------------------------------
Jim Lovell
/s/ S.B. LAI Director April 15, 1999
- --------------------------------------------
S.B. Lai
</TABLE>
44
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,153,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,069,000
<PP&E> 11,331,000
<DEPRECIATION> 440,000
<TOTAL-ASSETS> 23,588,000
<CURRENT-LIABILITIES> 2,561,000
<BONDS> 0
0
0
<COMMON> 1,000
<OTHER-SE> 10,976,000
<TOTAL-LIABILITY-AND-EQUITY> 23,588,000
<SALES> 0
<TOTAL-REVENUES> 1,374,000
<CGS> 0
<TOTAL-COSTS> 11,127,000
<OTHER-EXPENSES> 13,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 352,000
<INCOME-PRETAX> (10,118,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,118,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,118,000)
<EPS-PRIMARY> (1.14)
<EPS-DILUTED> (1.14)
</TABLE>
