<PAGE>
As filed with the Securities and Exchange Commission on September 5, 2000
An Exhibit List can be found on page II-2.
Registration No. 333-_______
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
________________________
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
________________________
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(Name of small business issuer in its charter)
DELAWARE 95-4257380
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
3205 Lakewood Blvd.
Long Beach, CA 90808
(562) 938-8618
(Address and telephone number of principal executive offices and principal place
of business)
Carl L. Chen
3205 Lakewood Blvd.
Long Beach, CA 90808
(562) 938-8618
(Name, address and telephone number of agent for service)
Copies to:
Otto E. Sorensen, Esq.
Luce, Forward, Hamilton & Scripps LLP
600 West Broadway, Suite 2600
San Diego, California 92101
(619) 699-2534
(619) 645-5324 (fax)
Approximate date of proposed sale to the public:
As soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box.: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
_________________________
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================================
Amount to be Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Securities Registered Offering Price Per Aggregate Offering Registration
to be Registered Security/(1)/ Fee
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Common Stock, $.0001 par value/(2)(3)/ 10,000,000 $2.50 $25,000,000 $6,600
------------------------------------------------------------------------------------------------------------------------------------
Shares of Common Stock, $.0001 par value/(4)/ 250,000 $3.15 $ 787,500 $ 208
------------------------------------------------------------------------------------------------------------------------------------
Total 10,250,000 $25,787,500 $6,808
====================================================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, as amended
(the "Act"), based on the average of the closing bid and asked prices for
the Registrant's Common Stock (the "Common Stock") as reported on the
NASDAQ National Market on September 1, 2000 and, with respect to shares of
common stock of the Company issuable upon exercise of outstanding
warrants, the higher of (i) such average sales price or (ii) the exercise
price of such warrants.
(2) Issuable as Put Shares.
(3) Pursuant to Rules 416 and 457 under the Act, additional shares as may be
issuable pursuant to the anti-dilution provisions of the warrants are also
being registered.
(4) Issuable upon exercise of Warrants with an exercise price of $3.15 issued
to the Finders.
_____________________________
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
PRELIMINARY PROSPECTUS Subject To Completion, Dated September 5, 2000
The information in this prospectus is not complete and may be changed.
ADVANCED AERODYNAMICS & STRUCTURES, INC.
3205 Lakewood Blvd.
Long Beach, CA 90808
(562) 938-8618
10,250,000 Shares
Common Stock
THE OFFERING
The resale of up to 10,250,000 shares of Class A Common Stock on the NASDAQ
National Market at the prevailing market price or in negotiated transactions.
* Up to 10,000,000 shares are issuable as Put Shares to certain selling
shareholders identified in this Prospectus (the "Selling Shareholders");
* Up to 250,000 shares are issuable upon the exercise of Purchase
Warrants issuable to certain finders identified in this Prospectus (the
"Finders").
We will receive no proceeds from the sale of the shares by the Selling
Shareholders or the Finders. However, we may receive proceeds from the sale of
Put Shares to the Selling Shareholders and, if the Purchase Warrants are
exercised, will receive proceeds from the sale of shares issuable upon the
exercise of the Purchase Warrants by the Selling Shareholders or the Finders.
TRADING SYMBOL
AASI (NASDAQ National Market)
__________________
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK.
See "Risk Factors" beginning on page 2.
__________________
THE SECURITIES AND EXCHANGE COMMISSION (SEC) AND STATE SECURITIES
REGULATORS HAVE NOT APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND
IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE
OFFER OR SALE IS NOT PERMITTED.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THIS
PROSPECTUS IS INCLUDED IN THE REGISTRATION STATEMENT THAT WAS FILED BY ADVANCED
AERODYNAMICS & STRUCTURES, INC., WITH THE SECURITIES AND EXCHANGE COMMISSION.
THE SELLING SHAREHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT BECOMES EFFECTIVE.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED IN THIS
PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL THE INFORMATION YOU SHOULD
CONSIDER BEFORE INVESTING IN THE SECURITIES. BEFORE MAKING AN INVESTMENT
DECISION, YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE "RISK
FACTORS" SECTION, THE FINANCIAL STATEMENTS AND THE NOTES TO THE FINANCIAL
STATEMENTS. SOME OF THE STATEMENTS MADE IN THIS PROSPECTUS DISCUSS FUTURE EVENTS
AND DEVELOPMENTS, INCLUDING OUR FUTURE BUSINESS STRATEGY AND OUR ABILITY TO
GENERATE REVENUE, INCOME AND CASH FLOW. THESE FORWARD-LOOKING STATEMENTS INVOLVE
RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE CONTEMPLATED IN THESE FORWARD-LOOKING STATEMENTS.
Our Company
AASI is a development stage enterprise organized in 1990 to design,
develop, manufacture and market propjet and jet aircraft intended primarily for
business use. We have 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"). We are modifying the JETCRUZER 450 to develop a six-seat
(including pilot), pressurized version of that aircraft for commercial sale (the
"JETCRUZER(TM) 500").
AASI began development of the JETCRUZER 450 in 1990 and obtained the
FAA Type Certificate approval in 1994. Throughout this period, we 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. The aircraft was used by AASI
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. We received the FAA Type Certificate
for the JETCRUZER 450 on June 14, 1994.
Although we received preliminary written indications of interest to
purchase the aircraft, we decided that we would not obtain a production
certificate for the JETCRUZER 450 or otherwise pursue commercialization of that
aircraft in part because the Type Certificate is subject to certain limitations,
which we believe reduce the commercial viability of the JETCRUZER 450. Instead,
we 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 we anticipate will not be subject to the limitations imposed by the
existing Type Certificate.
We have FAA approval to amend the Type Certificate, rather than obtain
a new Type Certificate. We currently anticipate that we can obtain an amendment
to the Type Certificate during the last half of 2000 and commence commercial
production of our aircraft within the same time frame. However, obtaining the
amendment may take longer than anticipated, and we may experience unforeseen
expense or delay in certifying and commercializing our aircraft.
AASI has not generated any operating revenues to date and has incurred
losses from its operating activities, including program development costs, of
$9,341,000 and $10,118,000 in 1999 and 1998, respectively. We believe we will
continue to experience losses until such time as we begin to sell aircraft on a
commercial scale. Research and development expenses have consisted primarily of
the costs of personnel, facilities, materials and equipment required to conduct
our development activities. These expenses aggregated $31,527,000 from inception
through December 31, 1999. These expenses were incurred primarily to develop the
JETCRUZER 450, to obtain a Type Certificate for it, and to design and test the
JETCRUZER 500.
1
<PAGE>
The Offering
Class A Common Stock offered for resale 10,250,000 shares
Use of Proceeds We will not receive proceeds from the
resale of the Common Stock described
in this Prospectus. However, we will
receive proceeds from the initial
placement of our Common Stock with
the Selling Shareholders. These
proceeds will be used to complete the
development, and begin the
manufacture, of the JETCRUZER 500.
NASDAQ National Market symbol AASI
RISK FACTORS
An investment in shares of our common stock is very risky. You should
carefully consider the following factors as well as the other information
contained and incorporated by reference in this prospectus before deciding to
invest.
Development Stage Company; Early Stage of Product Development; No
Assurance of Success; No Commercial Operations. AASI is in the development
stage and has not commenced any commercial operations or received any operating
revenues. Potential investors should be aware of the problems, delays, expenses
and difficulties usually encountered by an enterprise in the Company's stage of
development, many of which may be beyond our control. These include
unanticipated problems relating to product development, testing, initial and
continuing regulatory compliance, manufacturing costs, production and assembly,
the competitive and regulatory environment in which we plan to operate,
marketing problems and additional costs and expenses that may exceed current
estimates. AASI has been engaged primarily in research and development since its
inception and has not completed the development of the JETCRUZER 500. We may not
be able to successfully develop the JETCRUZER 500 or any other aircraft. We may
not be granted the necessary regulatory approvals to produce and sell our
aircraft, and our aircraft may not prove to be commercially viable or
marketable.
Accumulated Deficit; History of Losses; Expectation of Substantial
Future Losses. To date, AASI has incurred significant losses. At December 31,
1999, we had an accumulated deficit of approximately $50,412,000. We incurred
net losses of approximately $10,118,000 and $9,341,000 for the years ended
December 31, 1998 and 1999, respectively, and incurred a net loss of $3,839,000
for the six months ended June 30, 2000. These losses have resulted principally
from significant costs associated with the development of the JETCRUZER 500.
AASI expects to incur further losses for the foreseeable future due to
significant costs associated with amending its FAA Type Certificate,
manufacturing its proposed aircraft, obtaining the necessary regulatory
approvals, and marketing and selling its proposed aircraft. There can be no
assurance that sales of our aircraft will ever generate sufficient revenues to
fund continuing operations, that we will generate positive cash flow from
operations, or that we will attain or thereafter sustain profitability in any
future period.
Regulatory Uncertainty. AASI intends to amend its Type Certificate
with respect to the JETCRUZER 450 to include the JETCRUZER 500. In addition, we
will be required to obtain an amendment to our Type Certificate or a new type
certificate if and when we develop additional aircraft. Obtaining a new or
amended FAA Type Certificate is difficult, costly, and time consuming.
Currently, the Company believes it will obtain an amended certificate for the
JETCRUZER 500 during the middle of 2001. However, we may not be successful in
obtaining a new Type Certificate or amendments to our existing Type Certificate
for an aircraft. Further, if one or more new or amended type certificates are
obtained, they may be subject to conditions which may adversely affect the use
of the proposed aircraft for their intended purpose.
AASI will also need to obtain an FAA production certificate for the
commercial production of its aircraft and airworthiness certificates for
individual aircraft upon the completion of manufacture. AASI may not be able to
obtain a production certificate for its planned aircraft models, or
airworthiness certificates for individual aircraft, and therefore there can be
no assurance that the Company will be able to produce and sell aircraft.
2
<PAGE>
AASI will also be subject to the risk of modification, suspension or
revocation of any FAA certificate it holds. A modification, suspension, or
revocation could occur if, in the FAA's judgement, compliance with airworthiness
or safety standards by AASI was in doubt. If the FAA were to suspend or revoke
AASI's type or production certificate for an aircraft model, sales of that model
would be adversely affected or terminated. If, in the FAA's judgement, an unsafe
condition developed or was discovered after one or more of our aircraft had
entered service, the FAA could issue an "Airworthiness Directive," which could
result in a requirement that we develop appropriate design changes at our
expense. Foreign authorities could impose similar obligations upon AASI as to
aircraft within their jurisdiction. Any or all of these occurrences could expose
AASI to substantial additional costs and/or liabilities.
Limited Product Line; Fluctuations in Sales of Aircraft. Initially,
the JETCRUZER 500 is intended to be AASI's only product available for commercial
sale. Accordingly, our operating results and the future development of
additional products will depend substantially upon the successful sale of that
aircraft. Moreover, if there is a downturn in the market for general aviation
aircraft due to economic, political or other reasons, we would not be able to
rely on sales of other products to offset the downturn. It is possible that
sales of business aircraft could decline in the future for reasons beyond our
control. Furthermore, if a potential purchaser is experiencing an economic
downturn or is for any other reason seeking to limit its capital expenditures,
the high unit selling price of a new aircraft may result in the potential
purchaser deferring its purchase or electing to purchase a pre-owned aircraft or
a lower priced aircraft. Further, since AASI intends to rely on the sale of a
relatively small number of high unit selling price aircraft to provide
substantially all of its revenue, small decreases in the number of aircraft
delivered in any year may have a material negative effect on the results of
operations for that year. In addition, small changes in the number and timing of
deliveries of, and receipt of payments on, new aircraft may have a material
effect on our liquidity.
Competition. Our aircraft will compete with other aircraft that have
comparable characteristics and capabilities. Most of our competitors, including
Cessna Aircraft Co. (maker of the Caravan), Socata (maker of the TBM), Pilatus
(maker of the PC-12), Raytheon Aircraft Co. (Beechcraft) (maker of the King Air)
and New Piper Aircraft Corp. (maker of the Malibu Mirage), are substantially
larger in size and have far greater financial, technical, marketing, and other
resources than we do. Certain of our 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
our aircraft, and these competitors may introduce such aircraft and aircraft
changes prior to the delivery of our first aircraft. Our ability to compete
effectively may be adversely affected by the ability of these competitors to
devote greater resources to the sales and marketing of their products than are
available to us. In addition, we will need to convince potential customers of
the advantages of our aircraft as compared to competitors' aircraft having a
more conventional design and appearance. Future technological advances may
result in competitive aircraft with improved characteristics and capabilities
that could adversely affect our business. Our aircraft may also compete with
used aircraft which become available in the resale market at prices sufficiently
lower to offset deficits in performance, if any, as compared to our aircraft.
Need for Additional Financing. AASI believes that the net proceeds
from this equity line will be sufficient to meet its cash requirements at least
through the end of 2000; however, we may require additional financing prior to
that time. Also, if required, additional financing may not be available on
acceptable terms or at all. Failure to obtain any needed additional financing
would have a material adverse effect on our business and prospects and could
require that we severely limit or cease our operations.
Reliance on Single Source Suppliers. AASI will be dependent on certain
suppliers of products in order to manufacture its aircraft. In particular, we
will be dependent on Pratt & Whitney to supply the propjet engine for the
JETCRUZER 500. We have no contractual right to obtain any specified number of
engines from Pratt & Whitney. Should our ability to obtain the requisite number
of engines be limited for any lengthy period of time or the cost of the engines
increase, our ability to produce and sell aircraft could be materially and
adversely affected. In addition, the failure of other suppliers or
subcontractors to meet our performance specifications, quality standards or
delivery standards or schedules could have a material adverse effect on our
operations. Moreover, our ability to significantly increase our production rate
following the introduction of the JETCRUZER 500 could be limited by the ability
or willingness of key suppliers to increase their delivery rates. When we are
ready to begin the manufacture of our aircraft, the prices to obtain materials
and components may have changed and a number of suppliers may need to be
replaced. Our inability to obtain supplies to manufacture our products would
have a material adverse effect on our business prospects, operations and
financial condition.
3
<PAGE>
Insurance and Product Liability Exposure. Because the failure of an
aircraft manufactured by AASI or any other mishap involving such an aircraft may
result in physical injury or death to the occupants of the aircraft or others,
we could be subject to lawsuits involving product liability claims, which
lawsuits may involve claims for substantial sums. Although we intend to obtain
comprehensive product liability insurance prior to the commencement of
commercial sales of our aircraft, such insurance can be expensive and subject to
various coverage exclusions and may not be obtainable by us in the future on
acceptable terms or at all. Further, should we become involved in product
liability litigation, the expenses and damages awarded could be large and the
scope of any coverage may be inadequate. Increased insurance costs and/or
liability costs could require an increase in the price of our aircraft and
therefore could have a negative impact on sales.
Fluctuations in Quarterly Operating Results. AASI expects to derive a
substantial portion of its revenues from the sale of a relatively small number
of aircraft. As a result, a small reduction in the number of aircraft shipped in
a quarter due to, for example, unanticipated shipment reschedulings or
cancellations, supplier delays in the delivery of component parts or unexpected
manufacturing difficulties, could have a material and adverse effect on our
financial position and results of operations for that quarter.
Risks of International Operations. AASI intends to market and sell
its aircraft to foreign customers. Accordingly, AASI will be subject to all of
the risks inherent in international operations, including work stoppages,
transportation delays and interruptions, political instability or conflicts
between countries in which we may do business, foreign currency fluctuations,
economic disruptions, differences in airworthiness and certification standards
imposed by foreign authorities, the imposition of tariffs and import and export
controls, changes in governmental policies (including United States trade
policy) and other factors, including other foreign laws and regulations, which
could have an adverse effect on our business. With respect to international
sales that are denominated in U.S. dollars, an increase in the value of the U.S.
dollar relative to foreign currencies can increase the effective price of, and
reduce demand for, our products relative to competitive products priced in the
local currency. These international trade factors may, under certain
circumstances, reduce demand for our products or our ability to sell aircraft in
particular countries or deliver products in a timely manner or at a competitive
price, which in turn may harm our relationships with its customers. In addition,
foreign certification or equivalent approval is required prior to importing an
aircraft into a foreign country, and we may not receive such certification or
equivalent approval in any country. Our success will depend in part upon our
ability to obtain and maintain foreign certifications or equivalent approvals
and manage international marketing, sales and service operations.
Dependence on Key Personnel; Need for Additional Management Personnel.
AASI's success to date has depended in large part on the skills and efforts of
Dr. Carl Chen, the Company's Chairman and Chief Executive Officer, and, to a
lesser extent, on the skills and efforts of Mr. Gene Comfort, the Company's
Executive Vice President. AASI has obtained key-man life insurance coverage with
respect to Dr. Chen and Mr. Comfort in the face amounts of $2,000,000 and
$1,000,000, respectively, naming AASI as beneficiary. Our future success will
depend to a significant extent on our ability to hire certain other key
employees on a timely basis. Competition for highly-skilled business, product
development, technical and other personnel is intense, and we may not be
successful in recruiting new personnel or in retaining our existing personnel.
AASI will experience increased costs in order to retain and attract skilled
employees. AASI's failure to attract additional qualified employees on a timely
basis or to retain the services of key personnel could have a material adverse
effect on the Company's operating results and financial condition.
Risks of Planned Growth. AASI plans to significantly expand its
operations during the fourth quarter of 2000, which could place a significant
strain on its limited personnel, financial and other resources. We intend to
expand our manufacturing capabilities and commence commercial manufacture of
aircraft shortly after certification, which is expected by the middle of 2001.
Our efforts to conduct manufacturing activities may not be successful, and we
may not be able to satisfy commercial scale production requirements on a timely
and cost-effective basis. Our ability to manage this growth, should it occur,
would require significant expansion of our engineering, production, marketing
and sales capabilities and personnel. We may not be able to find qualified
personnel to fill additional engineering, production, and sales and marketing
positions or be able to successfully manage a larger sales and marketing
organization.
Control by Insiders; Ownership of Shares Having Disproportionate
Voting Rights. Dr. Carl Chen, AASI's Chairman and Chief Executive Officer, and
C.M. Cheng, a Director of the Company, beneficially own, or have voting control
over, shares of AASI's capital stock representing approximately 83% of the total
voting power of AASI. Accordingly, they will continue to be able to elect at
least a majority of AASI's directors and thereby direct the policies
4
<PAGE>
of AASI for the foreseeable future. Furthermore, the disproportionate vote
afforded the shares of Class B Common Stock and Class E Common Stock could also
impede or prevent a change of control of AASI. As a result, potential acquirors
may be discouraged from seeking to acquire control of AASI through the purchase
of Class A Common Stock, which could have a depressive effect on the market
price of our securities.
Limitation on Officers' and Directors' Liabilities Under Delaware Law.
Pursuant to AASI's Certificate of Incorporation, and as authorized under
applicable Delaware law, directors and officers of AASI are not liable for
monetary damages for breach of fiduciary duty, except (i) in connection with a
breach of the duty of loyalty, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
dividend payments or stock repurchases illegal under Delaware law or (iv) for
any transaction in which a director has derived an improper personal benefit.
Possible Adverse Effects of Authorization of Preferred Stock; Anti-
Takeover Provisions; Enhanced Voting Power of Class B Common Stock and Class E
Common Stock. AASI's Certificate of Incorporation authorizes the issuance of a
maximum of 5,000,000 shares of preferred stock on terms which may be fixed by
AASI's Board of Directors without stockholder action. The terms of any series of
preferred stock, which may include priority claims to assets and dividends and
special voting rights, could adversely affect the rights of holders of the
Common Stock. The issuance of any series of preferred stock could make the
possible takeover of AASI or the removal of management of AASI more difficult,
discourage hostile bids or control of AASI in which stockholders may receive
premiums for their shares of Class A Common Stock or otherwise dilute the rights
of holders of Class A Common Stock. In addition, AASI is subject to Delaware
General Corporation Law provisions that may have the effect of delaying,
deferring or preventing certain changes of control of AASI. Furthermore, the
disproportionate vote afforded the Class B Common Stock and Class E Common Stock
could also serve to impede or prevent a change in control of AASI.
Shares Available for Future Sale; Registration Rights. Future sales of
Common Stock by existing stockholders pursuant to Rule 144 under the Securities
Act of 1933, as amended (the "Securities Act"), or otherwise, could have an
adverse effect on the price of AASI's securities. As of July 31, 2000, AASI had
outstanding 8,924,857 shares of Common Stock, 10,400,000 Class A Warrants
(including Class A Warrants originally issued to certain Selling Securityholders
in December 1996), 6,900,000 Class B Warrants (excluding the 10,400,000 Class B
Warrants issuable upon the exercise of the Class A Warrants), 74,300 shares of
Series A 5% Cumulative Convertible Preferred Stock (which are convertible into
2,013,550 shares of Class A Common Stock), and 1,615,000 Warrants which issued
in connection with the sale of the Series A 5% Cumulative Convertible Preferred
Stock. Approximately 2,024,857 of the outstanding shares of Common Stock are
"restricted securities" within the meaning of Rule 144 under the Securities Act.
Pursuant to Rule 144, virtually all of these restricted shares are eligible for
resale. 8,000,000 of the restricted shares are Class E Common Stock, which
shares are not currently transferable and are subject to redemption by AASI for
a nominal consideration if AASI does not meet certain income or stock price
levels, and are convertible into Class B Common Stock if AASI does meet such
levels. The resale of the Common Stock underlying the Preferred Stock has been
registered with the SEC. Sales of Common Stock, or the possibility of such
sales, in the public market may adversely affect the market price of the
securities offered hereby.
Possible Delisting of Securities From the NASDAQ Stock Market. AASI's
Class A Common Stock, Class A Warrants and Class B Warrants are quoted on The
NASDAQ National Market, and its Units of Class A Common Stock and Warrants are
quoted on the NASDAQ SmallCap Market. Although AASI currently meets the minimum
financial requirements for continued inclusion on NASDAQ, for a period of time
in late 1999 and early 2000 it failed to satisfy the NASDAQ National Market
requirement with regard to tangible net assets. Based on that failure, on April
27, 2000, AASI appeared before a NASDAQ hearing panel to demonstrate its
compliance with NASDAQ maintenance standards and its ability to continue to be
in compliance with those standards. The decision of the hearing panel was to
continue the listing of AASI Common Stock on the National Market. There can be
no assurance, however, that AASI will continue to meet the listing standards of
the National Market. If our securities are delisted from the NASDAQ National
Market, trading, if any, in the Class A Common Stock would thereafter be
conducted on the NASDAQ SmallCap Market, or in the over-the-counter markets in
the so-called "pink sheets," or through the NASD's "Electronic Bulletin Board."
Consequently, the liquidity of our securities could be impaired, not only in the
number of securities which could be bought and sold, but also through delays in
the timing of the transactions, reductions in the number and quality of security
analysts' and the news media's coverage of AASI, and lower prices for our
securities than might otherwise be attained.
5
<PAGE>
Risk of Low-Price Stocks. If AASI's securities were to be delisted
from NASDAQ, they could become subject to Rule 15g-9 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), which imposes additional
sales practice requirements on broker-dealers which sell such securities to
persons other than established customers and "accredited investors" (generally,
individuals with net worths in excess of $1,000,000 or annual incomes exceeding
$200,000, or $300,000 together with their spouses). For transactions covered by
this rule, a broker-dealer must make a special suitability determination for the
purchaser and have received the purchaser's written consent to the transaction
prior to sale. Consequently, the rule may adversely affect the ability of
broker-dealers to sell AASI's securities and may adversely affect the ability of
purchasers in the Offering to sell any of the securities acquired hereby in the
secondary market.
Commission regulations define a "penny stock" to be any non-NASDAQ
equity security that has a market price (as therein defined) of less than $5.00
per share or with an exercise price of less than $5.00 per share, subject to
certain exceptions. For any transaction involving a penny stock, unless exempt,
the rules require delivery, prior to any transaction in a penny stock, of a
disclosure schedule prepared by the Commission relating to the penny stock
market. Disclosure is also required to be made about commissions payable to both
the broker-dealer and the registered representative and current quotations for
the securities. Finally, monthly statements are required to be sent disclosing
recent price information for the penny stock held in the account and information
on the limited market in penny stocks.
The penny stock restrictions will not apply to our securities if they
are listed on NASDAQ and have certain price and volume information provided on a
current and continuing basis or if AASI meets certain minimum net tangible
assets or average revenue criteria. There can be no assurance that our
securities will qualify for exemption from these restrictions. In any event,
even if AASI's securities were exempt from such restrictions, it would remain
subject to Section 15(b)(6) of the Exchange Act, which gives the Commission the
authority to prohibit any person that is engaged in unlawful conduct while
participating in a distribution of a penny stock from associating with a broker-
dealer or participating in a distribution of a penny stock, if the Commission
finds that such a restriction would be in the public interest. If our securities
were subject to the rules on penny stocks, the market liquidity for our
securities could be severely and adversely affected.
No Dividends. AASI has paid no dividends to its stockholders since
its inception and does not plan to pay dividends in the foreseeable future. We
intend to reinvest earnings, if any, in the development and expansion of our
business.
Volatility of Stock Price May Increase Number of Shares Issuable Upon
Conversion of Preferred Stock. The stock market from time to time experiences
significant price and volume fluctuations, some of which are unrelated to the
operating performance of particular companies. We believe that a number of
factors can cause the price of our common stock to fluctuate, perhaps
substantially. These factors include, among others:
- Announcements of financial results and other developments
relating to our business;
- Changes in the general state of the economy; and
- Changes in market analyst estimates and recommendations for our
common stock.
Significant downward fluctuations of the price of our stock may
substantially increase the number of shares of common stock issuable upon
conversion of outstanding Series A Preferred Stock as a result of the conversion
formula, which is tied to the market price of the common stock. The consequences
of decreases in the common stock price are more fully discussed below under the
risk factor entitled "The issuance of additional shares of common stock upon
conversion of preferred stock may cause significant dilution of existing
shareholders' interests and exert downward pressure on the price of our common
stock."
The Issuance of Additional Shares of Common Stock Upon Conversion of
Preferred Stock May Cause Significant Dilution of Existing Shareholders'
Interests and Exert Downward Pressure on the Price of Our Common Stock.
Significant dilution of existing shareholders' interests may occur if we issue
additional shares of common stock underlying outstanding shares of preferred
stock. As of July 31, 2000, we had 74,300 shares of Series A Preferred Stock
outstanding. We may issue additional shares of Preferred Stock. The number of
shares of Class A Common Stock issuable upon conversion of the Series A
Preferred Stock may constitute a significant percentage of the
6
<PAGE>
total outstanding shares of our Class A Common Stock, as such conversion is
based on a formula pegged to the market price of the Class A Common Stock. The
formula provides, specifically, that the number of shares of Class A Common
Stock issuable upon the conversion of one share of Series A Preferred Stock is
calculated as $100 (plus any accrued and unpaid dividends on such share) divided
by the conversion price. The conversion price is equal to the lesser of (i) 100%
of the average of the closing bid price of the Class A Common Stock on the last
three trading days before the date of initial issuance of shares of Series A
Preferred Stock, or (ii) 90% of the average of the eight lowest closing bid
prices of the Class A Common Stock during the last 180 trading days before the
date of conversion. Therefore, there is a possibility that the Series A
Preferred Stock may convert to Class A Common Stock at a rate which may be below
the prevailing market price of the Class A Common Stock at the time of
conversion.
The exact number of shares of common stock into which the Series A
Preferred Stock may ultimately be convertible will vary over time as the result
of ongoing changes in the trading price of our common stock. Decreases in the
trading price of our common stock would result in increases in the number of
shares of common stock issuable upon conversion of the Series A Preferred Stock.
The following consequences could result:
- If the market price of our common stock declines, thereby
proportionately increasing the number of shares of common stock
issuable upon conversion of the Series A Preferred Stock, an
increasing downward pressure on the market price of the common
stock might result (sometimes referred to as a downward "spiral"
effect).
- The dilution caused by conversion of Series A Preferred Stock and
sale of the underlying shares could also cause downward pressure
on the market price of the common stock.
- Once downward pressure is placed on the market price of the
Company's stock, the pressure could encourage short sales by
holders of Series A Preferred Stock and others, thus placing
further downward pressure in the price of the Common Stock.
- The conversion of Series A Preferred Stock would dilute the book
value and earnings per share of common stock held by our existing
shareholders.
USE OF PROCEEDS
We expect to sell to the Selling Shareholders, subject to effective
registration and applicable volume and other limitations, up to $20,000,000 of
common stock under the Private Equity Line of Credit Agreement. Additional
amounts may be received if the warrants to purchase common stock issued in
connection with the Private Equity Line of Credit Agreement are exercised. Net
proceeds are determined after deducting all expenses of the offering (estimated
to be $18,200,000).
We intend, in the following order of priority, to use the net proceeds
from this offering (excluding proceeds from warrant exercises), if any, as
follows:
Expenses of Financing
Expenses of Registration, Issuance, and Distribution $ 1,819,808
Working Capital $18,180,192
Total Proceeds $20,000,000
===========
7
<PAGE>
PRICE RANGE OF COMMON STOCK
Our Class A Common Stock is traded on the NASDAQ National Market under
the symbol "AASI." The following table shows the high and low last sale prices
for our Class A Common Stock, as reported on the NASDAQ National Market.
YEAR PERIOD HIGH LOW
Fiscal Year 2000 First Quarter 6.688 2.500
Second Quarter 5.250 2.781
Third Quarter 3.375 2.500
(as of August 15, 2000)
Fiscal Year 1999 First Quarter 4.625 2.875
Second Quarter 4.000 2.750
Third Quarter 3.313 2.000
Fourth Quarter 3.875 1.531
DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock. We
currently anticipate that we will retain all future earnings for use in the
operation and expansion of our business and do not anticipate paying any cash
dividends in the foreseeable future.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR PLAN OF OPERATION SHOULD
BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND THE RELATED NOTES. THIS
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS BASED UPON CURRENT EXPECTATIONS
THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS OUR PLANS, OBJECTIVES,
EXPECTATIONS AND INTENTIONS. OUR ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK
FACTORS," "BUSINESS" AND ELSEWHERE IN THIS PROSPECTUS. SEE "RISK FACTORS."
Certain statements contained in this report, including 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 to
those risks and uncertainties set forth in this Prospectus under the heading
"Risk Factors."
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 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 has not generated
any operating revenues to date and has incurred losses from such activities. The
Company believes it will continue to experience losses until such time as it
commences the sale of aircraft on a commercial scale.
Prior to commencing commercial sales of the JETCRUZER 500, the Company
will need to, among other things, complete the development of the aircraft,
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.
8
<PAGE>
The Company expects to receive progress payments during the
construction of aircraft and final payments upon the delivery of aircraft.
However, the Company believes it will continue to experience losses until such
time as it commences the sale of aircraft on a commercial scale.
The Company has been and will continue its efforts on the following
events:
* Completing Company high-speed cruise flight-testing to assure
customers of the JETCRUZER 500's speed.
* Commencing production of the JETCRUZER 500. Upon the successful
completion of the pressurization and Company speed tests, the
Company immediately will commence production of the first
JETCRUZER 500 planes. The Company anticipates that production
will start in lots of 4 planes per month.
* Starting progress payment collections. As the Company starts the
production process, each customer whose plane is being built will
be requested to make an initial progress payment, as specified in
the customer's purchase contract. The Company believes that this
event will be the start of positive cash flow.
* Obtaining Type Inspection Authorization (TIA). This event marks
the end of Company flight tests and means that the FAA will test
the plane, using its pilots.
* Obtaining an amended Type Certificate (TC) for the JETCRUZER 500
from the FAA. This means that the Company may deliver planes to
its customers.
* Delivering the first JETCRUZER 500. With the delivery of its
first plane, the Company will record its first sales revenue and
cost of goods sold.
* Obtaining a production certificate from the FAA. This will allow
use of the Company's specified inspectors during the production
and delivery processes of the JETCRUZER 500. This certification
should quickly follow the receipt of the TC.
The Company entered into a subscription agreement for the sale of up
to $10,000,000 of 5% Cumulative Convertible Series A Preferred Stock, of which
to date the Company has received net cash proceeds of $6,820,000.
The Company's management believes that its current working capital
with the additional funding obtained in June 2000 will be sufficient to finance
its plan of operations through the end of the third quarter, by which time the
Company expects to have received the initial funding of its new equity line of
$20,000,000. The initial positive cash flow from customer progress payments
should commence shortly after production begins. However, there can be no
assurances that the current timetable for completion of the development and
certification of the aircraft will not be delayed beyond the middle of 2001. If
the Company's estimates prove to be incorrect, or additional sources of
financing prove to be unavailable, if needed, the Company will have to curtail
its development plans.
Liquidity and Capital Resources
At June 30, 2000, our Company had working capital of $3,524,000 and
stockholders' equity of $5,045,000. Since its inception in January 1990, our
Company has experienced continuing negative cash flow from operations, which,
prior to the December 1996 IPO, resulted in our inability to pay certain
existing liabilities in a timely manner. Our Company has financed its operations
through private funding of equity and debt and through the proceeds generated
from its December 1996 initial public offering.
We expect 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. Our working capital requirements will depend upon
numerous factors, including the level of resources devoted by the Company to
9
<PAGE>
the scale-up of manufacturing and the establishment of sales and marketing
capabilities and the progress of our research and development program for the
JETCRUZER 500 and other proposed aircraft.
Our management team has developed a financial plan to address its
working capital requirements. We entered into a subscription agreement for the
sale of up to $10,000,000 of 5% Cumulative Convertible Series A Preferred Stock,
of which the Company has received net proceeds of $6,820,000 through July 31,
2000.
While there is no assurance that additional financing will be
available, our Company's management believes that it has developed a financial
plan that, if executed successfully, will substantially improve our ability to
meet our working capital requirements. This financial plan includes the
commencement of production and the collection of progress payments to assist
with the working capital requirements. However, there can be no assurances that
the current timetable for completion of the development and certification of the
aircraft will not be delayed beyond the middle of 2001. It is anticipated
production will commence shortly after certification. If our estimates prove to
be incorrect, or additional sources of financing prove to be unavailable, if
needed, we will have to curtail our development plans.
In November 1998 we moved into our manufacturing and headquarters
facility. The primary financing for this project was our 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"). We were 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 IDBs
which was to expire on August 5, 2002, if not terminated earlier by the Company
or the Bank. The IDBs were retired in 1999 and the stand-by letter of credit in
favor of the holders of the IDBs was terminated by the Company.
In June, 1999, we sold our 200,000 square-foot building to The Abbey
Company and now lease it back. The purchase price of the building was $9,800,000
and the term of the lease is eighteen years plus an option to extend the lease
for an additional ten years. Monthly payments under the terms of the leaseback
are approximately $106,000 and will be adjusted annually, after the first year,
for changes in the Consumer Price Index, not to exceed 3% per annum. The rent
for periods after the eighteenth year would be at fair market rental value.
We lease approximately 10 acres of land located on the Long Beach
Airport in Long Beach, California. The lease commenced on January 14, 1999 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. An escalation
clause in the lease increases the monthly rent to $7,400 beginning July 1999.
The lease contains incremental increases that escalate the monthly rent to
approximately $15,600 after 5 years.
We had no material capital commitments at June 30, 2000, other than
those discussed elsewhere in this prospectus. We intend 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 12
months, including engineers and manufacturing technicians necessary to produce
its aircraft.
Seasonality
The Company believes its business is not seasonal.
Conversion of Performance Shares
In the event our Company attains certain earnings thresholds or our
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 we attain such earnings thresholds or stock price
levels, we will recognize a substantial charge to earnings during the period in
which such conversion occurs, which would have the effect of increasing our
Company's loss or reducing or eliminating its earnings, if any, at that time. In
the event our 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.
10
<PAGE>
BUSINESS
Overview
Our Company is a development stage enterprise organized in 1990 to
design, develop, manufacture and market propjet and jet aircraft intended
primarily for business use. We have 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"). We are modifying the JETCRUZER 450 to develop a
six-seat (including pilot), pressurized version of such aircraft for commercial
sale (the "JETCRUZER (TM)500") which, we anticipate, will takeoff and land in
less than 2,000 feet, be able to fly at 30,000 feet above sea level, and have a
high cruise speed of approximately 345 mph and a capability of flying from Los
Angeles to New York with only one stop.
Our Company began development of the JETCRUZER 450 in 1990 and
obtained the FAA Type Certificate approval in 1994. Throughout this period, we
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 our 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 our Company and the FAA from 1992 through 1994. We received the FAA
Type Certificate for the JETCRUZER 450 on June 14, 1994.
Although we received preliminary written indications of interest to
purchase the aircraft, we decided that we 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 we believe reduce the commercial viability
of the JETCRUZER 450. Instead, our 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 our Company anticipates will not be
subject to the limitations imposed by the existing Type Certificate.
Our Company has not generated any operating revenues to date and has
incurred losses from its operating activities, including program development
costs, of $5,600,000 and $6,500,000 in 1999 and 1998, respectively. Our Company
believes it will continue to experience losses until such time as it commences
the sale of aircraft on a commercial scale. Research and development expenses
have consisted primarily of the costs of personnel, facilities, materials and
equipment required to conduct our development activities. Such expenses
aggregated $50,412,000 from inception through December 31, 1999. 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 and the
STRATOCRUZER 1250 "See Other Aircraft".
Industry Background
The general aviation industry comprises essentially all nonmilitary
aviation activity other than scheduled and 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.
Purchasers of general aviation aircraft include corporations,
governments, the military, the general public and 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, freight, equipment 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.
11
<PAGE>
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. Aircraft
deliveries by United States manufacturers have increased consistently with sales
generating approximately $3.1 billion in 1996, $4.8 billion in 1997, $5.9
billion in 1998 and $7.9 billion in 1999.
Strategy
Our objective is to become a worldwide market leader in the sale and
manufacture of small business aircraft. To achieve this objective, we intend to
focus on the performance, efficiency and safety of our proposed aircraft, which
will differentiate these aircraft from our competition. Our strategy is to
capitalize on a perceived lack of low-priced, high-performance aircraft in the
marketplace. Our Company believes that its ability to offer an aircraft which
out performs competitive aircraft at a reduced cost will enable us to penetrate
the world business, private and government aircraft markets. Additionally, our
Company intends to expend substantial resources on a worldwide sales and
marketing program to position itself with potential customers.
We believe that aircraft sales are heavily dependent on the quality
and safety of a company's products. Accordingly, we intend to maintain high
quality and safety standards in all aspects of the design and manufacture of our
proposed aircraft. For example, we believe 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, our Company believes that the
reliability of its component suppliers, such as Pratt & Whitney, the engine
manufacturer, will be viewed favorably by potential customers.
Our 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. Our
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 our Company's smaller size as compared to
its competitors, resulting in our Company's ability to contain administrative
costs and the overhead expenses allocable to the development process.
Additionally, our Company's Southern California location is home to a number of
workers from recently downsized aerospace and defense companies who our Company
was able to hire to assist in the certification of the JETCRUZER 450. These
employees provided us with an expertise in testing, certifying, tool and jig
manufacturing and other aspects of the certification process that would not
otherwise have been available to us.
Our Company believes that it will be able to control manufacturing
costs by producing most of the tooling, jigs, dies and molds in-house required
for the manufacture of its aircraft. Also, because our Company produces the
airframe and most of the associated components of its aircraft in-house, it will
have greater control over the production process; and we believe that this
control will also help keep construction and certification costs at reduced
levels.
Aircraft
General. Our aircraft are based on a canard wing design in which a
-------
smaller wing (the "canard") is installed in front of the aircraft's main wing.
We believe 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.
We believe 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, in part, 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 our
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.
12
<PAGE>
Management also believes that our aircraft will provide performance
advantages over competitors' models, including better handling characteristics
and increased speed. Based on the reports of its test pilots, our 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 our 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 are
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 500. The JETCRUZER 500 is a six-seat (including pilot),
-------------
high performance single engine propjet with conventionally constructed wings
made from aluminum attached to a fuselage formed from a high-strength graphite
nomex honeycomb composite material. The aircraft has a canard configuration with
two lift-producing surfaces and no conventional wing flaps. The JETCRUZER 500 is
powered by a Pratt & Whitney PT6A-66A propjet engine located at the rear of the
aircraft. The JETCRUZER 500 is a modified version of the JETCRUZER 450.
In June 1994, the FAA awarded us a Type Certificate for the JETCRUZER
450, which is a non-pressurized propjet aircraft powered by a smaller Pratt &
Whitney engine. However, the Type Certificate is subject to a number of FAA
limitations that were imposed as a result of the aircraft's early stage of
development. For example, the maximum number of occupants was limited to five,
as compared to the six passenger (including pilot) design configuration of the
JETCRUZER 500, and the maximum operating speed was limited to 178 mph, as
compared to the approximately 345 mph design speed of the JETCRUZER 500. We are
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 our Company, including
adding a larger fuselage, pressurization, environmental systems, de-icing
capability, and autopilot certification, all of which have been necessary to
produce the JETCRUZER 500 for commercial sale. Two model 500's have already been
produced and flown with the next two anticipated to be completed in the third
and fourth quarters of 2000. The entire JETCRUZER program has almost a thousand
hours of flight testing. Several hundred additional hours of testing will be
required to obtain the amendment of the Type Certificate. We anticipate the
certification amendment will be received in the middle of 2001. 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, we believe that the JETCRUZER 500 will carry six passengers
(including pilot) and have a cruise speed of approximately 345 mph. We also
believe that the aircraft should be able to climb at approximately 2,600 feet
per minute, cruise at an altitude of 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 our
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 currently is available
for commercial sale at a base price of $1,495,000.
Other Aircraft
STRATOCRUZER(R) 1250. We currently intend to further develop a twin
--------------------
engine jet aircraft called the STRATOCRUZER 1250. The STRATOCRUZER 1250, will 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 41,000 feet. The
STRATOCRUZER 1250 will be able to takeoff in less than 3,200 feet and land in
less than 3,000 feet. The
13
<PAGE>
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. We believe 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 our Company currently possesses. Therefore, there can be no
assurance that we 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.
Manufacturing
Our 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. We are is in the process of obtaining and producing
additional sets of the equipment necessary for production of the JETCRUZER 500.
Our 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. Our 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 spar milling and painting. The manufacturing process for
our aircraft is highly technical and requires skilled assembly technicians. We
believe 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 us.
The equipment and procedures used by our Company for manufacturing
must be certified, and are subject to inspection and continuing oversight, by
the FAA.
Our Company has a complete in-house computer design system, with
interactive, computer-aided design ("CAD") capabilities. We maintain 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 our precision tools and gauges are certified by the National
Bureau of Standards.
Our 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, our 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 us.
Marketing, Distribution and Service
Our Company has developed an in-house sales and marketing 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.
14
<PAGE>
Our 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. We participated 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 our aircraft
to potential purchasers and increases overall awareness of our products. We also
promote general knowledge of our products by issuing press releases to aviation
magazines and newspapers. We also use paid advertising in trade magazines,
general interest flying magazines and international business magazines to
promote its products.
Management anticipates that most of our aircraft will be sold to
corporations for transportation of their personnel, guests and company property.
We have developed direct marketing programs to target such corporations. Our
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
transportation, surveillance, mapping photography, forest fire detection, and
fractional use entities who purchase one or more aircraft and sell interests in
each aircraft to several persons or entities. Our 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 FAA regulations effective as of May 4, 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. We believe
that the affect of this FAA resolution will be to open up new markets for the
JETCRUZER 500.
We intend to provide referral assistance to customers who require
financing to complete the purchase of an aircraft from us. 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 our
Company upon the receipt of evidence of export sales commitments.
Service. Our aircraft will be serviced primarily by fixed base
-------
operations ("FBOs") authorized by us. FBOs 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 us, 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. Our 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 our aircraft, such as engines and avionics, will be provided by the
manufacturers of those systems.
Suppliers
We rely 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 our 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. We have
contractual rights to engines from Pratt & Whitney. The failure of suppliers or
subcontractors to meet our performance specifications, quality standards or
delivery standards or schedules could have a material adverse effect on our
operations. Moreover, our Company's ability to significantly increase its
production rate following the introduction of the JETCRUZER 500 could be limited
by the ability or willingness of its key suppliers to increase their delivery
rates.
Competition
The JETCRUZER 500 will compete against several other types of
aircraft, including new and used single and multi-engine propjets and high-end
piston powered aircraft. Management believes its aircraft will be differentiated
from its competition based primarily on the aircraft's price and performance.
Single engine propjets have only recently come
15
<PAGE>
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 propjet competition for the JETCRUZER consists of three
aircraft. The Cessna Caravan is all metal and sells for $1.4 million and has a
high speed of 160 kts, a landing gear that does not retract, no pressurization
and is designed basically for freight use. Cessna delivered 700 Caravans in 7
years and received an order for 100 aircraft from one customer. The Company also
expects competition from the TBM 700. Made in France from metal, it has a
similar passenger capacity and performance to the JETCRUZER, but its $2.6
million price tag is almost double that of the JETCRUZER. The last competitor is
the Pilatus PC-12. Made in Switzerland from metal, it has a lower airspeed of
270 kts and sells for almost double the price of the JETCRUZER at $2.4 million.
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, lightweight graphite composites, high performance and is one of the
lowest priced propjets in the world.
An additional competitor to the JETCRUZER 500 could be 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. We believe that piston aircraft such as the Mirage,
and propjet aircraft such as the JETCRUZER 500 compete for different customers
based on performance, speed and reliability. However, the price differential may
induce certain purchasers to select the lower-priced piston aircraft.
We believe that the JETCRUZER 500 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.
Most of our competitors are substantially larger in size and have far
greater financial, technical, marketing, and other resources than we do. Certain
of our 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 our aircraft. Therefore, there
can be no assurance that future technological changes or marketing initiatives
on the part of our competitors will not have a material adverse effect on our
ability to market our 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.
Our Company, however, believes that it may be able to attract purchasers who
might otherwise acquire a used aircraft by emphasizing the price, performance
and technology, of our aircraft.
Product Liability and Insurance. The failure of an aircraft
-------------------------------
manufactured by our 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, we could be subject to lawsuits involving product liability
claims. We intend 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 us on acceptable terms or at
all. Further, should we become involved in product liability litigation, the
expenses and damages awarded could be large and the scope of any coverage may be
inadequate. Our Company has obtained other insurance as needed, including flight
test insurance for its pilots and aircraft used during the FAA certification
process.
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 our
operations.
16
<PAGE>
Certification. On June 14, 1994, we 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.
Our Company is in the process of amending its Type Certificate with respect
to the JETCRUZER 450 to include the JETCRUZER 500. Our 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, our Company has accomplished, among other things, (a)
the filing of an appropriate application with the FAA, (b) development and
submission to the FAA of an appropriate design and substantiating data and
receipt of FAA approval that such design and data comply with applicable FAA
airworthiness standards, (c) development and receipt of FAA approval of a flight
test plan, (d) construction of an initial prototype JETCRUZER 500 for use in
flight testing and construction of a flight test Jetcruzer 500, currently in
flight testing, and (e) completion of fuselage pressurization tests. We must
accomplish the following before receiving an amendment to our 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, our Company believes that it can obtain an amended certificate for the
JETCRUZER 500 during the middle of 2001.
Our Company intends to obtain a FAA production certificate for the
commercial production of its aircraft. In order to obtain a production
certificate, we must commence production of an aircraft and make application for
the certificate. The FAA will regularly inspect our Company's facilities and
procedures during the production process.
When the initial aircraft is nearly complete, we 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 our
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 we believe will be five to six months in the
case of the JETCRUZER 500. The Company expects to obtain the production
certificate during the middle of 2001.
There can be no assurance that our Company will not encounter a delay in
obtaining a production certificate for its planned aircraft models or
airworthiness certificates for individual aircraft.
Our 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 us is in doubt. If the FAA were to suspend or revoke our
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 our 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. Foreign authorities could impose similar obligations upon our Company
as to
17
<PAGE>
aircraft within their jurisdiction. Any or all of the above occurrences could
expose us 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 our 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 our 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 our 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. Our
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. Our 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 July 31, 2000 the Company had 108 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.
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Carl Leei Chen, Ph.D 55 Chairman of the Board,
President, Chief Executive
Officer, Director and Director
Nominee
C.M. Cheng 55 Consultant to the Company,
Director and Director Nominee
James A. Lovell 71 Director and Director Nominee
S.B. Lai, Ph.D. 49 Director and Director Nominee
Other Officers:
Gene Comfort 56 Executive Vice President and
General Manager
David M. Turner, CPA 65 Vice President Finance and
Administration, Chief Financial
Officer, and Secretary
Michael W. Lai 52 Vice President Engineering
</TABLE>
18
<PAGE>
Directors serve until the next annual meeting or until their successors are
elected or appointed. All officers are appointed by and serve at the discretion
of the Board of Directors, other than Dr. Chen, who has an employment agreement
with the Company. See Management - Employment Agreement. There are no family
relationships between any directors or officers of the Company.
Dr. Carl L. Chen is the founder of the Company and has been its President
and a director since the Company's incorporation in January 1990 and the Chief
Executive Officer of the Company since December 1994. From January 1992 to
October 1995, Dr. Chen served as President, and since January 1992 has been a
minority stockholder, of Union China Investment and Development Group, Inc.
(Union China), a company located in Monterey Park, California, which was formed
to invest in commercial real estate. Union China confirmed a plan of
reorganization pursuant to Chapter 11 of the Federal bankruptcy laws in August
1995. The bankruptcy case for Union China was closed in May 1996 pursuant to a
Final Decree and Order Closing Case entered by the Bankruptcy Court for the
Central District of California. Since January 1992, Dr. Chen has served as the
President of California Aerospace Technology, Inc., a consulting company for the
satellite industry, located in Monterey Park, California. Dr. Chen was Chairman
of SIDA Corporation, a high technology trading company located in Monterey Park,
California, from 1989 to May 1996. Prior to founding the Company in 1990, Dr.
Chen was a Satellite System Engineering Manager at Hughes Space and
Communications, Inc. for 15 years. Dr. Chen has a Ph.D. in Engineering from the
California Institute of Technology and Masters Degrees in Control Engineering
and Aerospace Engineering from UCLA and West Virginia University, respectively.
Dr. Chen is a graduate of the Owner/President Management program at the Graduate
School of Business Administration of Harvard University.
C.M. Cheng is a consultant to the Company and has served as a director of
the Company since June 1996. Since April 1996, Mr. Cheng has been a Vice
President of Eurotai International, Ltd., a private company located in Taipei,
Taiwan, which distributes health food products. From 1984 to April 1996, Mr.
Cheng served as a Vice President, Director of the Office of the President, and
Manager of Corporate Planning with Taiwan Yeu Tyan Machinery, Mfg. Co. Ltd., a
public company located in Taipei, Taiwan, which manufactures automobiles and
heavy equipment. From 1980 to 1983, Mr. Cheng was an Associate Professor of
Economics and Management at Taiwan National Sun-Yet-Sen University. Mr. Cheng is
the director of Harpa Limited, a corporation organized under the laws of the
Cayman Islands (Harpa), a principal stockholder of the Company. See Certain
Relationships and Related Transactions and Principal Shareholders.
James A. Lovell Jr. is the former spacecraft commander of the Apollo 13
mission. He currently is the President of Lovell Communications, a business
devoted to disseminating information about the United States Space Program.
Prior to that he was Executive Vice President of Centel Corporation. Mr. Lovell
is a Fellow in the Society of Experimental Test Pilots and a member of the
Golden Eagles. He has been granted many honors and awards, including the
Presidential Medal for Freedom, the French Legion of Honor and the Congressional
Space Medal of Honor. In 1994 he and Jeff Kluger wrote Lost Moon, the story of
the Apollo 13 mission.
S. B. Lai has served as director of the Company since October 1997. Mr. Lai
is currently a Professor with the Graduate School of Business Administration,
National Chengchi University, Republic of China; the Secretary General, Chinese
Management Association, Republic of China; a third term Republic of China
National Assemblyman, Republic of China; and is Judge and Committeeman of the
National Quality Award. Over the past five years, Mr. Lai has also served as a
Director of the Ta-Yeh University, Republic of China; Secretary General of the
Chinese Management Association, Republic of China; and is a consulting
committeeman for the Ministry of Economic Affairs and the Ministry of Education
Affairs of the Republic of China. Mr. Lai received a BSME and MBA from National
Cheng-Kung University and a MSISE and Ph.D. from the University of Southern
California.
Gene Comfort has been the Executive Vice President and General Manager of
the Company since September 1995. He served as a director of the Company from
May 1996 through March 2000. From July 1993 to September 1995, Mr. Comfort was
the Vice President-Marketing of the Company, and he was the Director of
Marketing of the Company from April 1991 to July 1993. Mr. Comfort has been
involved in the aircraft industry for over 25 years in a variety of marketing,
sales and management positions. Mr. Comfort is a single and multi engine rated
pilot.
David M. Turner, CPA joined the Company in January 1997. Prior to that,
from 1994, he served as the Chief Financial Officer of Taitron Incorporated, a
publicly held company that distributes discrete semiconductors. From 1991 to
1994, Mr. Turner was President and sole owner of Maynard Enterprises,
Incorporated, a privately held consulting
19
<PAGE>
business working primarily in the health care industry. From 1988 to 1991, Mr.
Turner was the Chief Financial Officer and Corporate Vice President of Finance
of the Greater Southeast Management Company, a Washington D.C. company that
operated an inner city health care system, which included two hospitals, three
nursing homes and several subsidiary health care companies in the Mid Atlantic
area. During the same period, Mr. Turner was President and a Director of Greater
Southeast Asset Management Company, the asset-holding subsidiary of the Greater
Southeast Healthcare System. Mr. Turner received a Master of Business of
Administration from the University of Cincinnati.
Michael W. Lai joined the Company in May 1, 1998. Mr. Lai is in charge of
Engineering operations for the high performance JETCRUZER(TM) 500 single engine
propjet aircraft and the long range, STRATOCRUZER(TM) twin jet aircraft. He
brings a vast and extensive Aerospace, Engineering and Management background to
AASI as Director, President, General Manager and Design Engineer for major
aerospace corporations. Mr. Lai's impressive background includes; Design
Engineer for Volpar Inc., on 707, 727 and DC-9 aircraft, Airframe Designer for
Saunders Aircraft Corp., Ltd. Gimli Canada on ST-27 commuter aircraft and
Associate Engineer for Continental Airlines, on DC-9, DC-10 and Boeing 727
commercial aircraft. Mr. Lai is a FAA, FAR 23 and 25 Designated Engineering
Representative (DER) in Airframes, Structures, Systems and Equipment. He is a
licensed pilot and has a Masters in Systems Engineering from West Coast
University, Los Angeles, CA, a B.S. in Applied Mathematics (Engineering Option)
and an A.A. in Aircraft Maintenance Technology from Northrop institute of
Technology, Inglewood CA. Mr. Lai also holds FAA, A&P and Transport Canada,
Aircraft maintenance Licenses AML.
The Board of Directors held three meetings in 1999 and all Directors were
present at each meeting. The Board of Directors has a Compensation Committee,
which makes recommendations to the Board concerning salaries and incentive
compensation for officers and employees of the Company. The members of the
Compensation Committee are Messrs. Lai and Lovell. The Board of Directors also
has an Audit Committee which reviews the results and scope of the audit and
other accounting related matters. The members of the Audit Committee are
currently Messrs. Lai and Lovell. Both committees held three meetings during
1999.
The Company has agreed to nominate a designee of the Underwriter of its
recent public offering who is reasonably acceptable to the Company for election
to the Company's Board of Directors, if so requested by the Underwriter, for a
period of five years from December 6, 1996.
MANAGEMENT
Executive Compensation
The following tables set forth certain information as to the Company's
Chief Executive Officer and each of the Company's four most highly compensated
executive officers whose total annual salary and bonus for the fiscal year
ending December 31, 1999 exceeded $100,000:
SUMMARY COMPENSATION TABLE
Annual Compensation/(1)/
<TABLE>
<CAPTION>
Name and Principal Position Year Salary Bonus Other
Compensation
<S> <C> <C> <C> <C>
Carl L. Chen, Ph.D. 1999 $191,000 $0 $39,248/(2)/
Chairman and Chief Executive 1998 $200,000 $0 $39,248/(2)/
Officer 1997 $200,000 $0 $39,248/(2)/
Gene Comfort 1999 $143,000 $0 $ 0
Executive Vice President 1998 $160,961 $0 $ 0
1997 $150,000 $0 $ 0
</TABLE>
/(1)/ The compensation described in this table does not include medical
insurance, retirement benefits and other benefits which are available
generally to all employees of the Company and certain perquisites and
other personal benefits, the value of which did not exceed the lesser of
$50,000 or 10% of the executive officer's compensation in the table.
/(2)/ Represents premium for life insurance paid by the Company on behalf of Dr.
Chen.
20
<PAGE>
Employment Agreement
The Company entered into an eight-year employment agreement (the Chen
Employment Agreement) with Dr. Carl Chen, the Company's, Chairman, Chief
Executive Officer and President, commencing in May 1996. The Chen Employment
Agreement provides that, in consideration for Dr. Chen's services, he is to be
paid an annual salary of $200,000. He will receive increases in salary and
bonuses as deemed appropriate by the Board of Directors. The Company will
maintain life insurance coverage on Dr. Chen, and Dr. Chen may name the
beneficiary of such policy. The Chen Employment Agreement also provides that he
will not compete with the Company during the term of the Agreement and for
eighteen months thereafter and that, if Dr. Chen's employment is terminated by
the Company without cause (as defined therein), he will receive up to eighteen
months' salary as severance, payable monthly commencing on the thirtieth day
following such termination without cause.
Compensation of Directors
Non-employee directors receive $2,000 for each Board of Directors meeting
attended. The Company pays all out-of-pocket expenses of attendance.
Principal Shareholders
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of March 31, 2000 by (i) each person
who is known by the Company to own beneficially more than 5% of any class of the
Company's outstanding voting securities, (ii) each of the Company's directors
and executive officers, and (iii) all officers and directors of the Company as a
group.
<TABLE>
<CAPTION>
Title of Class Name and Address of Common Stock Percent of
Beneficial Owner/(1)/ Beneficially Ownership
Owned/(2)/
<S> <C> <C> <C>
Class A Common Stock Dr. Carl L. Chen/(3)/ 75,000 1.05%
Class B Common Stock 826,751 43.5%
Class E-1 Common Stock 1,653,503 41.34%
Class E-2 Common Stock 1,653,503 41.34%
Class A Common Stock Gene Comfort/(4)/ 24,400 .34%
Class B Common Stock 60,001 3.15%
Class E-1 Common Stock 120,000 3.00%
Class E-2 Common Stock 120,000 3.00%
Class A Common Stock C.M. Cheng/(4)//(5)/ 24,000 .34%
Class B Common Stock 1,013,572 53.33%
Class E-1 Common Stock 2,027,144 50.67%
Class E-2 Common Stock 2,027,144 50.67%
Class A Common Stock James A. Lovell Jr./(4)/ 20,000 .3%
Class A Common Stock S.B. Lai, Ph.D./(8)/ 14,000 .2%
Class A Common Stock David Turner/(9)/ 18,100 .2%
Class A Common Stock All executive officers 155,700 2.0%
Class B Common Stock and directors as a 1,900,324 100%
Class E-1 Common Stock group (6 persons) 3,800,647 95.02%
Class E-2 Common Stock 3,800,647 95.02%
Class B Common Stock Harpa Limited/(7)/ 1,013,572 53.33%
Class E-1 Common Stock 2,027,144 50.67%
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Title of Class Name and Address of Common Stock Percent of
Beneficial Owner/(1)/ Beneficially Ownership
Owned/(2)/
<S> <C> <C> <C>
Class E-2 Common Stock 2,027,144 50.67%
Class B Common Stock Shih Jen Yeh/(7)/ 1,013,572 53.33%
Class E-1 Common Stock 2,027,144 50.67%
Class E-2 Common Stock 2,027,144 50.67%
Class B Common Stock Chyao Chi Yeh/(7)/ 1,013,572 53.33%
Class E-1 Common Stock 2,027,144 50.67%
Class E-2 Common Stock 2,027,144 50.67%
Class A Common Stock Fidelity Management 487,500 8.80%
Research Company/(10)/
</TABLE>
(1) Except as otherwise indicated, the address of each principal stockholder
is c/o the Company at 3205 Lakewood Blvd., Long Beach, California 90808.
The Company believes that all persons named have sole voting power and
sole investment power, subject to community property laws where
applicable.
(2) The Common Stock of the Company is divided into four classes. Each share
of Class B Common Stock, Class E-1 Common Stock and Class E-2 Common Stock
is entitled to five votes per share, and Class A Common Stock is entitled
to vote per share. The shares of Class E Common Stock are subject to
redemption by the Company if the Company does not achieve certain income
or market price levels.
(3) Includes 200,000 shares of Class E-2 Common Stock held by Julie C. Chen,
as trustee of the Eric F. Chen Trust under Declaration of Trust dated
August 31, 1996, for the benefit of Eric F. Chen, Dr. Chen's son. Julie
Chen is Dr. Chen's sister-in-law. Dr. Chen disclaims beneficial ownership
of the 200,000 shares held by the Trust for the benefit of his son.
Excludes 25,000 shares of Class A Common Stock issuable upon the exercise
of options not exercisable within 60 days and includes options for 75,000
shares of Class A Common Stock which are currently exercisable.
(4) Excludes 15,000 shares of Class A Common Stock issuable upon the exercise
of options which are not exercisable within 60 days and includes options
for 20,000 shares of Class A Common Stock which are currently exercisable.
(5) Includes 5,217,860 shares of Common Stock held by Harpa Limited, a Cayman
Island corporation (Harpa). C.M. Cheng is a director of Harpa and has sole
voting and investment control over the shares of Common Stock held by
Harpa and thus may be deemed to beneficially own such shares. Mr. Cheng
disclaims beneficial ownership of such shares. The address of Harpa is c/o
Citco Trust Company Limited., Corporate Center, West Bay Road, P.O. Box
31106 SMB, Grand Cayman, Cayman Islands, B.W.I.
(6) Common Stock beneficially owned is Class A Common Stock, which was
contained in 15,000 Units purchased by Mr. Gorlin in March and April 1997.
Excludes 20,000 shares of Class A Common Stock issuable upon the exercise
of options not exercisable within 60 days and includes options for 10,000
shares of Class A Common Stock issuable upon the exercise of options which
are currently exercisable.
(7) The voting stock of Harpa is currently held equally by Shih Jen Yeh and
Chyao Chi Yeh, who are children of Song Gen Yeh, the former Chairman and
principal stockholder of the Company. See Certain Transactions. The
address of Mr. Shih Jen Yeh and Mr. Chyao Chi Yeh is 14th Floor, No. 55,
Section 2, Chung-Cheng Road, Shih-Lin District, Taipei, Taiwan.
(8) Excludes 20,000 shares of Class A Common Stock issuable upon the exercise
of options which are not exercisable within 60 days and includes options
for 10,000 shares of Class A Common Stock issuable upon the exercise of
options which are currently exercisable.
(9) Excludes 12,000 shares of Class A Common Stock issuable upon the exercise
of options which are not exercisable within 60 days and includes 18,000
shares of Class A Common Stock issuable upon the exercise of options.
(10) The address for Fidelity Management Research Company is 82 Devonshire
Street, Boston, Massachusetts 02109.
Certain Relationships and Related Transactions
From January 1990 through December 1993, Mr. Song Gen Yeh, who was at
that time a principal stockholder and director of the Company, advanced funds to
the Company in the aggregate amount of $10,478,000. In December 1993, the
Company entered into an agreement with Mr. Yeh to repay such advances through
the issuance of 584,074 shares of Class B Common Stock, 1,168,148 shares of
Class E-1 Common Stock, and 1,168,148 shares of Class E-2 Common Stock of the
Company. Such shares were issued to Mr. Yeh in June 1996. From 1994 through
1995, Mr. Yeh provided additional advances to the Company aggregating $250,000.
In June 1996, such advances were repaid by the Company through the issuance of
13,937 shares of Class B Common Stock, 27,873 shares of Class E-1 Common Stock,
and 27,873 shares of Class E-2 Common Stock. Such shares were subsequently
transferred to Harpa Limited (Harpa),
22
<PAGE>
a Cayman Islands corporation the voting stock of which is controlled by two of
Mr. Yeh's children. C.M. Cheng, a director of the Company, is the Director of
Harpa and, as such, has the power to vote the shares of the Company's Common
Stock held by Harpa. See Principal Stockholders.
In January 1990, the Company entered into a five-year agreement (the
Management Agreement) with SIDA Corporation (SIDA). Dr. Carl L. Chen, the
Chairman, Chief Executive Officer and President of the Company, was, at that
time, a principal stockholder of SIDA, and the other two stockholders of SIDA
were also, at that time, stockholders of the Company. The Management Agreement
provided for annual payments to SIDA of $140,000 for management services
consisting essentially of those customarily performed by the President of a
company. The SIDA agreement expired by its terms in January 1995. As of June 30,
1996, SIDA was owed $259,000 of unpaid management fees. This amount, together
with accrued interest of $64,000 through August 30, 1996, was paid from the
proceeds of a Bridge Financing in September 1996. In October 1993 and February
1994, the Company obtained loans from SIDA in the aggregate principal amount of
$110,000, bearing interest at 12%. These loans, together with accrued interest
of $31,000, were repaid from the proceeds of the Bridge Financing in September
1996.
In February and July 1994, the Company received loans in an aggregate
principal amount of $565,000, bearing interest at a rate of 12%, from four
individuals who were at the time not affiliated with the Company. One of such
persons, C.M. Cheng, became a director of the Company in June 1996. These loans,
together with accrued interest of $161,000, were repaid with the proceeds of the
Bridge Financing in September 1996.
In December 1994, the Company entered into a New Management Agreement (the
New Management Agreement) with Dr. Chen which took effect in January 1995.
Pursuant to the New Management Agreement, Dr. Chen agreed to serve as the
Company's President and Chief Executive Officer. The New Management Agreement
had a term of 10 years and provided that Dr. Chen was to receive a signing bonus
of 139,365 shares of Class B Common Stock, 278,730 shares of Class E-1 Common
Stock, and 278,730 shares of Class E-2 Common Stock, an annual salary of
$350,000, and additional annual compensation payable in 147,727 shares of Class
B Common Stock, 295,454 shares of Class E-1 Common Stock, and 295,454 shares of
Class E-2 Common Stock. In May 1996, Dr. Chen agreed to terminate the New
Management Agreement. Pursuant to the New Management Agreement and in connection
with its termination, the Company issued a total of 577,823 shares of Class B
Common Stock, 1,155,647 shares of Class E-1 Common Stock, and 1,155,647 shares
of Class E-2 Common Stock to Dr. Chen. At June 30, 1996, $144,000 remained
accrued and unpaid under the New Management Agreement. This amount was paid to
Dr. Chen with the proceeds of the Bridge Financing in September 1996.
In May 1996 the Company entered into an Employment Agreement with Dr. Chen
pursuant to which he agreed to serve as its Chairman, Chief Executive Officer
and President. See Management Employment Agreement. As of August 31, 1996,
compensation of $69,000 was accrued and unpaid under this Agreement. This amount
was paid from the proceeds of the Bridge Financing in September 1996. From
September 1995 through August 1996, Dr. Chen made loans bearing interest at a
rate of 12% to the Company in the aggregate principal amount of $562,000. In May
1996, Dr. Chen agreed to convert $336,000 of these loans into 187,118 shares of
Class B Common Stock, 374,236 shares of Class E-1 Common Stock, and 374,236
shares of Class E-2 Common Stock. The remaining $226,000 principal amount of
these loans, together with $36,000 of accrued interest, was repaid with the
proceeds of the Bridge Financing in September 1996.
In 1994 and 1995, the Company obtained loans from General Bank in the
aggregate principal amount of $900,000. This loan bore interest at the prime
rate plus 1.5% and had a maturity date of October 1996. Repayment of the loan
was guaranteed by the Small Business Administration, the California Export
Finance Office and Dr. Chen and was secured by substantially all the assets of
the Company. The total outstanding balance of the loan of approximately $915,000
(including accrued interest) was repaid from the proceeds of the Bridge by them
and will reimburse such persons for their reasonable charges and expenses in
connection therewith.
DESCRIPTION OF SECURITIES
The following description of the capital stock of the Company and certain
provisions of the Company's Certificate of Incorporation and Bylaws is a summary
and is qualified in its entirety by the provisions of the Certificate of
Incorporation and Bylaws, which have been filed as exhibits to the Company's
Registration Statement of which this Prospectus is a part.
23
<PAGE>
The authorized capital stock of the Company currently consists of
60,000,000 shares of Class A Common Stock, $.0001 par value (giving effect to
the amendment to the Company's Certificate of Incorporation in November 1996),
10,000,000 shares of Class B Common Stock, $.0001 par value, 4,000,000 shares of
Class E-1 Common Stock, $.0001 par value, 4,000,000 shares of Class E-2 Common
Stock, $.0001 par value, and 5,000,000 shares of Preferred Stock, $.0001 par
value. As of August 21, 2000, there were outstanding 1,900,324 shares of Class B
Common Stock (held of record by four stockholders), 4,000,000 shares of Class E-
1 Common Stock (held of record by four stockholders), 4,000,000 shares of Class
E-2 Common Stock (held of record by four stockholders), 7,050,437 shares of
Class A Common Stock and no shares of Preferred Stock.
Units
Each Unit previously offered consisted of one share of Class A Common
Stock, one Class A Warrant and one Class B Warrant. At any time commencing on
the date of issuance until the fifth anniversary date of the Prospectus for that
offering, each Class A Warrant will be exercisable to purchase one share of
Class A Common Stock and one Class B Warrant and each Class B Warrant will be
exercisable to purchase one share of Class A Common Stock. The Common Stock and
Warrants included in the Units are immediately transferable separately upon
issuance.
Common Stock
The Class A Common Stock, Class B Common Stock, Class E-1 Common Stock and
Class E-2 Common Stock are substantially identical, except that the holders of
Class A Common Stock have the right to cast one vote, and the holders of Class B
Common Stock, Class E-1 Common Stock, and Class E-2 Common Stock have the right
to cast five votes, for each share held of record on all matters submitted to a
vote of the holders of Common Stock, including the election of directors. The
Class A Common Stock, Class B Common Stock, Class E-1 Common Stock and Class E-2
Common Stock vote together as a single class on all matters on which
stockholders may vote, including the election of directors, except when voting
by class is required by applicable law. Holders of the Class A Common Stock,
Class B Common Stock, Class E-1 Common Stock and Class E-2 Common Stock have
equal ratable rights to dividends from funds legally available therefor, when,
as and if declared by the Board of Directors and are entitled to share ratably,
as a single class, in all of the assets of the Company available for
distribution to the holders of shares of Common Stock upon the liquidation,
dissolution or winding up of the affairs of the Company. Except as described
herein, no pre-emptive, subscription, or conversion rights pertain to the Common
Stock and no redemption or sinking fund provisions exist for the benefit
thereof. All outstanding shares of Common Stock are, and those shares of Class A
Common Stock offered hereby will be duly authorized, validly issued, fully paid
and nonassessable.
As a consequence of their ownership of Common Stock and the enhanced voting
power of the Class B Common Stock, Class E-1 Common Stock, and Class E-2 Common
Stock, the current stockholders of the Company will continue to control a
majority of the voting power of the Company following completion of the prior
offering and, accordingly, will be able to elect all of the Company's directors.
This difference in voting rights and consequent increase in the voting power of
the Class E-1 Common Stock, Class E-2 Common Stock and Class B Common Stock has
an anti-takeover effect, in that the existence of the Class E-1 Common Stock,
Class E-2 Common Stock and Class B Common Stock may make the Company a less
attractive target for a hostile takeover bid or render more difficult or
discourage a merger proposal, an unfriendly tender offer, a proxy contest, or
the removal of incumbent management, even if such transactions were favored by
the stockholders of the Company other than the holders of Class E-1 Common
Stock, Class E-2 Common Stock and Class B Common Stock. Thus, the stockholders
of the Company may be deprived of an opportunity to sell their shares at a
premium over prevailing market prices in the event of a hostile takeover bid.
Those seeking to acquire the Company through a business combination will be
compelled to consult first with the holders of the Class E-1 Common Stock, Class
E-2 Common Stock and Class B Common Stock in order to negotiate the terms of
such a business combination. Additionally, any such proposed business
combination would have to be approved by the Board of Directors, which may be
under the control of the holders of the Class E-1 Common Stock, Class E-2 Common
Stock and Class B Common Stock; and, if stockholder approval were required, the
approval of the holders of the Class E-1 Common Stock, Class E-2 Common Stock
and Class B Common Stock would be necessary before any such business combination
could be consummated.
24
<PAGE>
Performance Shares
The Company's Certificate of Incorporation provides that the Class E-1 and
the Class E-2 Common Stock is redeemable by the Company at a price of $.01 per
share unless the Company meets certain income or share price thresholds. If the
thresholds are met, the Performance Shares will be automatically converted into
shares of Class B Common Stock. The Performance Shares are not assignable or
transferable other than upon death, by operation of law, or to related parties
who agree to be bound by the restrictions on the Performance Shares set forth in
the Company's Certificate of Incorporation.
(a) The 4,000,000 shares of outstanding Class E-1 Common Stock will be
automatically converted into Class B Common Stock if, and only if, one or more
of the following conditions are met:
(i) the Company's net income before provision for income taxes and
exclusive of any extraordinary earnings as audited and determined by the
Company's independent public accountants (the "Minimum Pretax Income") amounts
to at least $17.5 million for the fiscal year ending December 31, 1998;
(ii) the Minimum Pretax Income amounts to at least $22.5 million for
the fiscal year ending December 31, 1999;
(iii) the Minimum Pretax Income amounts to at least $28.5 million for
the fiscal year ending December 31, 2000;
(iv) the Minimum Pretax Income amounts to at least $36.0 million for
the fiscal year ending on December 31, 2001;
(v) the Minimum Pretax Income amounts to at least $45.0 million for
the fiscal year ending on December 31, 2002; or
(vi) the Minimum Pretax Income amounts to at least $56.0 million for
the fiscal year ending on December 31, 2003.
(b) The 4,000,000 shares of outstanding Class E-2 Common Stock will be
converted into Class B Common Stock if, and only if, at least one of the
following conditions is met.
(i) the Minimum Pretax Income amounts to at least $21.875 million
for the fiscal year ending on December 31, 1998;
(ii) the Minimum Pretax Income amounts to at least $28.125 million
for the fiscal year ending on December 31, 1999;
(iii) the Minimum Pretax Income amounts to at least $35.625 million
for the fiscal year ending on December 31, 2000;
(iv) the Minimum Pretax Income amounts to at least $45.0 million for
the fiscal year ending on December 31, 2001
(v) the Minimum Pretax Income amounts to at least $56.25 million
for the fiscal year ending on December 31, 2002; or
(vi) the Minimum Pretax Income amounts to at least $69.5 million for
the fiscal year ending on December 31, 2003.
The Minimum Pretax Income amounts set forth above (i) shall be calculated
exclusive of any extraordinary earnings or charge, including, but not limited
to, any charge to income resulting from conversion of the Performance Shares and
(ii) shall be increased proportionately, with certain limitations, in the event
additional shares of Common Stock or securities convertible into, exchangeable
for or exercisable into Common Stock are issued after completion of
25
<PAGE>
the Offering. The bid price amounts set forth above are subject to adjustment in
the event of any stock splits, reverse stock splits or other similar events.
If none of the applicable Minimum Pretax Income or bid price levels set
forth above have been met by March 31, 2004, the Performance Shares will be
redeemable by the Company at a price of $.01 per share. The Company expects that
the conversion of Performance Shares owned by officers, directors, employees and
consultants of the Company will be deemed compensatory and, accordingly, will
result in a substantial charge to reportable earnings equal to the fair market
value of such shares on the date of conversion. Such charge could substantially
increase the loss or reduce or eliminate the Company's net income for financial
reporting purposes for the period or periods during which such shares are, or
become probable of being, converted. Therefore, although the amount of
compensation expense recognized by the Company will not affect the Company's
cash flow, it may have a negative effect on the market price of the Company's
securities.
The restrictions on the Class E-1 Common Stock and Class E-2 Common Stock
were required by the Underwriter as a condition to that offering. The Minimum
Pretax Income and bid price levels set forth above were determined by
negotiation between the Company and the Underwriter and should not be construed
to imply or predict any future earnings by the Company or any increase in the
market price of its securities.
Bid Price shall mean the closing bid price of the Class A Common Stock as
quoted on the Nasdaq SmallCap Market or as reported by the National Quotation
Bureau, Inc. or the closing sales price of the Class A Common Stock if it is
listed on the Nasdaq National Market or a national stock exchange.
The "Minimum Pretax Income" amounts set forth above assume the conversion
into Class B Common Stock of all of the shares of Class E Common Stock and the
conversion into Class A Common Stock of any outstanding Class B Common Stock and
any other securities which are convertible into Class A or Class B Common Stock
solely upon surrender of such convertible securities without the payment of any
additional consideration, but shall be increased proportionally to reflect the
issuance of any other additional shares, including any shares that may be issued
upon the exercise of any warrants or options presently outstanding or hereafter
granted, provided, however, that, with respect to any shares of Class A Common
Stock issued upon exercise of warrants subject to a registration statement
covering shares of Class A Common Stock (the "Registration Statement") filed
with the Commission (provided such Registration Statement is filed on or before
September 30, 1996), so long as any portion of the net proceeds received by the
Company upon such exercise is not utilized by the Company, but such proceeds
(the "Invested Proceeds") are instead invested in short-term high interest
bearing securities or accounts or securities issued or guaranteed by the United
States government, then the adjustment to the Minimum Pretax Income amounts set
forth above with respect to that number of warrants which generated such
Invested Proceeds shall be equal to 8% per annum multiplied by such amount of
Invested Proceeds. The Minimum Pretax Income shall be calculated exclusive of
any extraordinary earnings or extraordinary charges including, but not limited
to, any charge to income resulting from the conversion of shares of Class E
Common Stock.
Class B Common Stock
Each share of Class B Common Stock was convertible at any time commencing
thirteen months following the date of the Prospectus for that offering at the
option of the holder into one share of Class A Common Stock. Shares of Class B
Common Stock will also automatically convert into an equivalent number of fully
paid and non-assessable shares of Class A Common Stock after such period upon
the sale or transfer of such shares of Class B Common Stock (other than a
transfer to another holder of Class B Common Stock) by the original record
holder thereof or upon the death of the holder thereof unless and to the extent
that such shares are acquired by another holder of Class B Common Stock.
Redeemable Warrants
The following is a brief summary of the material provisions of the
Warrants, but such summary does not purport to be complete and is qualified in
all respects by reference to the actual text of the Warrant Agreement between
the Company, the Underwriter, and American Stock Transfer and Trust Company (the
"Transfer and Warrant Agent"). A copy of the Warrant Agreement has been filed as
an exhibit to the Registration Statement for that offering.
26
<PAGE>
Class A Warrants
The holder of each Class A Warrant is entitled, upon payment of the
exercise price of $6.50, to purchase one share of Class A Common Stock and one
Class B Warrant. Unless previously redeemed, the Class A Warrants are
exercisable at any time after their issuance until the fifth anniversary of the
date of the Prospectus for that offering, provided that at such time a current
prospectus relating to the Class A Common Stock and the Class B Warrants
underlying the Class A Warrants is in effect and the underlying Class A Common
Stock and the Class B Warrants are qualified for sale or exempt from
qualification under applicable state securities laws. The Class A Warrants
included in the Units previously offered are immediately transferable separately
from the Class A Common Stock and the Class B Warrants issued with such Class A
Warrants as part of the Units. The Class A Warrants are subject to redemption,
as described below.
Class B Warrants
The holder of each Class B Warrant is entitled, upon payment of the
exercise price of $8.75, to purchase one share of Class A Common Stock. Unless
previously redeemed, the Class B Warrants are exercisable at any time after
their issuance until the fifth anniversary of the date of the Prospectus for
that offering, provided that at such time a current prospectus relating to the
underlying Class A Common Stock is then in effect and the Class A Common Stock
underlying the Warrants is qualified for sale or exempt from qualification under
applicable state securities laws. The Class B Warrants included in the Units
previously offered are transferable separately from the Class A Common Stock and
Class A Warrants issued with such Class B Warrants as part of the Units, and the
Class B Warrants underlying the Class A Warrants will be transferable separately
from the Class A Common Stock received upon exercise of the Class A Warrants.
The Class B Warrants are subject to redemption, as described below.
Redemption
Commencing one year from the date of the Prospectus for that offering, the
Class A Warrants are subject to redemption by the Company, upon 30 days' written
notice, at a price of $.05 per Warrant, if the average closing bid price of the
Class A Common Stock for any 30 consecutive trading days ending within 15 days
of the date on which the notice of redemption is given shall have exceeded
$12.00 per share. The Class B Warrants are subject to redemption by the Company
commencing one year from the date of that Prospectus, upon 30 days' written
notice, at a price of $.05 per Warrant, if the average closing bid price of the
Class A Common Stock for any 30 consecutive trading days ending within 15 days
of the date on which the notice of redemption is given shall have exceeded
$15.00 per share. Holders of Warrants will automatically forfeit their rights to
purchase the shares of Class A Common Stock and/or Class B Warrants issuable
upon exercise of such Warrants unless the Warrants are exercised before the
close of business on the business day immediately prior to the date set for
redemption. All of the outstanding Warrants of a class, except for those
underlying the Unit Purchase Option, must be redeemed if any of that class are
redeemed. A notice of redemption shall be mailed to each of the registered
holders of the Warrants by first class mail, postage prepaid, upon 30 days'
notice before the date fixed for redemption. The notice of redemption shall
specify the redemption price, the date fixed for redemption, the place where the
Warrant certificates shall be delivered and the redemption price to be paid, and
that the right to exercise the Warrants shall terminate at 5:00 p.m. (New York
City time) on the business day immediately preceding the date fixed for
redemption.
General
The Warrants may be exercised upon surrender of the certificate or
certificates therefor on or prior to the expiration or the redemption date (as
explained above) at the offices of the Company's warrant agent (the "Warrant
Agent") with the subscription form on the reverse side of the certificate or
certificates completed and executed as indicated, accompanied by payment (in the
form of a certified or cashier's check payable to the order of the Company) of
the full exercise price for the number of Warrants being exercised.
The Warrants contain provisions that protect the holders thereof against
dilution by adjustment of the exercise price per share and the number of shares
issuable upon exercise thereof upon the occurrence of certain events, including
issuances of Class A Common Stock (or securities convertible, exchangeable or
exercisable into Class A Common Stock) at less than market value, stock
dividends, stock splits, mergers, sale of substantially all of the Company's
assets, and for other extraordinary events; provided, however, that no such
adjustment shall be made upon, among other things,
27
<PAGE>
(i) the issuance or exercise of options or other securities under the Company's
Stock Option Plan or other employee benefit plans or (ii) the sale or exercise
of outstanding options or warrants or the Warrants offered hereby.
The Company is not required to issue fractional shares of Class A Common
Stock and in lieu thereof will make a cash payment based upon the current market
value of such fractional shares. The holder of the Warrants will not possess any
rights as a stockholder of the Company unless and until he or she exercises the
Warrants.
Preferred Stock
The Preferred Stock may be issued in series, and shares of each series will
have such rights, preferences, and privileges as are fixed by the Board of
Directors in the resolutions authorizing the issuance of that particular series.
In designating any series of Preferred Stock, the Board of Directors may,
without further action by the holders of Common Stock, fix the number of shares
constituting the series and fix the dividend rights, dividend rate, conversion
rights, voting rights (which may be greater or lesser than the voting rights of
the Common Stock), rights and terms of redemption (including any sinking fund
provisions), and the liquidation preferences of the series of Preferred Stock.
The holders of any series of Preferred Stock, when and if issued, are expected
to have priority claims to dividends and to any distributions upon liquidation
of the Company, and they may have other preferences over the holders of the
Common Stock.
The Board of Directors may issue series of Preferred Stock without action
by the holders of the Common Stock. Accordingly, the issuance of Preferred Stock
may adversely affect the rights of the holders of the Common Stock. In addition,
the issuance of Preferred Stock may be used as an "anti-takeover" device without
further action on the part of the holders of the Common Stock. The issuance of
Preferred Stock may also dilute the voting power of the holders of Common Stock,
in that a series of Preferred Stock may be granted enhanced per share voting
rights and the right to vote on certain matters separately as a class, and may
render more difficult the removal of current management, even if such removal
may be in the stockholders' best interest. The Company has no current plans to
issue any Preferred Stock.
As of July 31, 2000, we had 74,300 shares of 5% Cumulative Convertible
Series A Preferred Stock outstanding. Holders of the Series A Preferred Stock
are entitled to receive cash dividends, payable quarterly and have preferential
liquidation rights above all other issuances of Common Stock for an amount equal
to the stated value. The Preferred Stock and unpaid dividends are convertible
into shares of Common Stock equal to an amount determined by the market value at
the date of close of the Common Stock, adjusted for changes in the market price
prior to the conversion. The Preferred Stockholders do not have voting rights.
Unit Purchase Option
Upon the closing of the prior offering, the Company had agreed to grant to
the Underwriter the Unit Purchase Option to purchase up to 600,000 Units. The
Units issuable upon exercise of the Unit Purchase Option will, when so issued,
be identical to the Units previously offered. The Unit Purchase Option cannot
be transferred, sold, assigned or hypothecated for three years, except to any
officer of the Underwriter or members of the selling group or their officers.
The Unit Purchase Option is exercisable during the two-year period commencing
three years from the date of this Prospectus at an exercise price of $6.50 per
Unit (130% of the initial public offering price) subject to adjustment under
certain circumstances. The holders of the Unit Purchase Option have certain
demand and piggyback registration rights.
Registration Rights
The Company has granted certain demand and piggyback registration rights to
the holder of the Unit Purchase Option relating to their options and the
underlying securities.
Transfer Agent and Warrant Agent
American Stock Transfer & Trust Company, New York, New York, will serve as
Transfer Agent for the shares of Common Stock and Warrant Agent for the
Warrants.
28
<PAGE>
Certain Statutory and Charter Provisions Under the Delaware General Corporation
Law
Section 203 of the Delaware General Corporation Law provides, in general,
that a stockholder acquiring more than 15% of the outstanding voting shares of a
publicly-held Delaware corporation subject to the statute (an "Interested
Stockholder") may not engage in certain "Business Combinations" with the
corporation for a period of three years subsequent to the date on which the
stockholder became an Interested Stockholder unless (i) prior to such date the
corporation's board of directors approved either the Business Combination or the
transaction in which the stockholder became an Interested Stockholder or (ii)
upon consummation of the Business Combination, the Interested Stockholder owns
85% or more of the outstanding voting stock of the corporation (excluding shares
owned by directors who are also officers of the corporation or shares held by
employee stock option plans that do not provide employees with the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer), or (iii) the Business Combination is
approved by the corporation's board of directors and authorized at an annual or
special meeting of stockholders, and not by written consent, by the affirmative
vote of at least two-thirds of the outstanding voting stock of the corporation
not owned by the Interested Stockholder.
Section 203 defines the term "Business Combination" to encompass a wide
variety of transactions with or caused by an Interested Stockholder in which the
Interested Stockholder receives or could receive a benefit on other than a pro
rata basis with other stockholders, including mergers, certain asset sales,
certain issuances of additional shares to the Interested Stockholder or
transactions in which the Interested Stockholder receives certain other
benefits.
These provisions could have the effect of delaying, deferring or preventing
a change of control of the Company. The Company's stockholders, by adopting an
amendment to the Certificate of Incorporation or Bylaws of the Company, may
elect not to be governed by Section 203, effective twelve months after adoption.
Neither the Certificate of Incorporation nor the Bylaws of the Company currently
excludes the Company from the restrictions imposed by Section 203.
The Delaware General Corporation Law permits a corporation through its
Certificate of Incorporation to eliminate the personal liability of its
directors to the Corporation or its stockholders for monetary damages for breach
of fiduciary duty of loyalty and care as a director with certain exceptions. The
exceptions include a breach of the director's duty of loyalty, acts or omissions
not in good faith or which involve intentional misconduct or knowing violation
of law, and improper personal benefit. The Company's Certificate of
Incorporation exonerates its directors from monetary liability to the fullest
extent permitted by this statutory provision.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of common stock in the public market
could adversely affect market prices prevailing from time to time. Under the
terms of this offering, the 10,250,000 shares of common stock to be issued under
the Private Equity Line of Credit Agreement, or underlying the warrants to be
issued under the Private Equity Line of Credit Agreement, may be resold without
restrictions or further registration under the Securities Act of 1933, except
that any shares purchased by our "affiliates," as that term is defined under the
Securities Act, may generally only be sold in compliance with the limitations of
Rule 144 under the Securities Act.
Outstanding Restricted Stock
2,024,857 outstanding shares of common stock are restricted securities
within the meaning of Rule 144 and may not be sold in the absence of
registration under the Securities Act unless an exemption from registration is
available, including the exemption from registration offered by Rule 144. In
general, under Rule 144, as currently in effect, a person who has beneficially
owned restricted shares for at least one year, including a person who may be
deemed to be our affiliate, may sell within any three-month period a number of
shares of common stock that does not exceed a specified maximum number of
shares. This maximum is equal to the greater of 1% of the then outstanding
shares of our common stock or the average weekly trading volume in the common
stock during the four calendar weeks immediately preceding the sale. Sales under
Rule 144 are also subject to restrictions relating to manner of sale, notice and
availability of current public information about us. In addition, under Rule
144(k) of the Securities Act, a person who is not our affiliate, has not been an
affiliate of ours within three months prior to the sale and has beneficially
owned shares for at least two years would be entitled to sell such shares
immediately without regard to volume limitations, manner of sale provisions,
notice or other requirements of Rule 144.
29
<PAGE>
Preferred Stock
As of July 31, 2000, there were 74,300 shares of Series A 5% Cumulative
Convertible Preferred Stock currently outstanding held by 14 shareholders of
record. The shares of common stock to be issued upon the conversion of the
preferred stock may not be sold in the absence of registration under the
Securities Act unless an exemption from registration is available, including the
exemption from registration offered by Rule 144. A registration statement with
regard to the resale of the underlying common stock is currently effective.
Warrants
The resale of shares of common stock to be issued upon the exercise of the
warrants issued or issuable to finder under the Investment Agreement are being
registered by this offering statement.
PLAN OF DISTRIBUTION
The Selling Shareholders are free to offer and sell their common shares at
such times, in such manner and at such prices as they may determine. The types
of transactions in which the common shares are sold may include transactions in
the over-the-counter market (including block transactions), negotiated
transactions, the settlement of short sales of common shares, or a combination
of such methods of sale. The sales will be at market prices prevailing at the
time of sale or at negotiated prices. Such transactions may or may not involve
brokers or dealers. The Selling Shareholders have advised us that they have not
entered into any agreements, understandings or arrangements with any
underwriters or broker-dealers regarding the sale of its securities. The
Selling Shareholders do not have an underwriter or coordinating broker acting in
connection with the proposed sale of the common shares.
The Selling Shareholders may effect such transactions by selling common
stock directly to purchasers or to or through broker-dealers, which may act as
agents or principals. Such broker-dealers may receive compensation in the form
of discounts, concessions, or commission from the Selling Shareholders. They
may also receive compensation from the purchasers of common shares for whom such
broker-dealers may act as agents or to whom they sell as principal, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions).
Each Selling Shareholder is, and any broker-dealer that acts in connection
with the sale of common shares may be deemed to be, an "underwriter" within the
meaning of Section 2(11) of the Securities Act. Any commissions received by
such broker-dealers and any profit on the resale of the common shares sold by
them while acting as principals might be deemed to be underwriting discounts or
commissions.
Because the Selling Shareholders are "underwriters" within the meaning of
Section 2(11) of the Securities Act, they will be subject to prospectus delivery
requirements.
We have informed the Selling Shareholders that the anti-manipulation rules
of the SEC, including Regulation M promulgated under the Securities and Exchange
Act, may apply to their sales in the market and have provided each Selling
Shareholder with a copy of such rules and regulations.
The Selling Shareholders also may resell all or a portion of the common
shares in open market transactions in reliance upon Rule 144 under the
Securities and Exchange Act, provided it meets the criteria and conforms to the
requirements of such Rule.
30
<PAGE>
SELLING SHAREHOLDERS
The Selling Shareholders are offering hereby a total of up to
10,250,000 shares of our Class A Common Stock. The following table sets forth
certain information with respect to the Selling Shareholders as of August 31,
2000. The Selling Shareholders are not currently affiliates of the Company, and
have not had a material relationship with the Company during the past three
years, other than as a holder of securities of the Company and the negotiation
of the Private Equity Line of Credit Agreement.
<TABLE>
<CAPTION>
Amount and Percentage
Beneficial Ownership of Maximum Number of Shares of Common Stock
Common Stock as of of Common Stock Offered Beneficially Owned
Name August 31, 2000/(1)/ for Sale in this Offering After the Offering/(2)/
-------------------------------------------------------------------------------------------------------------------------
Number %
------------------------------
<S> <C> <C> <C> <C>
Austinvest Anstalt Balzers 2,027,501 2,000,000 27,501 *
Esquire Trade & Finance, Inc. 2,738,562 2,700,000 38,562 *
Rhossili Investments Limited 1,500,000 1,500,000 0 0
Fernbrigg Partner, Ltd. 1,000,000 1,000,000 0 0
Talbiya B. Investments, Ltd. 525,000/(3)/ 525,000 0 0
Nesher Ltd. 300,000 300,000 0 0
Keshet L.P. 600,000 600,000 0 0
The Keshet Fund L.P. 500,000 500,000 0 0
The Endeavour Capital Fund, S.A. 1,000,000 1,000,000 0 0
Libra Finance, S.A. 125,000/(3)/ 125,000 0 0
</TABLE>
(1) This number includes (solely for purposes of this prospectus) up to an
aggregate of 10,000,000 shares of our common stock that we may sell to the
Selling Shareholders pursuant to the Private Equity Line of Credit
Agreement and 250,000 shares of common stock underlying Purchase Warrants
issuable in connection with the Private Equity Line of Credit Agreement,
which shares would not be deemed beneficially owned within the meaning of
Sections 13(d) and 13(g) of the Exchange Act before their acquisition by
the Selling Shareholders. It is expected that the Selling Shareholders
will not beneficially own more than 9.9% of our outstanding common stock
at any time.
(2) Assumes that the Selling Shareholders will sell all of the shares of
common stock offered hereby and in a prior registration statement filed on
May 5, 2000. We cannot assure you that the Selling Shareholders will sell
all or any of the shares offered hereunder or in the prior offering.
(3) This number includes 125,000 shares of common stock issuable upon exercise
of outstanding Purchase Warrants which are currently exercisable, which
represents 2% of our issued and outstanding Class A Common Stock as of
August 31, 2000. A total of 250,000 shares of common stock are issuable
upon exercise of outstanding Purchase Warrants which are currently
exercisable, which represents 4% of outstanding Class A Common Stock as of
August 31, 2000.
Investment Agreement
Overview. On August 15, 2000, we entered into a Private Equity Line
of Credit Agreement with the Selling Shareholders identified in this Prospectus.
This Agreement entitles us to issue and sell our common stock for up to an
aggregate of $20 million from time to time during a three-year period following
the effective date of this registration statement. This is also referred to as
a put right.
Put Rights. In order to invoke a put right, we must have an effective
registration statement on file with the SEC registering the resale of the common
shares which may be issued as a consequence of the invocation of that put right.
Additionally, we must provide the Selling Shareholders with an Optional Purchase
Notice, which must set forth the Investment Amount which we intend to sell to
the Selling Shareholders. The Investment Amount sold to the Selling
Shareholders in a Put may not exceed a limit based on the price of the Class A
Common Stock and the average daily reported trading volume during the twenty
calendar days preceding the delivery of the Optional Purchase Notice. The
Investment Amount specified in an Optional Purchase Notice may not be less than
$200,000.
The Selling Shareholders will purchase stock from us at 92% or 93% of
the market price. Market price is defined as the daily volume weighted average
price of the Class A Common Stock during the fourteen business-day period
following the date of the Optional Purchase Notice.
31
<PAGE>
Limitations and Conditions Precedent to our Put Rights. The Selling
Shareholders' obligation to acquire and pay for any common shares with respect
to any particular put is subject to certain conditions precedent, including:
. This Registration Statement must be effective;
. Trading of our Class A Common Stock must not have been suspended, and
our Class A Common Stock must continue to be listed on its principal
market;
. Until our shareholders vote to approve the Private Equity Line of
Credit Agreement, no more than 3,200,000 shares of Class A Common
Stock may be issued; and
. The average trading volume for our Class A Common Stock over the
previous thirty trading days must equal or exceed 20,000 shares per
trading day.
Short Sales. The Selling Shareholders and their affiliates are prohibited
from engaging in short sales of our common stock at a per share price of less
than ten dollars per share unless they have received a put notice and the amount
of shares involved in a short sale does not exceed the number of shares
specified in the put notice.
LEGAL MATTERS
The validity of the shares of common stock being offered hereby will be
passed upon for the Company by Luce, Forward, Hamilton and Scripps LLP, San
Diego, California.
EXPERTS
The financial statements of Advanced Aerodynamics and Structures, Inc.
("AASI") at December 31, 1999, and for each of the two years in the period ended
December 31, 1999, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon (which contains an explanatory paragraph describing conditions
that raise substantial doubt about the Company's ability to continue as a going
concern as described in Note 2 to the financial statements) appearing elsewhere
herein, and are included in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities
Act of 1933, as amended, relating to the shares of common stock being offered by
this prospectus, and reference is made to such registration statement. This
prospectus constitutes the prospectus of AASI filed as part of the registration
statement, and it does not contain all information in the registration
statement, as certain portions have been omitted in accordance with the rules
and regulations of the SEC.
We are subject to the informational requirements of the Securities Exchange
Act of 1934 and pursuant to those requirements, we file reports, proxy
statements and other information with the Securities and Exchange Commission
relating to our business, financial statements and other matters. Reports, proxy
and information statements filed under Sections 14(a) and 14(c) of the
Securities Exchange Act of 1934 and other information filed with the SEC,
including copies of the registration statement, can be inspected and copied
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
The public may obtain information on the operation of the Public Reference Room
by calling 1-800-SEC-0330. The SEC also maintains an Internet site that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the SEC at http://www.sec.gov.
------------------
We intend to furnish our shareholders with annual reports containing
audited financial statements.
32
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Number
------
Report of Independent Auditors F-2
Balance Sheet F-3
Statement of Operations F-4
Statement of Stockholders' Equity F-5
Statement of Cash Flows F-6
Notes to Financial Statements F-7
F-1
<PAGE>
To the Board of Directors
Advanced Aerodynamics & Structures, Inc.
We have audited the accompanying balance sheet of Advanced Aerodynamics &
financial statements based on our audits. Structures, Inc. (a development
stage enterprise) as of December 31, 1999, and the related statements of
operations, stockholders' equity, and cash flows for the two years then ended,
and for the period from January 26, 1990 (inception) through December 31,
1999. 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 in accordance with auditing standards generally
accepted in the United States. 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 audits provide a
reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly, in
all material respects, the financial position of Advanced Aerodynamics &
Structures, Inc., at December 31, 1999, and the results of its operations and
its cash flows for each of the two years then ended and the period from
January 26, 1990 (inception) through December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
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, 1999 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 6, 2000
F-2
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A Development Stage Enterprise)
BALANCE SHEET
<TABLE>
<CAPTION>
December 31, 1999
-----------------
<S> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents.................................. $ 498,000
Short term investments..................................... 2,328,000
Prepaid expenses and other current assets.................. 76,000
-------------
Total current assets 2,902,000
Property, Plant and equipment, net........................... 11,035,000
Other assets................................................. 194,000
-------------
Total assets........................................... $ 14,131,000
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable........................................... $ 391,000
Capital lease obligation, current portion 241,000
Other accrued liabilities 539,000
-------------
Total current liabilities.............................. 1,171,000
Capital lease obligation, long term.......................... 9,629,000
Deferred revenue............................................. 1,727,000
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
Accumulated other comprehensive loss......................... (32,000)
-------------
Deficit accumulated during the development stage............. (50,412,000)
-------------
Total stockholders' equity............................. 1,604,000
-------------
Total liabilities and stockholders' equity................... $ 14,131,000
=============
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A Development Stage Enterprise)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Period from
January 26,
1990
Year Ended (inception) to
December 31, December 31,
------------------------- --------------
1998 1999 1999
------------ ----------- --------------
<S> <C> <C> <C>
Interest income..................... $ 927,000 $ 373,000 $ 2,743,000
Other income........................ 447,000 60,000 1,322,000
------------
1,374,000 433,000 4,065,000
Cost and expenses:
Research and development costs...... 6,469,000 5,566,000 30,766,000
General and administrative
expenses........................... 4,658,000 3,186,000 17,878,000
Loss on disposal of assets.......... 13,000 -- 755,000
Realized loss on sale of
investments........................ -- 30,000 30,000
Interest expense.................... 352,000 992,000 3,345,000
In-process research and development
acquired........................... -- -- 761,000
------------ ----------- ------------
11,492,000 9,774,000 53,535,000
------------ ----------- ------------
Loss before extraordinary item...... (10,118,000) (9,341,000) (49,470,000)
Extraordinary loss on retirement of
Bridge Notes....................... -- -- (942,000)
------------
Net loss............................ $(10,118,000) $(9,341,000) $(50,412,000)
============ =========== ============
Net loss per share.................. $ (1.14) $ (1.05)
============ ===========
Weighted average number of shares
outstanding........................ 8,900,000 8,900,000
============ ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A Development Stage Enterprise)
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Common Stock
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............
Conversion of
stockholder advances... 598,011 -- 1,196,021 -- 1,196,021 --
Conversion of officer
loans ................. 187,118 -- 374,236 -- 374,236 --
Stock issued in
consideration for
services in 1994, 1995
and 1996............... 595,283 -- 1,190,566 -- 1,190,566 --
Imputed interest on
advances from
stockholder............
Net proceeds from
initial public offering
of Units............... 6,000,000 1,000
Net proceeds from
exercise of over-
allotment option....... 900,000 --
Warrants issued in
connection with
issuance of Bridge
Notes..................
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 over-allotment
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 --
Net Loss...............
Unrealized loss on
investments............
Comprehensive Loss.....
---- ---- --------- ------ --------- ------ --------- ------ --------- ------
Balance at December 31,
1999.................... -- $-- 6,999,676 $1,000 1,900,324 -- 4,000,000 -- 4,000,000 --
==== ==== ========= ====== ========= ====== ========= ====== ========= ======
</TABLE>
F-5
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A Development Stage Enterprise)
STATEMENT OF STOCKHOLDERS' EQUITY--(Continued)
<TABLE>
<CAPTION>
Deficit
Accumulated Accumulated
Additional Other During the
Public Class A Class B Paid-In Comprehensive Development
Warrants Warrants Warrants Capital Losses Stage Total
--------- ----------- ---------- ----------- ------------- ------------- ------------
<S> <C> <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............ 799,00 799,000
Conversion of
stockholder advances... 10,728,000 10,728,000
Conversion of officer
loans ................. 336,000 336,000
Stock issued in
consideration for
services in 1994, 1995
and 1996............... 1,507,000 1,507,000
Imputed interest on
advances from
stockholder............ 11,000 11,000
Net proceeds from
initial public offering
of Units............... 9,583,000 4,166,000 12,566,000 26,316,000
Net proceeds from
exercise of over-
allotment option....... 1,707,000 466,000 1,922,000 4,095,000
Warrants issued in
connection with
issuance of Bridge
Notes.................. 473,000 473,00
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
over-allotment 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 -- (41,072,000) 10,977,000
Net Loss............... (9,341,000) (9,341,000)
Unrealized loss on
investments............ (32,000) (32,000)
------------
Comprehensive Loss..... (9,373,000)
--------- ----------- ---------- ----------- --------- ------------- ------------
Balance at December 31,
1999.................... $473,000 $11,290,000 $4,632,000 $35,652,000 $ (32,000) $ (50,412,000) $ 1,604,000
========= =========== ========== =========== ========= ============= ============
</TABLE>
F-6
<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,
---------------------------- ----------------
1998 1999 1999
------------- ------------- ----------------
<S> <C> <C> <C>
Operating Activities:
Net Loss....................... $ (10,118,000) $ (9,341,000) $ (50,412,000)
Adjustment 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..... (328,000) (10,000) (474,000)
Extraordinary loss on
retirement of Bridge Notes... -- -- 942,000
Depreciation and
amortization................. 440,000 985,000 3,625,000
Loss on disposal of assets.... 13,000 -- 755,000
Realized loss on sale of
investments.................. 30,000 30,000
Changes in operating assets
and liabilities:
Increase in prepaid expenses
and other current assets..... 344,000 12,000 97,000
Increase (decrease) in other
assets....................... 230,000 (7,000) (194,000)
Decrease in account payable... (272,000) (1,260,000) (997,000)
Increase (decrease) in accrued
liabilities.................. 1,996,000 (515,000) 1,646,000
Increase in deferred revenue.. 910,000 150,000 1,490,000
------------- ------------- -------------
Net cash used in operating
activities.................... (6,785,000) (9,956,000) (40,378,000)
Investing Activities:
Increase in construction in
progress..................... -- -- (446,000)
Proceeds from insurance claims
upon loss of aircraft........ -- -- 30,000
Proceeds from sales of
assets....................... -- 9,800,000 9,803,000
Capital expenditures.......... (1,081,000) (111,000) (5,843,000)
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....... (3,021,000) (22,062,000) (33,720,000)
Proceeds from maturities of
investments in bonds......... -- 828,000 828,000
Proceeds from sale of
investments.................. 6,706,000 19,672,000 30,502,000
Restricted cash from long term
debt......................... -- -- (8,500,000)
Decrease in restricted cash... -- 405,000 405,000
------------- ------------- -------------
Net cash provided by (used in)
investing activities.......... 3,665,000 8,532,000 (6,941,000)
Financing Activities:
Adjustment to net proceeds
from initial public offering
and exercise of over-
allotment option............. (78,000)
Proceeds from long term debt.. -- (8,500,000) --
Restricted cash collateral for
long term debt............... -- 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
Payments on capital lease
obligations.................. (4,000) (231,000) (275,000)
Repayment of bridge financing -- -- (7,000,000)
------------- ------------- -------------
Net cash (used in) provided by
financing activities.......... (4,000) (231,000) 47,817,000
Net (decrease) increase in cash
and cash equivalents.......... (3,124,000) (1,655,000) 2,153,000
Cash and cash equivalents at
beginning of period........... 5,277,000 2,153,000 --
------------- ------------- -------------
Cash and cash equivalents at
end of period................. $ 2,153,000 $ 498,000 $ 498,000
============= ============= =============
Supplemental cash flow
information:
Cash paid for interest........ 316,000 805,000 1,976,000
Supplemental disclosure of
noncash investing and
financing activities:
Stockholder advances converted
to common stock.............. $ 10,728,000
Loans from officer converted
to common stock.............. 36,000
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............... 9,854,000 9,894,000
Deposit surrendered as payment
for rents due................ 80,000
Construction in progress
acquired with restricted
cash......................... 7,845,000 287,000 8,578,000
</TABLE>
F-7
<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. In July 1996, the Company
reincorporated by merging into a newly formed corporation in Delaware. 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. Since its inception, the Company has been engaged primarily
in research and development of its proposed aircraft the JETCRUZER 500, for
commercial sale. The Company is in the process of obtaining its Federal
Aviation Administration ("FAA") Type Certificate for technical revisions to
its aircraft for commercial sale.
During 1996 the Company successfully completed its initial public offering
of 6,900,000 units, including the exercise of the overallotment option. Each
unit sold is composed on one share of Class A common stock one class A warrant
and one class B warrant. The net proceeds of the offering of $30,411,000 were
used to finance the continued development, manufacture and marketing of its
product to achieve commercial viability.
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 Company can begin commercial production of their product and. the
certification process is complete Prior to commencing commercial sales, the
Company will need to, among other things, complete the development of the
JETCRUZER 500 and obtain the requisite regulatory approvals. The Company
incurred program development costs to date of approximately $30,000,000 and
has recorded a cumulative net loss of $50,412,000. Based upon the Company's
current development spending levels, current working capital is insufficient
to meet the Company's needs over the current year.
The Company's management team has been developing a financial plan to
address its working capital requirements. As discussed in Note 4, the Company
entered into a subscription agreement for the sale of up to $10,000,000 of 5%
Cumulative Convertible Series A Preferred Stock, of which the Company received
net proceeds of $4,550,000. Additionally, The Company signed a letter of
intent to sell and leaseback manufacturing equipment. This transaction will
generate an additional $1,000,000.
Going forward, however, significant amounts of additional cash will be
needed to continue the Company's development activities and ultimately
production. The remaining $5,000,000 in Preferred Stock funding will not occur
until certain criteria have been met, including passing the pressurization
test for the fuselage structure and completion of the registration of 200% of
the Common Stock underlying the Convertible Preferred Stock. It is anticipated
that the remaining proceeds will be received in two installments; $2 million
in the second quarter and the final $3 million in the third quarter.
Additionally, the commencement of production and the collection of progress
payments starting in the third quarter is imperative to the success of
managements' financial plan to meet its working capital requirements. There
can be no assurances that the current timetable for completion of the
development and certification of the aircraft will not be delayed beyond the
current fiscal year.
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 and ultimate production.
The Company's Independent Auditors have included a "going concern" emphasis
paragraph in their audit report accompanying the 1999 financial statements.
The paragraph states that the recurring losses and working
F-8
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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 $97,000
and $75,000 for the years ended December 31, 1999 and 1998, 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, 1999.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash, cash equivalents
and short term investments. The Company maintains its financial instruments
with major financial institutions. At times, cash balances held by financial
institutions were in excess of federal limits. The Company by policy, limits
the amount of credit exposure to anyone financial institution, and does not
consider itself to have any significant concentrations of credit risk.
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.
Short Term Investments
The Company's investment strategies consider safety of principal,
availability of funds and maximum return on investment.
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
F-9
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
amortization is included in investment income. Interest on securities
classified as held-to-maturity is included in investment income.
Debt securities for which the Company does not have the intent or ability to
hold to maturity are classified as "available for sale" and are reported at
their fair market value as determined by the quoted market price. During the
year ended December 31, 1999, the Company incurred $32,000 in gross unrealized
losses on debt securities classified as "available for sale", which has been
reported as comprehensive loss in the statement of shareholders' equity. The
tax effect of these losses is immaterial to the financial statements.
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, 3-5 years for office furniture and equipment and 18
years for the building acquired under a capital lease. 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.
Stock Based Compensation
The Company grants stock options with an exercise price equal to at least
the fair value of the stock at the date of grant as determined by the Board of
Directors.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock based compensation plans
which is an inhinsic value based method. 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.
Accounting 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.
Accounting Pronouncements
In the current year, the Company adopted the provisions of Statement of
Position (SOP) 98-1, Accounting For the Costs of Computer Software Developed
For or Obtained For Internal Use. SOP 98-1 requires the capitalization and
amortization of qualified computer software for internal use. There has been
no impact to the Company's earnings or financial position due to adoption of
SOP 98-1.
F-10
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In April 1999, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-
up Activities," which is effective for fiscal years beginning after December
15, 1999. 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 ."As amended, SFAS No. 133 establishes
accounting and reporting standards for derivative instruments. The effective
date of the pronouncement was delayed to fiscal years beginning after June 18,
2000 and is effective for interim periods in the year of adoption. 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. Management believes that
the adoption of SFAS No. 133 will not have a material effect on the Company's
financial statements, because the Company does not have any derivative
instruments as of December 31, 1999.
4. PREFERRED STOCK SUBSCRIPTION
On March 6, 2000, the Company received $4,550,000 in net proceeds related to
an agreement to issue up to 100,000 shares of 5% Cumulative Convertible Series
A Preferred Stock with a par value of $.0001 for the aggregated purchase price
of $10 million and Common Stock Purchase Warrants to purchase Class A Common
Stock at an above market price. For consideration received in the initial
funding, the Company issued 50,000 shares of Preferred stock and 650,000
Warrants and paid $450,000 in commissions and legal fees. Additionally, as
consideration for the transaction a Special Warrant to purchase up to 25,000
shares Class A Common Stock was issued. The remaining $5,000,000 in funding
will not occur until certain criteria have been met, including passing the
pressurization test for the fuselage structure and completion of the
registration of 200% of the Common Stock underlying the Convertible Preferred
Stock. Terms for the Special Warrant are similar to the terms of the Warrants
issued with the Preferred Stock.
Holders of the Preferred Stock are entitled to receive cash dividends,
payable quarterly and have preferential liquidation rights above all other
issuances of common stock for an amount equal to the stated value. The
Preferred stock and unpaid dividends are convertible into shares of Common
stock equal to an amount determined by the market value at the date of close
of the common stock, adjusted for changes in the market price prior to the
conversion. The Preferred stockholders do not have voting rights. The Warrants
are callable in installments after the registration is effective. The Company
has reserved 4,000,000 of its Class A Common Stock for the conversion of the
Preferred Stock.
5. PROPERTY, PLANT AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<S> <C>
Building........................................................... $ 9,800,000
Office furniture and equipment..................................... 1,158,000
Machinery and equipment............................................ 2,756,000
-----------
Gross property and equipment....................................... 13,714,000
Accumulated depreciation and amortization.......................... (2,679,000)
-----------
Property, Plant, and equipment..................................... $11,035,000
===========
</TABLE>
F-11
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
As described in note 13, the building is held under a capital lease. In
addition, included in office furniture and equipment and machinery and
equipment are assets acquired under capital leases in the amount of $272,000
and $33,000 respectively.
6. 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, 1999 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Federal net operating loss....................................... $ 15,901,000
State net operating loss......................................... 1,411,000
Research & development credits................................... 1,898,000
Other............................................................ 90,000
------------
Total deferred tax assets......................................... 19,300,000
Deferred tax liabilities:
Tax over book depreciation....................................... (105,000)
------------
Total net deferred tax assets.................................... 19,195,000
Valuation allowance.............................................. (19,195 000)
------------
$ -0-
============
</TABLE>
At December 31, 1999, the Company had U.S. Federal and California state net
operating loss ("NOL") carryforwards of approximately $47,900,000 and
$15,200,000, 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 2000 through 2004.
At December 31, 1999, the Company had Federal and California research and
development ("R&D") credit carryforwards of approximately $1,356,000 and
$542,000, respectively. The Federal R&D credit carryforwards will expire in
the years 2004 through 2009. The California R&D credit carryforwards can be
carried forward indefinitely.
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
December 31, December
1998 31, 1999
------------ -----------
<S> <C> <C>
Deferred:
Federal............................................ (3,380,000) $(3,505,000)
State.............................................. (378,000) (444,000)
----------- -----------
Total deferred..................................... (3,758,000) (3,949,000)
Increase in valuation allowance..................... 3,758,000 3,949,000
----------- -----------
$ -- $ --
=========== ===========
</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 1998 and 1999.
F-12
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. INVESTMENTS
At December 31, 1999 the following marketable securities were classified as
available for sale:
<TABLE>
<CAPTION>
Amortized Cost Gross Unrealized
or Cost Losses Fair Value
-------------- ---------------- ----------
<S> <C> <C> <C>
Money Market Funds................... 52,000 -- 52,000
US Government........................ 433,000 (2,000) 431,000
Corporate Bonds...................... 707,000 (9,000) 698,000
Mortgage-backed securities........... 1,167,000 (21,000) 1,146,000
--------- --------- ---------
Total Marketable Securities.......... 2,359,000 (32,000) 2,327,000
========= ========= =========
The contractual maturities of debt securities at December 31, 1999 are as
follows:
<CAPTION>
Amortized Cost Fair Value
---------------- ----------
<S> <C> <C> <C>
Due in one year or less............................. 205,000 205,000
Due after one through five years.................... 1,455,000 1,437,000
Due five through 10 years........................... 116,000 113,000
Due after 10 years.................................. 531,000 520,000
--------- ---------
2,307,000 2,275,000
========= =========
</TABLE>
8. RELATED PARTY TRANSACTIONS
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
bridge notes.
On December 23, 1993, the Company entered into an agreement with a
stockholder to convert 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.
In May 1996, the Company entered into an employment agreement with the
Company's President, which 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. In consideration of the termination of a
previous employment agreement the Company issued 577,823, 1,155,647 and
1,155,647 shares of Class B, Class E-1 and Class E-2 common stock,
respectively, to the Company's President.
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.
F-13
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
9. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company is generally subject to
claims, complaints, and legal actions. At December 31, 1999, the Company is
not a party to any action which would have a material impact on its, financial
condition, operations, or cash flows.
The Company 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 $7,400. 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.
In addition, as described in Note 13; in May 1999 the Company entered into
an agreement with a third party to sell its manufacturing and administrative
facility and lease it back under a capital lease. The lease term is for 18
years plus an option to extend the lease for an additional 10 years. Monthly
payments under this lease are approximately $106,000 and will be adjusted
annually, after the first year, for changes in the Consumer Price Index,
subject to a maximum of 3%.
Future minimum lease payments applicable to non-cancelable operating leases
and capital leases as of December 31, 1999, are as follows:
<TABLE>
<CAPTION>
Capital Leases Operating Leases
-------------- ----------------
<S> <C> <C>
2000............................................ 1,359,000 94,000
2001............................................ 1,359,000 115,000
2002............................................ 1,353,000 189,000
2003............................................ 1,345,000 190,000
2004............................................ 1,277,000 190,000
Thereafter...................................... 15,796,000 4,321,000
---------- ----------
Net future minimum lease payments............... 22,489,000 $5,099,000
---------- ----------
Amount representing interest.................... (12,619,000)
----------
Present value of minimum lease payments......... 9,870,000
----------
</TABLE>
The Company incurred rent expense of $175,000 and $383,000, and for the
years ended December 31, 1999 and 1998, respectively.
10. STOCKHOLDERS' EQUITY
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.
F-14
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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 $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,
$35.6million in 2000, $45.0 million in 2001, $563 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 18 months after December 3, 1996
and ending 36 months thereafter, the bid price of the Company's Class A Common
Stock averages $18.50 per share for 30 consecutive business days. Class E-2
Common Stock shares may be converted if commencing 18 months after December 3,
1996 and ending 36 months thereafter, the bid price of the Company's Class A
Common Stock 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.
Upon the closing of the Initial Public Offering, the Company granted to the
Underwriter Unit Purchase Option to purchase up to 600,000 Units. The Units
issuable upon exercise of the Unit Purchase Option will, when so issued, be
identical to the Units. The Unit Purchase Option cannot be transferred, sold,
assigned or hypothecated for three years, except to any officer of the
Underwriter or member of the selling group or their officers. The Unit
Purchase Option is exercisable during the two-year period commencing three
years from December 6, 1996 at an exercise price of $6.50 per Unit (130% of
the initial public offering price) subject to adjustment under certain
circumstances. The holders of the Unit Purchase Option have certain demand and
piggyback registration rights.
The Company has reserved approximately 39,400,000 shares of Class A Common
Stock for future issuance for the following conversions: 1,900,000 shares
issuable upon the conversion of Class B common stock currently outstanding;
8,000,000 shares issuable upon the conversion of Class B common stock should
the 4,000,000 shares of Class E-1 and E-2 common stock, respectively be
converted into shares of Class B common stock; 27,700,000 shares issuable upon
the exercise of purchase warrants; and 1,800,000 shares issuable upon the
exercise of a 600,000 unit purchase option by the Company's underwriter. In
addition, the Company has reserved 8,000,000 shares of Class B common stock
for future issuance upon the conversion of 4,000,000 shares of Class E-1 and
E-2 common stock respectively.
F-15
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
11. WARRANTS
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. Currently 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. Currently Class B 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.
Upon closing of the public offering previously issued bridge warrants were
converted into one Class A Warrant ("Public Warrant") which is identical in
all respects to the Class A Warrant. 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. 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. In March 1998, the Board of Directors
amended the Plan by authorizing the Company the ability to grant additional
options for up to 500,000 shares of Class A Common Stock. Under the Plan, the
Company may grant options with respect to a total of 1,000,000 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.
Had the Company accounted for stock options granted in 1998 and 1999 using
the fair value method at the date of grant as prescribed by Statement of
financial Accounting Standards No. 123, additional compensation expense would
have been recorded and the pro form effects would have been as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1998 1999
------------ -----------
<S> <C> <C>
Pro forma net loss.................................. $(10,356,000) $(9,712,000)
Pro forma net loss per share........................ $ (1.16) $ (1.09)
</TABLE>
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 5.02% and 6.81% for 1998 and 1999,
respectively; dividend yields of 0% for 1998 and 1999; volatility factors of
the expected market price of the Company's common stock of .878 and .863 for
1998 and 1999, respectively; and a weighted average expected life of the
option of 10 years for both 1998 and 1999, 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.
F-16
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The weighted average fair value of options granted during 1998 and 1999 was
$.73 and $2.22, per option, respectively. The weighted average exercise price
for 1997 and 1999 was $5.00. The weighted average remaining contractual life
of options outstanding is 8.75 years and 8.06 years for 1998 and 1999,
respectively.
At December 31, 1999, options to purchase 175,000 shares of Class A Common
Stock were available for future grants and 588,000 shares of Class A Common
Stock were reserved for the exercise of options. Transactions under the Plan
during the year ended December 31, 1998 and 1999 are summarized as follows:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
-------- ----------------
<S> <C> <C>
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
Granted............................................. 132,000 $5.00
Exercised........................................... -- --
Canceled............................................ (137,000) $5.00
Outstanding at December 31, 1999..................... 588,000 $5.00
</TABLE>
As of December 31, 1998 and 1999 87,000 and 185,800 options, respectively,
were exercisable at a weighted average exercise price of $5.00 per option.
13. 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 and related manufacturing equipment which the Company
moved into on November 16, 1998. On June 1, 1999, the Company retired all the
industrial development bonds using the restricted cash previously held as
security for the IDB.
14. SALE AND LEASEBACK TRANSACTION
Pursuant to an Agreement dated May 19, 1999, the Company sold to AP-Long
Beach Airport LLC its leasehold interest in real property located at 3205
Lakewood Boulevard, Long Beach, California, together with the manufacturing
hangar facility (approximately 205,000 square feet) and finished office space
(approximately 22,000 square feet) owned by the company (collectively, the
"Property". The cash sales price was $9,800,000.
As part of this transaction, the Company and AP-Long Beach Airport LLC
entered into an agreement to sublease the land to the Company subject to the
terms at the original land lease agreement which was assigned to AP Long Beach
Airport LLC, and lease the manufacturing hangar facility and finished office
space to the Company for term of 18 years. The $246,000 deferred gain on the
sale of the facility is being amortized over the 18 year lease term.
F-17
<PAGE>
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
15. 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.
16. PER SHARE INFORMATION
In February 1997, the FASB issued Statement 128, talks "Earnings per Share",
It replaces the presentation of primary Earnings per share with a presentation
of basic earnings per share which excludes any dilutive effects of options,
warrants and convertible securities, 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>
1998 1999
------------ -----------
<S> <C> <C>
Numerator
Loss before extraordinary item................... $(10,118,000) $(9,341,000)
------------ -----------
Denominator
Weighted average shares of Class B Shares........ 1,924,629 1,900,324
Weighted average shares of Class A Shares........ 6,975,371 6,999,676
------------ -----------
Denominator for basic loss per share-weighted
average shares.................................... 8,900,000 8,900,000
------------ -----------
Basic loss per share............................... $ (1.14) $ (1.05)
============ ===========
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
NONE
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Information regarding directors and executive officers of the Company will
appear in the Proxy Statement of the Annual Meeting of Stockholders and is
incorporated herein by this reference. The Proxy Statement will be filed with
the SEC within 120 days following December 31, 1999.
ITEM 10. EXECUTIVE COMPENSATION
Information regarding executive compensation will appear in the Proxy
Statement for the Annual Meeting of Stockholders and is incorporated herein by
this reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management will appear in the Proxy Statement for the Annual Meeting of
Stockholders and is incorporated herein by this reference.
F-18
<PAGE>
================================================================================
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from the
information contained in this prospectus. This document may only be used where
it is legal to sell the securities. The information in this document may only be
accurate on the date of this document.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary...................................................... 1
------------------
Risk Factors............................................................ 2
------------
Use of Proceeds......................................................... 7
---------------
Price Range of Common Stock............................................. 8
---------------------------
Dividend Policy......................................................... 8
---------------
Management's Discussion and Analysis or
---------------------------------------
Plan of Operation.................................................... 8
-----------------
Business................................................................ 11
--------
Management.............................................................. 20
----------
Description of Securities............................................... 23
-------------------------
Shares Eligible For Future Sale......................................... 29
-------------------------------
Plan of Distribution.................................................... 30
--------------------
Selling Shareholders.................................................... 31
--------------------
Legal Matters........................................................... 32
-------------
Experts................................................................. 32
-------
Available Information................................................... 32
---------------------
Index to Financial Statements........................................... F-1
</TABLE>
10,250,000 SHARES
OF COMMON STOCK
Advanced Aerodynamics &
Structures, Inc.
PROSPECTUS
September 5, 2000
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Registrant estimates that expenses in connection with the distribution
described in this Registration Statement will be as shown below. All expenses
incurred with respect to the distribution, except for fees of counsel, if any,
retained individually by the selling shareholders and any discounts or
commissions payable with respect to sales of the shares, will be paid by AASI.
See "Plan of Distribution."
SEC registration fee $ 6,808.00
Printing expenses 5,000.00
Accounting fees and expenses 6,000.00
Legal fees and expenses 2,000.00
Total $19,808.00
==========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Reference is made to Section 145 of the General Corporation Law of the
State of Delaware. As permitted by Delaware law, the Company's Certificate of
Incorporation contains an article limiting the personal liability of directors.
The Certificate of Incorporation provides that a director of the Company shall
not be personally liable for any damages from any breach of fiduciary duty as a
director, except for liability based on a judgment or other final adjudication
adverse to him establishing that his acts or omissions were committed in bad
faith or were the result of active or deliberate dishonesty and were material to
the cause of action so adjudicated, or that he personally gained a financial
profit or other advantage to which he was not legally entitled. The Company's
Certificate of Incorporation and Bylaws also provide for indemnification of all
officers and directors of the Company to the fullest extent permitted by law.
The Company has entered into Indemnification Agreements ("Indemnification
Agreements") with each of Dr. Carl Chen, Gene Comfort, and C.M. Cheng
(collectively, the "Indemnitees"). The Indemnification Agreements permit the
Company to indemnify the Indemnitees for liabilities and expenses arising from
certain actions taken by the Indemnitees for or on behalf of the Company and
require indemnification in certain circumstances.
II-1
<PAGE>
ITEM 16. EXHIBITS.
The following exhibits are filed or incorporated by reference as part
of this Registration Statement.
Exhibit No. Description
----------- -----------
* 3.1 Certificate of Incorporation
** 3.2 Bylaws
* 3.3 Amendment to Certificate of Incorporation
3.4 Certificate of Designation
* 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
****** 4.4 Form of Subscription Agreement between the Registrant and
the Series A 5% Cumulative Convertible Preferred Stock
Subscribers
****** 4.5 Form of Common Stock Purchase Warrant to be issued to the
Series A 5% Cumulative Convertible Preferred Stock
Subscribers and Placement Agents
****** 4.6 Form of Special Common Stock Purchase Warrant to be
issued to the Series A 5% Cumulative Convertible
Preferred Placement Agent
****** 4.7 Form of Funds Escrow Agreement
5.1 Form of Opinion of Luce, Forward, Hamilton & Scripps LLP
as to legality of securities being offered
* 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 Jne 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
II-2
<PAGE>
Exhibit No. Description
----------- -----------
***** 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
10.23 Private Equity Line of Credit Agreement, dated August 15,
2000, between the Company and certain Investors
10.24 Registration Rights Agreement between the Company and the
investors participating in the Private Equity Line of
Credit Agreement
10.25 Form of Warrant issued in connection with Private Equity
Line of Credit Agreement
23.1 Consent of Ernst & Young LLP
II-3
<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.
****** Incorporated by reference to the Company's Report in Form
10-KSB for the year ended December 31, 1999, filed with
the Securities and Exchange Commission on March 30, 2000.
II-4
<PAGE>
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than a
20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in
the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to section 13 or section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof; and
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering; and
(b) For purposes of determining any liability under the Securities Act of
1933, each filing of the registrant's annual report pursuant to section 13(a) or
section 15(d) of the Securities Exchange Act of 1934 that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities, other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding, is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Long Beach, State of California, on September 5,
2000.
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 Officer, and September 5, 2000
--------------------------------- Chairman of the Board
Carl L. Chen
/s/ DAVID M. TURNER Vice President - Finance and Chief Financial September 5, 2000
--------------------------------- Officer
Dave Turner
/s/ C.M. CHENG Director September 5, 2000
---------------------------------
C.M. Cheng
/s/ JIM LOVELL Director September 5, 2000
---------------------------------
Jim Lovell
/s/ S.B. LAI Director September 5, 2000
---------------------------------
S.B. Lai
</TABLE>
II-6
<PAGE>
EXHIBITS INDEX
Exhibit No. Description
* 3.1 Certificate of Incorporation
** 3.2 Bylaws
* 3.3 Amendment to Certificate of Incorporation
3.4 Certificate of Designation
* 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
****** 4.4 Form of Subscription Agreement between the Registrant
and the Series A 5% Cumulative Convertible Preferred
Stock Subscribers
****** 4.5 Form of Common Stock Purchase Warrant to be issued to
the Series A 5% Cumulative Convertible Preferred Stock
Subscribers and Placement Agents
****** 4.6 Form of Special Common Stock Purchase Warrant to be
issued to the Series A 5% Cumulative Convertible
Preferred Placement Agent
****** 4.7 Form of Funds Escrow Agreement
5.1 Form of Opinion of Luce, Forward, Hamilton & Scripps
LLP as to legality of securities being offered
* 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
<PAGE>
Exhibit No. Description
***** 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
10.23 Private Equity Line of Credit Agreement, dated August 15,
2000, between the Company and certain Investors
10.24 Registration Rights Agreement between the Company and the
investors participating in the Private Equity Line of
Credit Agreement
10.25 Form of Warrant issued in connection with Private Equity
Line of Credit Agreement
23.1 Consent of Ernst & Young LLP
<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.
****** Incorporated by reference to the Company's Report in Form
10-KSB for the year ended December 31, 1999, filed with
the Securities and Exchange Commission on March 30, 2000.
