As filed with the Securities and Exchange Commission on May 23, 2002
An Exhibit List can be found on page II-1.
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)
Roy H. Norris
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
===================================================================================================================================
Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Securities Amount to be Offering Price Per Aggregate Offering Registration
to be Registered Registered Security(1) Price Fee
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Shares of Class A Common Stock, $.0001 par value(3) 626,002 $0.34-1.203 $ 627,081
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Shares of Class A Common Stock, $.0001 par value(2) 126,974,638 0.31 39,362,138
- -----------------------------------------------------------------------------------------------------------------------------------
Shares of Class A Common Stock, $.0001 par value(4) 4,268,764 0.327-3.15 2,610,385
- -----------------------------------------------------------------------------------------------------------------------------------
Shares of Class A Common Stock, $.0001 par value(5) 3,343,116 0.31 1,036,366
- -----------------------------------------------------------------------------------------------------------------------------------
Shares of Class A Common Stock, $.0001 par value(6) 8,152,174 0.31 2,527,174
- -----------------------------------------------------------------------------------------------------------------------------------
Shares of Class A Common Stock, $.0001 par value(7) 2,646,412 0.22275 589,488
- -----------------------------------------------------------------------------------------------------------------------------------
Shares of Class A Common Stock, $.0001 par value(8) 93,167,702 0.31 28,881,988
- -----------------------------------------------------------------------------------------------------------------------------------
Shares of Class A Common Stock, $.0001 par value(9) 36,306,284 0.25-0.30 9,984,228
- -----------------------------------------------------------------------------------------------------------------------------------
Shares of Class A Common Stock, $.0001 par value(10) 8,310,559 $0.31 2,576,273
- -----------------------------------------------------------------------------------------------------------------------------------
Shares of Class A Common Stock, $.0001 par value(11) 13,620,186 $0.31 4,222,258
- -----------------------------------------------------------------------------------------------------------------------------------
Shares of Class A Common Stock, $.0001 par value(12) 45,761,646 $0.31 14,186,110
- -----------------------------------------------------------------------------------------------------------------------------------
Shares of Class A Common Stock, $.0001 par value(13) 100,000 $0.30 30,000
- -----------------------------------------------------------------------------------------------------------------------------------
Shares of Class A Common Stock, $.0001 par value(14) 1,130,000 $0.31 350,300
- -----------------------------------------------------------------------------------------------------------------------------------
Total(15) 344,407,483 $106,983,789 $9,843
===================================================================================================================================
(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 Class A Common Stock as reported on the Over the Counter
Bulletin Board on May 20, 2002.
(2) Issuable upon the exercise of outstanding warrants issued under the March
26, 2002, Series A Preferred Stock Subscription Agreements: 480,000
warrants at an exercise price of $1.203 per share and 146,002 warrants at
an exercise price of $0.34 per share.
(3) Issuable upon the resale of common stock issuable under the August 15,
2000, Private Equity Line of Credit Agreement. A total of $17,522,500 in
Class A Common Stock remains issuable under this agreement and
approximately 150% of the shares issuable at an estimated issuance price
per share of $0.207 is being registered.
(4) Issuable upon the exercise of outstanding warrants issued under the Private
Equity Line of Credit Agreement: 250,000 warrants at an exercise price of
$3.15; 436,092 warrants at an exercise price of $1.11; 966,990 warrants at
an exercise price of $0.50 and 2,615,682 warrants at an exercise price of
$.327.
(5) Issuable upon the conversion of notes issued in lieu of the payment of
finders fees payable under the March 27, 2001, Subscription Agreement and
the June 27, 2001, Subscription Agreement. We are registering 150% of the
shares issuable upon conversion of $410,089 in notes issued at an estimated
conversion price of $0.184 per share.
(6) Issuable upon the conversion of a convertible note issued on June 27, 2001.
We are registering 150% of the shares issuable upon the conversion of the
$1 million note at an estimated conversion price of $0.184 per share.
(7) Issuable upon the exercise of outstanding warrants issued on June 27, 2001,
at an exercise price of $0.22275 per share.
(8) Issuable upon the conversion of secured notes issued under the October 26,
2001, Subscription Agreement. We are registering 150% of the shares
issuable upon the conversion of the $10,000,000 in notes issued at an
estimated conversion price of $0.161 per share.
(9) Issuable upon the exercise of warrants issued under the October 26, 2001,
Subscription Agreement; the October 26, 2001, Put Agreement and the January
30, 2002, Subscription Agreement. One half of the warrants have an exercise
price of $0.25 per share and the remaining warrants have an exercise price
of $0.30 per share. 4,538,284 of these warrants were issued in payment of
finders fees.
(10) Issuable upon the conversion of notes issued in lieu of the payment of
finders fees payable under the October 26, 2001, Subscription Agreement. We
are registering 150% of the shares issuable upon conversion of $892,000 in
notes issued at an estimated conversion price of $0.161 per share.
(11) Issuable upon the conversion of $1,461,900 in notes issued under the
October 26, 2001, Put Agreement. We are registering 150% of the shares
issuable upon the conversion of the $1,329,000 in notes issued and $132,900
in finders fee notes issued at an estimated conversion price of $0.161 per
share.
(12) Issuable upon the conversion of $4,911,750 in notes issued under the
January 30, 2002, Subscription Agreement. We are registering 150% of the
shares issuable upon the conversion of the $4,555,000 in notes issued and
$356,750 in finders fee notes issued at an estimated conversion price of
$0.161 per share.
(13) Issuable upon the exercise of warrants issued under a consulting agreement
at an exercise price of $0.30.
(14) For the resale of shares issued and to be issued to consultants for
services provided to us. We have an obligation to register these shares
under our agreements with the consultants.
(15) 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.
----------------------
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.
PRELIMINARY PROSPECTUS Subject To Completion, Dated May 23, 2002
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
344,407,483 Shares
Class A Common Stock
THE OFFERING
Advanced Aerodynamics & Structures, Inc. ("AASI" or the "Company") is
hereby registering the resale of up to 343,277,483 shares of AASI Class A Common
Stock pursuant to the terms of its Private Equity Line of Credit Agreement;
Series A Preferred Stock; Secured Convertible Notes; Convertible Notes; and
warrants issued in connection with its Private Equity Line of Credit Agreement,
Series A Preferred Stock, Secured Convertible Notes and Convertible Notes.
The resale of up to 1,130,000 shares of Class A Common Stock by certain
selling stockholders identified in this prospectus at the prevailing market
price or in negotiated transactions, including shares issuable pursuant to the
conversion of warrants.
Each selling stockholder is deemed to be an underwriter of the shares of
common stock which they are offering.
TRADING SYMBOL
AASI (Over the Counter Bulletin Board)
-------------
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK.
See "Risk Factors" beginning on page 3.
-------------
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 STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT BECOMES EFFECTIVE.
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
We are a development stage enterprise organized in 1990 to design, develop,
manufacture and market general aviation aircraft. At the end of 2001, we
recognized that a unique opportunity exists in the general aviation industry
today. We believe that an opportunity has been created for the formation of a
new general aviation company whose products offer an alternative to business
travel by airline for executives of small- to medium-sized businesses and high
net worth individuals as a result of the concurrence of the following: (1)
reduction of product-liability exposure as a consequence of the passage of
General Aviation Revitalization Act of 1994, (2) the availability of several top
of the line general aviation product lines as a result of the recent recession
and changes in strategic direction by several general aviation aircraft
manufacturers, and (3) deteriorating comfort and convenience of airline travel.
To take advantage of the current opportunity, we have hired a management
team with significant experience in turning around general aviation
manufacturing companies. The new management team has taken the first step in our
strategy by acquiring the assets of Mooney Aircraft Corporation. Mooney produced
high-performance, single-engine piston aircraft for more than 50 years and are
currently recognized as the highest performance piston engine aircraft in
commercial production. Over 10,000 Mooney aircraft are in operation around the
world. We plan to pursue the acquisition of other complementary general aviation
product lines and development programs as they become available. Significant
spending on the Jetcruzer program has been suspended, and we will review how
best to capitalize on the completed development work.
We have not generated any operating revenues to date and have incurred
losses from our operating activities of $21,200,000 and $10,800,000 in 2001 and
2000, respectively, and $5,700,000 during the three-month period ended March 31,
2002. We believe we will continue to experience losses until such time as we
attain a sales level of our aircraft on a commercial scale.
1
The Offering
Class A Common Stock offered by selling Up to 344,407,483 shares, which may
stockholders (including shares underlying be sold based on current market
preferred stock, convertible debentures prices or in negotiated transactions.
and warrants) This number represents 85% of
64,328,017 shares outstanding as of
May 22, 2002, assuming the full
conversion of the preferred stock and
convertible debentures, complete
exercise of the warrants being
registered and the issuance of common
stock for the full amount remaining
under the Private Equity Line of
Credit.
Use of proceeds General corporate purposes*
Over the Counter Bulletin Board symbol AASI
* We will not receive proceeds from the resale by selling stockholders of
the Class A Common Stock described in this prospectus. If exercised, we may
receive proceeds from the sale of shares issuable upon the exercise of warrants
by the selling stockholders. However, if the cashless exercise provision of any
of the warrants is used, we will not receive proceeds from the exercise of those
warrants.
Notice About Forward-Looking Statements
To the extent that the information presented in this prospectus discusses
financial projections, information or expectations about our business plans,
results of operations, products or markets, or otherwise makes statements about
future events, such statements are forward-looking. Such forward-looking
statements can be identified by the use of words such as "intends,"
"anticipates," "believes," "estimates," "projects," "forecasts," "expects,"
"plans," and "proposes." Although we believe that the expectations reflected in
these forward-looking statements are based on reasonable assumptions, there are
a number of risks and uncertainties that could cause actual results to differ
materially from such forward-looking statements. These include, among others,
the cautionary statements in the "Risk Factors" section of this prospectus.
These cautionary statements identify important factors that could cause actual
results to differ materially from those described in the forward-looking
statements. When considering forward-looking statements in this prospectus, you
should keep in mind the cautionary statements in the "Risk Factors" section and
other sections of this prospectus.
2
RISK FACTORS
This investment has a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described below and the other
information in this prospectus. If any of the following risks actually occur,
our business, operating results and financial condition could be harmed and the
value of our stock could go down. This means you could lose all or a part of
your investment.
PAYMENT OF CONVERTIBLE NOTES ISSUED UNDER VARIOUS SUBSCRIPTION AGREEMENTS COULD
BE DEMANDED AT ANY TIME UNDER THE TERMS OF THE NOTES.
We did not register the shares issuable upon conversion within 30 days of
the closing date of the June 27, 2001, Subscription Agreement, or within 45 days
of the closing date of the October 26, 2001 Subscription Agreements and the
January 30, 2002, Subscription Agreements, each of which is a non-registration
event and an event of default pursuant to the subscription agreements. In
accordance with the terms of the subscription agreements, the holders may
accelerate the notes and demand immediate repayment of all principal and
interest owed to the notes. We do not have sufficient cash to comply with a
demand for repayment of all the June 2001, October 2001 and January 2002 notes.
If the holders of the notes were to demand repayment of the principal and
interest under such notes, and we were unable to make such repayment, such
holders could take various actions to accomplish repayment, including, but not
limited to, foreclosure on our assets, virtually all of which were pledged as
security for the October 2001 Secured Convertible Notes. Any demand for
repayment of the notes would have a material adverse effect upon the Company and
could jeopardize its ability to continue its development efforts or to continue
operations. There are also liquidation damages due to the note holders as a
result of the non-registration event. Such damages are calculated from the date
of the non-registration event at an amount equal to 1% of the principal amount
issued for the first 30 days or part thereof, and then 2%, during the pendency
of the non-registration event.
Periodic interest payments are due on all outstanding notes issued pursuant
to the March 27, 2001, Subscription Agreement, the June 27, 2001, Subscription
Agreement and the October 26, 2001, Subscription Agreement. The interest
payments became due approximately three months after the initial issuance of the
June 2001 notes and six months after the initial issuance of the October notes,
but have not been paid. Pursuant to the terms of the notes, the holder has the
right to call the notes due.
Our failure to continue the listing of our Class A Common Stock on NASDAQ
was a violation of the terms of our Secured Convertible Notes issued on March
27, 2001 (the "March 2001 Secured Convertible Notes"). Pursuant to such terms,
the holders of the March 2001 Secured Convertible Notes may accelerate the notes
and demand immediate repayment of all principal and interest owed pursuant to
the notes.
We do not have sufficient cash to comply with a demand for repayment of all
the notes as described above. Any demand for immediate repayment of the notes
would have a material adverse effect upon the Company and could jeopardize its
ability to continue its development efforts or to continue operations. The
aggregate amount of the principal and interest due on these notes at March 31,
2002, was $2,636,000 for the March 27, 2001, notes; $1,210,000 for the June 27,
2001 note; $11,738,000 for the October 26, 2001, notes; $1,484,000 for the
January 30, 2002, notes issued pursuant to the October 26, 2001, Put Agreement;
and $2,307,000 for the January 30, 2002, notes. The aggregate amount of the
principal and interest due on all outstanding convertible notes is $19,375,000
as of March 31, 2002.
A DEMAND FOR THE IMMEDIATE REPAYMENT OF THE NOTES PAYABLE TO CONGRESS DUE TO
ANY DEFAULT IN PAYMENT WOULD ADVERSELY AFFECT OUR BUSINESS.
Under the terms of our agreements with Congress, we paid $8,000,000 to
acquire their position as a senior secured creditor in the Mooney Aircraft
Corporation bankruptcy. $3,500,000 of the purchase price was paid in cash
and $4,500,000 in secured notes as follows: (1) a Secured Promissory Note
for $500,000, (2) a Secured Promissory Note for $2,500,000, and (3) a
Secured Promissory Note for $1,500,000, each due at various times with
varying schedules for interest payments and the repayment of principal.
These notes are secured by substantially all the assets acquired from
Congress.
As additional security for our compliance with the fulfillment of our
obligations to Congress, there is a Limited Recourse Secured Promissory Note
for $5,700,000. This note is a contingent note, payable in the event that
we default under the payment terms of the other notes. This note is also
secured by substantially all the assets acquired from Congress.
If sources of financing are unavailable, we will be unable to pay our
obligations to Congress and will be in default on the notes. Congress may
then accelerate the notes and demand immediate repayment of all principal
and interest owed. We do not have sufficient cash to comply with a demand
for repayment of all the Congress notes. If Congress were to demand
repayment of the principal and interest under such notes, and we were unable
to make such repayment, Congress could take various actions to accomplish
repayment, including, but not limited to, foreclosure on our assets,
virtually all of which were pledged as security for the notes. Any demand
for repayment of the notes would have a material adverse effect upon the
Company and could jeopardize its ability to continue its development efforts
or to continue operations.
RISK OF LOW-PRICE STOCKS.
AASI's Class A Common Stock is classified as a "penny stock" by the
Commission. This classification severely and adversely effects the market
liquidity for our Class A Common Stock. Commission regulations define a "penny
stock" to be any non-NASDAQ equity security that has a market price 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.
3
As a "penny stock" shares of AASI's Class A Common Stock are 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 prior written consent to the transaction. Consequently, the rule may
adversely affect the ability of broker-dealers to sell AASI's securities and may
adversely affect the ability of holders of AASI's securities to sell such
securities in the secondary market.
WE ARE A DEVELOPMENT STAGE COMPANY; NO ASSURANCE OF SUCCESS; NO COMMERCIAL
OPERATIONS.
AASI is in the development stage and has not received any operating
revenues. Potential investors should be aware of the problems, delays, expenses
and difficulties usually encountered by an enterprise in our stage of
development, many of which may be beyond our control. These include
unanticipated problems relating to 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.
WE HAVE ACCUMULATED A SUBSTANTIAL DEFICIT; WE HAVE A HISTORY OF LOSSES; WE
EXPECT SUBSTANTIAL FUTURE LOSSES.
To date, AASI has incurred significant losses. At March 31, 2002, we had an
accumulated deficit of approximately $92,400,000. We have incurred
losses from our operating activities of $21,200,000 and $10,800,000 in 2001 and
2000, respectively, and $5,700,000 during the three-month period ended March 31,
2002. These losses have resulted principally from significant costs associated
with the development of the JETCRUZER 500. AASI expects to incur further losses
due to significant costs associated with manufacturing its aircraft, obtaining
the necessary regulatory approvals, and marketing and selling its aircraft.
There can be no assurance that sales of our aircraft will ever generate
sufficient revenues to fund its continuing operations, that we will generate
positive cash flow from our operations, or that we will attain or thereafter
sustain profitability in any future period.
WE WILL NEED ADDITIONAL FINANCING.
We will need to obtain additional financing in order to complete the
renovation of our facilities in Kerrville and restart the production of new
aircraft and spares. Failure to obtain such additional financing would have a
material adverse effect on our business and prospects and could require that we
severely limit or cease our operations. Additional financing may not be
available on acceptable terms or at all.
REGULATORY UNCERTAINTY.
AASI will 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 we will be able to produce and sell aircraft.
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 judgment, 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 judgment, 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.
4
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 such 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.
WE FACE NUMEROUS COMPETITORS, SOME OF WHICH HAVE GREATER RESOURCES.
Our aircraft will compete with other aircraft that have comparable
characteristics and capabilities. Many of our competitors, including Textron
(Cessna Aircraft Co.), Raytheon Aircraft Co. (Beechcraft) and New Piper Aircraft
Corp, 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 have greater financial and other resources that may 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.
RELIANCE ON SINGLE SOURCE SUPPLIERS.
AASI will be dependent on certain suppliers of products in order to
manufacture its aircraft. Should our ability to obtain the requisite components
be limited for any lengthy period of time or the cost of the components
increase, our ability to produce and sell aircraft could be materially and
adversely affected. Securing acceptable pricing and terms from suppliers of the
bankrupt Mooney Aircraft Company may be difficult because of financial
difficulties caused by that bankruptcy and damage to the reputation of Mooney as
a customer. 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 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.
AVAILABILITY OF A SKILLED WORKFORCE.
AASI will be dependent on recalling the skilled workforce that was employed
by the old Mooney Aircraft Company, in order to manufacture its aircraft. Should
our ability to obtain the requisite skills be limited for any lengthy period of
time or the cost of these skilled individuals increase, our ability to produce
and sell aircraft could be materially and adversely affected. Moreover, our
ability to significantly increase our production rate could be limited by the
availability of sufficient numbers of craftsmen in manufacturing, assembly,
finishing, engineering, quality, sales and product support. Our inability to
obtain sufficient numbers of skilled workers in a number of critical areas would
have a material adverse effect on our business prospects, operations and
financial condition.
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
5
terms or at all. Currently the coverage offered specifically excludes
Mooney aircraft produced by the bankrupt Mooney Aircraft Company. 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 rescheduling 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 conflict 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, materially and
adversely impact 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 have an adverse impact on 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.
The results of AASI's operations will depend in large part on the skills
and efforts of Roy Norris, our Chairman and Chief Executive Officer, and, to a
lesser extent, on the skills and efforts of Dale Ruhmel, Executive Vice
President of Manufacturing and Engineering, Peter Larson, Executive Vice
President and Chief Financial Officer, and Nelson Happy, Executive Vice
President and General Counsel. 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 there can be no assurance that we will 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 our operating results and financial condition.
RISKS OF PLANNED GROWTH.
AASI plans to significantly expand its operations during 2002, which could
place a significant strain on its limited personnel, financial and other
resources. We intend to reestablish the manufacturing capabilities of our Mooney
subsidiary and recommence commercial manufacture of Mooney aircraft. 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. We
also intend to seek to acquire additional aircraft product lines which will
place additional demands on our limited resources.
6
CONTROL BY INSIDERS; OWNERSHIP OF SHARES HAVING DISPROPORTIONATE VOTING RIGHTS.
Sam Rothman, a Director of AASI, and C.M. Cheng, also a Director of AASI,
beneficially own, or have voting control over, shares of AASI's capital stock
representing a significant portion of the total voting power of AASI.
Accordingly, they will continue to be able to have a significant influence over
the election of AASI's directors and thereby influence the direction of the
policies 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 serve to 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.
These provisions may limit the ability of AASI's stockholders to obtain damages
from AASI's directors, either directly or on a derivative basis, for breach of
fiduciary duty.
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 Class A
Common Stock. The issuance 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
May 22, 2002, AASI had outstanding 64,328,017 shares of Class A Common Stock,
debentures issued under various agreements convertible into 118,847,588 shares
of Class A Common Stock, warrants issued under various agreements for 59,917,951
shares of Class A Common Stock, 10,400,000 Class A Warrants and 6,900,000 Class
B Warrants (excluding the 10,400,000 Class B Warrants issuable upon the exercise
of the Class A Warrants), 40,491 shares of Series A Preferred Stock, 1,900,324
shares of Class B Common Stock, and 8,000,000 shares of Class E Common Stock.
The Class A and Class B Warrants have been extended until May 31, 2002. The
shares of Class E Common Stock 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. 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.
7
OUR COMMON STOCK HAS BEEN DELISTED FROM THE NASDAQ STOCK MARKET.
Our Class A Common Stock was delisted from the NASDAQ Stock Market in April
2001, and it is now traded through the NASD's "Electronic Bulletin Board."
Consequently, the liquidity of our securities has been severely impacted, not
only by the number of securities which can 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.
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 THE NUMBER OF SHARES ISSUABLE UPON
CONVERSION OF PREFERRED STOCK AND CONVERTIBLE NOTES AND UNDER PRIVATE EQUITY
LINE OF CREDIT.
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 and convertible notes as a
result of the conversion formula, which is tied to the market price of the
common stock. The price at which stock is issued under the Private Equity Line
of Credit is also based on the market price of our Class A Common Stock. This
may result in additional dilution to existing stockholders if shares are issued
under the Private Equity Line of Credit at a time when the market price of our
Class A Common Stock is depressed. The consequences of decreases in the common
stock price are more fully discussed below under the risk factor below.
THE ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK UPON CONVERSION OF PREFERRED
STOCK MAY CAUSE SIGNIFICANT DILUTION OF EXISTING STOCKHOLDERS' INTERESTS AND
EXERT DOWNWARD PRESSURE ON THE PRICE OF OUR COMMON STOCK.
Significant dilution of existing stockholders' interests may occur if we
issue additional shares of common stock underlying outstanding shares of
preferred stock. As of May 22, 2002, we had 40,491 shares of Series A Preferred
Stock outstanding. The number of shares of common stock issuable upon conversion
of the Series A Preferred Stock may constitute a significant greater percentage
of the total outstanding shares of our common stock, as such conversion is based
on a formula pegged to the market price of the common stock. The formula
provides, specifically, that the number of shares of 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 (1) 100% of the average of
the closing bid price of the common stock on the last three trading days before
the date of initial issuance of shares of Series A Preferred Stock, or (2) 90%
of the average of the eight lowest closing bid prices of the 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 common stock at a
rate which may be below the prevailing market price of the 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:
8
-- 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 our 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
stockholders.
THE ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK UPON CONVERSION OF CONVERTIBLE
NOTES MAY CAUSE SIGNIFICANT DILUTION OF EXISTING STOCKHOLDERS' INTERESTS AND
EXERT DOWNWARD PRESSURE ON THE PRICE OF OUR COMMON STOCK.
Significant dilution of existing stockholders' interests may occur if
we issue additional shares of common stock underlying outstanding shares of
convertible notes. As of May 22, 2002, we had $ 19,401,435 aggregate principal
amount of convertible notes outstanding. The number of shares of common stock
issuable upon conversion of the convertible notes may constitute a significant
greater percentage of the total outstanding shares of our common stock, as such
conversion is based on a formula pegged to the market price of the common stock.
The formula provides, specifically, that the number of shares of common stock
issuable upon the conversion of the notes is calculated by dividing the
aggregate principal amount outstanding by the conversion price. For certain
notes, the conversion price is, at the option of the holder (1) 80% of the
average of the three lowest closing bid prices of the common stock during the
last 60 trading days before the date of conversion or (2) $.25. For other notes,
the conversion price is, at the option of the holder (1) 70% of the average of
the three lowest closing bid prices of the common stock during the last 30
trading days before the date of conversion or (2) $.35. Therefore, it is likely
that the notes may convert to common stock at a rate which is below the
prevailing market price of the common stock at the time of conversion.
9
The exact number of shares of common stock into which the notes 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 notes. 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 notes, 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 notes 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 our
stock, the pressure could encourage short sales by holders of
notes and others, thus placing further downward pressure in
the price of the common stock.
-- The conversion of notes would dilute the book value and
earnings per share of common stock held by our existing
stockholders.
THE ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK UNDER THE PRIVATE EQUITY LINE
OF CREDIT MAY CAUSE DILUTION OF EXISTING STOCKHOLDERS' INTERESTS AND EXERT
DOWNWARD PRESSURE ON THE PRICE OF OUR COMMON STOCK.
Dilution of existing stockholders' interests may occur if we issue
additional shares of common stock at below-market prices under the Private
Equity Line of Credit. As of May 22, 2002, we had $17,522,500 available to us
under the Private Equity Line of Credit, although we cannot draw on this equity
line without the waiver of certain conditions by the investors. Should we be
able to obtain waivers of these conditions, Class A Common Stock would be issued
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 we request the purchase of stock under
the equity line.
Decreases in the trading price of our common stock would result in
increases in the number of shares of common stock issuable under the equity
line. The following consequences could result:
-- If the market price of our common stock declines, thereby
proportionately increasing the number of shares of common
stock issued under the credit line, an increasing downward
pressure on the market price of the common stock might result
(sometimes referred to as a downward "spiral" effect).
-- Once downward pressure is placed on the market price of our
stock, the pressure could encourage short sales by holders of
notes and others, thus placing further downward pressure in
the price of the common stock.
-- The conversion of notes and the Series A Preferred Stock which
could result would dilute the book value and earnings per
share of common stock held by our existing stockholders.
USE OF PROCEEDS
We will not receive any of the proceeds of the sale of shares underlying
the Series A Preferred Stock, the secured convertible notes, the convertible
notes or the warrants or any of the outstanding shares, the resale of which is
registered pursuant to the registration statement of which this prospectus is a
part. Additional amounts may be received if the warrants to purchase Class A
Common Stock issued under various agreements are exercised without the use of
any applicable cashless exercise provision.
10
PRICE RANGE OF COMMON STOCK
Our Class A Common Stock is listed for trading on the Over the Counter
Bulletin Board under the symbol "AASI". The following table sets forth the range
of high and low last sale prices per share for the Class A Common Stock as
quoted on the Over the Counter Bulletin Board, for the periods indicated.
YEAR ENDED DECEMBER 31, 2000 HIGH LOW
----------------------------------- ---------- ----------
First Quarter $6.688 $2.500
Second Quarter 5.250 2.781
Third Quarter 3.375 2.000
Fourth Quarter 2.156 .344
YEAR ENDED DECEMBER 31, 2001 HIGH LOW
----------------------------------- ---------- ----------
First Quarter $0.687 $0.250
Second Quarter 0.380 0.190
Third Quarter 0.332 0.180
Fourth Quarter 0.290 0.170
PERIOD ENDED MARCH 31, 2002 HIGH LOW
----------------------------------- ---------- ----------
First Quarter $0.440 $0.220
Second Quarter through May 20, 2002 0.330 0.210
At March 31, 2002, there were approximately 182 holders of record of our
Class A Common Stock; 4 holders of record of our Class B Common Stock; 5 holders
of record of our Class E-1 Common Stock and 6 holders of record of our Class E-2
Common Stock. We believe that there are significant numbers of beneficial owners
of our Class A Common Stock whose shares are held in "street name."
We have not paid cash dividends on our common stock and do not anticipate
that we will do so in the near future. Our present policy is to retain earnings
to finance the development of our operations.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS
The following discussion and analysis of our plan of operations should be
read in conjunction with the financial statements and the related notes. This
prospectus contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934 which are 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."
PLAN OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in this report.
GENERAL
Since 1990, we have been a development-stage enterprise organized to
design, develop, manufacture and market propjet and jet aircraft intended
primarily for business, corporate and government use and have been engaged
principally in research and development of our proposed aircraft. We began our
operations in Burbank, California.
We have hired a management team with significant experience in turning
around general aviation manufacturing companies to take advantage of current
opportunities. The new management team instituted a technical review of the
Jetcruzer 500 program. Based on this review, the new management team concluded
that the Jetcruzer 500 was not likely to achieve its design objectives at a
commercially-reasonable cost. Accordingly, significant spending on the Jetcruzer
program was suspended, and we will review how best to capitalize on the
completed development work.
On February 8, 2002, we announced we had purchased Congress Financial
Corporation's ("Congress") position as senior secured creditor for Mooney
Aircraft Corporation of Kerrville, Texas ("Mooney"). On February 6th, the U.S.
Bankruptcy Court in San Antonio, Texas, approved an operating agreement which
allowed us to manage Mooney until a plan of reorganization was approved. The
Bankruptcy Court approved the sale of substantially all of the Mooney assets to
us on March 18, 2002, and on April 24, 2002 we completed the Mooney asset
acquisition.
Mooney Aircraft Corporation has been the world's leading supplier of high
performance single engine general aviation aircraft primarily serving business
and owner-flown markets. Mooney has produced over 10,000 aircraft since its
founding in 1947 and presently has over 8,000 aircraft in operation in the US
alone. We have acquired substantially all of Mooney's assets and intend to
return to full production of the Mooney aircraft line. Mooney aircraft's assets
are held by our wholly-owned subsidiary named Mooney Airplane Company, Inc. We
will formally change our name to Mooney Aerospace Group, Ltd.
We believe the acquisition of Mooney's assets is the first step in our
strategy to become a leading supplier of piston, turboprop and light jet
aircraft for the business and owner-flown general aviation markets. It is our
intention to accomplish this objective through both the acquisition of existing
high quality general aviation product lines and the development of revolutionary
new aircraft models. Our goals are to create a dynamic new general aviation
company, return Mooney to full production and create substantial potential for
earnings growth for the Company and its stockholders.
When we commence the commercial sale of our aircraft, we will derive a
substantial portion of our revenues from the sale of a relatively small number
of aircraft. As a result, a small reduction in the number of aircraft shipped in
a quarter could have a material adverse effect on our financial position and
results of operations for that quarter. Our policy is to collect progress
payments during the construction of aircraft and final payments upon the
delivery of aircraft. Construction or delivery delays near the end of a
particular quarter due to, for example, shipment rescheduling, delays in the
delivery of component parts or unexpected manufacturing difficulties, could
cause the financial results of the quarter to fall significantly below our
expectations and could materially and adversely affect our financial position
and results of operations for the quarter.
12
During 2002 and 2003, we intend to focus our efforts on the following
events:
. The restoration to full production of Mooney's manufacturing line in
Kerrville, Texas.
. Enhancement and aggressive implementation of Mooney's marketing program.
. Analysis and appropriate acquisition of other existing general
aviation products that will allow us to offer a wide variety of products
designed to meet potential customers' aviation needs.
We have entered into three-year employment agreements with Roy Norris,
Chairman/CEO; Peter Larson, Executive Vice President/Chief Financial Officer;
Dale Ruhmel, Executive Vice President of Engineering and Operations and J.
Nelson Happy, Executive Vice-President and General Counsel, on similar terms.
The majority of their compensation was designed to reward performance. Over the
three-year period they will vest in ownership of five percent, three percent,
two percent and three percent, respectively, of the outstanding shares of the
Company and all receive annual salaries of $200,000 plus reimbursement of
expenses.
We have not generated any operating revenues to date and have incurred
losses from our operating activities of $21,200,000 and $10,800,000 in 2001 and
2000, respectively, and $5,700,000 during the three-month period ended March 31,
2002. We believe we will continue to experience losses until such time as we
attain a sales level of our aircraft on a commercial scale.
Our current cash balance, including the additional funding obtained
subsequent to March 31, 2002 described elsewhere (see "Liquidity and Capital
Resources"), has been sufficient to finance our plan of operations and
acquisitions to date. Additional funding will be required, either through
additional stock issuances or debt financing. If sources of financing are
unavailable, we will have to curtail our plans and will be unable to pay our
obligations to Congress.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
operating amounts and results.
Period from
Quarter Ended January 26, 1990
Years Ended December 31 March 31, (inception) to
---------------------------- --------------- March 31,
2000 2001 2002 2002
------------- ------------- --------------- ----------------
Interest and other income $143,000 $73,000 $41,000 $ 4,322,000
Research and development, and
general and administrative expenses (9,884,000) (12,445,000) (3,812,000) (75,546,000)
Interest expense (938,000) (4,969,000) (1,903,000) (11,155,000)
Loss on disposal of assets -- -- -- (755,000)
Realized loss on sale of investments (36,000) -- -- (66,000)
Non-recurring expenses -- (3,823,000) -- (3,823,000)
Extraordinary loss -- -- -- (942,000)
------------- ------------- --------------- ----------------
Net loss $ (10,715,000) $ (21,164,000) $(5,674,000) $(87,965,000)
============= ============= =============== ================
We have not generated any revenues from operations. Our losses have
resulted primarily from expenditures made in connection with the research and
development of the Jetcruzer aircraft and general and administrative activities.
We have decided to suspend the expenditure of substantial sums on the Jetcruzer
500 program. We are considering several options for the program which include a
restart of the Jetcruzer program at a later date, use of JetCruzer flight
13
and test data to launch a new development activity and the sale of the program
to another company. During 1996 we incurred an extraordinary loss of $942,000,
resulting from the retirement of debt at the time of our December 1996 IPO.
Interest income consisted primarily of earnings derived from the unused
proceeds of the 1999 sale and leaseback of our 200,000 square foot building.
Interest income aggregated $2,858,000 from inception through March 31, 2002,
$75,000, $37,000, and $3,000 was earned in the years ended 2000 and 2001, and
for the three-month period ended March 31, 2002, respectively.
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 $47,159,000 from inception
through March 31, 2002. These expenses were incurred to develop the Jetcruzer
450, to obtain a type certificate for the Jetcruzer 450, and to begin the design
of the Jetcruzer 500. Research and development expenses amounted to $7,630,000
in 2001 as we accelerated the development of the Jetcruzer 500. In the
three-month period ended March 31, 2002, research and development expenses
decreased to $1,661,000 as plans for the suspension of the Jetcruzer 500 were
made.
General and administrative expenses have consisted primarily of
administrative salaries and benefits, rent, marketing expenses, insurance and
other administrative costs. Such expenses aggregated $28,387,000 from inception
through March 31, 2002, $3,543,000 and $4,815,000 of which were incurred in 2000
and 2001, respectively. Through the three-month period ended March 31, 2002,
$2,151,000 of general and administrative expenses were incurred. The increases
in 2002 were primarily due to salary expenses, travel expenses, and legal
expenses related to financing activities.
Non-recurring expenses, which were incurred in the year ended December 31,
2001, consist of the following: a write-off of capitalized tooling costs of
approximately $2,082,000; a write-off of capitalized engineering software of
approximately $723,000; and an accrual of approximately $1,018,000 related to
commitments to purchase specific items from certain vendors. We believe both the
capitalized tooling and software have no future use to us due to the change in
our business strategy and the re-design of our previous major product, the
Jetcruzer 500. The accrual to vendors represents costs incurred by vendors in
the production of items specifically related to the Jetcruzer 500 with no
alternative saleable value to the vendors.
Interest expense has consisted primarily of interest expended by us for
bank and private financing, including the amortization of debt issue costs and
discounts on convertible debentures. Interest expense aggregated $11,155,000
from inception through March 31, 2002, $938,000, $4,969,000 and $1,903,000 of
which were incurred in 2000, 2001, and for the three-month period ended March
31, 2002, respectively.
We account for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." We have incurred
net losses in each year since our inception and consequently have paid no
federal or state income taxes.
At March 31, 2002, we had federal and California state tax net operating
loss carryforwards of approximately $76,774,000 and $29,240,000, respectively,
which, if unused, will expire in varying amounts in the years 2002 through 2021.
Our ability to use our net operating loss carryforwards to offset future taxable
income may be limited annually if there is a substantial change of control of
our Company. We give no assurance as to the amount of the net operating loss
carryforwards that will be available in future years.
At March 31, 2002, we had federal and California state research and
development ("R&D") credit carryforwards of approximately $1,356,000 and
$542,000, respectively. The federal R&D credit carryforwards will expire in the
years 2004 through 2009. The state R&D credit carryforwards can be carried
forward indefinitely.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002, we had working capital of $2,679,000 and a stockholders'
deficiency of $2,846,000. Since our inception in January 1990, we have
experienced continuing negative cash flow from operations, which have resulted
14
in our inability to pay certain existing liabilities in a timely manner. We have
financed our operations through private funding of equity and debt and through
the proceeds generated from our December 1996 initial public offering.
We expect to continue to incur losses until such time as we commence our
production processes and regain market acceptance of our 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 to the scale-up
of manufacturing and the establishment of sales and marketing.
Our management team has developed a financial plan to address our working
capital shortfall which will substantially improve our ability to meet our
working capital requirements. On March 6, 2000, we entered into a series of
subscription agreements for the sale of up to $10,000,000 of 5% Cumulative
Convertible Series A Preferred Stock, from which we have received net proceeds
of $8,265,000 to date.
On August 11, 2000, we finalized the Private Equity Line of Credit which
permits us to sell up to $20,000,000 of our Class A Common Stock through a
Regulation D offering to a private investor. As of March 31, 2002, we received
net proceeds in the amount of $2,400,000. Waivers of certain conditions by the
investors were obtained for the previous proceeds, but there is no guaranty we
can obtain waivers in the future to obtain funds under this equity line.
On March 27, 2001, we consummated an agreement with certain investors to
provide $4,126,000 through secured convertible debentures. Under the same
agreement, an additional $1,000,000 was provided on July 25, 2001, with the
remaining $2,000,000 to be provided at a later date. Warrants to purchase
10,254,000 shares of common stock at exercise prices ranging from $0.24 to $0.45
were issued under this agreement. On June 27, 2001, we obtained new financing of
$1,000,000 by issuing an unsecured convertible debenture with warrants to
purchase 2,646,000 shares of common stock at an exercise price of $0.22. All of
these debentures are at an interest rate of 5% and are convertible into common
stock at the lesser of $0.25 or 80% of the three lowest closing prices for sixty
trading days prior to the conversion. The term of the debentures and warrants is
five years. All issuances were to accredited investors, as defined by Regulation
D rules issued by the Securities and Exchange Commission under the Securities
Act of 1933. Until such time that the secured debentures are converted, our
interest in our assets is being used as security.
At March 31, 2002, we were in default on one of the covenants in each of
the above agreements for failure to pay accrued interest on the notes when due.
Due to the default, we are required to accrue the interest due at 10%. In
accordance with the agreement, we have accrued approximately $223,000 in
interest due these note holders at March 31, 2002. We have not obtained waivers
from the note holders waiving their right to call the notes due or the payment
of outstanding interest, nor has any note holder elected to redeem their notes
outstanding according to the terms of the Subscription Agreement. Due to the
event of default, we have recorded all notes outstanding as a current liability
in the balance sheet.
On October 26, 2001, we received an initial $7,405,000 in net proceeds from
a private placement offering of 8% Secured Convertible Notes along with warrants
to purchase 17,714,000 shares of common stock. The notes were issued in the
principal amount of $7,750,000, less approximately $1,100,000 already advanced
by the note holders prior to the closing date. Both the maturity date of the
notes and the expiration date of the warrants is October 26, 2006. The first 50%
of the warrants may be exercised at a price of $.25 and the remaining 50% may be
exercised at $.30. In conjunction with this private placement, we entered into a
Put Agreement with a group of its investors who hold convertible notes and
preferred stock, some of whom participated in the private placement. We may sell
up to an additional $3,000,000 of convertible notes and warrants as part of this
private placement and under the Put Agreement, we have the option of selling up
to an additional $5,000,000 of convertible notes and warrants. Our right to
exercise our option under the Put Agreement expires October 25, 2002.
We did not register the shares issuable upon conversion within 30 days of
the closing date of the June 27, 2001, financing, or within 60 days of the
October 26, 2001, closing date which is a non-registration event pursuant to the
Subscription Agreement. In accordance with the terms of the Subscription
Agreement, we have accrued $134,000 representing liquidation damages due to the
note holder as a result of the non-registration event. Such damages are
calculated at an amount equal to 1% of the principal amount issued for the first
30 days or part thereof, and 2% thereafter, during the pendency of the
non-registration event.
15
On February 27, 2002, we completed three financing transactions for total
proceeds of $5,734,000 and incurred financing costs of $184,000 paid from the
proceeds and $474,650 issued in convertible notes. The net proceeds for these
transactions were used to make the cash payment to Congress described below and
to fund current operations. In the first of the three financing transactions we
issued $2,250,000 in 8% Secured Convertible Notes under the October 26, 2001
private placement in which $3,000,000 was available to us for additional
financing. The notes are convertible after 120 days into shares of common stock
at a conversion price of $.35 or 70% of the average of the three lowest closing
bid prices for our common stock for the thirty days prior to conversion. The
maturity date of the notes is October 26, 2006. Attached to the notes were
warrants to purchase 5,143,000 shares of our common stock. The first 50% of the
warrants may be exercised after 45 days at a price of $.25 and the remaining 50%
may be exercised at $.30. The expiration date of the warrants is January 30,
2007.
In the second of the three financing transactions, we issued $1,329,000 in
8% Unsecured Convertible Notes as part of the October 26, 2001 Put Agreement in
which we had the option to sell up to an additional $5,000,000 in convertible
notes. The notes are convertible after 120 days into shares of common stock
under the same terms as the October 26, 2001 private placement, except that
there is no security involved. The maturity dates of the notes is October 26,
2006. Attached to the Notes were warrants to purchase 3,037,000 shares of our
common stock. The warrants may be exercised under the same terms as the warrants
issued in conjunction with the October 26, 2001 private placement.
In the third of the three financing transactions, we issued $2,155,000 in
8% Unsecured Convertible Notes as part of a new private placement dated January
30, 2002. The notes are convertible after 120 days into shares of common stock
under the same terms as the October 26, 2001 private placement. The maturity
date of the notes is October 26, 2006. Attached to the notes were warrants to
purchase 4,926,000 shares of our Class A Common Stock. The warrants may be
exercised under the same terms as the warrants issued in conjunction with the
October 26, 2001 private placement.
On March 26, 2002, we issued $1,450,000 in 8% Unsecured Convertible Notes
in a subsequent closing that was part of the new private placement dated January
30, 2002. The notes are convertible after 120 days into shares of common stock
under the same terms as the October 26, 2001 private placement. The maturity
date of the notes is October 26, 2006. Attached to the notes were warrants to
purchase 3,314,000 shares of our Class A Common Stock. The warrants may be
exercised under the same terms as the warrants issued in conjunction with the
October 26, 2001 private placement.
On April 11, 2002, we issued $950,000 in 8% Unsecured Convertible Notes in
a subsequent closing that was part of the private placement dated January 30,
2002. The notes are convertible after 120 days into shares of common stock under
the same terms as the October 26, 2001 private placement. The maturity date of
the notes is October 26, 2006. Attached to the Notes were warrants to purchase
1,900,000 shares of common stock. The warrants may be exercised under the same
terms as the warrants issued in conjunction with the October 26, 2001, private
placement.
Under the terms of our agreements with Congress, we paid $8,000,000 to
acquire their position as a senior secured creditor. $3,500,000 of the purchase
price was paid in cash and $4,500,000 in secured notes as follows: (1) a Secured
Promissory Note for $500,000, (2) a Secured Promissory Note for $2,500,000, and
(3) a Secured Promissory Note for $1,500,000, each due at various times with
varying schedules for interest payments and the repayment of principal. These
notes are secured by substantially all the assets acquired from Congress.
As additional security for our compliance with the fulfillment of our
obligations to Congress, there is a Limited Recourse Secured Promissory Note for
$5,700,000. This note is a contingent note, payable in the event that we default
under the payment terms of the other notes. This note is also secured by
substantially all the assets acquired from Congress.
While there is no assurance that additional financing will be available, we
believe that we have developed a financial plan that, if executed successfully,
will substantially improve our ability to meet our working capital requirements.
Our current cash balance including the additional funding obtained subsequent to
March 31, 2002 described above has been sufficient to finance our plan of
operations and acquisitions to date. Additional funding will be required and is
expected, either through additional stock issuances or debt financing. If
sources of financing are unavailable, we will have to curtail our plans and will
be unable to pay our obligations to Congress.
16
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 of $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 us.
In June 1999, we sold our 200,000 square-foot building to The Abbey Company
and leased it back. The sale 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 our current lease are
approximately $119,620 and escalate annually through June 1, 2007, and will be
adjusted annually beginning June 1, 2009, for changes in the Consumer Price
Index. The rent for the option period 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 October 20, 1997, and has a
term of 30 years with an option to renew for an additional 10 years. The current
monthly rent is $15,600. We had no material capital commitments at December 31,
2001, other than as discussed elsewhere in this report. We intend to hire a
number of additional employees that will require substantial capital resources.
We anticipate that we will hire up to 200 employees over the next twelve
months, including engineers and manufacturing technicians necessary to produce
our aircraft.
SEASONALITY
We believe our business is not seasonal.
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis and Plan of Operations discusses our
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. When we prepare these
financial statements, we are required to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the 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. On an
on-going basis, we evaluate our estimates and judgments, including those related
to investments, long-lived assets, deferred tax assets, other liabilities and
revenue recognition. We base our estimates and judgments on historical
experience and on various other factors that we believe to be reasonable under
the circumstances, the results of which form the basis for our judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Our actual results may differ from these estimates under
different assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in preparing our consolidated financial
statements. (See Note 3 of the Notes to Financial Statements for our Summary of
Significant Accounting Policies.)
Deferred Taxes
We record a valuation allowance to reduce the deferred-tax assets to the
amount that is more likely than not to be realized. We consider future taxable
income in assessing the need for a valuation allowance. Should we determine that
we are able to realize the deferred tax assets in the future, an adjustment to
the deferred tax assets would increase income in the period such determination
was made.
Revenue Recognition
We defer the deposits collected on airplane orders until such time that
production will commence. As the production process commences, deposits
collected on sales orders will be recorded as income.
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Other Liabilities
During fiscal year 2001, we recorded an estimate of the liability for
cancelled special orders for manufacturing equipment and inventory for the
Jetcruzer resulting from our actions. Although we do not expect significant
changes, the actual costs may differ from these estimates.
Valuation of Certain Marketable Securities
We currently classify our investment securities as available-for-sale
securities. Pursuant to SFAS No. 115, such securities are measured at fair
market value in the financial statements with unrealized gains or losses
recorded in other comprehensive income until the securities are sold. However, a
decline in the fair market value below cost that is other than temporary is
accounted for as a realized loss.
Long-lived Assets
We review the recoverability of our long-lived assets pursuant to SFAS No.
144 whenever significant events or changes occur which might impair the recovery
of recorded costs. Because of the significant delays of the commencement and
production of the Jetcruzer 500, we have written off tooling and software assets
based upon the estimated market value of those assets.
CONVERSION OF PERFORMANCE SHARES
In the event we attain 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 loss or reducing or
eliminating our earnings, if any, at that time. In the event we do not attain
these earnings thresholds or minimum bid price levels, and no conversion occurs,
no compensation expense will be recorded for financial reporting purpose.
BUSINESS
OVERVIEW
We are a development stage enterprise organized in 1990 to design, develop,
manufacture and market general aviation aircraft. We began development of the
Jetcruzer 450 in 1990. The Jetcruzer 450 is a non-pressurized, single-engine
aircraft powered by a Pratt & Whitney propjet engine which obtained the FAA type
certificate approval in 1994. We later decided to amend the type certificate to
develop a stretched and pressurized version of the 450 called the Jetcruzer 500
for commercial sale. Research and development expenses increased in 2001 as we
accelerated the development of the Jetcruzer 500.
At the end of 2001, we recognized that a unique opportunity exists in the
general aviation industry today. We believe that an opportunity has been created
for the formation of a new general aviation company whose products offer an
alternative to business travel by airline for executives of small- to
medium-sized businesses and high net worth individuals as a result of the
concurrence of the following: (1) reduction of product-liability exposure as a
consequence of the passage of General Aviation Revitalization Act of 1994, (2)
the availability of several top of the line general aviation product lines as a
result of the recent recession and changes in strategic direction by several
general aviation aircraft manufacturers, and (3) deteriorating comfort and
convenience of airline travel.
To take advantage of the current opportunity, we have hired a management
team with significant experience in turning around general aviation
manufacturing companies. The new management team has taken the first step in our
strategy by acquiring the assets of Mooney Aircraft Corporation. Mooney produced
high-performance, single-engine
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piston aircraft for more than 50 years and are currently recognized as the
highest performance piston engine aircraft in commercial production. Over 10,000
Mooney aircraft are in operation around the world. We plan to pursue the
acquisition of other complementary general aviation product lines and
development programs as they become available.
The new management team also instituted a technical review of the
Jetcruzer 500 program. Based on this review, the new management team concluded
that the Jetcruzer 500 was not likely to achieve its design objectives at a
commercially-reasonable cost. Accordingly, significant spending on the Jetcruzer
program was suspended, and we will review how best to capitalize on the
completed development work.
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.
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. An aircraft must
qualify under FAA regulations in order to be used for certain purposes, and the
ability of an aircraft to so qualify will have a material affect on the
potential market for such aircraft.
Currently, there are fewer than ten major manufacturers of general
aviation aircraft based in the United States. Piston aircraft make up the
numerical majority of aircraft delivered by these manufacturers, whereas
propjets and jet aircraft account for the majority of billings. Aircraft
deliveries by United States manufacturers have increased consistently with sales
generating approximately $3.1 billion in 1996, $4.7 billion in 1997, $5.9
billion in 1998, $7.8 billion in 1999, $8.6 billion in 2000 and $8.7 billion in
2001.
STRATEGY
General
An opportunity exists in the general aviation industry today to create
a new general aviation company composed of the best of existing aircraft models
produced today and available for acquisition either as a result of depressed
financial conditions or due to a desire by their manufacturers to exit the
industry. Also, in 1994, the passage of the General Aviation Revitalization Act
of 1994 ("GARA") has resulted in the reduction of product liability exposure of
general aviation aircraft manufacturers. Finally, airline travel has steadily
become a less desirable means of travel for the business traveler due to the
airlines' adoption of a hub-and-spoke system significantly extending the time
and reducing the convenience of airline travel to destinations without major
terminal facilities. The events of September 11, 2001, have caused increased
security measures to be implemented that cause further travel delays and
inconvenience to business travelers.
We believe that an opportunity has been created for the formation of a
new general aviation company whose products offer an alternative to business
travel by airline for executives of small- to medium-sized businesses and high
net worth individuals as a result of the concurrence of the following: (1)
reduction of product-liability exposure as a consequence of the passage of
General Aviation Revitalization Act of 1994, (2) the availability of several top
of the line general aviation product lines as a result of the recent recession
and changes in strategic direction by several general aviation aircraft
manufacturers, and (3) deteriorating comfort and convenience of airline travel.
19
We intend to build such a new general aviation company through two
major strategies, as follows:
. The acquisition and manufacture of the "best of breed" existing
models from aircraft manufacturers who desire to exit the general
aviation manufacturing business or are under financial duress.
Only aircraft models that are considered best in their class and
fit together as a coherent product line are being considered.
. Development of new, small jet and turboprop aircraft (4 to 6
passengers), offering high performance and high safety of flight,
coupled with purchase and operating costs substantially below
currently available models that will be attractive to individuals
and small- to medium-size companies who have not previously
considered private aircraft as an alternative to airline travel.
Advanced Aerodynamics & Structures, Inc., now doing business as Mooney
Aerospace Group, Ltd., and sometimes referred to as the "Company," has already
taken the first step in this strategy by agreeing to acquire substantially all
of the assets of the Mooney Aircraft Corporation ("Mooney") at a federal
bankruptcy auction in San Antonio, Texas on March 18, 2002, and through the
provisions of an Asset Purchase Agreement with the general unsecured creditors
committee. The Mooney Aircraft Corporation has produced high-performance,
single-engine piston aircraft for more than 50 years. Mooney aircraft are
recognized as the highest performance piston engine aircraft in commercial
production and have a wide following. Over 10,000 Mooney aircraft are in
operation around the world. Mooney was producing three models when it filed for
bankruptcy in July 2001.
Mooney was operated after its bankruptcy filing by a skeleton staff
that primarily focused on supplying spare parts and technical service to its
customer base. We have formed a new company to own and operate the assets being
acquired from Mooney. This wholly-owned subsidiary is named Mooney Airplane
Company, Inc. We will be formally changing our name to Mooney Aerospace Group,
Ltd.
We intend to establish full production of the Mooney line of aircraft,
which will consist of three models, the Eagle 2, Ovation 2, and the Bravo at our
manufacturing facility in Kerrville, Texas. As we acquire additional aircraft
product lines, it is our intention to produce those models at the Kerrville
manufacturing facility as well.
We believe we can operate Mooney Airplane Company, Inc. at a profit by
eliminating significant amounts of overhead, reducing manufacturing costs, and
by instituting a new approach for the sale and distribution of Mooney aircraft.
An increase in these costs led to Mooney's Chapter 11 bankruptcy in July of
2001.
We have hired a management team with significant experience in turning
around general aviation manufacturing companies in order to achieve these goals.
Roy Norris, President & CEO, is the former President of Raytheon Aircraft
Company, a major producer of general aviation aircraft. Pete Larson, CFO, is the
former CFO of Cessna Aircraft Company and had significant experience in turning
around Cessna's financial performance. Dale Ruhmel, Executive Vice President for
Operations and Engineering, is the former head of Advanced Design and Technical
Services for Cessna Aircraft Company and an industry-recognized expert in small
aircraft design and certification. The combined experience of this management
team will provide the necessary knowledge to make the required changes to bring
Mooney back to profitability.
We continue to investigate the acquisition of other top of the line
general aviation product lines that will be complementary to the Mooney line.
Negotiations are underway with one major manufacturer, which may lead to the
purchase of that manufacturer's line of piston engine aircraft. We are also in
negotiations with Century Aerospace, Inc. for the acquisition of the rights to
complete the development and construction of the Century Jet, a small six
passenger micro-jet with attractive cost advantages over existing small jet
aircraft. We plan to pursue acquisition of other complementary general aviation
product lines and development programs as they become available.
20
Manufacturing
We will manufacture all aircraft products for both Mooney and any
future-acquired lines in Kerrville, Texas, at the location of Mooney's existing
manufacturing facilities. Mooney has a favorable long-term lease on both land
and building at the Kerrville Airport, which makes Kerrville a
financially-attractive location to build aircraft. As many as 700 aircraft per
year have been produced in this facility, and it should provide the space
required for our future production plans.
Additionally, the Kerrville area has an experienced aerospace labor
work force developed over the many years Mooney has produced aircraft in this
location. There are no other aircraft manufacturers in the immediate area, so
competition for experienced workers is minimal. Labor to supply the needs
created by long-term growth is available in nearby San Antonio.
We plan to greatly simplify the manufacturing process used at Mooney by
eliminating inappropriate levels of computer control. The Mooney aircraft is a
simple and straightforward aircraft to build and the overuse of MRP/ERP type
manufacturing control systems led to an increase in hours to build as opposed to
the desired decrease. We plan to make appropriate use of these computer tools.
The layout of the production line offers another opportunity for
reducing man-hours. Additionally, Mooney previously had an adverse
indirect-labor to direct-labor ratio, which is being corrected as we restart
operations. Lack of sufficient funding under the prior ownership was a cause of
cost growth. Irregular and excessive vendor payments caused disruptions in
material deliveries which impacted the production line, requiring installations
to be done out of station and out of sequence. Vendors were not inclined to give
best pricing terms under these conditions. We plan to enter into long-term
supply agreements to reduce raw material and purchased component costs.
We have hired Jack Jansen as President and COO for Mooney Airplane
Company, Inc. He ran manufacturing at Mooney from 1992-1994 and also was head of
manufacturing for another major general aviation manufacturer, Piper Aircraft
Company, building aircraft similar to Mooney aircraft.
Sales And Marketing
Sales Strategy
We plan to adopt a multifaceted method of sales that will capitalize on
agents for international sales and direct sales domestically. We will have two
showrooms and will station company salespersons in five select areas. We plan to
reset the price value equation for single-engine piston-powered aircraft and
gain market share through aggressive marketing and advertising emphasizing the
high performance capabilities of Mooney aircraft, new lower pricing, and high
safety. We intent to use new marketing channels, such as in-house sales from an
attractive showroom coupled with salespersons located in major market areas. We
believe that new lower prices coupled with high performance capabilities of
Mooney aircraft will allow us to compete successfully in our market area.
Domestic Sales
We will adopt a new direct sales program from our California and Texas
locations combined with five company salespersons located in select cities of
the U.S.
We will advertise nationwide and provide one telephone number to call,
one website to view, and two showrooms from which to sell. Far fewer
salespeople, at significantly less salary and much lower commissions, are
required for this approach. The salespeople will concentrate on one product line
of aircraft only and refine the sale to a high level in a short time. Used
aircraft sales or other lines of aircraft that have previously been sold by the
dealer do not distract them. The vice president of sales, sales managers and
other key individuals are located in the same building allowing immediate
answers to sales questions or problems. If a sale cannot be completed, the
salesperson has access to years of experience by calling in the sales managers
who are in the building to assist at any time.
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We believe that this method is ideal for high-volume sales in today's
fast-paced market environment. The vast majority of sales will be from two major
outlets, the current facility showroom at the Long Beach airport and from the
factory in Texas. Many customers will have a very short trip to see a new
Mooney, as the highest concentration of domestic aircraft sales are located in
California and Texas.
International Sales
We plan to appoint a series of international agents who will represent
us in key international markets. These agents will be selected from experienced
international dealers and salespersons residing in the country of
responsibility. We will use the services of a consultant, Al Stauffer,
previously head of international sales for both Piper and Mooney, to identify
key candidates and make appropriate introductions. Agents will conduct sales by
signing international customers to a Mooney contract and will be paid a
commission for their success on a per aircraft basis.
New Product Development Programs
Currently we have only one new aircraft product under development, the
Jetcruzer 500, a six passenger, turboprop-powered design employing a forward
canard and rear-mounted wing in a pusher configuration. The unusual design was
chosen in an attempt to produce a stall-resistant design with high speed and low
operating and acquisition costs.
In January 2002, our board of directors brought in a new management
team to replace former management due to continuing delays in the Jetcruzer
program. The new management team instituted a technical review of the Jetcruzer
500 program. Based on this review, the new management team concluded that the
Jetcruzer 500 was not likely to achieve its design objectives at a
commercially-reasonable cost. Additionally, subsequent noise tests determined
the aircraft could not meet current federal guidelines for external noise
levels.
Accordingly, our board of directors resolved on March 26, 2002, that
significant spending on the Jetcruzer program should be suspended and that we
should review new technologies which might increase the viability of the program
and how best to capitalize on the existing development work associated with the
Jetcruzer program. Options to be considered by management include a restart of
the Jetcruzer program at a later date, use of JetCruzer flight and test data to
launch a new development activity and the sale of the program to another
company.
We are currently in negotiations with the Century Aerospace
Corporation, Inc. for the acquisition of the exclusive rights to build the
Century Jet, a six passenger micro-jet that has significantly lower operating
and acquisition costs compared to competitive models. The aircraft has completed
preliminary design and wind-tunnel testing. Should we acquire the manufacturing
rights, we must complete the design and certification of the aircraft. We will
focus our attention on the Century Jet once we have re-established production of
the Mooney line.
We continue to evaluate the acquisition of other general aviation
development programs for aircraft complementary to the Mooney line and to
investigate internal development programs.
SUPPLIERS
We rely on various suppliers of materials and components which are
necessary to manufacture our aircraft. Our aircraft will utilize engines,
propellers and avionics provided by outside manufacturers. These suppliers also
produce equipment for other aircraft manufacturers. The Mooney models use
engines manufactured by Teledyne Continental and engines, propellers and
governers manufactured by Textron. We have contractual agreements for these
products with both Teledyne and Textron.
The failure of suppliers or subcontractors to meet our performance
specifications, quality standards, delivery standards or schedules could have a
material adverse effect on our operations. Moreover, our ability to increase our
production rate on the reopened Mooney production line could be limited by the
ability or willingness of our key suppliers to increase their delivery rates.
22
COMPETITION
We anticipate a very competitive market for each of our products. We
are completing our pricing and marketing strategies, as well as our production
costs projections. Each of these factors influences the nature of our
competitive market. When we have such information in hand, we will have a better
idea of the most direct competition for the various Mooney models. It is
anticipated that our competition will be the Cirrus Models SR20 and SR22, the
Lancair Columbia 300, the Socata Models TB-20GT and TB-21GT and the Commander
Models 115 and 115TC.
PRODUCT LIABILITY AND INSURANCE
The failure of an aircraft, or any component part thereof, manufactured
by us or any other mishap involving such an aircraft may result in physical
injury or death to the occupants of the aircraft or others, and damage or
destruction of the aircraft itself, and therefore, we could be subject to
lawsuits involving product liability claims. We have obtained product-liability
insurance for the Jetcruzer 500 aircraft but do not intend to renew it at this
time for coverage of that product. We intend to obtain product-liability
insurance for Mooney aircraft before the delivery of any newly-manufactured
aircraft. Such insurance is expensive and subject to various exclusions. Since
the events of September 11, 2001, product-liability insurance for manufacturers
of general aviation aircraft has become less available and more costly.
There can be no assurance that coverage will be available to us on
acceptable terms or at all. Although we believe we will be able to obtain the
necessary product liability insurance, we do not know what limits of coverage
will apply. 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. We have obtained other insurance as needed, including
flight-test insurance for our 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.
FAA CERTIFICATION
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.
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. We will be applying for the
renewal of production certificates for the Mooney line of aircraft and believe
we will obtain them during 2002.
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. We will need to renew the airworthiness
certificates for the Mooney line. There can be no assurance that we will not
encounter a delay in obtaining an amended type certificate or a production
certificate for our planned or existing aircraft models or airworthiness
certificates for individual aircraft. We will also be subject to the risk of
modification, suspension or revocation of any FAA certificate we hold. Such
modification, suspension, or revocation could occur if, in the FAA's judgment,
compliance with airworthiness or safety standards by the Company 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 judgment, 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 us
to develop appropriate design changes. Foreign authorities could impose similar
obligations upon us as to aircraft within their jurisdiction. Any or all of the
above occurrences could expose us to substantial additional costs and/or
liability.
23
PRODUCT-LIABILITY RISK LIMITATIONS
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 us until eighteen years from the date we deliver our first aircraft,
management believes that GARA will indirectly benefit us 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
our view of GARA's effects will prove to be correct.
With respect to the Mooney assets, the Bankruptcy Court's order and the
Asset Purchase Agreement grant us ownership of the Mooney assets free and clear
of any product-liability claims for products manufactured prior to our
acquisition of the assets. Therefore we believe that we would not be found
liable for product-liability claims related to Mooney aircraft or parts
manufactured prior to our acquisition of the Mooney assets. However, we may be
named as a defendant in future lawsuits and may incur costs associated with the
defense of such claims.
FOREIGN CERTIFICATION
In order for us to sell our aircraft in foreign countries, we must
comply with each country's aircraft certification process. Certain countries
will accept as adequate 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. We intend to begin the certification process
in a foreign country once we have received FAA certification for our aircraft
and have finalized a sale or distributorship of that aircraft in that country.
We have not yet determined which foreign market or markets we will first
address. Priorities in this area will be established by the levels of interest
in our products by dealers and distributors in the various foreign markets. At
this time we are unable to determine Mooney's certification status in foreign
countries. We will attempt to obtain any certifications required for us to sell
Mooney aircraft abroad.
EMPLOYEES
As of March 31, 2002, we had approximately 60 full-time employees. We
believe that our relations with our employees are good. We are not a party to
any collective bargaining agreement.
PROPERTIES
We have leased approximately ten acres of land located on the Long
Beach Airport in Long Beach, California (the "Ground Lease"). The Ground Lease
term commenced on October 20, 1997, and continues for 30 years with an option to
renew for an additional 10 years. The lease also contains options to lease other
airport properties. The current monthly rent for the Ground Lease is $15,600.
The Ground Lease was assigned to AP-Long Beach Airport LLC in June 1999.
We retained Commercial Developments International West to design and
build our approximately 200,000 square-foot manufacturing and headquarters
facility (the "New Facility") on the property subject to the Ground Lease. We
moved into the New Facility on November 18, 1998. The total cost for the New
Facility, including its design, construction, licenses, fees and change orders,
was approximately $9,800,000. In June 1999, we sold the New Facility to The
Abbey Company and leased it back. The sale 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 our current
lease are approximately $119,620 and escalate annually through June 1, 2007, and
will be adjusted annually beginning June 1, 2009, for changes in the Consumer
Price Index. The rent in the option period following the eighteenth year would
be at fair market rental value.
The capacity of hanger and office space of the facility in Long Beach
is now in excess of our requirements as a result of the acquisition of the
Mooney facility in Kerrville, Texas and our decision to focus all production
activities in
24
Texas. The company is examining alternatives for the location of the California
sales, advanced development and Corporate offices which may include subletting
the facility at Long Beach and may include a relocation within the Southern
California region.
25
MANAGEMENT
The following table sets forth certain information with respect to each
director and executive officer of the Company as of May 20, 2002.
Name Age Position
Roy H. Norris 57 Chairman of the Board, President, Chief
Executive Officer, Director
Shalom Babad 27 Director
C.M. Cheng 54 Consultant to the Company and Director
Hon. Robert P. Kaplan 65 Director
S. B. Lai, Ph.D. 50 Director
Arie Rabinowitz 30 Director
Samuel Rothman 48 Director
Other Officers:
J. Nelson Happy 58 Executive Vice President and General Counsel
L. Peter Larson 52 Executive Vice President and Chief Financial
Officer, Secretary and Treasurer
Dale Ruhmel 67 Executive Vice President of Operations and
Engineering
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, although Mr. Norris, Mr. Larson, Mr.
Nelson and Mr. Ruhmel have entered into employment agreements with the Company.
See "Management - Employment Agreements." There are no family relationships
between any of our directors or officers.
Roy H. Norris was elected as the President, Chief Executive Officer and
Chairman of the Board effective January 8, 2002. He was previously elected as a
director of the Company on June 1, 2001. He was previously a private business
consultant with extensive experience in the aviation industry. From 1994 to
1997, he served as President of Raytheon Aircraft (formerly Beech Aircraft), a
$2.3 billion enterprise. Previously, Mr. Norris was President and Chief
Executive Officer of Raytheon Corporate Jets, a division of Raytheon which
merged into Raytheon Aircraft in 1994. He has also served as Vice President of
Sales and Marketing for Gulfstream Aerospace and Senior Vice President for
Marketing and Sales for Cessna Aircraft Company. Mr. Norris has a degree in
Chemical Engineering from Auburn University and was named its Outstanding
Engineering Graduate for 1997.
Shalom Babad is a consultant to the Company and was appointed as a
director in April 2002. He has been self-employed as a consultant in fundraising
and security investments during the past five years.
C.M. Cheng has served as a director of the Company since June 1996.
Since April 1996, Mr. Cheng has been a Vice President of Eurotai International,
Ltd., a private company located in Taipei, Taiwan, which distributes health food
products. From 1984 to April 1996, Mr. Cheng served as a Vice President,
Director of the Office of the President, and Manager of Corporate Planning with
Taiwan Yeu Tyan Machinery, Mfg. Co. Ltd., a public company located in Taipei,
Taiwan, which manufactures automobiles and heavy equipment. From 1980 to 1983,
Mr. Cheng was an Associate
26
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 Stockholders."
Hon. Robert P. Kaplan was elected as a director of the Company in June
2001. He was previously the Canadian Solicitor General and also was a member of
the Parliament of Canada from 1968 until 1993, when he retired from elective
politics. Since leaving public life in 1993, Mr. Kaplan has, among other things,
engaged in trade and investment in the Former Soviet Union. He serves as a
director of Hurricane Hydrocarbons Limited, a Calgary-based company which owns
oil fields and a major refinery in Kazakhstan, producing 10% of that country's
oil. It is listed on the Toronto, Frankfurt and Alberta Stock Exchanges.
Hurricane Hydrocarbans Limited was under bankruptcy protection from May 1999 to
March 2000, and emerged successfully. Mr. Kaplan served as a director, chairman
and acting CEO during this period. He also serves as a director of Rex Diamond
Corp., Ltd. Mr. Kaplan graduated with an Honours B.A. in Sociology (Criminology)
and an LL.B from the University of Toronto in 1961. He was called to the Bar in
Ontario in 1963, and practiced law with Toronto law firms doing tax and
corporate work until 1968.
S. B. Lai has served as a director of AASI 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.
Arie Rabinowitz has served as a director of the Company since December
2001. He has been a vice president at LH Financial during the past five years.
Sam Rothman has served as a director of the Company since December 2001. He
has been self-employed in real estate and security investments during the past
five years.
J. Nelson Happy has been the General Counsel and an Executive Vice
President of the Company since January 8, 2002. He was previously the CEO of
Conco Refining Company from September 1999 to December 2001. From September 1993
to August 1999, he served as the chief executive of Regent University School of
Law.
L. Peter Larson has been the Chief Financial Officer and an Executive Vice
President of the Company since January 8, 2002. He was the CEO of Telkonet
Communications, which he co-founded in 1999, prior to joining AASI and and was
involved in several start-up and turnaround assignments as a consultant
beginning in 1993. Mr. Larson received a B.S. in Electrical Engineering from
Union College in 1971 and a M.S. in Operations Research fro Rensselaer
Polytechnic Institute in 1973. He then joined General Dynamics where he served
in a number of management positions including Vice President Finance and
Controller of the General Dynamics Services Company. Mr. Larson was Senior Vice
President and Chief Financial Officer of Cessna Aircraft for 5 years beginning
in January 1989.
Dale Ruhmel has been the Executive Vice President of Operations and
Engineering since January 8, 2002. He served as a consultant in the aviation
industry during the past five years.
The Board of Directors held two meetings in 2001 and all Directors were
present at each meeting. No director attended fewer than seventy-five percent
(75%) of the aggregate number of meetings held by the Board of Directors and the
committees on which he served during 2001. The Board of Directors 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. Babad,
Kaplan and Rothman. The Audit Committee held one meeting during 2001.
27
EXECUTIVE COMPENSATION
The following tables set forth certain information as to our Chief
Executive Officer and each of our four most highly-compensated executive
officers whose total annual salary and bonus for the fiscal year ending December
31, 2001, exceeded $100,000:
SUMMARY COMPENSATION TABLE
Annual Compensation/(1)/
--------------------------
Other
Name and Principal Position Year Salary Bonus Compensation
- -------------------------------------------------------------------------------
Carl L. Chen, Ph.D. 2001 $200,000 $0 $39,248/(2)/
Chairman and Chief Executive 2000 $200,000 $0 $39,248/(2)/
Officer 1990 $191,000 $0 $39,248/(2)/
Gene Comfort 2001 $153,000 $0 $0
Executive Vice President 2000 $153,000 $0 $0
1999 $143,000 $0 $0
- --------------------
/(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.
EMPLOYMENT AGREEMENTS
We have entered into three-year employment agreements with Roy Norris,
Chairman/CEO; Peter Larson, Executive Vice President/Chief Financial Officer;
Dale Ruhmel, Executive Vice President of Engineering and Operations and J.
Nelson Happy, Executive Vice-President and General Counsel, on similar terms.
The majority of their compensation was designed to reward performance. Over the
three-year period they will vest in ownership of five percent, three percent,
two percent and three percent, respectively, of the outstanding shares of the
Company and all receive annual salaries of $200,000 plus reimbursement of
expenses. We entered into an eight-year employment agreement (the "Chen
Employment Agreement") with Dr. Carl Chen as Chairman, Chief Executive Officer
and President commencing in May 1996. The Chen Employment Agreement provided
that, in consideration for Dr. Chen's services, he was to be paid an annual
salary of $200,000. Dr. Chen resigned effective January 8, 2002, under the terms
of a severance agreement with the following terms: (i) a $300,000 payment with
the first half paid during the first six months of 2002 and the second half paid
on January 8, 2004; (ii) eighteen months of health insurance; (iii) 2,000,000
warrants with an exercise price of $0.25 and a three-year term; and (iv) Dr.
Chen's granting of an irrevocable proxy for his Class E-1 and Class E-2 Common
Shares to Samuel Rothman, a director.
COMPENSATION OF DIRECTORS
Non-employee directors receive $2,500 for each Board of Directors meeting
attended. We pay all out-of-pocket expenses of attendance.
28
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of our Common Stock as of May 20, 2002, by (i) each person
who is known by us to own beneficially more than 5% of any class of our
outstanding voting securities, (ii) each of our directors and executive
officers, and (iii) all of our officers and directors as a group.
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholder has sole or shared voting power or investment power and
also any shares which the selling stockholder has the right to acquire within 60
days. Percentages are based on a total of 64,328,017 shares of common stock
outstanding on May 22, 2002.
Common Stock
Name and Address of Beneficially Percent of
Title of Class Beneficial Owner/(1)/ Owned/(2)/ Ownership
- ------------------------------------------------------------------------------------------
Class A Common Stock Roy H. Norris/(3)/ 3,216,401 5%
Class A Common Stock Shalom Babad/(4)/ 1,929,841 3%
Class A Common Stock C.M. Cheng/(5)(6)/ 15,000 less than 1%
Class B Common Stock 1,013,572 53%
Class E-1 Common Stock 2,027,144 51%
Class E-2 Common Stock 2,027,144 51%
Class A Common Stock Hon. Robert P. Kaplan/(7)/ 350,413 less than 1%
Class A Common Stock S.B. Lai, Ph.D./(8)/ 28,000 less than 1%
Class A Common Stock Arie Rabinowitz/(9)/ 1,929,841 3%
Class A Common Stock Samuel Rothman/(10)/ 1,929,841 3%
Class E-1 Common Stock 1,653,503 41%
Class E-2 Common Stock 1,653,503 41%
Class A Common Stock J. Nelson Happy/(11)/ 1,929,841 3%
Class A Common Stock L. Peter Larson/(12)/ 1,929,841 3%
Class A Common Stock Dale Ruhmel/(13)/ 1,286,560 2%
Class A Common Stock All executive officers 14,545,577 23%
Class B Common Stock and directors as a group 1,073,573 56%
Class E-1 Common Stock (10 persons) 3,800,647 95.02%
Class E-2 Common Stock 3,800,647 95.02%
Class A Common Stock Carl L. Chen, Ph.D./(14)/ 75,000 less than 1%
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 B Common Stock Harpa Limited/(6)/ 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%
29
Common Stock
Name and Address of Beneficially Percent of
Title of Class Beneficial Owner/(1)/ Owned/(2)/ Ownership
- ----------------------------------------------------------------------------------------
Class B Common Stock Shih Jen Yeh/(6)/ 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/(6)/ 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 Alpha capital 6,432,800 9.99%
Akteingesellschaft/(15)/
Class A Common Stock Austinvest Anstalt 6,432,800 9.99%
Balzers/(16)/
Class A Common Stock The Endeavour Capital 6,432,800 9.99%
Investment Fund, S.A./(17)/
Class A Common Stock Esquire Trade & Finance 6,432,800 9.99%
Inc./(18)/
- ---------------------
/(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 one 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)/ There is an employment agreement pursuant to which Mr. Norris will be
granted a 5% interest in the Company which is nondilutable for three
years.
/(4)/ We entered into a consulting agreement pursuant to which Mr. Babad will
be granted a 3% interest in the Company which is nondilutable.
/(5)/ Includes 5,067,860 shares of Common Stock held by Harpa Limited, a Cayman
Island corporation (Harpa). C.M. Cheng is a director of Harpa and has
sole voting and investment control over the shares of Common Stock held
by Harpa and thus may be deemed to beneficially own such shares. Mr.
Cheng disclaims beneficial ownership of such shares. The address of
Harpa is c/o Coutts Co.(Cayman) Ltd., Coutts House, P.O. Box 707, West
Bay Road, Grand Cayman, Cayman Islands.
/(6)/ 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.
/(7)/ This amount includes 325,413 shares issued upon the conversion of $50,000
of debentures but does not include common stock issuable upon the
conversion of $310,000 in convertible debentures which remain
outstanding.
30
/(8)/ Excludes 7,000 shares of Class A Common Stock issuable upon the
exercise of options which are not exercisable within 60 days and
includes options for 28,000 shares of Class A Common Stock issuable
upon the exercise of options which are currently exercisable.
/(9)/ We entered into a consulting agreement pursuant to which Mr. Rabinowitz
will be granted a 3% interest in the Company which is nondilutable.
/(10)/ We entered into a consulting agreement pursuant to which Mr. Rothman
will be granted a 3% interest in the Company which is nondilutable. Mr.
Rothman disclaims beneficial ownership of the shares underlying the 3%
interest which will all be issued in his wife's name. Mr. Rothman holds
an irrevocable proxy from Dr. Chen to vote the Class E-1 and Class E-2
shares Dr. Chen previously controlled. This amount does not include
common stock issuable upon the conversion of $170,775 in convertible
debentures which remain outstanding.
/(11)/ There is an employment agreement pursuant to which Mr. Happy will be
granted a 3% interest in the Company which is nondilutable for three
years.
/(12)/ There is an employment agreement pursuant to which Mr. Larson will be
granted a 3% interest in the Company which is nondilutable for three
years.
/(13)/ There is an employment agreement pursuant to which Mr. Ruhmel will be
granted a 2% interest in the Company which is nondilutable for three
years.
/(14)/ Pursuant to a severance agreement, Dr. Chen has granted an irrevocable
proxy to Mr. Rothman to vote the Class E1 and Class E-2 shares which Dr.
Chen formerly controlled.
/(15)/ The address for Alpha Capital Aktiengesellschaft is Pradafant 7,
Furstentums 9490, Vaduz, Lichtenstein. Includes an estimated 6,432,800
shares of Class A Common Stock issuable upon the conversion or exercise
of debentures and warrants. Excludes an estimated 12,288,089 shares of
Class A Common Stock issuable upon the conversion or exercise of
debentures and warrants, which may not be converted or exercised
pursuant to a contractually stipulated 9.99% ownership restriction. The
full conversion and exercise of all debentures and warrants would
exceed this restriction.
/(16)/ The address for Austinvest Anstalt Balzers is Landstrasse 938, 9494
Furstentums, Balzers, Liechtenstein. Includes an estimated 6,432,800
shares of Class A Common Stock issuable upon the conversion of Series A
Preferred Stock or exercise of warrants. Excludes an estimated 1,678,294
shares of Class A Common Stock issuable upon conversion of Series A
Preferred Stock or exercise of warrants, which may not be converted or
exercised pursuant to a contractually stipulated 9.99% ownership
restriction. The full conversion of all Series A Preferred Stock and
exercise of all warrants would exceed this restriction.
/(17)/ The address for The Endeavour Capital Investment Fund, S.A. is
Cumberland House, 27 Cumberland Street, Nassau, New Providence, The
Bahamas. Includes an estimated 6,432,800 shares of Class A Common Stock
issuable upon the exercise or conversion of Series A Preferred Stock,
debentures, and warrants. Excludes an estimated 3,108,265 shares of
Class A Common Stock issuable upon conversion or exercise of Series A
Preferred Stock, debentures, and warrants, which may not be converted
or exercised pursuant to a contractually stipulated 9.99% ownership
restriction. The full conversion and exercise of all Series A Preferred
Stock, debentures, and warrants would exceed this restriction.
31
/(18)/ The address for Esquire Trade & Finance Inc. is Trident Chambers, Road
Town, Tortola, B.V.I. Includes an estimated 6,432,800 shares Class A
Common Stock issuable upon conversion of Series A Preferred Stock and
exercise of warrants. Excludes an estimated 1,172,875 shares of Class A
Common Stock issuable upon conversion or exercise of Series A Preferred
Stock and warrants, which may not be converted or exercised pursuant to
a contractually stipulated 9.99% ownership restriction. The full
conversion and exercise of all Series A Preferred Stock and warrants
would exceed this restriction.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have entered into three-year employment agreements with Roy Norris,
Chairman/CEO; Peter Larson, Executive Vice President/Chief Financial Officer;
Dale Ruhmel, Executive Vice President of Engineering and Operations and J.
Nelson Happy, Executive Vice-President and General Counsel, on similar terms.
The majority of their compensation was designed to reward performance. Over the
three-year period they will vest in ownership of five percent, three percent,
two percent and three percent, respectively, of the outstanding shares of the
Company and all receive annual salaries of $200,000 plus reimbursement of
expenses.
In March 2001, we entered into a consulting agreement to issue a 6%
nondilutable interest in the Company to a group of consultants, three of whom
later became members of our Board of Directors. In October 2001, this agreement
was amended to increase the nondilutable interest in the Company to be issued to
the consultants to 12%.
Certain of our directors hold or have held convertible debentures issued by
us to them for their investment.
Mr. Babad, a director, received $29,032 in finder's fees in 2001 and has a
consulting agreement with us that provides for payments to him of $10,000 a
month from December 2001 through March 2002, and $7,000 a month from April 2002.
Mr. Rothman, a director, received $170,775 in finder's fees in 2001 prior
to his appointment as a director.
DESCRIPTION OF SECURITIES
The following description of the capital stock of AASI and certain
provisions of our Certificate of Incorporation and Bylaws is a summary and is
qualified in its entirety by the provisions of the Certificate of Incorporation
and Bylaws, which have been filed as exhibits to the Company's Registration
Statement of which this Prospectus is a part.
The authorized capital stock of the Company consists of 625,000,000 shares
of Class A Common Stock, $.0001 par value, 10,000,000 shares of Class B Common
Stock, $.0001 par value, 4,000,000 shares of Class E-1 Common Stock, $.0001 par
value, 4,000,000 shares of Class E-2 Common Stock, $.0001 par value, and
5,000,000 shares of Preferred Stock, $.0001 par value, of which 100,000 have
been designated as Class A Preferred Stock. As of May 22, 2002, there were
outstanding 64,328,017 shares of Class A Common Stock, 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 five stockholders), 4,000,000 shares of
Class E-2 Common Stock (held of record by six stockholders) and 40,491 shares of
Class A 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. The exercise price of the Class A Warrant and the Class B Warrant at
the time of issuance was $6.50 and $8.75, respectively.
32
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 AASI 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 AASI have controlled a majority of the voting
power of the Company, and accordingly, were able to elect all of AASI's
directors. This difference in voting rights and consequent increase in the
voting power of the Class B Common Stock, Class E-1 Common Stock and Class E-2
Common Stock has an anti-takeover effect, in that the existence of the Class B
Common Stock, Class E-1 Common Stock and Class E-2 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 B
Common Stock, Class E-1 Common Stock and Class E-2 Common Stock. Thus, the
stockholders of AASI 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 B Common Stock, Class
E-1 Common Stock and Class E-2 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 B Common Stock, Class E-1 Common
Stock and Class E-2 Common Stock; and, if stockholder approval were required,
the approval of the holders of the Class B Common Stock, Class E-1 Common Stock
and Class E-2 Common Stock would be necessary before any such business
combination could be consummated.
PERFORMANCE SHARES
Our Certificate of Incorporation provides that the Class E-1 and E-2 Common
Stock is redeemable by AASI at a price of $.01 per share unless the Company
meets certain income thresholds as described below. 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 AASI'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) our net income before provision for income taxes and exclusive of
any extraordinary earnings as audited and determined by AASI'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;
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(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 the
Offering.
If none of the applicable Minimum Pretax Income levels set forth above have
been met by March 31, 2004, the Performance Shares will be redeemable by AASI at
a price of $.01 per share. We expect that the conversion of Performance Shares
owned by officers, directors, employees and consultants of AASI 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 our 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 AASI will
not affect our cash flow, it may have a negative effect on the market price of
our 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 levels set forth above were determined by negotiation between AASI
and the Underwriter and should not be construed to imply or predict any future
earnings by us.
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CLASS B COMMON STOCK
Each share of Class B Common Stock is convertible at any time 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 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.
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. We have no current plans to issue any
additional preferred stock, other than under the March 2000 Series A Preferred
Stock equity line.
As of May 22, 2002, we had 40,491 shares of Series A Preferred Stock
outstanding with a $100 stated value per share. 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 Series A Preferred Stock and unpaid
dividends are convertible into shares of Class A Common Stock equal to an amount
determined by the market value at the date of close of the Class A Common Stock,
adjusted for changes in the market price prior to the conversion. The preferred
stockholders do not have voting rights.
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.
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
35
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. Our 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 shares of common stock to be issued under the
Private Equity Line of Credit Agreement, upon the conversion of the various
outstanding notes and Series A Preferred Stock and underlying warrants which
have been issued issued under the various agreements, as described in this
Prospectus, 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
5,365,687 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.
Preferred Stock
As of May 22, 2002, there were 40,491 shares of Series A Preferred Stock
currently outstanding held by 14 stockholders 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 and the resale of additional shares
underlying the conversion of the preferred stock are being registered by this
offering statement.
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Convertible Notes
As of May 10, 2002, $19,691,435 of convertible notes with 73 holders was
outstanding. The shares of common stock to be issued upon the conversion of the
notes 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 certain of the underlying shares of common stock is currently
effective and the resale of additional shares underlying the conversion of the
notes are being registered by this registration statement.
Warrants
The resale of shares of common stock to be issued upon the exercise of
warrants which have been issued under the various agreements described in this
registration statement are being registered by this registration statement.
37
PLAN OF DISTRIBUTION
The selling stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling stockholders may use any one or more of the
following methods when selling shares:
-- ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
-- block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
-- purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
-- an exchange distribution in accordance with the rules of the
applicable exchange;
-- privately-negotiated transactions;
-- short sales;
-- broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
-- a combination of any such methods of sale; and
-- any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
The selling stockholders may pledge their shares to their brokers under the
margin provisions of customer agreements. If a selling stockholders defaults on
a margin loan, the broker may, from time to time, offer and sell the pledged
shares.
The selling stockholders may also engage in short sales against the box,
puts and calls and other transactions in our securities or derivatives of our
securities and may sell or deliver shares in connection with these trades. The
selling stockholders may pledge their shares of common stock to their brokers
under the margin provisions of customer agreements. If a selling stockholder
defaults on a margin loan, the broker may, from time to time, offer and sell the
pledged shares.
Broker-dealers engaged by the selling stockholders may arrange for other
broker-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
Each selling stockholder shall be deemed to be an "underwriter" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such persons and any profit on the resale of the shares
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act.
We are required to pay all fees and expenses incident to the registration
of the shares, including fees and disbursements of counsel to the selling
stockholders, but excluding brokerage commissions or underwriter discounts. We
and the selling stockholders have agreed to indemnify each other against certain
losses, claims, damages and liabilities, including liabilities under the
Securities Act.
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SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of the shares
of common stock by the selling stockholders. We will not receive any proceeds
from the resale of the common stock by the selling stockholders. We will receive
proceeds from the exercise of the warrants, unless a cashless exercise provision
is available and is used. Assuming all the shares registered below are sold by
the selling stockholders, none of the selling stockholders will continue to own
any shares of our common stock.
The following table also sets forth the name of each person who is offering
the resale of shares of common stock by this prospectus, the number of shares of
common stock beneficially owned by each person, the number of shares of common
stock that may be sold in this offering and the number of shares of common stock
each person will own after the offering, assuming they sell all of the shares
offered.
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholder has sole or shared voting power or investment power and
also any shares which the selling stockholder has the right to acquire within 60
days. The actual number of shares of common stock issuable upon the conversion
of the convertible debentures is subject to adjustment depending on, among other
factors, the future market price of the common stock, and could be materially
less or more than the number estimated in the table. We are registering more
shares than can be currently converted due to our contractual obligations.
Percentages are based on a total of 64,328,017 shares of common stock
outstanding on May 22, 2002.
39
MARCH 2000 PREFERRED STOCK EQUITY LINE AGREEMENT
Overview. On March 3, 2000, we entered into a Subscription Agreement with
certain of the selling stockholders identified in this Prospectus. Under this
agreement we have issued $9,108,500 in Series A Preferred Stock with a put
option to issue and sell an additional $891,500 of Series A Preferred Stock upon
the agreement of the applicable selling stockholders.
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 underlie the conversion of the preferred stock to be issued as a
consequence of the invocation of that put right. Additionally, we must provide
the selling stockholders with a Put Notice, which must set forth the Investment
Amount which we intend to sell to the selling stockholders, and which must be
accompanied by certain required documents.
Limitations and Conditions Precedent to Our Put Rights. The selling
stockholders' obligation to acquire and pay for any Series A Preferred Stock
with respect to any particular put is subject to certain conditions precedent,
including:
-- The resale of the shares to be issued must be registered on an
effective Registration Statement;
-- 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; and
-- The Company must be in compliance with the Certificate of Designation
which governs the Series A Preferred Stock.
Short Sales. The selling stockholders and their affiliates are prohibited
from engaging in short sales of our common stock at a time when the last
reported bid of the common stock is less than $7.00 per share.
AUGUST 2000 PRIVATE EQUITY LINE OF CREDIT AGREEMENT
Overview. On August 15, 2000, we entered into a Private Equity Line of
Credit Agreement with certain of the selling stockholders 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 the registration statement filed on September 5,
2000. This is also referred to as a put right. $17,522,500 remains available
under this agreement.
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 stockholders with an Optional Purchase
Notice, which must set forth the Investment Amount which we intend to sell to
the selling stockholders. The Investment Amount sold to the selling stockholders
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 stockholders 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.
Limitations and Conditions Precedent to Our Put Rights. The selling
stockholders' obligation to acquire and pay for any common shares with respect
to any particular put is subject to certain conditions precedent, including:
-- The resale of the shares to be issued must be registered on an
effective Registration Statement;
-- 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; 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.
40
Short Sales. The selling stockholders 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.
MARCH 27, 2001, SUBSCRIPTION AGREEMENT FOR SECURED CONVERTIBLE NOTES
Overview. On March 27, 2001, we entered into a subscription agreement with
certain of the selling stockholders identified in this Prospectus for the sale
of (i) between $4,000,000 to $5,000,000 in secured convertible notes and (ii)
warrants to purchase two shares of our Class A Common Stock for each dollar
loaned to us pursuant to such convertible notes. The maturity date on these
secured convertible notes and the expiration date on these warrants is 3 years
from the date of issuance.
The secured convertible notes bear interest at the annual rate of 5% and
are convertible following issuance into shares of our Class A Common Stock at,
upon the election of the holder, one of the following prices per share: ii)
$0.25; ii) 80% of the average of the three lowest closing prices of our Class A
Common Stock for the sixty trading days immediately prior to the conversion
date; or iii) the closing price of our Class A Common Stock on the last trading
day immediately preceding the date of the initial issuance of the notes. These
convertible notes are secured by all of our assets.
The warrants may be exercised following issuance and will have an exercise
price per share of 110% of the closing price of the Class A Common Stock on the
trading day prior to the issuance of the warrant.
We are required to register the resale of the shares of Class A Common
Stock underlying the secured convertible notes and warrants.
Initial Closing. Pursuant to the subscription agreements discussed above,
on March 27, 2001, we sold in an initial closing $4,100,000 in secured
convertible notes for face value and issued warrants to purchase 8,254,060
shares of our Class A Common Stock at an exercise price of $0.45 per share.
As part of this initial closing, we incurred fee obligations to finders of
$330,089 which was paid by the issuance of unsecured convertible notes
substantially similar to the secured convertible notes described above, but for
the security interest.
Put Rights. The subscription agreement also provided us with put rights for
up to an additional $3 million in secured convertible notes and warrants under
the same terms as the March 27, 2001, subscription agreement. We completed a put
on July 25, 2001, and issued $1 million in secured convertible notes for face
value and issued warrants to purchase 2,000,000 shares of our Class A Common
Stock at an exercise price of $0.242 per share. As part of this put, we incurred
fee obligations to finders of $80,000. Of this $80,000, $68,480 was paid by the
issuance of unsecured convertible notes substantially similar to the secured
convertible notes described above, but for the security interest.
Conversion. The closing price of our Class A Common Stock as of May 20,
2002, was $0.31. Assuming an average price of $0.184 and further assuming that
holders would elect the lesser of this average price and $0.25, the conversion
price under the secured convertible notes would be $0.184 and the $1,135,785
face value of the currently outstanding secured convertible notes (including
finders notes) would be convertible into approximately 6,172,745 shares of our
Class A Common Stock. This calculation does not include interest and is
therefore potentially convertible into a higher number of shares.
JUNE 27, 2001, SUBSCRIPTION AGREEMENT FOR CONVERTIBLE NOTES
Overview. On June 27, 2001, we entered into a subscription agreement with a
certain Selling Stockholder identified in this Prospectus for the sale of
$1,000,000 in secured convertible notes and warrants to purchase shares of our
Class A Common Stock. The maturity date on these secured convertible notes is 5
years from the date of issuance and the expiration date on these warrants is 3
years from the date of issuance.
The convertible notes bear interest at the annual rate of 5% and are
convertible following issuance into shares of our Class A Common Stock at, upon
the election of the holder, one of the following prices per share: i) $0.25; ii)
80% of
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the average of the three lowest closing prices of our Class A Common Stock for
the sixty trading days immediately prior to the conversion date; or iii) the
closing price of our Class A Common Stock on the last trading day immediately
preceding the date of the initial issuance of the notes.
The warrants may be exercised following issuance and will have an exercise
price per share of 110% of the closing price of the Class A Common Stock on the
trading day prior to the issuance of the warrant.
We are required to register the resale of the shares of Class A Common
Stock underlying the secured convertible notes and warrants.
Closing. Pursuant to the subscription agreement discussed above, on March
27, 2001, we issued $1,000,000 in secured convertible notes for face value and
issued warrants to purchase 2,646,212 shares of our Class A Common Stock at an
exercise price of $0.22275 per share. As part of the closing, we incurred fee
obligations to finders of $100,000.
Conversion. The closing price of our Class A Common Stock as of May 20,
2002, was $0.31. Assuming an average price of $0.184 and further assuming that
holders would elect the lesser of this average price and $0.25, the conversion
price under the secured convertible notes would be $0.184 and the $1,000,000
face value of the currently outstanding secured convertible notes would be
convertible into approximately 5,434,783 shares of our Class A Common Stock.
This calculation does not include interest and is therefore potentially
convertible into a higher number of shares.
OCTOBER 26, 2001, SUBSCRIPTION AGREEMENT FOR SECURED CONVERTIBLE NOTES
Overview. On October 26, 2001, we entered into a subscription agreement
with certain of the selling stockholders identified in this Prospectus for the
sale of (i) between $7,000,000 to $10,000,000 in secured convertible notes and
(ii) warrants to purchase two shares of our Class A Common Stock for each dollar
loaned to us pursuant to such convertible notes. The maturity date on these
secured convertible notes and the expiration date on these warrants is 5 years
from the date of issuance.
The secured convertible notes bear interest at the annual rate of 8% and
are convertible following 120 days from issuance into shares of our Class A
Common Stock at, upon the election of the holder, one of the following prices
per share: i) $0.35; or ii) 70% of the average of the three lowest closing
prices of our Class A Common Stock for the thirty trading days immediately prior
to the conversion date. These convertible notes are secured by all of our
assets.
The warrants may be exercised following 45 days from issuance and provide
an exercise price per share of: i) $0.25 for the first 50% of the shares
purchasable thereunder; and ii) $0.30 for the remaining 50% of such shares.
We are required to register the resale of the shares of Class A Common
Stock underlying the secured convertible notes and warrants.
Initial Closing. Pursuant to the subscription agreements discussed above,
on October 26, 2001, we sold in an initial closing $7,000,000 in secured
convertible notes for face value and issued warrants to purchase 14,000,000
shares of our Class A Common Stock. We also received a commitment from one
investor to purchase within 120 days of October 26, 2001, an additional
$1,000,000 in secured convertible notes for face value and obtain an additional
warrant to purchase up to 2,000,000 shares of our Class A Common Stock. This
commitment was reduced by $250,000 pursuant to the terms of the subsequent
closing of November 12, 2001.
As part of this initial closing, we incurred fee obligations to finders of
$697,000 plus warrants to purchase up to 2,000,000 shares of our Class A Common
Stock. Of this $697,000, $622,000 was paid by the issuance of unsecured
convertible notes substantially similar to the secured convertible notes
described above, but for the security interest. The warrants issued to finders
were identical to those issued on October 26, 2001.
Subsequent Closings. On November 12, 2001, additional investors were added
to the subscription agreement discussed above, and we sold an additional
$750,000 in secured convertible notes for face value and issued warrants to
purchase 1,500,000 shares of our Class A Common Stock.
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As part of this subsequent closing, we incurred fee obligations to finders
of $75,000 plus warrants to purchase up to 214,285 shares of our Class A Common
Stock. Of this $75,000, $45,000 was paid by the issuance of unsecured
convertible notes substantially similar to the secured convertible notes
described above, but for the security interest. The warrants issued to finders
were identical to those issued on October 26, 2001.
On February 27, 2002, additional investors were added to the subscription
agreement discussed above, and we sold an additional $2,250,000 in secured
convertible notes for face value and issued warrants to purchase 4,500,000
shares of our Class A Common Stock.
As part of this subsequent closing, we incurred fee obligations to finders
of $225,000 plus warrants to purchase up to 642,857 shares of our Class A Common
Stock. The finders fees of $225,000 were paid by the issuance of unsecured
convertible notes substantially similar to the secured convertible notes
described above, but for the security interest. The warrants issued to finders
were identical to those issued on October 26, 2001.
OCTOBER 26, 2001, PUT AGREEMENT FOR UNSECURED CONVERTIBLE NOTES
Put Agreement. In connection with the initial closing on October 26, 2001,
we also entered into an agreement with certain investors who hold our
securities, some of whom purchased secured convertible notes and obtained
warrants in the initial closing, providing us with the right to sell to such
investors up to an additional $5,000,000 in secured convertible notes and
warrants under the same terms as the October 26, 2001, subscription agreement.
This right expires on October 26, 2002. The put amount was reduced by $500,000
pursuant to the subsequent closing of November 12, 2001. On February 27, 2002,
we closed on a put in the amount of $1,329,000 and issued unsecured convertible
notes in that amount and issued warrants to purchase 2,658,000 shares of our
Class A Common Stock. We incurred fee obligations to finders of $132,900 plus
warrants to purchase up to 379,714 shares of our Class A Common Stock. The
finders fees of $132,900 were paid by the issuance of unsecured convertible
notes substantially similar to the unsecured convertible notes issued to the
investors. The warrants issued to finders were identical to those issued on
October 26, 2001.
JANUARY 30, 2002, SUBSCRIPTION AGREEMENT FOR UNSECURED CONVERTIBLE NOTES
Initial Closing. We entered into a January 30, 2002, subscription agreement
for up to $5,000,000 in unsecured convertible notes on the same terms as the
October 26, 2001, subscription agreement discussed above, except that the notes
were unsecured. February 27, 2002, we completed an issuance of $2,155,000 in
unsecured convertible notes for face value and issued warrants to purchase
4,310,000 shares of our Class A Common Stock.
As part of this initial closing, we incurred fee obligations to finders of
$215,500 plus warrants to purchase up to 615,714 shares of our Class A Common
Stock. Of this $215,500, $116,750 was paid by the issuance of unsecured
convertible notes identical to the unsecured convertible notes issued to the
investors. The warrants issued to finders were identical to those issued on
October 26, 2001.
Subsequent Closings. On March 26, 2002, additional investors were added to
the subscription agreement discussed above, and we sold an additional $1,450,000
in secured convertible notes for face value and issued warrants to purchase
2,900,000 shares of our Class A Common Stock.
As part of this subsequent closing, we incurred fee obligations to finders
of $145,000 plus warrants to purchase up to 414,286 shares of our Class A Common
Stock. The finders fee of $145,000 was paid by the issuance of unsecured
convertible notes substantially similar to the unsecured convertible notes
issued to investors. The warrants issued to finders were identical to those
issued on October 26, 2001.
On April 11, 2002, additional investors were added to the subscription
agreement discussed above, and we sold an additional $950,000 in secured
convertible notes for face value and issued warrants to purchase 1,900,000
shares of our Class A Common Stock.
As part of this subsequent closing, we incurred fee obligations to finders
of $95,000 plus warrants to purchase up to 271,428 shares of our Class A Common
Stock. The finders fee of $95,000 was paid by the issuance of unsecured
43
convertible notes substantially similar to the unsecured convertible notes
issued to investors. The warrants issued to finders were identical to those
issued on October 26, 2001.
CONVERSION PROVISIONS FOR NOTES ISSUED ON OR AFTER OCTOBER 26, 2001
The conversion provisions are the same for the October 26, 2001,
Subscription Agreement and Put Agreement and the January 30, 2002 Subscription
Agreement. The closing price of our Class A Common Stock as of May 20, 2002, was
$0.31. Assuming an average price of $0.161 and further assuming that holders
would elect the lesser of this average price and $0.35, the conversion price
under the secured convertible notes would be $0.161 and the $17,265,650 face
value of the currently outstanding secured convertible notes (including finders
notes) would be convertible into approximately 107,240,062 shares of our Class A
Common Stock. This calculation does not include interest and is therefore
potentially convertible into a higher number of shares.
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 & Structures, Inc.
("AASI") at December 31, 2001, and for each of the two years in the period ended
December 31, 2001, 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 our 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 Class A 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 stockholders with annual reports containing
audited financial statements.
44
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 2001
Page
Number
Report of Independent Auditors F-1
Balance Sheet F-2
Statement of Operations F-3
Statement of Stockholders' Deficiency F-4
Statement of Cash Flows F-6
Notes to Financial Statements F-8
INTERIM (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
Page
Number
Balance Sheet F-24
Statement of Operations F-25
Statement of Stockholders' Equity F-26
Statement of Cash Flows F-29
Notes to Financial Statements F-31
45
To the Board of Directors
Advanced Aerodynamics & Structures, Inc.
We have audited the accompanying balance sheet of Advanced Aerodynamics &
Structures, Inc. (a development stage enterprise) as of December 31, 2001, and
the related statements of operations, stockholders' deficiency, and cash flows
for the two years then ended, and for the period from January 26, 1990
(inception) through December 31, 2001. 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, 2001, and the results of its operations and
its cash flows for each of the two years in the period then ended and the period
from January 26, 1990 (inception) through December 31, 2001, 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, has an
accumulated deficit and a working capital deficiency at December 31, 2001. 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 26, 2002
F-1
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
December 31,
2001
------------------
ASSETS
Current assets:
Cash and cash equivalents $ 681,000
Debt issuance costs, current portion 58,000
Prepaid expenses and other current assets 67,000
------------------
Total current assets 806,000
Property, plant and equipment, net 12,159,000
Investments available-for-sale 1,924,000
Restricted cash 436,000
Debt issuance costs 341,000
Other assets 314,000
------------------
Total assets $15,980,000
==================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 2,087,000
Other accrued liabilities 1,646,000
Capital leases, current portion 158,000
Notes payable 389,000
Convertible debentures, current (net discount of $11,518,000) 1,240,000
------------------
Total current liabilities 5,520,000
Long-term liabilities:
Capital leases, long-term 12,850,000
Deferred land lease 369,000
Deferred revenue 1,815,000
------------------
Total liabilities 20,554,000
Stockholders' deficiency:
Preferred Stock, par value $.0001 per share; 5,000,000 shares
authorized; none issued and outstanding, 100,000 shares
designated as Series A. -
Series A, 5% Cumulative Convertible Preferred Stock, $100 stated
value per share, 100,000 shares authorized, 46,648 shares
issued and outstanding 3,615,000
Class A Common Stock, par value $.0001 per share; 625,000,000
shares authorized; 45,338,850 shares issued and outstanding 37,000
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
Warrants 6,352,000
Public Warrants 473,000
Class A Warrants 11,290,000
Class B Warrants 4,632,000
Additional paid-in capital 55,631,000
Accumulated other comprehensive loss (29,000)
Deficit accumulated during the development stage (86,575,000)
------------------
Total stockholders' deficiency (4,574,000)
------------------
Total liabilities and stockholders' deficiency $15,980,000
==================
See accompanying notes to financial statements.
F-2
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
Period from
January 26,
Year Ended 1990
December 31, (inception) to
-------------------------------- December 31,
2000 2001 2001
------------ ------------ ------------
Interest income $ 75,000 $ 37,000 $ 2,855,000
Other income 68,000 36,000 1,426,000
------------ ------------ ------------
143,000 73,000 4,281,000
Cost and expenses:
Research and development costs 6,341,000 7,630,000 44,737,000
General and administrative expenses 3,543,000 4,815,000 26,236,000
Loss on disposal of assets - - 755,000
Realized loss on sale of investments 36,000 - 66,000
Interest expense 938,000 4,969,000 9,252,000
In-process research and development acquired - - 761,000
Non-recurring expenses - 3,823,000 3,823,000
------------ ------------ ------------
10,858,000 21,237,000 85,630,000
------------ ------------ ------------
Loss before extraordinary item (10,715,000) (21,164,000) (81,349,000)
Extraordinary loss on retirement of Bridge Notes - - (942,000)
------------ ------------ ------------
Net loss $(10,715,000) $(21,164,000) $(82,291,000)
============ ============ ============
Net loss per share $(1.26) $(.73)
============ ============
Weighted average number of shares outstanding 9,168,000 30,010,000
============ ============
See accompanying notes to financial statements.
F-3
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
Statement of Stockholders' Deficiency
- --------------------------------------------------- --------------------------------------------------------------------------------
Common Stock
- --------------------------------------------------- --------------------------------------------------------------------------------
Preferred Stock Class A Class B Class E-1 Class E-2
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Warrants
------------------- --------------------------------------------------------------------------------
Common stock issued at $3.59 $ $ 418,904 $ 836,189 $ 836,189 $ $
per share
Common stock issued in
exchange for in-process
research and development at
$.36 per share 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 at $.51 per share 595,283 1,190,566 1,190,566
Imputed interest on advances
from stockholder
Net proceeds from initial public
offering of Units at $4.39
per share 6,000,000 1,000
Net proceeds from exercise of
over-allotment option at
$4.55 per share 900,000
Warrants issued in connection
with issuance of Bridge
Notes at $.79 per share
Net loss from inception to
December 31, 1996
----------------------------------------------------------------------------------------------------
Balance at December 31, 1996 6,900,000 1,000 2,000,000 4,000,000 4,000,000
Adjustment to proceeds from
initial public offering and
exercise of overallotment
option
Net loss
----------------------------------------------------------------------------------------------------
Balance at December 31, 1997 6,900,000 1,000 2,000,000 4,000,000 4,000,000
Conversion of Class B to A
Common Stock 99,676 (99,676)
Net loss
----------------------------------------------------------------------------------------------------
Balance at December 31, 1998 6,999,676 1,000 1,900,324 4,000,000 4,000,000
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
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Deficit
accumulated
Public Class A Class B Additional Accumulated other during the
warrants warrants warrants paid-in capital comprehensive loss development stage Total
----------------------------------------------------------------------------------------------------
Common stock issued at $3.59 $ $ $ $ 7,500,000 $ $ $ 7,500,000
per share
Common stock issued in
exchange for in-process
research and development at
$.36 per share 361,000 361,000
Imputed interest on advance
from stockholders 799,000 799,000
Conversion of stockholder 10,728,000 10,728,000
advances
Conversion of officer loans 336,000 336,000
Stock issued in consideration
for services in 1994, 1995,
and 1996 at $.51 per share 1,507,000 1,507,000
Imputed interest on advances
from stockholder 11,000 11,000
Net proceeds from initial public
offering of Units at $4.39
per share 9,583,000 4,166,000 12,566,000 26,316,000
Net proceeds from exercise of
over-allotment option at
$4.55 per share 1,707,000 466,000 1,922,000 4,095,000
Warrants issued in connection
with issuance of Bridge
Notes at $.79 per share 473,000 473,000
Net loss from inception to
December 31, 1996 24,328,000 24,328,000
------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 473,000 11,290,000 4,632,000 35,730,000 (24,328,000) 27,798,000
Adjustment to proceeds from
initial public offering and
exercise of overallotment
option (78,000) (78,000)
Net loss (6,625,000) (6,625,000)
------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 473,000 11,290,000 4,632,000 35,652,000 (30,953,000) 21,095,000
Conversion of Class B to A
Common Stock
Net loss (10,118,000) (10,118,000)
------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 473,000 11,290,000 4,632,000 35,652,000 (41,071,000) 10,977,000
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
F-4
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
Statement of Stockholders' Deficiency (continued)
- --------------------------------------------------- --------------------------------------------------------------------------------
Common Stock
- --------------------------------------------------- --------------------------------------------------------------------------------
Preferred Stock Class A Class B Class E-1 Class E-2
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Warrants
------------------- --------------------------------------------------------------------------------
Net proceeds from issuance of
preferred stock at $63.08 per
share 79,800 $5,034,000 $ $ $ $ $
Net proceeds from issuance of
warrants at $1.29 per share 2,217,000
Conversion of Preferred Stock to
Class A (10,891) (687,000) 712,663
Net proceeds from issuance of
common stock at $0.69 per
share 1,252,160
Net proceeds from issuance of
warrants at $1.43 per share 358,000
Amortization of discount on
Preferred Stock 278,000
Amortization of warrants
attached to common stock
Unrealized gain on investments
Net loss
----------------------------------------------------------------------------------------------------
Comprehensive loss
----------------------------------------------------------------------------------------------------
Balance at December 31, 2000 68,909 4,625,000 8,964,499 1,000 1,900,324 4,000,000 4,000,000 2,575,000
Net proceeds from issuance of
preferred stock at $84.54
per share 11,285 978,000
Net proceeds from issuance of
warrants at $0.06 per share 60,000
Conversion of Preferred Stock
to Class A (33,546) (2,167,000) 16,112,563 16,000
Net proceeds from issuance of
common stock at $0.17 per
share 5,300,701 5,000
Net proceeds from issuance of
warrants at $.07 per share 274,000
Amortization of discount on
Preferred Stock 179,000
Amortization of warrants
attached to common stock
Issuance of warrants attached to
debentures at $.11 per share 3,433,000
Beneficial conversion feature
related to debentures
Conversion of Convertible
Debentures to Class A 14,961,087 15,000
Unrealized loss on investments
Net loss
----------------------------------------------------------------------------------------------------
Comprehensive loss
----------------------------------------------------------------------------------------------------
Balance at December 31, 2001 46,648 $3,615,000 45,338,850 $37,000 1,900,324 $ 4,000,000 $ 4,000,000 $ $6,352,000
====================================================================================================
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Deficit accumulated
Public Class A Class B Additional Accumulated other during the
warrants warrants warrants paid-in capital comprehensive loss development stage Total
----------------------------------------------------------------------------------------------------
Net proceeds from issuance of
preferred stock at $63.08 per
share $ $ $ $ 342,000 $ $ (342,000) $ 5,034,000
Net proceeds from issuance of
warrants at $1.29 per share 2,217,000
Conversion of Preferred Stock to
Class A 687,000 --
Net proceeds from issuance of
common stock at $0.69 per
share 863,000 863,000
Net proceeds from issuance of
warrants at $1.43 per share 358,000
Amortization of discount on
Preferred Stock (278,000) --
Amortization of warrants
attached to common stock 45,000 (45,000) --
Unrealized gain on investments 32,000 32,000
Net loss (10,715,000) (10,715,000)
----------------------------------------------------------------------------------------------------
Comprehensive loss (10,683,000)
----------------------------------------------------------------------------------------------------
Balance at December 31, 2000 473,000 11,290,000 4,632,000 40,549,000 (64,752,000) (607,000)
Net proceeds from issuance of
preferred stock at $84.54
per share 170,000 (194,000) 954,000
Net proceeds from issuance of
warrants at $.06 per share 60,000
Conversion of Preferred Stock
to Class A 2,318,000 (183,000) (16,000)
Net proceeds from issuance of
common stock at $0.17 per
share 1,237,000 1,242,000
Net proceeds from issuance of
warrants at $.07 per share 274,000
Amortization of discount on
Preferred Stock (163,000) 16,000
Amortization of warrants
attached to common stock 119,000 (119,000)
Issuance of warrants attached to
debentures at $.11 per share 3,443,000
Beneficial conversion feature
related to debentures 9,674,000 9,674,000
Conversion of Convertible
Debentures to Class A 1,564,000 1,579,000
Unrealized loss on investments (29,000) (29,000)
Net loss (21,164,000) (21,164,000)
----------------------------------------------------------------------------------------------------
Comprehensive loss (21,193,000)
----------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $473,000 $11,290,000 $4,632,000 $55,631,000 $(29,000) $(86,575,000) $ (4,574,000)
====================================================================================================
F-5
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
PERIOD FROM
JANUARY 26
1990
YEAR-ENDED DECEMBER 31, (INCEPTION)
------------------------------ TO DECEMBER 31,
2000 2001 2001
------------------------------------------------
OPERATING ACTIVITIES:
Net loss $(10,715,000) $(21,164,000) $(82,291,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Noncash stock compensation expense -- -- 1,207,000
Noncash professional service expense -- 344,000 344,000
Noncash interest expense -- 211,000 547,000
Amortization of discount on convertible debentures -- 2,158,000 2,158,000
Amortization of debt issue costs -- 73,000 73,000
Cost of in-process research and development acquired -- -- 761,000
Imputed interest on advances from stockholder -- -- 810,000
Interest income from restricted cash invested -- -- (474,000)
Extraordinary loss on retirement of bridge notes -- -- 942,000
Depreciation and amortization 1,148,000 1,692,000 6,465,000
Loss on disposal of assets -- 2,805,000 3,560,000
Realized loss on sale of investments 36,000 -- 66,000
Changes in operating assets and liabilities:
Decrease in prepaid expenses and other current assets 7,000 2,000 106,000
Increase in other assets (12,000) (109,000) (315,000)
Increase in accounts payable 1,002,000 694,000 699,000
Increase in accrued liabilities 145,000 1,330,000 3,121,000
Increase in deferred revenue 70,000 45,000 1,605,000
------------------------------------------------
Net cash used in operating activities (8,319,000) (11,919,000) (60,616,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in construction in progress -- -- (446,000)
Proceeds from insurance claims upon loss of aircraft -- -- 30,000
Proceeds from sales of assets -- -- 9,803,000
Capital expenditures (2,276,000) (82,000) (8,201,000)
Purchase of certificate of deposit -- -- (1,061,000)
Proceeds from redemption of certificate of deposit -- -- 1,061,000
Purchase of investments (2,626,000) (2,881,000) (39,227,000)
Proceeds from maturities of investments in bonds -- 653,000 1,481,000
Proceeds from sale of investments 4,950,000 304,000 35,756,000
Restricted cash from long-term debt -- -- (8,095,000)
Increase in restricted cash (405,000) (31,000) (436,000)
------------------------------------------------
Net cash used in investing activities (357,000) (2,037,000) (9,335,000)
------------------------------------------------
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)
Proceeds from issuance of convertible preferred stock 5,034,000 954,000 5,988,000
Proceeds from issuance of convertible debentures -- 9,798,000 9,798,000
Proceeds from issuance of warrants 2,217,000 3,777,000 5,994,000
Advances from stockholder -- -- 10,728,000
Proceeds from issuance of common stock 1,221,000 898,000 9,619,000
Net proceeds from initial public offering and exercise of over-allotment option -- -- 30,411,000
Net proceeds from bridge financing -- 1,100,000 7,295,000
Net proceeds from loans from officers -- -- 336,000
Payments on capital lease obligations (281,000) (378,000) (934,000)
Payments on promissory notes -- (425,000) (425,000)
Repayment of bridge financing -- (1,100,000) (8,100,000)
------------------------------------------------
Net cash provided by financing activities 8,191,000 14,624,000 70,632,000
------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (485,000) 668,000 681,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 498,000 13,000 --
------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,000 $ 681,000 $ 681,000
================================================
F-6
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS (continued)
PERIOD FROM
JANUARY 26
1990
(INCEPTION)
YEAR-ENDED DECEMBER 31, TO DECEMBER 31,
------------------------------------------------
2000 2001 2001
------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $1,190,000 $1,256,000 $ 4,422,000
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
Assets acquired with a note $ 814,000 $ 814,000
Assets acquired under capital leases $ 433,000 $3,200,000 $13,527,000
Deposit surrendered as payment for rents due $ 80,000
Construction in progress acquired with restricted cash $ 8,578,000
F-7
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS STRATEGY
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. Since its
inception, the Company has been engaged primarily in research and
development of its proposed aircraft, the JETCRUZER 500. In June
1994, the FAA awarded the Company a Type Certificate for the
JETCRUZER 450, which is a non-pressurized propjet aircraft
powered by a smaller Pratt & Whitney engine. The Company is
amending the Type Certificate to remove these limitations in the
certification of the JETCRUZER 500.
On January 8, 2002 the Board of Directors elected a new
management team of experienced aviation executives to refocus the
Company. The Chief Executive Officer, Dr. Carl Chen, was replaced
by Roy Norris, former President of Raytheon Aircraft Company.
Following the reorganization of management, the Company adopted a
new business strategy of becoming a leading supplier of piston,
turboprop, and light jet aircraft for the business and
owner-flown general aviation markets. The Company plans to
accomplish this through the acquisition of existing high quality
aviation lines and the development of new aircraft models. The
Company, under its new management team, conducted a technical
review of the JETCRUZER 500 program to ascertain the reasons for
the continued delays in the JETCRUZER 500 program and the actual
status of the aircraft. This review revealed that the JETCRUZER
500 was seriously overweight, was not achieving its speed goals,
and had a serious gravity problem with fuel burn. Additionally,
subsequent noise tests determined that the aircraft could not
meet current federal guidelines for external noise levels.
Accordingly, the Board of Directors suspended significant
spending on the JETCRUZER 500 program. The Company is currently
considering several options, which includes a restart of the
JETCRUZER 500 at a later date, sale of the program to another
company or use the JETCRUZER flight and test data to launch a new
development activity.
As discussed in Note 16, the Company's first step is the
acquisition of Mooney Aircraft Corporation's ("Mooney") assets
out of bankruptcy, which was approved by the bankruptcy courts on
March 18, 2002. It is expected that the deal will close some time
in April 2002. Mooney is located in Kerrville, Texas. This is an
important first step in the Company's new strategy to assemble a
new and vibrant general aviation manufacturer with revolutionary
newly developed aircraft products using the latest in technology
and cost effective manufacturing techniques. In connection with
the acquisition of the Mooney assets, the Company set up a
wholly-owned subsidiary, Mooney Airplane Company, to acquire
those assets. In addition, the Board of Directors approved the
name change of the parent company from Advanced Aerodynamics &
Structures, Inc. to Mooney Aerospace Group, Ltd.
2. FINANCIAL RESULTS AND LIQUIDITY
To date, the Company has generated no sales revenue and none is
projected until the Company can begin commercial production of
their product and regain market acceptance of the aircraft at
profitable selling prices and volumes. The Company incurred
program development costs to date of approximately $45,498,000
and has recorded a cumulative net loss of $(82,291,000). The
Company's management team has been developing a financial plan to
address its working capital requirements and believes that if
executed successfully, the Plan will substantially improve the
Company's ability to meet its working capital requirements
throughout the current year. Although the Company has received
verbal commitments to carry out the acquisition of the
F-8
Mooney assets and to complete its business strategy, the
current working capital is insufficient to meet the Company's
needs beyond the second quarter of fiscal 2002. These
conditions raise substantial doubt as to the Company's ability
to continue as a going concern. These 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 costs of
in-process research and development acquired) are expensed as
incurred.
Pre-operating Costs
Pre-operating costs are expensed as incurred.
Advertising Expense
Advertising costs are expensed as incurred. Advertising expense
was $476,000 and $43,000 for the years ended December 31, 2000
and 2001, respectively.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid instruments
that have original maturities of three months or less and are
readily convertible to cash to be considered cash equivalents.
Cash and cash equivalents are held by major financial
institutions.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash, cash
equivalents, investments available-for-sale, and restricted cash.
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 any one 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.
Long-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. Currently all debt
securities are classified as available-for-sale, as the Company
intends to sell such securities as necessary to fund operations.
Such securities are recorded at market value, with unrealized
gains/losses being recorded in other comprehensive income.
F-9
During the year ended December 31, 2001, unrealized losses
amounted to $29,000 which have been reported in the balance sheet
and statement of stockholders' deficiency. Long-term investments
are recorded at market value as determined by the most recently
traded price of each security at the balance sheet date. When
securities are sold, the investment account is relieved by use of
the specific identification method.
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.
The Company reviews the recoverability of its long-lived assets,
as required by Statement of Financial Accounting Standards
("SFAS") No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of whenever
significant events or changes occur which might impair the
recovery of recorded costs. The measurement of possible
impairment is either based upon significant losses or on the
inability to recover the balance of the long-lived asset from
expected future operating cash flows on an undiscounted basis. If
an impairment exists, the amount of such impairment is calculated
based upon the discounted cash flows or the market values as
compared to the recorded costs.
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.
Deferred Revenue
Deferred revenue represents advance deposits from customers which
were paid when the sales order was signed. The Company will
record these deposits as revenue once the Company has obtained
its production certificate and commences production of the
JETCRUZER 500.
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. The
Company has elected to continue to account for its employee
stock- based compensation plans using an intrinsic value based
method of accounting prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25) and related Interpretations. Under APB 25, because the
exercise price of the Company's employee stock options equal 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
accounting principles generally accepted in the United States
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.
F-10
Accounting Pronouncements
Impact of Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 141, Business Combinations and SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS No. 141 is effective
for any business combinations completed after June 30, 2001 and
SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill deemed to have
indefinite lives will no longer be amortized but will be subject
to annual impairment tests in accordance with the Statements.
Other intangible assets will continue to be amortized over their
useful lives.
The Company expects to adopt the provisions of SFAS No. 141 and
SFAS No. 142 on January 1, 2002 and has not yet determined what
the effect of the adoption of these pronouncements will be on the
earnings and financial position of the Company.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which supersedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of. SFAS No. 144
addresses financial accounting and reporting for the impairment
of long-lived assets and for long-lived assets to be disposed of.
However, SFAS No. 144 retains certain fundamental provisions of
SFAS No. 121 including recognition and measurement of the
impairment of long-lived assets to be held and used; and
measurement of long-lived assets to be disposed of by sale. SFAS
No. 144 is effective for fiscal years beginning after December
15, 2001. The Company expects to adopt SFAS No. 144 on January 1,
2002 and is in the process of assessing the effect of adopting
this pronouncement.
Reclassifications
Certain reclassifications have been made to the 2000 balances to
conform to the 2001 presentation.
4. CONVERTIBLE DEBENTURES
On March 27, 2001, the Company obtained new financing of up to
$5,000,000, with an availability of up to an additional
$3,000,000. The additional amount becomes available after certain
criteria have been met, as defined in the agreement. The Company
issued $4,100,000 in Secured Convertible Notes ("Notes" or
"Debentures") with an interest rate of 5% to accredited
investors, as defined by Regulation D rules issued by the
Securities and Exchange Commission under the Securities Act of
1933. On July 25, 2001, the Company issued an additional
$1,000,000 in Notes under this agreement. In conjunction with the
financing, the Company issued an additional $410,000 in Secured
Convertible Notes as finders fees. As part of the agreement the
Company also issued warrants to purchase 10,254,000 shares of
Common stock at an exercise price ranging from approximately $.24
to $.45 per share. The Company filed a proxy statement and Form
S-3 Registration Statement as required by the terms of the
agreement. There is a mandatory redemption requirement at 125% of
the unpaid principal balance and unpaid interest upon the
occurrence of default or if the Company is prohibited from
issuing shares of common stock. Additionally, the Company may put
the additional notes to the note holders upon meeting certain
covenants related to the availability of trading of the stock,
trading volume and market price and other milestones.
At December 31, 2001, the Company was in default on one of the
covenants of the agreement for failure to pay accrued interest on
the notes within 10 days of December 31, 2001. Due to the
default, the Company is required to accrue the interest due at
10%. In accordance with the agreement, the Company has accrued
approximately $242,000 in interest due these note holders at
F-11
December 31, 2001. The Company has not obtained waivers from the
note holders waiving their right to call the notes due or the
payment of outstanding interest, nor has any note holder elected
to redeem their notes outstanding according to the terms of the
Subscription Agreement. Due to the event of default, the Company
has recorded all notes outstanding as a current liability in the
Balance Sheet.
The debentures were issued with various stated conversion prices,
which resulted in a beneficial conversion feature since the
effective conversion price was below market at the time of the
issuances. The discount of $3,345,000, which resulted from these
transactions, will be amortized over the life of the debentures.
During the current year, $1,356,000 was amortized to interest
expense, due to the passage of time and conversions into shares
of Common Stock.
On June 27, 2001, the Company obtained new financing of
$1,000,000, which is separate from that of March 27, 2001,
described above. The Company issued $1,000,000 in a Convertible
Note (or "Debenture") with an interest rate of 5% to an
accredited investor, as defined by Regulation D rules issued by
the Securities and Exchange Commission under the Securities Act
of 1933. As part of the agreement, the Company issued warrants to
purchase 2,646,000 shares of common stock at a purchase price of
$.22 per share. There is a mandatory redemption requirement at
125% of the unpaid principal balance and unpaid interest upon the
occurrence of default or if the Company is prohibited from
issuing shares of common stock. The Company did not register the
shares issuable upon conversion within 30 days of the closing
date which is a non-registration event pursuant to Section 10.4
of the Subscription Agreement. In accordance with the Section,
the Company has accrued $115,000 representing liquidation damages
due to the note holder as a result of the non-registration event.
Such damages are calculated at an amount equal to 1% of the
principal amount issued per 30 days or part thereof, and 2% for
each 30 days or part thereof, during the pendency of the
non-registration event.
The debenture was issued with various stated conversion prices,
which resulted in a beneficial conversion feature since the
effective conversion price was below market at the time of the
issuance. The discount of $351,000, which resulted from this
transaction, will be amortized over the life of the debenture.
During the current year approximately $36,000 was amortized to
interest expense. No notes issued under this agreement were
converted in 2001.
At December 31, 2001, the Company was in default on one of the
covenants of the June 27, 2001 agreement for failure to pay
accrued interest on the notes within 10 days of December 31,
2001. Due to the default, the Company is required to accrue the
interest due at 10%. In accordance with the agreement, the
Company has accrued approximately $52,000 in interest due the
note holders at December 31, 2001. The Company has not obtained a
waiver from the note holder waiving his right to call the notes
due or the payment of the outstanding interest, nor has the note
holder elected to redeem his notes outstanding according to the
terms of the Subscription Agreement. Due to the event of default,
the Company has recorded this note outstanding as a current
liability in the Balance Sheet.
On October 26, 2001, the Company obtained new financing of up to
$10,000,000 with an availability of up to an additional
$3,000,000, as part of a private placement offering, which is
separate from that of March 27, 2001 and June 27, 2001. The
Company issued $7,750,000 in Secured Convertible Notes (or
"debentures") with an interest rate of 8% to accredited
investors, as defined by Regulation D rules issued by the
Securities and Exchange Commission under the Securities Act of
1933. In conjunction with the financing, the Company issued an
additional $667,000 in Secured Convertible Notes as finders fees.
As part of the agreement, the Company issued warrants to purchase
17,714,000 shares of Common stock. Half of the warrants may be
exercised at a purchase price of $.25 per share. The other 50%
may be exercised at $.30 per share. There is a mandatory
redemption requirement at 125% of the unpaid principal balance
and unpaid interest upon the occurrence of default or if the
Company is prohibited from issuing shares of Common stock. The
Company did not register the shares issuable upon conversion
within 60 days
F-12
of the closing date, which is a non-registration event pursuant
to Section 10.4 of the Subscription Agreement. In accordance with
the Section, the Company has accrued $292,000 representing
liquidation damages due to the note holders as a result of the
non-registration event. Such damages are calculated at an amount
equal to 1% of the principal amount issued per 30 days, for the
first 30 days or part thereof, and 2% for each 30 days or part
thereof, during the pendency of the non-registration event. The
Company has recorded the debentures as a current liability.
In conjunction with the October 26, 2001 private placement, the
Company entered into a Put Agreement with a group of its
investors who hold Convertible Notes and Preferred Stock. Under
the Put Agreement, the Company may sell up to an additional
$5,000,000 in Convertible Notes and warrants. The Company's right
to exercise this option expires October 25, 2002.
The debentures were issued with various stated conversion prices,
which resulted in a beneficial conversion feature since the
conversion price was below market at the time of issuance. The
discount of $5,936,000, which resulted from this transaction,
will be amortized over the life of the debentures. During the
current year approximately $210,000 was amortized to interest
expense due to the passage of time. No notes issued under this
agreement were converted in 2001. The Company has accrued
approximately $122,000 in interest at 8% due to the note holders
at December 31, 2001.
As of December 31, 2001, various note holders converted a total
of $2,195,000 of convertible debentures into 14,961,000 shares of
Class A Common Stock.
Contractual future repayments of convertible debentures as of
December 31, 2001 are as follows:
2002 $ 462,000
2003 --
2004 2,879,000
2005 --
2006 9,417,000
--------------
12,758,000
Less discount on convertible debentures (11,518,000)
--------------
Convertible debentures, net $ 1,240,000
==============
However, due to the events of default and non-registration events
previously noted, all notes outstanding have been recorded as a
current liability.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consist of the following:
Building $13,000,000
Office furniture and equipment 1,228,000
Machinery and equipment 1,616,000
--------------
Gross property and equipment 15,844,000
Accumulated depreciation and amortization (3,685,000)
--------------
Property, plant, and equipment $12,159,000
==============
The Company purchased computer equipment amounting to $814,000
with a note payable and stated interest at 15.45% which is
payable monthly. Principal payments amount to $68,000 a month
through June 2002.
As described in Note 9, 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 $306,000 and $39,000, respectively, net
of $286,000 and $12,000 of accumulated depreciation,
respectively. The Company did not capitalize any interest during
the year ended December 31, 2001.
F-13
6. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial statement purposes and the amounts used
for income tax purposes. Significant components of the Company's
deferred tax liabilities and assets as of December 31, 2001 are
as follows:
Deferred tax assets:
Federal net operating loss $ 26,407,000
State net operating loss 2,797,000
Research & development credits 1,978,000
Other 189,000
-----------------
Total deferred tax assets 31,371,000
Valuation allowance (31,371,000)
-----------------
$ --
=================
At December 31, 2001, the Company had Federal and California
state net operating loss ("NOL") carryforwards of approximately
$76,774,000 and $29,240,000, respectively, Federal NOLs could, if
unused, expire in varying amounts in the years 2012 through 2021.
California NOLs, if unused, could expire in varying amounts from
2002 through 2011.
At December 31, 2001, 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 beginning in 2004. The
California R&D credit carryforwards can be carried forward
indefinitely.
The provision for income taxes are as follows:
December 31, December 31,
2000 2001
------------- -------------
Deferred:
Federal $(3,834,000) $(6,950,000)
State (416,000) (987,000)
------------- -------------
Total deferred (4,250,000) (7,937,000)
Increase in valuation allowance 4,250,000 7,937,000
------------- -------------
$ -- $ --
============= =============
Utilization of the net operating loss and tax credit
carryforwards will 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 2000 and 2001.
7. LONG-TERM INVESTMENTS
At December 31, 2001, all long-term investments were classified
as available-for-sale and were U.S. government debt securities.
These investments were recorded at fair value. Unrealized losses
relating to the securities totaled $29,000 during the year ended
December 31, 2001, and have been included in Accumulated Other
Comprehensive Loss on the face of the Statement of Stockholders'
Deficiency.
F-14
The contractual maturities of debt securities at December 31,
2001 are as follows:
Fair Value
--------------
Due in one year or less $1,363,000
Due after one through five years --
Due five through 10 years 136,000
Due after 10 years 425,000
--------------
$1,924,000
==============
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. In
February 2002, the Company entered into a severance agreement
with the Company's President who resigned effective January 8,
2002. Based upon the terms of the severance package, the
President will receive a total of $300,000 paid out through
2004.
Also in May 1996, an officer of the Company was awarded 17,460
shares of Class B Common Stock and 34,919 shares each of Class
E-1 and Class E-2 Common Stock for services rendered.
Compensation cost of $31,000 was charged to expense in 1996 based
on the fair value of the stock awarded by reference to an
independent appraisal.
In March 2001, we entered into a consulting agreement to issue a
6% nondilutable interest in the Company to a group of
consultants, three of whom later became members of our Board of
Directors. We issued 845,678 shares of Class A Common Stock at
that time with a fair value of $344,000 in exchange for
consulting services provided. In October 2001, this agreement was
amended to increase the nondilutable interest in the Company to
be issued to the consultants to 12%.
In addition, one member of the Board of Directors is also an
investor in one of the convertible debenture agreements discussed
in Note 4, and at December 31, 2001 held notes in the principal
amount of $360,000.
F-15
9. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company is generally
subject to claims, complaints, and legal actions. At December 31,
2001, 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 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.
Pursuant to an Agreement dated May 19, 1999, the Company sold 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. The cash purchase price was $9,800,000. As
part of this transaction, the Company entered into an agreement
to sublease the land and lease the manufacturing hanger facility
and finished office space to the Company for a term of 18 years,
plus an option to extend the lease for an additional 10 years.
The $246,000 deferred gain on the sale of the facility is being
amortized over the 18 year lease term.
Effective January 1, 2001, the lessor of the building amended the
payment terms of the lease to include escalating payments through
June 1, 2008, after which the payments escalate according to
Consumer Price Index (CPI) increases. As a result of the change
in payment terms, the cost of the building and the capital lease
obligation were increased by $3,200,000, increasing the cost
value of the building to $13,000,000, which approximated fair
value at the time of the amendment. As the fair value was less
than the present value of the amended future minimum lease
payments, the total amount recorded including this adjustment was
limited to the fair value of the building, as required by SFAS
No. 13, Accounting for Leases.
During 2000, the Company entered into a capital lease agreement
for a new computer system. As required under the agreement, the
Company purchased certificates of deposit amounting to $405,000.
These certificates are being used as collateral under the lease,
and as such, have been recorded as restricted cash in the
accompanying financial statements.
Future minimum lease payments applicable to non-cancelable
operating leases and capital leases as of December 31, 2001, are
as follows:
CAPITAL OPERATING
LEASES LEASES
--------------------------------
2002 $1,636,000 $189,000
2003 1,744,000 187,000
2004 1,882,000 187,000
2005 2,051,000 187,000
2006 2,298,000 187,000
Thereafter 28,407,000 3,948,000
--------------------------------
Net future minimum lease payments 38,018,000 $4,885,000
==============
Amount representing interest (25,010,000)
--------------
Present value of minimum lease payments 13,008,000
Less amount representing the current portion (158,000)
--------------
$12,850,000
==============
F-16
The Company incurred rent expense of $180,000 and $173,000, for
the years ended December 31, 2000 and 2001, 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.
During 1996 the Company successfully completed its initial public
offering of 6,900,000 units including exercise of the over
allotment option. Each unit sold is composed of 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.
Additionally, 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.
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.
All shares of Class E-1 and Class E-2 Common Stock ("Performance
Shares") are not transferable or assignable and may be converted
into shares of Class B Common Stock in the event income before
provision for income taxes, exclusive of any extraordinary
earnings or losses, reaches certain targets over the next seven
years, or if the market price of the Class A Common Stock reaches
specified levels over the next three years. With respect to
targeted earnings, Class E-1 Common Stock shares may be converted
if pretax income exceeds $45.0 million in 2002 and $56.0 million
in 2003. Class E-2 Common Stock shares may be converted if pretax
income exceeds, $56.3 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.
F-17
Upon the closing of the Initial Public Offering, the Company
granted to the Underwriter A Unit Purchase Option to purchase up
to 600,000 Units and 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. 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 Class A Warrants issued in connection with the Company's
initial public offering in 1996, 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. The warrants originally expired on
December 3, 2001, but have been extended through May 31, 2002.
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 is given shall exceed $15.00 per share.
Preferred Stock
As of December 31, 2001, the Company received $8,265,000 in net
cash proceeds related to a preferred stock agreement to issue up
to 100,000 shares of 5% Cumulative Convertible Series A Preferred
Stock ("Preferred Stock") with a stated value of $100 per share
and Common Stock Purchase Warrants to purchase Class A Common
Stock, for the aggregated purchase price of $10 million. The
Company issued 91,085 shares of Preferred Stock with a stated
value of $9,108,500 and detachable warrants to purchase 1,082,000
shares of common stock and paid $843,000 in commissions and legal
fees. Of the total amount issued to date, 11,285 shares of
Preferred Stock with a stated value of $1,128,500, and detachable
warrants to purchase 128,310 shares of common stock were issued
during the year ended December 31, 2001. The remaining $891,500
in Preferred Stock funding will not occur until certain criteria
have been met.
Additionally, as consideration for the transaction, placement
warrants to purchase up to 1,688,000 shares of Class A Common
Stock were issued. Of the amount issued to date, 926,000 were
issued in the year ended December 31, 2001. Fair values of
$1,231,000 and $987,000 for the detachable warrants and the
placement warrants, respectively, were included in stockholders'
deficiency and were netted as a discount to the Preferred Stock.
The warrants are exercisable in installments and the terms for
the placement warrants are similar to the terms of the detachable
warrants issued with the Preferred Stock. The fair value for
these warrants was estimated at the dates of grant using a
Black-Scholes pricing model with the following weighted-average
assumptions: risk-free interest rates of 4.68% to 6.43%; dividend
yields of 0%; a volatility factor of .566 to .915 and an expected
life of the warrants of 3 years.
The Preferred Stock was issued with various conversion prices.
This resulted in a beneficial conversion feature since the
effective conversion price was below market at the time of the
issuance. The discount on the Preferred Stock of $536,000 was
immediately amortized to Accumulated Deficit, as the preferred
stockholders were able to convert to common stock immediately
upon issuance of the Preferred Stock. Of the total amount
amortized, $194,000 was amortized in the year ended December 31,
2001.
F-18
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 stockholder does not have voting
rights. As of December 31, 2001, the Company has dividends in
arrears for the Preferred Stock totaling $336,000 or $7.20 per
share.
As of December 31, 2001, various preferred stockholders converted
a total of 44,000 shares plus dividends in arrears into
16,825,000 shares of Class A Common Stock. No warrants have been
exercised as of December 31, 2001.
Equity Line Of Credit
On August 15, 2000, the Company signed a Private Equity Line of
Credit Agreement ("Equity Line") to sell up to $20,000,000 of
Common stock over the course of two years. This Equity Line
enables the Company to request, at the Company's sole discretion,
that the investors purchase certain amounts of shares every 15
days at a price equal to 92% or 93% of the market price. Each
request will be for a minimum of $200,000 and subject to a
maximum of $1,500,000. Additional drawings on this Equity Line
are dependent upon stock market conditions. The Company sold a
total of 5,707,000 shares under the Equity Agreements with a
total net proceeds of $2,393,000, of which 4,455,000 shares under
the Equity Agreement were sold for net cash proceeds of
$1,172,000 as of December 31, 2001.
In connection with the Equity Line transactions, warrants to
purchase 4,269,000 shares of Common Stock over the next three
years, at a stock price as defined in each agreement, were
issued. The fair value related to these warrants of $632,000 has
been included in stockholders' equity and no warrants have been
exercised as of December 31, 2001. The fair value of these
warrants was estimated on the date of issuance using a
Black-Scholes pricing model with the following weighted average
assumptions:
Transaction Risk-Free Dividend Volatility Expected
Date Exercise Price Interest Yield Factor Life
--------------- --------------- ----------- ---------- ------------ ----------
August 15, 2000 $3.15 6.12% 0% .855 3
May 1, 2001 $.32-$1.20 4.68% 0% .915 3
The Company has reserved approximately 182,000,000 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 E Common Stock; 27,700,000
shares issuable upon the exercise of purchase warrants; 4,000,000
shares issuable under the Stock Option Plan, 20,282,000 shares
issuable upon conversion of the outstanding Preferred Stock,
33,386,000 shares issuable upon the exercise of the detachable
warrants and placements warrants, 4,269,000 shares issuable upon
the exercise or warrants issued in connection with the Equity
Line and 82,538,000 shares issuable upon conversion of the
outstanding Convertible Debentures.
F-19
11. STOCK OPTIONS
In July 1996, the Company's Board of Directors approved the Stock
Option Plan (the "Plan"). The Plan provides for the grant of
incentive and non-qualified stock options to certain employees,
officers, directors, consultants, and agents of the Company.
Under the 1996 Stock Option Plan, the Company may grant options
with respect to a total of 500,000 shares of Class A Common
Stock. Subsequent Stock Option Plans were approved in 1998 and
2000, authorizing the Company to grant additional options for up
to 2,000,000 shares of Class A Common Stock. Options under the
1996, 1998 and 2000 Plans 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 10 years as
determined by the Board of Directors.
In April 2001, the Board of Directors approved the 2001 Stock
Option Plan (the "2001 Plan"). Under the 2001 Plan, the Company
may grant options with respect to a total of 1,500,000 shares of
Class A Common Stock. Options under the 2001 Plan are to be
granted at not less than fair market value, vest in equal annual
installments over four years and may be exercised for a period of
one to 10 years as determined by the Board of Directors.
Transactions under the Stock Option Plans during the year ended
December 31, 2000 and 2001 are summarized as follows:
WEIGHTED
AVERAGE EXERCISE
SHARES PRICE
---------- -----------------
Outstanding at December 31, 1999 588,000 $5.00
Granted -- --
Exercised -- --
Canceled (74,000) $5.00
----------
Outstanding at December 31, 2000 514,000 $5.00
Granted 878,000 $ .50
Exercised -- --
Canceled (70,000) $2.43
---------- -----------------
Outstanding at December 31, 2001 1,322,000 $2.15
The weighted average fair value of options granted during 2001
was $0.23, per option. The weighted average exercise price for
2000 and 2001 was $5.00 and $0.50, respectively. The weighted
average remaining contractual life of options outstanding is 7.06
years and 8.06 years for 2000 and 2001, respectively. As of
December 31, 2000 and 2001, 268,000 and 570,500 options were
exercisable at a weighted average exercise price of $5.00 per
option. At December 31, 2001, options to purchase 2,297,000
shares of Class A Common Stock were available for future grants
under the 1996, 1998, 2000 and 2001 Plans.
If the Company had elected to recognize compensation cost based
on the fair value of the options granted at the grant date as
prescribed by SFAS No. 123, net loss and net loss per share would
have been increased to the pro forma amounts shown below:
Years Ended December 31,
---------------------------------
2000 2001
--------------- ---------------
Pro forma net loss $(10,936,000) $(21,365,000)
Pro forma net loss per share $(1.24) $(0.71)
F-20
The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the
following weighted-average assumptions: risk-free interest rates
of 6.81% and 4.89% for 2000 and 2001, respectively, dividend
yields of 0% for 2000 and 2001; volatility factors of the
expected market price of the Company's common stock of .863 and
.915 for 2000 and 2001, respectively, and a weighted average
expected life of the option of 10 years and 4 years for 2000 and
2001, 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.
12. NON-RECURRING EXPENSES
During the fourth quarter of fiscal 2001, the Company recorded
approximately $3,823,000 of non-recurring expenses. These
expenses were primarily the result of: a write-off of capitalized
tooling costs of approximately $2,082,000; a write-off of
capitalized engineering software of approximately $723,000; and
an accrual of approximately $1,018,000 related to commitments to
purchase special orders from certain vendors. The Company
believes the capitalized tooling and engineering software have no
future use to the Company due to the change in the Company's
business strategy and the re-design of its major product, the
JETCRUZER 500. The accrual to vendors represents costs incurred
by vendors in the production of items specifically related to the
JETCRUZER 500 with no alternative saleable value to the vendors.
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. BENEFIT PLAN
The Company has a 401(k) savings plan with a profit sharing
provision, covering substantially all full time employees. The
Company may make discretionary contributions to the Plan as
authorized by the Board of Directors. The Company has not made
any profit sharing contributions to the Plan.
15. PER SHARE INFORMATION
The Company calculates basic net loss per share as required by
SFAS No. 128, "Earnings per Share". Basic earnings per share
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 following table
sets forth the computation of basic loss per share:
F-21
2000 2001
---------------- -----------------
Numerator
Loss before extraordinary item $(10,715,000) $(21,164,000)
Amortization of Discount on Preferred Stock (620,000) (361,000)
Dividend in Arrears (246,000) (336,000)
---------------- -----------------
Numerator for basic loss per share $(11,581,000) $(21,861,000)
================ =================
Denominator
Weighted average shares of Class B Shares 1,900,000 1,900,000
Weighted average shares of Class A Shares 7,268,000 28,110,000
---------------- -----------------
Denominator for basic loss per share 9,168,000 30,010,000
---------------- -----------------
Basic loss per share $(1.26) $(0.73)
================ =================
16. SUBSEQUENT EVENTS
On February 6, 2002 the U.S. Bankruptcy Court in San Antonio,
Texas, approved an operating agreement, which allows the Company
to manage Mooney while a plan of reorganization was prepared for
approval. Mooney has operated under the protection of Chapter 11
bankruptcy since July 2001.
On February 8, 2002, the Company purchased Congress Financial
Corporations position (the "Congress Position") as senior secured
creditor for Mooney. Under the terms of the Assignment and
Assumption Agreement, the purchase price paid by the Company in
connection with the acquisition of the Congress Position was
$8,000,000 with $3,500,000 paid in cash and $4,500,000 payable in
secured notes. Each note is secured by substantially all the
assets acquired from Congress Corporation. As additional security
for the Company's compliance with the fulfillment of its
obligations pursuant to the Assignment and Assumption Agreement
and the acquisition notes, the Company delivered to Congress
Corporation a Limited Recourse Secured Promissory Note for
$5,700,000. This note is a contingent note, payable only in the
event that the Company defaults under the terms of the original
acquisition notes.
On March 18, 2002, the bankruptcy courts approved the sale of
Mooney's assets to the Company, which is expected to close in
April 2002. Mooney produces top of the line, single engine piston
airplanes including the Eagle, the Ovation2, and the Bravo, which
are the performance leaders in the four-passenger single engine
aircraft market. For over 50 years, the Company has produced high
performance piston aircraft, which are considered by many to be
the "best of breed" in the owner-flown aircraft market. There are
more than 10,000 Mooney aircraft in operation around the world.
Additionally, the Company has entered into discussions with
Century Aerospace Corporation concerning acquisition of the
rights to manufacture the Century Jet, one of the exciting new
entrants in the "micro-jet" market. The Century Jet is a
revolutionary new business jet that could be priced more than
$1,000,000 below the current least expensive business jet,
setting a new benchmark for low cost business travel by private
aircraft and providing a cost effective alternative to airline
travel for small and medium-sized businesses.
On February 27, 2002, the Company completed three financing
transactions for total proceeds of $5,734,000 and incurred
financing costs of $184,000. The net proceeds of these
transactions were used to acquire the Congress Position as
secured creditor for Mooney Aircraft and to fund current
operations.
The Company issued $2,250,000 in 8% Secured Convertible Notes
under the October 26, 2001 placement offering in which $3,000,000
was available to the Company for additional financing. The Notes
are convertible after 120 days into shares of Class A Common
Stock at a conversion
F-22
price of $.35 or 70% of the average of the three lowest closing
bid prices for the Company's Common Stock for the thirty days
prior to conversion. The maturity date of the Notes is October
26, 2006. Attached to the Notes were warrants to purchase up to
4,500,000 shares of the Company's Class A Common Stock. The first
50% of the warrants may be exercised after 45 days at a price of
$.25 whereas the remaining 50% of the warrants may be exercised
at $.30. The expiration date of the warrants is January 30, 2007.
The Company issued $1,329,000 in 8% Unsecured Convertible Notes
as part of the October 26, 2001 Put Agreement in which the
Company had the option to sell up to an additional $5,000,000 in
Convertible Notes. The Notes are convertible after 120 days into
shares of Class A Common Stock under the same terms as the
October 26, 2001 placement offering described above. The maturity
date of the notes is October 26, 2006. Attached to the Notes were
warrants to purchase 2,658,000 shares of the Company's Class A
Common Stock. The warrants may be exercised under the same terms
as the warrants issued in conjunction with the October 26, 2001
placement offering described above.
The Company issued $2,155,000 in 8% Unsecured Convertible Notes
as part of a new placement offering dated January 30, 2002. The
Notes are convertible after 120 days into shares of Class A
Common Stock under the same terms of the October 26, 2001
placement offering described above. The maturity date of the
notes is October 26, 2006. Attached to the Notes were warrants to
purchase 4,310,000 shares of the Company's Class A Common Stock.
The warrants may be exercised under the same terms as the
warrants issued in conjunction with the October 26, 2001
placement.
On March 26, 2002, the Company issued $1,450,000 in 8% Unsecured
Convertible Notes in a subsequent closing that was part of the
new private placement dated January 30, 2002. The notes are
convertible after 120 days into shares of Class A Common Stock
under the same terms as the October 26, 2001 private placement.
The maturity date of the notes is October 26, 2006. Attached to
the notes were warrants to purchase 2,900,000 shares of our Class
A Common Stock. The warrants may be exercised under the same
terms as the warrants issued in conjunction with the October 26,
2001 private placement.
F-23
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEET
March 31, 2002
------------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,820,000
Debt issuance costs, current portion 90,000
Receivable from Mooney Aircraft Corporation 8,158,000
Prepaid expenses and other current assets 74,000
------------------
Total current assets 11,142,000
Property, plant and equipment, net 11,867,000
Investments available-for-sale 1,000
Restricted cash 435,000
Debt issuance costs 412,000
Other assets 315,000
------------------
Total assets 24,172,000
==================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 2,415,000
Other accrued liabilities 2,884,000
Capital leases, current portion 147,000
Notes payable -- current portion 1,447,000
Convertible debentures, current (net discount of $16,468,000) 1,570,000
------------------
Total current liabilities 8,463,000
Long-term liabilities:
Capital leases, long-term 12,826,000
Notes payable 3,200,000
Convertible debenture, long term (net discount of $1,244,000) 351,000
Deferred land lease 366,000
Deferred revenue 1,812,000
------------------
Total liabilities 27,018,000
Stockholders' deficiency:
Preferred Stock, par value $.0001 per share; 5,000,000 shares
authorized; none issued and outstanding, 100,000 shares
designated as Series A. -
Series A, 5% Cumulative Convertible Preferred Stock, $100 stated
value per share, 100,000 shares authorized, 42,371 shares
issued and outstanding 3,346,000
Class A Common Stock, par value $.0001 per share; 625,000,000
shares authorized; 55,313,509 shares issued and outstanding 47,000
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
Warrants 9,075,000
Public Warrants 473,000
Class A Warrants 11,290,000
Class B Warrants 4,632,000
Additional paid-in capital 60,742,000
Accumulated other comprehensive loss (27,000)
Deficit accumulated during the development stage (92,424,000)
------------------
Total stockholders' deficiency (2,846,000)
------------------
Total liabilities and stockholders' deficiency 24,172,000
==================
See accompanying notes to consolidated financial statements.
F-24
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended Period from
March 31, January 26, 1990
(inception) to
March 31,
2001 2002 2002
------------ ------------ --------------
Interest income $ 1,000 $ 3,000 $ 2,858,000
Other income -- 38,000 1,464,000
------------ ------------ --------------
1,000 41,000 4,322,000
Cost and expenses:
Research and development costs 1,775,000 1,661,000 46,398,000
General and administrative expenses 937,000 2,151,000 28,387,000
Loss on disposal of assets -- -- 755,000
Realized loss on sale of investments -- -- 66,000
Interest expense 1,963,000 1,903,000 11,155,000
In-process research and development acquired -- -- 761,000
Non-recurring expenses -- -- 3,823,000
------------ ------------ --------------
4,675,000 5,715,000 91,345,000
------------ ------------ --------------
Loss before extraordinary item (4,674,000) (5,674,000) (87,023,000)
Extraordinary loss on retirement of Bridge Notes -- -- (942,000)
--------------
Net loss $ (4,674,000) $ (5,674,000) $ (87,965,000)
============ ============ ==============
Net loss per share $ (.32) (.11)
------------ ------------
Weighted average number of shares outstanding 15,465,000 53,981,003
============ ============
See accompanying notes to consolidated financial statements.
F-25
See accompanying notes to financial statements.
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
Consolidated Statement of Stockholders' Deficiency
- --------------------------------------------------- -------------------------------------------------------------------------------
Common Stock
- --------------------------------------------------- -------------------------------------------------------------------------------
Preferred Stock Class A Class B Class E-1 Class E-2
----------------------------------- -------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Warrants
-------------------------------------------------------------------------------------------------------------------
Common stock issued at $3.59
per share $ $ 418,094 $ 836,189 $ 836,189 $
Common stock issued
in exchange for in-process
research and development at
$.36 per share 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 at $.51 per share 595,283 1,190,566 1,190,566
Imputed interest on advances
from stockholder
Net proceeds from initial public
offering of Units at $4.39
per share 6,000,000 1,000
Net proceeds from exercise of
over- allotment option at $4.55
per share 900,000
Warrants issued in connection
with issuance of Bridge Notes at
$.79 per share
Net loss from inception to
December 31, 1996
----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 6,900,000 1,000 2,000,000 4,000,000 4,000,000
Adjustment to proceeds from
initial public offering and
exercise of overallotment
option
Net loss
----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 6,900,000 1,000 2,000,000 4,000,000 4,000,000
Conversion of Class B to A Common
Stock 99,676 (99,676)
Net loss
----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 6,999,676 1,000 1,900,324 4,000,000 4,000,000
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
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Deficit accumulated
Public Class A Class B Additional Accumulated other during the
Warrants Warrants Warrants paid-in-capital Comprehensive loss development stage Total
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock issued at $3.59
per share $ $ $ $ 7,500,000 $ $ $ 7,500,000
Common stock issued
in exchange for in-process
research and development at
$.36 per share 361,000 361,000
Imputed interest on advances
from stockholder 799,000 799,000
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 at $.51 per share 1,507,000 1,507,000
Imputed interest on advances
from stockholder 11,000 11,000
Net proceeds from initial public
offering of Units at $4.39
per share 9,583,00 4,166,000 12,566,000 26,316,000
Net proceeds from exercise of
over- allotment option at $4.55
per share 1,707,00 466,000 1,922,000 4,095,000
Warrants issued in connection
with issuance of Bridge Notes
at $.79 per share 473,000 473,000
Net loss from inception to
December 31, 1996 24,328,000 24,328,000
---------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 473,000 11,290,000 4,632,000 35,730,000 (24,328,000) 27,798,000
Adjustment to proceeds from
initial public offering and
exercise of overallotment
option (78,000) (78,000)
Net loss (6,625,000) (6,625,000)
---------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 473,000 11,290,000 4,632,000 35,652,000 (30,953,000) 21,095,000
Conversion of Class B to A Common
Stock
Net loss (10,118,000) (10,118,000)
---------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 473,000 11,290,000 4,632,000 35,652,000 (41,071,000) 10,977,000
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
F-26
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
Statement of Stockholders' Deficiency (continued)
- ------------------------------------------------- --------------------------------------------------------------------------------
Common Stock
- ------------------------------------------------- --------------------------------------------------------------------------------
Preferred Stock Class A Class B Class E-1
------------------------- --------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
------------------------------------------------------------------------------------------------------------
Net proceeds from
issuance of
preferred stock
at $63.08 per
share 79,800 $ 5,034,000 $ $ $
Net proceeds from
issuance of
warrants at $1.29
per share
Conversion of
Preferred Stock
to Class A (10,891) (687,000) 712,663
Net proceeds from
issuance of
common stock at
$0.69 per share 1,252,160
Net proceeds from
issuance of
warrants at $1.43
per share
Amortization of
discount on
Preferred Stock 278,000
Amortization of
warrants attached
to common stock
Unrealized gain on
investments
Net loss
------------------------------------------------------------------------------------------------------------
Comprehensive loss
------------------------------------------------------------------------------------------------------------
Balance at
December 31, 2000 68,909 4,625,000 8,964,499 1,000 1,900,324 4,000,000
Net proceeds from
issuance of
preferred stock
at $84.54 per
share 11,285 978,000
Net proceeds from
issuance of
warrants at $.06
per share
Conversion of
Preferred Stock
to Class A (33,546) (2,167,000) 16,112,563 16,000
Net proceeds from
issuance of
common stock at
$0.17 per share 5,300,701 5,000
Net proceeds from
issuance of
warrants at $.07
per share
Amortization of
discount on
Preferred Stock 179,000
Amortization of
warrants attached
to common stock
Issuance of
warrants attached
to debentures at
$.11 per share
Beneficial
conversion
feature related
to debentures
Conversion of
Convertible
Debentures to
Class A 14,961,087 15,000
Unrealized loss on
investments
Net loss
------------------------------------------------------------------------------------------------------------
Comprehensive loss
------------------------------------------------------------------------------------------------------------
Balance at
December 31, 2001 46,648 $ 3,615,000 45,338,850 $ 37,000 1,900,324 $ 4,000,000 $
------------------------------------------------------------------------------------------------------------
Conversion of
Preferred Stock
to Class A (4,277) (305,000) 2,834,541 3,000
Net proceeds from
issuance of
warrants at $.11
per share
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
Class E-2
------------------------------------------------------------------------------------------------------------
Shares Amount Warrants Warrants warrants warrants paid-in capital
------------------------------------------------------------------------------------------------------------
Net proceeds from
issuance of
preferred stock
at $63.08 per
share $ $ $ $ $ $ 342,000
Net proceeds from
issuance of
warrants at $1.29
per share 2,217,000
Conversion of
Preferred Stock
to Class A 687,000
Net proceeds from
issuance of
common stock at
$0.69 per share 863,000
Net proceeds from
issuance of
warrants at $1.43
per share 358,000
Amortization of
discount on
Preferred Stock
Amortization of
warrants attached
to common stock 45,000
Unrealized gain on
investments
Net loss
------------------------------------------------------------------------------------------------------------
Comprehensive loss
------------------------------------------------------------------------------------------------------------
Balance at
December 31, 2000 4,000,000 2,575,000 473,000 11,290,000 4,632,000 40,549,000
Net proceeds from
issuance of
preferred stock
at $84.54 per
share 170,000
Net proceeds from
issuance of
warrants at $.06
per share 60,000
Conversion of
Preferred Stock
to Class A 2,318,000
Net proceeds from
issuance of
common stock at
$0.17 per share 1,237,000
Net proceeds from
issuance of
warrants at $.07
per share 274,000
Amortization of
discount on
Preferred Stock
Amortization of
warrants attached
to common stock 119,000
Issuance of
warrants attached
to debentures at
$.11 per share 3,443,000
Beneficial
conversion
feature related
to debentures 9,674,000
Conversion of
Convertible
Debentures to
Class A 1,564,000
Unrealized loss on
investments
Net loss
------------------------------------------------------------------------------------------------------------
Comprehensive loss
------------------------------------------------------------------------------------------------------------
Balance at
December 31, 2001 4,000,000 $ 6,352,000 $ 473,000 $ 11,290,000 $ 4,632,000 $55,631,000
------------------------------------------------------------------------------------------------------------
Conversion of
Preferred Stock
to Class A 411,000
Net proceeds from
issuance of
warrants at $.11
per share 11,000 22,000
---------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
Deficit accumulated
Accumulated other during the
comprehensive loss development stage Total
---------------------------------------------------------------
Net proceeds from
issuance of
preferred stock
at $63.08 per
share $ $ (342,000) $ 5,034,000
Net proceeds from
issuance of
warrants at $1.29
per share 2,217,000
Conversion of
Preferred Stock
to Class A -
Net proceeds from
issuance of
common stock at
$0.69 per share 863,000
Net proceeds from
issuance of
warrants at $1.43
per share 358,000
Amortization of
discount on
Preferred Stock (278,000) -
Amortization of
warrants attached
to common stock (45,000) -
Unrealized gain on
investments 32,000 32,000
Net loss (10,715,000) (10,715,000)
---------------------------------------------------------------
Comprehensive loss (10,683,000)
---------------------------------------------------------------
Balance at
December 31, 2000 (64,752,000) (607,000)
Net proceeds from
issuance of
preferred stock
at $84.54 per
share (194,000) 954,000
Net proceeds from
issuance of
warrants at $.06
per share 60,000
Conversion of
Preferred Stock
to Class A (183,000) (16,000)
Net proceeds from
issuance of
common stock at
$0.17 per share 1,242,000
Net proceeds from
issuance of
warrants at $.07
per share 274,000
Amortization of
discount on
Preferred Stock (163,000) 16,000
Amortization of
warrants attached
to common stock (119,000)
Issuance of
warrants attached
to debentures at
$.11 per share 3,443,000
Beneficial
conversion
feature related
to debentures 9,674,000
Conversion of
Convertible
Debentures to
Class A 1,579,000
Unrealized loss on
investments (29,000) (29,000)
Net loss (21,164,000) (21,164,000)
---------------------------------------------------------------
Comprehensive loss $ (21,193,000)
---------------------------------------------------------------
Balance at
December 31, 2001 $ (29,000) $ (86,575,000) $ (4,574,000)
---------------------------------------------------------------
Conversion of
Preferred Stock
to Class A (145,000) (36,000)
Net proceeds from
issuance of
warrants at $.11
per share 33,000
F-27
Amortization of 36,000
discount on
Preferred Stock
Amortization of
warrants attached
to common stock
Issuance of
warrants attached 2,712,000
to debentures at
$.17 per share
Beneficial
conversion
feature related
to debentures
Conversion of
Convertible
Debentures to
Class A 7,140,118 7,000
Unrealized gain on
investments
Net loss
------------------------------------------------------------------------------------------------------
Comprehensive loss
------------------------------------------------------------------------------------------------------
Balance at March 42,371 $3,346,000 55,313,509 $47,000 1,900,324 $- 4,000,000 $- $4,000,000 $9,075,000 $473,000
31, 2002
======================================================================================================
Amortization of 36,000
discount on
Preferred Stock
Amortization of 30,000 (30,000)
warrants attached
to common stock
Issuance of
warrants attached 2,712,000
to debentures at
$.17 per share
Beneficial
conversion 4,373,000 4,373,000
feature related
to debentures
Conversion of
Convertible 275,000 282,000
Debentures to
Class A
Unrealized gain on
investments 2,000 2,000
Net loss (5,674,000) (5,674,000)
-------------------------------------------------------------------------
Comprehensive loss (5,672,000)
-------------------------------------------------------------------------
Balance at March $11,290,00 $4,632,000 $60,742,000 $ (27,000) $(92,424,000) $(2,846,000)
31, 2002
=========================================================================
F-28
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD FROM
JANUARY 26
1990
(INCEPTION)
QUARTER ENDING MARCH 31, TO MARCH 31,
----------------------------
2001 2002 2002
--------------------------------------------
OPERATING ACTIVITIES:
Net loss $ (4,674,000) $ (5,674,000) $ (87,965,000)
Adjustments to reconcile net loss to net cash used in operating
activities:
Noncash stock compensation expense - 716,000 1,923,000
Noncash professional service expense - -- 344,000
Noncash interest expense - -- 547,000
Amortization of discount on convertible debentures 1,695,000 935,000 3,093,000
Amortization of debt issue costs - 94,000 167,000
Cost of in-process research and development acquired - -- 761,000
Imputed interest on advances from stockholder - -- 810,000
Interest income from restricted cash invested - -- (474,000)
Extraordinary loss on retirement of bridge notes - -- 942,000
Depreciation and amortization 350,000 291,000 6,756,000
Loss on disposal of assets - -- 3,560,000
Realized loss on sale of investments - -- 66,000
Changes in operating assets and liabilities:
Decrease (increase) in prepaid expenses and other current assets (39,000) (7,000) 99,000
Increase in other assets (109,000) -- (315,000)
Increase in accounts payable 493,000 328,000 1,027,000
Increase (decrease) in accrued liabilities (281,000) 520,000 3,641,000
Increase in deferred revenue 296,000 -- 1,605,000
--------------------------------------------
Net cash used in operating activities (2,269,000) (2,797,000) (63,413,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in construction in progress - -- (446,000)
Proceeds from insurance claims upon loss of aircraft - -- 30,000
Proceeds from sales of assets - -- 9,803,000
Capital expenditures (274,000) (2,000) (8,203,000)
Deposit on acquisition of assets -- (3,658,000) (3,658,000)
Purchase of certificate of deposit - -- (1,061,000)
Proceeds from redemption of certificate of deposit - -- 1,061,000
Purchase of investments - -- (39,227,000)
Proceeds from maturities of investments in bonds - -- 1,481,000
Proceeds from sale of investments - 1,924,000 37,680,000
Restricted cash from long-term debt - -- (8,095,000)
Increase in restricted cash - -- (436,000)
--------------------------------------------
Net cash used in investing activities (274,000) (1,736,000) (11,071,000)
--------------------------------------------
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)
Proceeds from issuance of convertible preferred stock 300,000 -- 5,988,000
Proceeds from issuance of convertible debentures 4,069,000 4,225,000 14,023,000
Proceeds from issuance of warrants - 2,724,000 8,718,000
Advances from stockholder - -- 10,728,000
Proceeds from issuance of common stock 1,459,000 -- 9,619,000
Net proceeds from initial public offering and exercise of
over-allotment option - -- 30,411,000
Net proceeds from bridge financing - -- 7,295,000
Net proceeds from loans from officers - -- 336,000
Payments on capital lease obligations (255,000) (35,000) (969,000)
Payments on promissory notes - (242,000) (667,000)
Repayment of bridge financing - -- (8,100,000)
--------------------------------------------
Net cash provided by financing activities 5,573,000 6,672,000 77,304,000
--------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 3,030,000 2,139,000 2,820,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,000 681,000 --
--------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,043,000 $ 2,820,000 $ 2,820,000
============================================
F-29
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
PERIOD FROM
JANUARY 26
1990
(INCEPTION)
QUARTER ENDING MARCH 31, TO MARCH 31,
-------------------------------------------
2001 2002 2002
-------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 268,000 $ 1,388,000 $ 5,810,000
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
Assets acquired with a note $ 4,500,000 $ 5,314,000
Assets acquired under capital leases $ 13,527,000
Deposit surrendered as payment for rents due $ 80,000
Construction in progress acquired with restricted cash $ 8,578,000
F-30
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(unaudited)
1. GENERAL
In the opinion of the Company's management, the accompanying unaudited
financial statements include all adjustments (which include only normal
recurring adjustments, except for accruals described in Note 7) necessary for a
fair presentation of the financial position of the Company at March 31, 2002 and
the results of operations and cash flows for the three months ended March 31,
2002 and March 31, 2001, respectively, and for the period from January 26, 1990
(inception) to March 31, 2002. Although the Company believes that the
disclosures in these financial statements are adequate to make the information
presented not misleading, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. Results of operations for
interim periods are not necessarily indicative of results of operations to be
expected for any other interim period or the full year.
The financial information in this quarterly report should be read in
conjunction with the audited December 31, 2001 financial statements and notes
thereto included in the Company's annual report filed on Form 10-KSB.
The Company is a development stage enterprise organized in 1990 to design,
develop, manufacture and market general aviation aircraft. At the end of 2001,
the Company recognized that a unique opportunity exists in the general aviation
industry today. The Company believes that an opportunity has been created for
the formation of a new general aviation company whose products offer an
alternative to business travel by airline for executives of small- to
medium-sized businesses and high net worth individuals as a result of the
concurrence of the following: (1) reduction of product-liability exposure as a
consequence of the passage of General Aviation Revitalization Act of 1994, (2)
the availability of several top of the line general aviation product lines as a
result of the recent recession and changes in strategic direction by several
general aviation aircraft manufacturers, and (3) deteriorating comfort and
convenience of airline travel.
The Company has hired a management team with significant experience in
turning around general aviation manufacturing companies in order to take
advantage of current opportunities. The new management team has already taken
the first step in our strategy by acquiring the assets of Mooney Aircraft
Corporation ("Mooney"). On February 6, 2002 the U.S. Bankruptcy Court in San
Antonio, Texas, approved an operating agreement, which allows the Company to
manage Mooney while a plan of reorganization was prepared for approval. Mooney
has operated under the protection of Chapter 11 bankruptcy since July 2001.
On February 8, 2002, the Company purchased Congress Financial Corporation's
position (the "Congress Position") as senior secured creditor for Mooney. Under
the terms of the Assignment and Assumption Agreement, the purchase price paid by
the Company in connection with the acquisition of the Congress Position was
$8,000,000 with $3,500,000 paid in cash and $4,500,000 payable in secured notes.
Each note is secured by substantially all the assets acquired from Congress
Corporation. As additional security for the Company's compliance with the
fulfillment of its obligations pursuant to the Assignment and Assumption
Agreement and the acquisition notes, the Company delivered to Congress
Corporation a Limited Recourse Secured Promissory Note for $5,700,000. This note
is a contingent note, payable only in the event that the Company defaults under
the terms of the original acquisition notes. In addition, during the quarter
ended March 31, 2002, the Company has forwarded cash to Mooney of $158,000 to
fund its current operations.
On March 18, 2002, the bankruptcy courts approved the sale of Mooney's
assets to the Company, which was completed on April 24, 2002. Mooney produces
top of the line, single engine piston airplanes including the Eagle, the
Ovation2, and the Bravo, which are the performance leaders in the four-passenger
single engine aircraft market. For over 50 years, the Company has produced high
performance piston aircraft, which are considered by many to be the "best of
breed" in the owner-flown aircraft market. There are more than 10,000 Mooney
aircraft in operation around the world.
Mooney aircraft's assets will be held by a newly formed wholly owned
subsidiary, Mooney Airplane Company, Inc. (MAC). The Company will be formally
changing its named to Mooney Aerospace Group, Ltd. The accompanying consolidated
financial statements are inclusive of the Company and MAC, however, at March 31,
2002 and for the three months then ended, there were no accounts or activity
under MAC.
The Company plans to pursue the acquisition of other complementary general
aviation product lines and development programs as they become available. The
new management team has suspended significant spending on the Jetcruzer, and
will review how best to capitalize on the completed development work.
2. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 is effective for any business combinations completed after
June 30, 2001 and SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill deemed to have indefinite lives
will no longer be amortized but will be subject to annual impairment tests in
accordance with the Statements. Other intangible assets will continue to be
amortized over their useful lives.
The Company has adopted the provisions of SFAS No.141 and SFAS No. 142 on
January 1, 2002. The adoption did not have an effect on the earnings and
financial position of the Company as of and for the three months ended March 31,
2002. The Company has not yet determined what the effect of the adoption of
these pronouncements related to the acquisition of Mooney on April 24, 2002 will
be on the earnings and financial position of the Company.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which supersedes SFAS No. 121.
Accounting for the Impairment of Long-Lived Assets an for Long-Lived Assets to
be Disposed Of. SFAS No. 144 addresses financial accounting and reporting for
the impairment of long-lived assets and for long-lived assets to be disposed of.
However, SFAS No. 144 retains certain fundamental provisions of SFAS No. 121
including recognition and measurement of the impairment of long-lived assets to
be held and used; and measurement of long-lived assets to be disposed of by
sale. SFAS No. 144 is effective for fiscal years beginning after December 15,
2001. The Company has adopted SFAS No. 144 on January 1, 2002. The adoption did
not have an effect on the earnings and financial position of the Company as of
and for the three months ended March 31, 2002.
3. NET LOSS PER COMMON SHARE
The Company's net loss per common share was computed based on the weighted
average number of shares of common stock outstanding during the three month
periods ended March 31, 2002 and 2001 and excludes all outstanding shares of
Class E-1 and Class E-2 Common Stock because the conditions for
F-31
the lapse of restrictions on such shares have not been satisfied. There is no
difference between the loss per common share amounts computed for basic and
dilutive purposes because the impact of convertible preferred stock, options and
warrants outstanding are anti-dilutive.
4. NOTES PAYABLE
As discussed in Note 1, on February 8, 2002 the Company entered into an
agreement with Congress Financial to acquire their position as a senior secured
creditor of Mooney for $8,000,000. Of this amount, $3,500,000 of the purchase
price was paid in cash, and $4,500,000 was paid in secured notes with the
following terms: (1) a Secured Promissory Note for $500,000, with an interest
rate of 2% percent per annum in excess of the prime rate, interest payments
being due the first day of each month starting with February 1, 2002 and the
full amount of $500,000 due on July 29, 2002, (2) a Secured Promissory Note for
$2,500,000, with an interest rate of 2% percent per annum in excess of the prime
rate with principal and interest payments of $208,333 being due in twelve
consecutive calendar quarterly installments commencing April 1, 2002 and, (3) a
Secured Promissory Note for $1,500,000, with an interest rate of 2% percent per
annum in excess of the prime rate, with interest payments being due on the first
business day of each calendar quarter commencing on July 1, 2004 and the
principal being due January 29, 2007. These notes are secured by substantially
all the assets acquired from Congress.
As additional security for our compliance with the fulfillment of our
obligations to Congress, there is a Limited Recourse Secured Promissory Note for
$5,700,000. This note is a contingent note, payable in the event that we default
funder the payment terms of the other notes. This note is also secured by
substantially all the assets acquired from Congress.
5. CONVERTIBLE DEBENTURES
On March 27, 2001, the Company obtained new financing of up to $5,000,000,
with an availability of up to an additional $3,000,000. The additional amount
becomes available after certain criteria have been met, as defined in the
agreement. The Company issued $4,100,000 in Secured Convertible Notes ("Notes"
or "Debentures") with an interest rate of 5% to accredited investors, as defined
by Regulation D issued by the Securities and Exchange Commission under the
Securities Act of 1933. On July 25, 2001, the Company issued an additional
$1,000,000 in Notes under this agreement. In conjunction with the financing, the
Company issued an additional $410,000 in Secured Convertible Notes as finders
fees. As part of the agreement the Company also issued warrants to purchase
10,254,000 shares of common stock at an exercise price ranging from
approximately $.24 to $.45 per share. The Company filed a proxy statement and
Form S-3 Registration Statement as required by the terms of the agreement. There
is a mandatory redemption requirement at 125% of the unpaid principal balance
and unpaid interest upon the occurrence of default or if we are prohibited from
issuing shares of common stock. Additionally, the Company may put the additional
notes to the note holders upon meeting certain covenants related to the
availability of trading of the stock, trading volume and market price and other
milestones.
The March 27, 2001 Debentures were issued with various stated conversion
prices, all of which were below market at the time of issuance. The discount of
$3,345,000 which resulted from these transactions, will be amortized over the
life of the Debentures. For the three months ended March 31, 2002, $613,000 is
being amortized to interest expense, due to the passage of time and conversions
into shares of common stock.
At March 31, 2002, the Company is in default of one of the covenants of the
agreement for failure to pay accrued interest within 10 days of March 31, 2002.
Due to the default, we are required to accrue interest on the notes at an annual
rate of 10%. In accordance with the agreement, the Company has accrued
approximately $223,000 in interest due on the Note at March 31, 2002. The
Company has not obtained waivers from the note holders waiving their right to
call the notes due or the payment of outstanding interest, nor has any note
F-32
holder the company to elect to redeem their notes. Due to the event of default,
the Company has recorded all notes outstanding as a current liability in the
balance sheet.
On June 27, 2001, the Company obtained new financing of $1,000,000, which
is separate from that of March 27, 2001, described above. The Company issued
$1,000,000 in a Convertible Note ("Note" or "Debenture") with an interest rate
of 5% to an accredited investor, as defined by Regulation D issued by the
Securities and Exchange Commission under the Securities Act of 1933. As part of
the agreement, the Company issued warrants to purchase 2,646,000 shares of
common stock at a purchase price of $.22 per share. There is a mandatory
redemption requirement at 125% of the unpaid principal balance and unpaid
interest upon the occurrence of default or if the Company is prohibited from
issuing shares of common stock. The Company did not register the shares issuable
upon conversion within 30 days of the closing date which is a non-registration
event pursuant to Section 10.4 of the Subscription Agreement. In accordance with
this section, the Company has accrued $134,000 representing liquidation damages
due to the note holder as a result of the non-registration event. Such damages
are calculated at an amount equal to 1% of the principal amount issued per 30
days or part thereof, and 2% for each 30 days or part thereof, during the
pendency of the non-registration event.
The June 27, 2001 debenture was issued with various stated conversion
prices, which resulted in a beneficial conversion feature since the effective
conversion price was below market at the time of the issuance. The discount of
$351,000 which resulted from this transaction, will be amortized over the life
of the debenture. During the three months ended March 31, 2002 approximately
$26,000 was amortized to interest expense. No notes issued under this agreement
were converted as of March 31, 2002.
At March 31, 2002, the Company was in default of one of the covenants of
the June 27, 2001 agreement for failure to pay accrued interest when due. Due to
the default, the Company is required to accrue the interest due at 10%. In
accordance with the agreement, the Company has accrued approximately $76,000 in
interest due on the notes at March 31, 2002. The Company has not obtained a
waiver from the note holder waiving its right to call the notes due or the
payment of the outstanding interest, nor has the note holder elected to redeem
its notes outstanding according to the terms of the Subscription Agreement. Due
to the event of default, the Company has recorded this note outstanding as a
current liability in the balance sheet.
On October 26, 2001, the Company obtained a new financing of up to
$10,000,000 with an availability of up to an additional $3,000,000, as part of a
private placement offering, which is separate from that of March 27, 2001 and
June 27, 2001. The Company issued $7,750,000 in Secured Convertible Notes
("Notes" or "Debentures") with an interest rate of 8% to accredited investors,
as defined by Regulation D issued by the Securities and Exchange Commission
under the Securities Act of 1933. In conjunction with the financing, the Company
issued an additional $667,000 in Secured Convertible Notes as finders fees. As
part of the agreement, the Company issued warrants to purchase 17,714,000 shares
of Common Stock. Half of the warrants may be exercised at a purchase price of
$.25 per share. The remaining 50% may be exercised at $.30 per share. There is a
mandatory redemption requirement at 125% of the unpaid principal balance and
unpaid interest upon the occurrence of default or if the Company is prohibited
from issuing shares of common stock. The Company did not register the shares
issuable upon conversion within 60 days of the closing date, which is a
non-registration event pursuant to Section 10.4 of the Subscription Agreement.
In accordance with this section, the Company has accrued $449,000 representing
liquidation damages due to the note holders as a result of the non-registration
event. Such damages are calculated at an amount equal to 1% of the principal
amount issued per 30 days, for the first 30 days or part thereof, and 2% for
each 30 days or part thereof, during the pendency of the non-registration event.
The Company has recorded the debentures as a current liability.
In conjunction with the October 26, 2001 private placement, the Company
entered into a Put Agreement with a group of its investors who hold convertible
notes and Preferred Stock. Under the Put Agreement,
F-33
the Company may sell up to an additional $5,000,000 in convertible notes and
warrants. The Company's right to exercise this option expires October 25,
2002. No options have been exercised as of March 31, 2002.
The October 26, 2001 Debentures were issued with various stated conversion
prices, which resulted in a beneficial conversion feature since the conversion
price was below market at the time of issuance. The discount of $5,936,000,
which resulted from this transaction, will be amortized over the life of the
debentures. For the three month period ended March 31, 2002, approximately
$282,000 was amortized to interest expense due to the passage of time. No notes
issued under this agreement were converted during the three month period March
31, 2002.
At March 31, 2002, the Company was in default of one of the covenants of
the October 26, 2001 agreement for failure to pay accrued interest when due. Due
to the default, the Company is required to accrue interest due at 10%. In
accordance with the agreement, the Company has accrued approximately $360,000 in
interest due the note holders at March 31, 2002. The Company has not obtained a
waiver from the note holder, waiving their right to call the notes due or the
payment of the outstanding interest, nor have the note holders, elected to
redeem their notes outstanding according to the terms of the Subscription
Agreement. Due to the event of default, the Company has recorded this note
outstanding as a current liability in the balance sheet.
On February 27, 2002, the Company completed three financing transactions
for total proceeds of $5,734,000 and incurred financing costs of $184,000. The
net proceeds of these transactions were used to make the cash payment to
Congress described in Note 1 and to fund current operations. In the first of the
three financing transactions, the Company issued $2,250,000 in 8% Secured
Convertible Notes under the October 26, 2001, private placement in which
$3,000,000 was available to us for additional financing. In conjunction with the
financing, the Company issued an additional $225,000 in Unsecured Convertible
Notes as finder's fees. The notes are convertible after 120 days into shares of
common stock at a conversion price of $.35 or 70% of the average of the three
lowest closing bid prices for our common stock for the thirty days prior to
conversion. The maturity date of the notes is October 26, 2006 and interest is
due on September 30, 2002 and semi- annually thereafter. Attached to the notes
were warrants to purchase 5,143,000 shares of common stock. The first 50% of the
warrants may be exercised after 45 days at a price of $.25 per share and the
remaining 50% may be exercised at $.30 per share. The warrants may be exercised
under the same terms as the warrants issued in conjunction with the October 26,
2001, private placement.
In the second of the three financing transactions, the Company issued
$1,329,000 in 8% Unsecured Convertible Notes as part of the October 26, 2001 Put
Agreement in which there is an option to sell up to an additional $5,000,000 in
convertible notes. In conjunction with the financing, the Company issued an
additional $133,000 in Unsecured Convertible Notes as finder's fees. The notes
are convertible after 120 days into shares of common stock under the same terms
as the October 26, 2001 private placement, except that there is no security
involved. The maturity date of the notes is October 26, 2006. Attached to the
notes were warrants to purchase 3,037,000 shares of common stock. The warrants
may be exercised under the same terms as the warrants issued in conjunction with
the October 26, 2001, private placement.
In the third of the three financing transactions, the Company issued
$2,155,000 in 8% Unsecured Convertible Notes as part of a new private placement
dated January 30, 2002. In conjunction with the financing, the Company issued an
additional $117,000 in Unsecured Convertible Notes as finders fees. The notes
are convertible after 120 days into shares of common stock under the same terms
as the October 26, 2001 private placement. The maturity date of the notes is
October 26, 2006. Attached to the Notes were warrants to purchase 4,926,000
shares of Class A Common Stock. The warrants may be exercised under the same
terms as the warrants issued in conjunction with the October 26, 2001 private
placement.
The February 27, 2002 debentures were issued with various stated conversion
prices, which resulted in a beneficial conversion feature since the conversion
price was below market at the time of issuance. The resulting discount of
$3,385,000 is being amortized over the life of the debentures. As of March 31,
2002, approximately $124,000 was amortized to interest expenses due to the
passage of time. No notes issued under this agreement were converted during the
three months ended March 31, 2002.
Additionally, on March 26, 2002, the Company issued $1,450,000 in 8%
Unsecured Convertible Notes that was part of the new private placement dated
January 30, 2002. In conjunction with the
F-34
closing, the Company issued an additional $145,000 in Unsecured Convertible
Notes as finder's fees. The notes are convertible after 120 days into shares of
common stock under the same terms as the October 26, 2001 private placement. The
maturity date of the notes is October 26, 2006 with interest being due on
September 30, 2002 and semi-annually thereafter. Attached to the notes were
warrants to purchase 3,314,000 shares of Class A Common Stock. The warrants may
be exercised under the same terms as the warrants issued in conjunction with the
October 26, 2001 private placement.
The March 26, 2002 debentures were issued with stated conversion prices,
which resulted in a beneficial conversion feature since the conversion price was
below market at the time of issuance. The resulting discount of $988,000 are
being amortized over the life of the debentures. As of March 31, 2002,
approximately $3,000 amortized to interest expense due the passage of time. No
notes issued under this agreement were converted during the three months ended
March 31, 2002.
As of March 31, 2002, various note holders converted a total of $ 3,217,000
of Convertible Debentures into 22,101,119 shares of Class A Common Stock.
6. STOCKHOLDERS' EQUITY
Preferred Stock
Through March 31, 2002, the Company has issued 91,085 shares and received
$8,265,000 (net on $843,000 in commissions and legal fees) related to a
preferred stock agreement to issue up to 100,000 shares of 5% Cumulative
Convertible Series A Preferred Stock ("Preferred Stock") with a stated value of
$100 per share and Common Stock Purchase Warrants to purchase Class A Common
Stock, for the aggregated purchase price of $10 million. The Company has
outstanding 42,371 shares of Preferred Stock with a stated value of $4,237,100
and detachable warrants to purchase 1,082,000 shares of common stock. No
Preferred Stock was issued during the three months ended March 31, 2002. The
remaining $891,500 in Preferred Stock funding will not occur until certain
criteria have been met.
Additionally, as consideration for the transaction, placement warrants to
purchase up to 1,688,000 shares of Class A Common Stock were issued. Fair values
of $1,231,000 and $987,000 for the detachable warrants and the placement
warrants, respectively, were included in stockholders' deficiency and were
netted as a discount to the Preferred Stock. The warrants are exercisable in
installments and the terms for the placement warrants are similar to the terms
of the detachable warrants issued with the Preferred Stock. The fair value for
these warrants was estimated at the dates of grant using a Black-Scholes pricing
model with the following weighted-average assumptions: risk-free interest rates
of 4.68% to 6.43%; dividend yields of 0%; a volatility factor of .566 to .915
and an expected life of the warrants of 3 years.
The Preferred Stock was issued with various conversion prices. This
resulted in a beneficial conversion feature since the effective conversion price
was below market at the time of the issuance. The discount on the Preferred
Stock of $536,000 was immediately recorded to Accumulated Deficit, as the
preferred Stockholders were able to convert to common stock immediately upon
issuance of the Preferred Stock. Of the total amount amortized at March 31,
2002, $36,000 was amortized in the three month period ended March 31, 2002.
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 of the common share at the date of
close, adjusted for changes in the market price prior to the conversion.
Preferred stockholder's do not have voting rights. As of March 31, 2002, the
Company had dividends in arrears for the Preferred Stock totaling $ 28,606 or
$ 8.60 per share.
For the three-month period ended March 31, 2002, various preferred
stockholders had converted a total of 4,277 shares plus dividends in arrears
into 2,835,000 shares of Class A Common Stock. No warrants have been exercised
as of March 31, 2002.
F-35
Equity Line of Credit
On August 15, 2000, we signed a Private Equity Line of Credit Agreement
("Equity Line") to sell up to $20,000,000 of Common stock over the course of two
years. This Equity Line enables us to request, at the Company's sole discretion,
that the investors purchase certain amounts of shares every 15 days at a price
equal to 92% or 93% of the market price. Each request will be for a minimum of
$200,000 and subject to a maximum of $1,500,000. Additional drawings on this
Equity Line are dependent upon stock market conditions. As of December 31, 2001,
the Company had 5,707,000 shares outstanding under the Equity Agreements with a
total net proceeds of $2,393,000. No shares under the equity line were sold
during the three-month period ended March 31, 2002.
In connection with the Equity Line transactions, warrants to purchase
4,269,000 shares of common stock over the next three years, at a stock price as
defined in each agreement, were issued. The fair value related to these warrants
of $632,000 has been included in stockholders' deficiency and no warrants have
been exercised as of March 31, 2002. The fair value of these warrants was
estimated on the date of issuance using a Black-Scholes pricing model with the
following weighted average assumptions:
Transaction Exercise Risk-Free Dividend Volatility Expected
Date Price Interest Yield Factor Life
----------- ---------- --------- -------- ---------- --------
August 15, 2000 $3.15 6.12% 0% .855 3
May 1, 2001 $.32-$1.20 4.68% 0% .915 3
7. EXECUTIVE COMPENSATION EXPENSES
The Company's former President and Chief Executive Officer, Dr. Carl Chen,
resigned effective January 8, 2002. He will remain available as needed for
consulting with the Company on a mutually agreed upon basis. The Company has
agreed to pay Dr. Chen severance of $300,000 over the next two years.
Additionally, he will receive two million in warrants at an exercise price of
$.25. At March 31, 2002, $100,000 of the cash severance has been paid. At that
date, the Company has accrued compensation expense of $520,000, representing the
remaining $200,000 cash payment plus the estimated fair value of the warrants to
be issued.
Additionally, the Company is executing three-year employment agreements
with four executives dated January 8, 2002. On a ratable basis over the
three-year period, the executives will vest a total of 12% ownership in the
Company. At March 31, 2002, the Company has accrued $196,000 in compensation
expense representing the estimated fair market value of the vested ownership at
the date.
8. SUBSEQUENT EVENTS
On April 11, 2002, the Company issued $950,000 in 8% Unsecured Convertible
Notes in a subsequent closing that was part of the private placement dated
January 30, 2002. The notes are convertible after 120 days into shares of common
stock under the same terms as the October 26, 2001 private placement. The
maturity date of the notes is October 26, 2006. Attached to the notes were
warrants to purchase 1,900,000 shares of our common stock. The warrants may be
exercised under the same terms as the warrants issued in conjunction with the
October 26, 2001, private placement.
As described in Note 1, the Company acquired substantially all of the
assets of Mooney Aircraft Corporation on April 24, 2002 pursuant to an order of
the U.S. Bankruptcy Court in San Antonio, Texas, signed on March 18, 2002, which
approved the sale.
F-36
====================================== =======================================
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. 344,407,483 SHARES
OF COMMON STOCK
TABLE OF CONTENTS
Page
Prospectus Summary 1
Risk Factors 3
Use of Proceeds 10
Price Range of Common Stock 11 Advanced Aerodynamics &
Management's Discussion and Structures, Inc.
Analysis and Plan of Operations 12
Business 18
Management 26
Description of Securities 32
Shares Eligible For Future Sale 36
Plan of Distribution 38 PROSPECTUS
Selling Stockholders 39
Legal Matters 44
Experts 44
Available Information 44
Index to Financial Statements 45
___________, 2002
====================================== =======================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Reference is made to Section 145 of the General Corporation Law of the
State of Delaware. As permitted by Delaware law, our 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. Our 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 it directors and officers (collectively, the
"Indemnitees"). The Indemnification Agreements permit us to indemnify the
Indemnitees for liabilities and expenses arising from certain actions taken by
the Indemnitees for or on behalf of the Company and require indemnification in
certain circumstances.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The registrant estimates that expenses in connection with the distribution
described in this registration abatement 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 stockholders 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 $ 9,843
Printing expenses* 5,000
Accounting fees and expenses* 6,000
Legal fees and expenses* 2,000
-------
Total $22,843
=======
* Estimated.
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In February 2002, we issued 100,000 Class A Common Stock shares and 100,000
warrants with an exercise price of $0.30 and a three-year term for consulting
services. We relied on Section 4(2) of the Act as a basis of exemption from
registration.
In March 2002, we issued 380,000 Class A Common Stock shares for consulting
services. We relied on Section 4(2) of the Act as a basis of exemption from
registration.
In April 2002, we issued 3,260,871 Class A Common Stock shares and
3,571,429 warrants with an exercise price of $0.45 and a two-year term to Mooney
Aircraft Corporation for the acquisition of substantially all of its assets. We
relied on Section 4(2) of the Act as a basis of exemption from registration.
In May 2002, we issued 500,000 Class A Common Stock shares for consulting
services. We relied on Section 4(2) of the Act as a basis of exemption from
registration.
Except as expressly set forth above, the individuals and entities to whom
we issued securities as indicated in this section of the registration statement
are unaffiliated with us.
ITEM 27. EXHIBITS.
The following exhibits are filed or incorporated by reference as part of
this Registration Statement.
Exhibit No. Description
----------- -----------
(1) 2.1 Agreement of Merger dated July 16, 1996 between Advanced
Aerodynamics and Structures, Inc., California corporation,
and Advanced Aerodynamics & Structures, Inc., a Delaware
corporation
(15) 2.2 Order of the U.S. Bankruptcy Court dated March 18, 2002 re
Mooney Aircraft Corporation
(15) 2.3
Asset Purchase Agreement by and between the Company and
Mooney Aircraft Corporation dated March 18, 2002
(15) 2.4 First Amendment to Asset Purchase Agreement by and between
the Company and Mooney Aircraft Corporation dated March 19,
2002
Advanced Aerodynamics & Structures, Inc.
(1) 3.1 Certificate of Incorporation
(15) 3.2 Bylaws as amended on March 15, 2002
(1) 3.3 Amended and Restated Certificate of Incorporation
(10) 3.4 Amendment to the Certificate of Incorporation
(7) 3.5 Certificate of Designation
(8) 3.6 Amendment to Certificate of Designation
Mooney Airplane Company, Inc.
(15) 3.7 Certificate of Incorporation
II-2
(15) 3.8 Certificate of Amendment of Certificate of Incorporation
(15) 3.9 Bylaws as amended on April 1, 2002
(1) 4.1 Specimen Certificate of Class A Common Stock
(1) 4.2 Warrant Agreement (including form of Class A and Class B
Warrant Certificates
(1) 4.3 Form of Underwriter's Unit Purchase Option
(6) 4.4 Form of March 2000 Subscription Agreement between the
Registrant and the Series A Preferred Stock Subscribers
(6) 4.5 Form of March 2000 Common Stock Purchase Warrant to be
issued to the Series A Preferred Stock Subscribers and
Placement Agents
(6) 4.6 Form of Special Common Stock Purchase Warrant to be issued
to the Series A Preferred Placement Agent
(6) 4.7 Form of Funds Escrow Agreement related to the March 2000
Subscription Agreement
(7) 4.8 Private Equity Line of Credit Agreement, dated August 15,
2000, between the Company and certain Investors
(7) 4.9 Registration Rights Agreement between the Company and the
investors participating in the Private Equity Line of Credit
Agreement
(7) 4.10 Form of Warrant issued in connection with Private Equity
Line of Credit Agreement
(8) 4.11 Waiver Agreement between the Registrant and the Series A
Preferred Stock Subscribers
(8) 4.12 Form of March 27, 2001, Subscription Agreement between the
Registrant and the 5% Secured Convertible Note Subscribers
(8) 4.13 Form of March 27, 2001, Secured Convertible Note between the
Registrant and the 5% Secured Convertible Note Subscribers
(8) 4.14 Form of March 27, 2001, Common Stock Purchase Warrant to be
issued to the 5% Secured Convertible Note Subscribers
(8) 4.15 Form of March 27, 2001, Collateral Agent Agreement between
the Collateral Agent and the 5% Secured Convertible Note
Subscribers
(8) 4.16 Form of March 27, 2001, Security Agreement between the
Registrant and the Collateral Agent
(11) 4.18 Form of June 27, 2001, Subscription Agreement ("SA") and
Form of Note (Exhibit A to the SA) and Form of Warrant
(Exhibit D to the SA)
(9) 4.19 Form of October 26, 2001 Subscription Agreement ("SA") and
Form of Secured Note (Exhibit A to the SA) and Form of
Warrant (Exhibit D to the SA)
(9) 4.20 Form of October 26, 2001 Security Agreement
II-3
(9) 4.21 Form of October 26, 2001 Lockup Agreement
(9) 4.22 Form of October 26, 2001 Put Agreement
(12) 4.23 Secured Tranche A Promissory Note for $500,000, dated
January 29, 2002, issued to Congress Financial Corporation
(Southwest), as executed
(12) 4.24 Secured Tranche B Promissory Note for $2,500,000, dated
January 29, 2002, issued to Congress Financial Corporation
(Southwest), as executed
(12) 4.25 Secured Tranche C Promissory Note for $1,500,000, dated
January 29, 2002, issued to Congress Financial Corporation
(Southwest), as executed
(12) 4.26 Limited Recourse Secured Tranche D Promissory Note for
$5,714,408.71, dated January 29, 2002, issued to Congress
Financial Corporation (Southwest), as executed
(13) 4.27 January 30, 2002 Subscription Agreement and Form of Secured
Note (Exhibit A to the Subscription Agreement) and Form of
Warrant (Exhibit D to the Subscription Agreement) for
subsequent closing under October 26, 2002 Subscription
Agreement
(13) 4.28 Notice of Put, Officer's Certificate and Modification of Put
Agreement Terms for the Put dated January 30, 2002
(13) 4.29 January 30, 2002 Subscription Agreement and Form of
Unsecured Note (Exhibit A to the Subscription Agreement) and
Form of Warrant (Exhibit D to the Subscription Agreement)
(14) 4.30 March 26, 2002 Subscription Agreement and Form of Unsecured
Note (Exhibit A to the Subscription Agreement) and Form of
Warrant (Exhibit D to the Subscription Agreement) for
subsequent closing under January 30, 2002 Subscription
Agreement
(16) 4.31 April 11, 2002 Subscription Agreement and Form of Unsecured
Note (Exhibit A to the Subscription Agreement) and Form of
Warrant (Exhibit D to the Subscription Agreement) for
subsequent closing under January 30, 2002 Subscription
Agreement
5.1 Form of Opinion of Luce, Forward, Hamilton & Scripps LLP as
to legality of securities being offered
(1) 10.1 Form of Indemnification Agreement
(2) 10.2 Amended 1996 Stock Option File
(1) 10.3 Employment Agreement dated as of May 1, 1996 between the
Company and Dr. Carl L. Chen
(15) 10.4 Severance Agreement and Warrant Agreement, each between the
Company and Dr. Carl L. Chen
(2) 10.5 Lease dated December 19, 1996 between Olen Properties Corp.,
a Florida corporation, and the Company
(3) 10.6 Standard Sublease dated June 27, 1997 with Budget Rent-a-Car
of Southern California
(3) 10.7 Standard Sublease dated July 16, 1997 with Budget Rent-a-Car
of Southern California
II-4
(3) 10.8 Standard Industrial/Commercial Multi-Tenant Lease-Gross dated
March 12, 1997 with the Golgolab Family Trust
(5) 10.9 Loan Agreement dated as of August 1, 1997 between the Company
and the California Economic Development Authority
(5) 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
(4) 10.11 Official Statement dated August 5, 1997
(5) 10.12 Letter of Credit issued by The Sumitomo Bank, Limited
(5) 10.13 Reimbursement Agreement dated as of August 1, 1997 between the
Company and the Sumitomo Bank, Limited
(5) 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
(5) 10.15 Remarketing Agreement dated as of August 1, 1997 between the
Company and Rauscher Pierce Refnes, Inc.
(5) 10.16 Blanket Letters of Representations of the California Economic
Development Authority and First Trust of California, National
Association
(5) 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
(5) 10.18 Custody, Pledge and Security Agreement dated as of August 1,
1997 between the Company and The Sumitomo Bank, Limited
(5) 10.19 Investment Agreement dated August 5, 1997 by and between the
Company and the Sumitomo Bank, Limited
(5) 10.20 Specimen Direct Obligation Note between the Company and the
Sumitomo Bank, Limited
(4) 10.21 Lease Agreement dated October 17, 1997 between the Company and
the City of Long Beach
(4) 10.22 Construction Agreement dated October 29, 1997 between the
Company and Commercial Developments International/West
(12) 10.23 Assignment and Assumption Agreement between Advanced
Aerodynamics and Structures, Inc. and Congress Financial
Corporation (Southwest), dated January 29, 2002, as executed
(12) 10.24 Collateral Assignment of Debt and Security Agreements between
Advanced Aerodynamics and Structures, Inc. and Congress
Financial Corporation (Southwest), dated January 29, 2002,
as executed
(17) 10.25 Roy Norris Employment Agreement
(17) 10.26 Dale Ruhmel Employment Agreement
II-5
(17) 10.27 L. Peter Larson Employment Agreement
(17) 10.28 J. Nelson Happy Employment Agreement
(17) 10.29 Exhibit 1 to Employment Agreements
23.1 Consent of Ernst & Young LLP
23.2 Consent of legal counsel (see Exhibit 5.1)
24.1 Power of Attorney (filed as part of the signature page to the
Registration Statement)
(1) Incorporated by reference to the Company's Registration
Statement on Form SB-2 (333-12273) filed on September 19,
1996, declared effective by the Securities and Exchange
Commission on December 3, 1996.
(2) Incorporated by reference to the Company's Report on Form
10-KSB filed with the Securities and Exchange Commission on
March 31, 1997.
(3) 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.
(4) Filed by paper pursuant to the Company's request for a
temporary hardship exemption relating to this report.
(5) Incorporated by reference to the Company's Report on Form
10-QSB filed with the Securities and Exchange Commission on
November 14, 1997.
(6) Incorporated by reference to the Company's Report on Form
10-KSB for the year ended December 31, 1999, filed with the
Securities and Exchange Commission on March 30, 2000.
(7) Incorporated by reference to the Company's Report on Form
SB-2 filed with the Securities and Exchange Commission on
September 5, 2000.
(8) Incorporated by reference to the Company's Report on Form
10-KSB filed with the Securities and Exchange Commission on
April 2, 2001.
(9) Incorporated by reference to the Company's Report on Form
10-QSB filed with the Securities and Exchange Commission on
November 14, 2001.
(10) Incorporated by reference to the Company's Definitive
Information Statement filed with the Securities and Exchange
Commission on November 21, 2001.
(11) Incorporated by reference to the Company's Registration
Statement on Form SB-2 (333-74924) filed on December 12,
2001, and withdrawn by the Company on January 24, 2002.
(12) Incorporated by reference to the Company's Report on Form
8-K filed with the Securities and Exchange Commission on
February 14, 2002.
II-6
(13) Incorporated by reference to the Company's Report on Form
8-K filed with the Securities and Exchange Commission on
March 14, 2002.
(14) Incorporated by reference to the Company's Report on Form
8-K filed with the Securities and Exchange Commission on
April 10, 2002.
(15) Incorporated by reference to the Company's Report on Form
10-KSB filed with the Securities and Exchange Commission on
April 16, 2002.
(16) Incorporated by reference to the Company's Report on Form
8-K filed with the Securities and Exchange Commission on
April 26, 2002.
(17) Incorporated by reference to the Company's Report on Form
10-QSB filed with the Securities and Exchange Commission on
May 20, 2002.
II-7
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of the 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) under the
Securities Act 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, and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For purposes of determining any liability under the Securities Act,
treat the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
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-8
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 May 23,
2002.
ADVANCED AERODYNAMICS & STRUCTURES, INC.
By: /s/ Roy H. Norris
------------------------------------
Roy H. Norris, President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below hereby constitutes and appoints Roy H. Norris as his true and lawful
attorney-in-fact and agent, with full power of substitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do them in person,
hereby ratifying and confirming all that said attorney-in-fact and agent or any
of them, or their or his substitute or substitutes, shall do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Roy H. Norris President, Chief Executive May 23, 2002
- ----------------------- Officer, and Chairman of the Board
Roy H. Norris
/s/ L. Peter Larson Chief Financial Officer and Principal May 23, 2002
- ----------------------- Accounting Officer
L. Peter Larson
/s/ Shalom Babad Director May 23, 2002
- -----------------------
Shalom Babad
/s/ C.M. Cheng Director May 23, 2002
- -----------------------
C.M. Cheng
/s/ S.B. Lai Director May 23, 2002
- -----------------------
S.B. Lai
/s/ Arie Rabinowitz Director May 23, 2002
- -----------------------
Arie Rabinowitz
/s/ Robert P. Kaplan Director May 23, 2002
- -----------------------
Robert P. Kaplan
/s/ Samuel Rothman Director May 23, 2002
- -----------------------
Samuel Rothman
II-9