UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file Number 000-21749
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 95-4257380
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
3205 Lakewood Boulevard
Long Beach, California 90808
(Address of principal executive offices)
(562) 938-8618
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
YES [X] NO [_]
As of May 15, 1999, the issuer had outstanding 6,999,676 shares of Class A
Common Stock, 1,900,324 shares of Class B Common Stock, 4,000,000 shares of
Class E-1 Common Stock and 4,000,000 shares of Class E-2 Common stock.
ADVANCED AERODYNAMICS & STRUCTURES, INC.
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Plan of Operations 8
PART II. OTHER INFORMATION 12
Item 6. Exhibits and Reports on Form 8-K 12
2
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
March 31,
1999
-----------------
ASSETS
Current Assets:
Cash and cash equivalents $ 581,000
Short term investments 475,000
Prepaid expenses and other current assets 73,000
------------
Total current assets 1,129,000
Restricted cash 9,011,000
Property, Plant and equipment, net 11,209,000
Other assets 183,000
------------
Total assets $ 21,532,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 775,000
Accrued payable to contractor 1,157,000
Capital lease obligation current portion 37,000
Other accrued liabilities 845,000
------------
Total current liabilities 2,814,000
Long-term debt 8,500,000
Capital lease obligation, long term 203,000
Deferred revenue 1,380,000
------------
Total liabilities 12,897,000
------------
Stockholders' equity
Preferred Stock, par value $.0001
per share; 5,000,000 shares authorized;
no shares issued and outstanding --
Class A common, par value $.0001 per share;
60,000,000 shares authorized; 6,999,676
shares issued and outstanding 1,000
Class B Common Stock, par value $.0001 per share;
10,000,000 shares authorized; 1,900,324 shares
issued and outstanding --
Class E-1 Common Stock; par value $.0001 per
share; 4,000,000 shares authorized; 4,000,000
shares issued and outstanding --
Class E-2 Common Stock; par value $.0001 per
share; 4,000,000 shares authorized; 4,000,000
shares issued and outstanding --
Warrants to purchase common stock --
Public Warrants 473,000
Class A Warrants 11,290,000
Class B Warrants 4,632,000
Additional paid-in capital 35,652,000
Deficit accumulated during the development stage (43,413,000)
------------
Total stockholders' equity 8,635,000
------------
Total liabilities and stockholder's equity $ 21,532,000
============
See accompanying notes to financial statements
3
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
Period from
January 26,
Three Months Ended 1990
March 31. (inception) to
----------------------------- March 31,
1998 1999 1999
------------- ----------- --------------
Interest income $ 305,000 118,000 $ 2,488,000
Other income 30,000 1,000 1,263,000
----------- ---------- ------------
335,000 119,000 3,751,000
Cost and expenses:
Research and development costs 1,621,000 1,578,000 26,496,000
Preoperating costs -- -- 282,000
General and administrative expenses 877,000 809,000 15,501,000
Loss on disposal of assets -- -- 755,000
Interest expense 79,000 74,000 2,427,000
In-process research and development acquired -- -- 761,000
----------- ----------- ------------
2,577,000 2,461,000 46,222,000
----------- ----------- ------------
Loss before extraordinary item (2,242,000) (2,342,000) (42,471,000)
Extraordinary loss on retirement of
Bridge Notes -- -- (942,000)
------------
Net loss and comprehensive loss $(2,242,000) $(2,342,000) $(43,413,000)
=========== =========== ============
Loss per share before extraordinary item $ (.25) $ (.26)
----------- -----------
Net loss and comprehensive loss per share $ (.25) $ (.26)
=========== ===========
Weighted average number of shares outstanding 8,900,000 8,900,000
=========== ===========
See accompanying notes to financial statements.
4
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
Statement of Stockholders' Equity
- --------------------------------------------------------------------------------
Common Stock
Preferred Stock Class A Class B Class E-1 Class E-2
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
Common stock
issued $ -- $ -- 418,094 $ -- 836,189 $ -- 836,189 $ --
Common stock
issued in
exchange for
in-process
research and
development 201,494 -- 402,988 -- 402,988 --
Imputed interest
on advances from
stockholder
Conversion of
stockholder
advances 598,011 -- 1,196,021 -- 1,196,021 --
Conversion of
officer loans 187,118 -- 374,236 -- 374,236 --
Stock issued in
consideration for
services in 1994,
1995, and 1996 595,283 -- 1,190,566 -- 1,190,566 --
Imputed interest on
advances from
stockholder
Net proceeds
from initial
public offering
of Units 6,000,000 1,000
Net proceeds from
exercise of
over-allotment
option 900,000 --
Warrants
issued in
connection with
issuance of
Bridge Notes
Net loss from
inception to
December 31, 1996
Balance at
December 31, 1996 -- -- 6,900,000 1,000 2,000,000 $ -- 4,000,000 -- 4,000,000 --
Adjustment to
proceeds from
initial public
offering and
exercise of
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
- ------------------------------------------------------------------------------------------------------------------------------
Balance at
March 31,
1999 -- $ -- 6,999,676 $1,000 1,900,324 $ -- 4,000,000 $ -- 4,000,000 $ --
==============================================================================================================================
Deficit
Accumulated
During the
Public Class A Class B Additional Development
Warrants Warrants Warrants Paid-In Capital Stage Total
------------ --------------- -------------- --------------- ----------------- --------------
Common
stock issued $ -- $ -- $ -- $ 7,500,000 $ -- $ 7,500,000
Common stock
issued in
exchange for
in-process
research and
development 361,000 361,000
Imputed
interest on
advances from
stockholder 799,000 799,000
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 1,507,000 1,507,000
Imputed interest
on advances
from stockholder 11,000 11,000
Net proceeds
from initial
public offering
of Units 9,583,000 4,166,000 12,566,000 26,316,000
Net proceeds
from exercise
of over-
allotment
option 1,707,000 466,000 1,922,000 4,095,000
Warrants issued
in connection
with issuance
of Bridge
Notes 473,000 473,000
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 (2,342,000) (2,342,000)
- -----------------------------------------------------------------------------------------------------------------------------
Balance at
March 31,
1999 $473,000 $11,290,000 $4,632,000 $35,652,000 $(43,413,000) $ 8,635,000
=============================================================================================================================
5
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
PERIOD FROM
JANUARY 26
THREE MONTHS ENDED 1990
MARCH 31, (INCEPTION)
--------------------------- TO
1998 1999 MARCH 31, 1999
-----------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,242,000) $(2,342,000) $(43,413,000)
Adjustments to reconcile net loss to net cash
used in operating activities: 1,207,000
Noncash stock compensation expense 336,000
Noncash interest expense-
Cost of in-process research and development acquired 761,000
Imputed interest on advances from stockholder 810,000
Interest income from restricted cash invested (107,000) (10,000) (474,000)
Extraordinary loss on retirement of Bridge Notes - 942,000
Depreciation and amortization 100,000 203,000 2,843,000
Loss on disposal of assets 755,000
Changes in assets and liabilities:
Increase in prepaid expenses and other current assets 304,000 15,000 100,000
Increase in other assets (187,000) 4,000 (183,000)
Increase (decrease) in accounts payable (213,000) 512,000 775,000
Increase (decrease) in accrued liabilities 345,000 (259,000) 1,902,000
Increase in deferred revenue 520,000 40,000 1,380,000
----------- ----------- ------------
Net cash used in operating activities (1,480,000) (1,837,000) (32,259,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in construction in progress (43,000) (446,000)
Proceeds from insurance claims upon loss of aircraft 30,000
Proceeds from disposal of assets 3,000
Capital expenditures (63,000) (81,000) (5,813,000)
Purchase of certificate of deposit (1,061,000)
Proceeds from redemption of certificate of deposit 1,061,000
Purchase of investments (11,658,000)
Proceeds from sale of investments 1,225,000 353,000 11,183,000
Restricted cash from long term debt (8,500,000)
----------- ----------- ------------
Net cash (used in) provided by investing activities 1,119,000 272,000 (15,201,000)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Adjustment to net proceeds from initial public offering
and exercise of over allotment option (78,000)
Proceeds from long term debt 8,500,000
Restricted cash collateral for long term debt (8,500,000)
Advances from stockholder 10,728,000
Proceeds from issuance of common stock prior to
initial public offering 7,500,000
Net proceeds from initial public offering and
exercise of over-allotment option 30,411,000
Net proceeds from bridge financing 6,195,000
Net proceeds from loans from officers 336,000
Payment of obligation under Capital Lease Obligations (7,000) (7,000)
Repayment of other short term loans (44,000)
Repayment of bridge financing (7,000,000)
----------- ----------- ------------
Net cash (used in) provided by financing activities (7,000) 48,041,000
----------- ----------- ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (361,000) (1,572,000) 581,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,277,000a 2,153,000
----------- ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,916,000 581,000 581,000
=========== =========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest 79,000 86,000 1,257,000
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Stockholder advances converted to common stock 10,728,000
Loans from officer converted to common stock 36,000
Common stock issued for noncash consideration
and compensation 1,507,000
Liabilities assumed from ASI 400,000
Common stock issued for in-process research and
development acquired 361,000
Equipment acquired under capital leases 40,000
Deposit surrendered as payment for rents due 80,000
Construction in progress acquired with 8,291,000
restricted cash
6
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
1. General
In the opinion of the Company's management, the accompanying unaudited
financial statements include all adjustments (which include only normal
recurring adjustments) necessary for a fair presentation of the financial
position of the Company at March 31, 1999 and the results of operations and
cash flows for the three months ended March 31, 1999 and March 31, 1998
respectively and for the period from January 26, 1990 to March 31, 1999.
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, 1998 financial statements and
notes thereto included in the Company's annual report filed on Form 10-
KSB.
The Company is a development stage enterprise. On December 3, 1996, the
Company successfully completed an initial public offering to finance the
continued development, manufacture and marketing of its product to achieve
commercial viability. The net proceeds of the offering were and will be
used to amend its Federal Aviation Administration ("FAA") Type Certificate
for technical revisions to its product, to obtain a FAA Production
Certificate for its product, to repay borrowings under a bridge loan, to
expand the Company's sales and marketing efforts, to establish a new
manufacturing facility, and to acquire production materials and additional
tooling and equipment.
2. 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
period ended March 31, 1999 and 1998 and excludes all outstanding shares of
Class E-1 and Class E-2 Common Stock because the conditions for 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 options and warrants outstanding
are anti-dilutive.
3. 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
been using the proceeds from the IDBs to finance the construction and
installation of a 200,000 square foot manufacturing facility and related
manufacturing equipment.
4. Conversion of Shares
In February of 1998 a shareholder of the Company converted 99,676 shares of
Class B Common Stock to 99,676 shares of Class A Common Stock. The
conversion resulted in an increase in Class A Common Stock to 6,999,676 and
a decrease in the number of outstanding shares of Class B Common Stock to
1,900,324. This transaction had no impact on earnings per share as both
classes of shares are included in the calculation of weighted average
number of common stock outstanding.
7
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A Development Stage Enterprise)
Item 2. Plan of Operations
Certain statements contained in this report, including statements
concerning the Company's future cash and financing requirements, the Company's
ability to obtain market acceptance of its aircraft, the Company's ability to
obtain regulatory approval for its aircraft, and the competitive market for
sales of small business aircraft and other statements contained herein regarding
matters that are not historical facts, are forward looking statements; actual
results may differ materially from those set forth in the forward looking
statements, which statements involve risks and uncertainties, including without
limitation to those risks and uncertainties set forth in the Company's
Registration Statement on Form SB-2 (No. 333-12273) under the heading "Risk
Factors."
The Company is a development stage enterprise organized to design, develop,
manufacture and market propjet and jet aircraft intended primarily for business
use. Since its inception, the Company has been engaged principally in research
and development of its proposed aircraft. In March 1990, the Company made
application to the FAA for a Type Certificate for the JETCRUZER 450, which
Certificate was ultimately granted in June 1994. The Company has not generated
any operating revenues to date and has incurred losses from such activities.
The Company believes it will continue to experience losses until such time as it
commences the sale of aircraft on a commercial scale.
Prior to commencing commercial sales of the JETCRUZER 500, the Company will
need to, among other things, complete the development of the aircraft, obtain
the requisite regulatory approvals, hire additional engineering and
manufacturing personnel and expand its sales and marketing efforts. The Company
estimates that the cost to complete development of the JETCRUZER 500 and obtain
an amendment of its FAA Type Certificate will be approximately $6,500,000. This
amount includes the cost of equipment and tooling, static and flight testing of
the aircraft and the employment of the necessary personnel to build and test the
aircraft.
The Company expects to receive progress payments during the construction of
aircraft and final payments upon the delivery of aircraft. However, the Company
believes it will continue to experience losses until such time as it commences
the sale of aircraft on a commercial scale.
During the balance of 1999, the Company intends to focus its efforts in the
following areas:
- Completion of the development of the JETCRUZER 500, including, among
other things, pressurization, environmental systems, de-icing capability
and autopilot certification.
- Obtaining an amendment to its Type Certificate to include the JETCRUZER
500, including the manufacture of FAA conformed models of the JETCRUZER
500 and static and flight testing.
- Establishing a production line in the Company's new manufacturing
facility and acquiring production inventory and additional items of
equipment, tooling and computer hardware and software systems.
- Obtaining a production certificate from the FAA and commencing commercial
production of the JETCRUZER 500.
- Increasing its engineering, manufacturing and administrative staff in
anticipation of increased development and production activities.
The Company believes that the remaining net proceeds from its December 1996
initial public offering ("IPO"), and the expected proceeds of the sale and lease
back of the New Facility, if completed, (see "Subsequent Events") will be
sufficient to finance its plan of operations for at least the next twelve
months, based upon the current status of its business operations, its current
plans and current economic and industry conditions. If the Company is unable to
complete the sale and lease-back of the New Facility, or its estimates prove to
be incorrect, then during such period the Company may have to seek additional
sources of financing, reduce operating costs and/or curtail growth plans.
8
Liquidity and Capital Resources
At March 31, 1999, the Company had negative working capital of $(1,685,000)
and stockholders' equity of $8,635,000. Since its inception in January 1990, the
Company has experienced continuing negative cash flow from operations, which,
prior to the December 1996 IPO, resulted in the Company's inability to pay
certain existing liabilities in a timely manner. The Company has financed its
operations through private funding of equity and debt and its December 1996 IPO.
Prior to mid-1994, the activities of the Company were financed primarily by
(i) equity contributions from Mr. Song Gen Yeh and members of his immediate
family, who were at that time directors and principal stockholders of the
Company, in the aggregate amount of $7,280,000 and (ii) loans in the aggregate
amount of $10,728,000 from Mr. Yeh. The loans made by Mr. Yeh were repaid
through the issuance of 598,011 shares of Class B Common Stock, 1,196,021 shares
of Class E-1 Common Stock, and 1,196,021 shares of Class E-2 Common Stock of the
Company in June 1996. Additionally, in October 1993, the Company received a loan
of $60,000, bearing interest at a rate of 12%, from SIDA Corporation ("SIDA"), a
corporation then affiliated with Dr. Carl Chen, the President and Chief
Executive Officer and a Director of the Company; and, in February and July 1994,
the Company received loans in an aggregate amount of $565,000, bearing interest
at a rate of 12%, from four individuals who were at the time not affiliated with
the Company. One of such persons, C.M. Cheng, became a Director of the Company
in June 1996. These loans were repaid in September 1996 with the proceeds of the
Bridge Financing described below.
In the second half of 1994, the Company's expenditures decreased because
capital constraints required a reduction of the Company's development
activities. The Company's capital requirements during that period were satisfied
primarily by a loan from General Bank in the principal amount of approximately
$550,000, bearing interest at the prime rate plus 1 1/2%, which loan was
guaranteed by the Small Business Administration, the California Export Finance
Office and Dr. Chen and secured by substantially all of the Company's assets.
The Company also received an additional $50,000 loan from SIDA.
During 1995 and 1996, the Company's capital requirements were met by
additional advances of $350,000 pursuant to the bank loan described above and
loans by Dr. Chen, bearing interest at a rate of 12%, in the aggregate principal
amount of $562,000. In June 1996, $336,000 of indebtedness owed by the Company
to Dr. Chen was converted into 187,118 shares of Class B Common Stock, 374,236
shares of Class E-1 Common Stock, and 374,236 shares of Class E-2 Common Stock.
In September 1996, the bank loan, in the aggregate principal amount of
$900,000 plus $15,000 in accrued interest, $226,000 of the principal amount owed
to Dr. Chen, together with interest thereon of $36,000, and the loan from SIDA,
in the aggregate principal amount of $110,000 plus $31,000 in accrued interest,
were repaid with the proceeds of the Bridge Financing described below.
In August 1996, the Company completed the Bridge Financing of $7,000,000
principal amount of Bridge Notes and 3,500,000 Bridge Warrants (which were
automatically converted to Class A Warrants upon completion of the IPO). The net
proceeds of the Bridge Financing were approximately $6,195,000 after deducting
commissions and a non-accountable expense allowance aggregating $805,000 paid to
the placement agent and other expenses of the Bridge Financing. The net proceeds
of the Bridge Financing were used to repay bank and other outstanding
indebtedness, loans from officers and directors, accrued compensation and past
due accounts payable and as working capital. The Company used a portion of the
net proceeds of the IPO to repay the Bridge Notes. Additionally, in 1996, the
Company recognized a extraordinary loss of approximately $942,000, representing
the combined unamortized debt discount and issuance costs arising from the
Bridge Financing, in the quarter in which the Bridge Notes were repaid.
9
The Company expects to continue to incur losses until such time, if ever,
as it obtains regulatory approval for the JETCRUZER 500 and related production
processes and market acceptance for its proposed aircraft at selling prices and
volumes which provide adequate gross profit to cover operating costs and
generate positive cash flow. The Company's working capital requirements will
depend upon numerous factors, including the level of resources devoted by the
Company to the scale-up of manufacturing and the establishment of sales and
marketing capabilities and the progress of the Company's research and
development program for the JETCRUZER 500 and other proposed aircraft.
The Company expects that the remaining net proceeds of the December 1996
IPO, and the expected proceeds of the sale and lease back of the New Facility,
if completed, will enable it to meet its liquidity and capital requirements for
at least the next twelve months, by which time the Company expects to have
received a Type Certificate amendment and a production certificate for the
JETCRUZER 500 and to have commenced commercial production and sale of the
JETCRUZER 500. Such proceeds will be used primarily for amendment of the Type
Certificate, the purchase of equipment and tooling and sales and marketing. The
Company's capital requirements are subject to numerous contingencies associated
with development stage companies. Specifically if delays are encountered in
amending the current Type Certificate, the time and cost of obtaining such
certification may be substantial, may render it impossible for the Company to
complete such amended certification and may therefore have a material and
adverse effect on the Company's operations. Further, if the Company has not
completed the development of the JETCRUZER 500, received the required regulatory
approvals and successfully commenced commercial production of its aircraft by
the third quarter of 2000, the Company may require additional funding to fully
implement its proposed business plan. Other than the sale and lease-back
described above, the Company has no commitments from any third parties for any
future funding, and there can be no assurance that the Company will be able to
obtain financing in the future from bank borrowings, debt or equity financings
or other sources on terms acceptable to the Company or at all. In the event
necessary financing were not obtained, the Company would be materially and
adversely affected and might have to substantially reduce operations.
The Company has moved into an approximately 200,000 square foot
manufacturing and headquarters facility (the "New Facility"). The primary
financing for this project is the Company's obligation under a loan agreement
related to proceeds received from $8,500,000 in the issuance of Industrial
Development Bonds (IDB) by the California Economic Development Financing
Authority (the "Authority"). The Company was required to provide cash collateral
to Sumitomo Bank, Limited (the "Bank") in the amount of $8,500,000 for a stand-
by letter of credit in favor of the holders of the IBDs which will expire on
August 5, 2002, if not terminated earlier by the Company or the Bank.
The Company leases approximately 10 acres of land located on the Long Beach
Airport in Long Beach, California. The lease commenced on January 14, 1998 and
has a term of 30 years with an option to renew for an additional 10 years. The
lease also contains options to lease other airport properties. The monthly rent
currently under the lease is $4,500. An escalation clause in the lease increases
the monthly rent to $7,500 beginning July 1999. The lease contains incremental
increases which escalate the monthly rent to approximately $15,600 after 5
years.
The Company contracted with Commercial Developments International/West
(Design/Builder) to design and build their approximately 200,000 square foot
manufacturing and headquarters facility (the "New Facility") on the above
mentioned leased property. The facility was substantially completed during 1998,
and on November 16, 1998, the Company moved in. The total cost for the New
Facility, including its design, construction, licenses, fees and change orders
was approximately $9,000,000.
The Company has purchased a new integrated manufacturing, production and
cost control computer system, to support future Company growth and production
requirements. The system has been certified as Year 2000 compliant. Management
expects to have the new system installed and running during second half of 1999
and estimates the associated costs to be immaterial to the Company's operations.
The Company had no material capital commitments at March 31, 1999, other
than discussed in this report. The Company intends to hire a number of
additional employees which will require substantial capital resources. The
Company anticipates that it will hire up to 200 employees over the next twelve
months, including engineers and manufacturing technicians necessary to produce
its aircraft.
10
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A Development Stage Enterprise)
YEAR 2000 COMPLIANCE
Management believes it has an effective program in place to resolve the
Year 2000 issue in a timely manner. As noted below, the Company has not yet
completed all necessary phases of the Year 2000 program.
ASSESSMENT REMEDIATION TESTING IMPLEMENTATION
- -------------------------------------------------------------------------------------------------
Information 100% Complete 70% Complete 70% Complete 65% Complete
TECHNOLOGY Expected Expected Expected completion
completion date completion date Date June 1999
August 1999 September 1999
- -------------------------------------------------------------------------------------------------
OPERATING 100% Complete 90% Complete 50% Complete 50% Complete
EQUIPMENT
WITH EMBEDDED CHIPS Expected Expected Expected
OR SOFTWARE completion date completion date completion date
June 1999 July 1999 Aug 1999
- -------------------------------------------------------------------------------------------------
PRODUCTS 100% Complete N/A N/A N/A
- -------------------------------------------------------------------------------------------------
3RD PARTY 100% Complete N/A N/A N/A
- -------------------------------------------------------------------------------------------------
In May 1998, the Company signed a contract with Baan Business Systems of
California for license and implementation of the Baan ERP system. The Company
has received assurances from Baan that the hardware and software is Year 2000
compliant. Training and implementation began in the 3rd quarter of 1998 and is
scheduled to be completed in the 2nd half of 1999. Although the Company does not
perceive any problems with its new computer system, the failure of the new
hardware and software package to be Year 2000 compliant might result in
significant unexpected costs which would have a material adverse effect on the
Company's results of operations. The Company has completed its assessment of its
major vendors and has concluded there is no significant Year 2000 problem with
such vendors or their products.
The Company is currently assessing various other vendors, which it plans to
utilize when production of the JETCRUZER 500 begins. The process of evaluation
includes both the significance of the vendors to the Company's operation and
their exposure to the Year 2000 problem. The Company does not anticipate any
material costs in completing its Year 2000 program.
The Company currently has no contingency plans in place in the event it
does not complete all phases of the Year 2000 program. The Company plans to
evaluate the status of completion in October 1999 and determine whether such a
plan is necessary.
Subsequent Events
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Charge to Income in the Event of Conversion of Performance Shares
In the event the Company attains certain earnings thresholds or the
Company's Class A Common Stock meets certain minimum bid price levels, the Class
E Common Stock will be converted into Class B Common Stock. In the event any
such converted Class E Common Stock is held by officers, directors, employees or
consultants, the maximum compensation expense recorded for financial reporting
purposes will be an amount equal to the fair value of the shares converted at
the time of such conversion which value cannot be predicted at this time.
Therefore, in the event the Company attains such earnings thresholds or stock
price levels, the Company will recognize a substantial charge to earnings during
the period in which such conversion occurs, which would have the effect of
increasing the Company's loss or reducing or eliminating its earnings, if any,
at that time. In the event the Company does not attain
11
these earnings thresholds or minimum bid price levels, and no conversion occurs,
no compensation expense will be recorded for financial reporting purposes.
Issuance of Convertible Preferred Stock
In March of 1999, the Company executed a non-binding term sheet with an
institutional investor for the issuance of approximately 4,000 shares of
Convertible Preferred Stock at a price per share of $1,000. Discussions
concerning this Convertible Preferred Stock financing have not proceeded while
the Company has addressed the sale and lease-back transaction described below.
Sale and Lease-Back of New Facility
In April 1999, the Company signed a Letter of Intent to sell its 200,000
square-foot building and lease it back. The purchase price of the building is
$9,800,000 and the term of the lease is twenty years plus an option to extend
the lease for an additional ten years. In accordance with the Letter of Intent,
the purchaser has deposited $100,000 into an escrow account.
If the transaction is completed, monthly payments under the terms of the
lease-back will be $106,167 and will be adjusted annually, after the first year,
for changes in the Consumers' Price Index, not to exceed 3% per annum. The rent
for periods after the twentieth year would be at fair market rental value.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None
12
ADVANCED AERODYNAMICS & STRUCTURES, INC.
(A Development Stage Enterprise)
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: May 17, 1999 ADVANCED AERODYNAMICS & STRUCTURES, INC.
By: /s/ Carl L. Chen
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Carl L. Chen, President
By: /s/ Dave Turner
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Dave Turner, Chief Financial Officer