CIRRUS DESIGN CORPORATION

PROJECT SUMMARY

HISTORY:

Cirrus Design Corporation is a manufacturer of general aviation aircraft. They currently have an R&D and manufacturing facility in Du.luth, Mn. Cofound,ed by brothers Alan and Dale Klapmeier, the company has moved from building kit aircraft to FAA certif'ied business and personal aircraft. They currently build a deluxe, high performance composite airplane (SR20) and plan to expand into building a fleet version of this aircraft (SRX) which will incorporate all the advanced technology but have fewer amenities. They currently have 78 professional and skilled employees in Duluth. They plan to create 60 new positions at t.he Grand Forks plant within the first year of operation and up to 170 in the second year. Salaries for fully trained production workers are estimated at approximately $25,ooO/year.

PROJECT:

Cirrus plans to expand to a manufacturing plant in the Grand Forks Industrial Park to build "flat" components for their aircraft (i.e., wings, flaps, rudders, etc.). Fuselages will continue to be manufactured at the Duluth facility. Also, in 1997, Cirrus plans to build an assembly facility -.t tbe Grand Forks International Airport.

FINANCING REQUEST:

cirrus' financial request is as follows (1) City financing of a building in the Industrial Park to be leased by Cirrus, (2) the purchase of $1.4 million in equity by the Grand Forks Growth Fund, (3) participation by local lending institutions, (4) participation by the Bank of North Dakota, (5) par-t.Lc tpa t Lon in the amount of $150 rOOD by the local state revolving loan fund, (6) equity purchase in the amount of $500,000 by the state Development Fund, and (7) a $100,000 Development Fund relocation grant. Total project cost exceeds $~3 million. Cirrus is also requesting a five year tax exemption on the manufacturing facility in the Industrial Park.

RECOMMENDATION:

The Growth Fund Committee recommends the following:

1. The Grand Forks Growth Fund purchase $1,225,000 worth of Cirrus Design Corporation (Cirrus) common stock. The per share price of said common stock shall be the selling price as of the date of purchase.

2. The Grand Forks Growth Fund assist Cirrus with the companies lease of its manufacturing facility leased from the City by making its first two years lease payments. Thi s assistance sha 11 not exceed $ 600./ 000 . Upon, reaching this amount Cirrus shall begin making the payments.

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In exchange for this assistance, Cirrus will issue to the Grand Forks Growth Fund shares of its common stock of the company.. The value of the stock issued shall be equivalent to the amount of the lease payment as of the date of payment.

3. The Grand Forks Growth Fund provide a job creation incentive not to exceed $5,000 for each job created and sustained that pays not less than $8.50/hour and provides a comprehensive benefit program. This incentive is not to exceed $1,000,000. To determine the full time equivalent number of jobs created, total qualifying hours shall be divided by 2080. One-fifth of this incentive shall be paid out for each of the first five years of operation.

In exchange for this incentive, Cirrus will issue to the Grand Forks Growth Fund shares and/or warrants of its common stock of the company. The value of the stock and/or warrants issued :shall be equivalent to the incentive paid as of the date of payment.

4. The Growth Fund further acknowledges that Cirrus will be asking the City of Grand Forks to construct the building in the Industrial Park and lease it to the company. Also, that Cirrus will request from the City a five year declining tax exemption on that facility. It is further anticipated that the City will be asked to provide Tax Increment Financing in 1997 to assist in the construction of the facility to be located at the airport.

Note: Since there will probably be no active market for the common stock of Cirrus during the first three years, the current stock price for the transactions outlined above will be negotiated on the basis of the most recent or planned and imminent private placement of company stock under approved offering memoranda.

These terms are contingent upon the following conditions:

1. That Cirrus receive $500,000 equity investment from the North Dakota Development Fund.

2. That Cirrus obtain the participation from community lenders and the Bank of North Dakota in an amount not less that $1,000,000.

3. That Cirrus receive a $100,000 relocation grant from the North Dakota Development Fund.

4. That Cirrus receive a $150,000 loan and/or equity investment from the Rural Revolving Loan Fund.

S. That Cirrus complete a private placement equity investment of a minimum of $2,500,000.

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Cirrus Design Corporation Grand Forks Growth Pund Application

Executive Summary

Cirrus Design Corporation, a manufacturer of general aviation aircraft, proposes to establish large scale manufacturing operations in Grand Forks. The company, which also has R&D and manufacturing facilities in Duluth MN, will manufacture botb aircraft components and entire aircraft in Grand Forks.

The Cirrus plan envisions manufacture in Grand fork, of the SRX, a fleet version of the SR20 which is a deluxe, high performance fou r place state-or-the-art composite airplane. The SRX will incorporate all of the SR20's advanced technology flight attributes, but with fewer amenities than it. higher priced sibling, the SR20. The SRX, for msrance, may incorporate a smaller engine. It will certainly be more spartan -- with plastic or fabric seats, in place of more exotic materials in the SR20, a reduced avionics complement, and other modifications that reduce cost to fleet buyers, while retaining the flight performance attributes tbat differentiate Cirrus aircraft from the competition -- most of wl:ticb are based on 1950's technology.

The market for the SHX includes fligbt training centers uch a UND Aerospace, as well as private pilot training centers throughout the world, and individual private pilots who value performance more than amenities.

The component Fabcication operations planned for the Grand Forks plant include wh.at Cirrus calls "flat" components. These include the wings, flaps, elevators, rudder, and similar components for both the SRX and. the SH.20. Pu elages for both the SRX and the SR20 are progcammed for production in Duluth. Cirrus estimates that approximately 66% of the cost of these components for both aircraft will be gener-ated in its Grand Forks plant.

The Grand Forks manufacturi.ng plant is estimated to employ approximately 60 persons by the end of 1996, a year in which the plant is entirely occupied with employee training and FAA cerrification activities. Employment is projected to grow to 170 by the end of 1997, increasing to more than 500 by the year 2000. Production salaries are e timated at approximately $25,000 per year for fuUy trained workers, with a very favorable fringe benel:lt package adding to this highly competitive wage.

The estimated new payroll generated in Grand Forks ranges from $3..5 to $4 million in the fust full year of operation in 1997, to more than $14,000,000 in the fourth year of production. Over the 20 year lease term for the manufacturing facility, the Cirrus payroll in Grand Forks is estimated ('0 exceed $240 million.

The financing package offered to assist Cirrus to open it Grand. Porks operation is larger and more complex than most that come to the Growth Fund for consideration. It includes: City Hnancing of a building to be leased. b)r Cirrus; JDA purchase of equity in Cirrus Design Corporation; participation lending by virtually all local banks, in conjunction with the Bank of North Dakota. and one or more rural loan fu nds: equity purchase by the State Development Fundi and a Development Fund relocation grant. The total funding. from these sources, together with the Cirrus investment in the project, exceeds $13 million.

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The Grand Forks Gro\-vth Fund investment will ~row to approximately $2,760,000 over a period of 6 years. The total City investment is increased by the amount of' the building We will construct and lease to Cirrus, and. th e tax exemptions and Tax Increment Financing that are proposed. he cost of the building, to be financed by city bonds and leased to Cirrus, is estimated in the range of $3.5~$4 million. The Cirrus lease will fully repay the cost of the building, and return the city a profit of more than a half million over the term of the Lease.

The tax exemption on the manufacturing building is the standard five year declining exemption the city offers' most primary sector businesses. The building will produce nonexempt tax revenues of approximately $1.8' million over' the term f rhe lease. The TIF, if used, will assist the company in flnancj_ng a second building to be co nstru cted at the airport in 1997. The estimated value of the TIF is $162,414.

A critically important consideration that differentiates this financing from all others the Growth Fund has packaged is the level of equity (stock) that Cirrus is offering Grand Forks in return for the assistance provided in the early years. This venture is certainly not without risk. If the company were to die du ring the first year, the city would stand to lose as much as $1.5 million. This total rises during each of the next 4 years to a maximum approaching $2.8 million. The cost of the build.ing is in addition to this direct investment in Cirrus, but is discounted., because our critical shortage of' industrial buildings suggests that the Cirrus building could be leased to another tenant with little diflicuIty.

The unique attribute of this financing package is that every dollar invested by Grand FOL:ks is compensated by hares of Cirrus common rock, The city will invest $ 1.24 million to purchase Cirrus stock in 1996. These funds will be invested by Cirrus to finance operations that contribute directly to the growth of the Grand Forks operations. The city will also accept stock in lieu of rent for the first two years of operations. The estimated. annual Lease payments (Cirrus rent) will be approximately $300,000 per year, whlch added. to the $1.24 million brings the city investment in 1996 to $L54 Illation.

Additional incentives for creation of jobs paying more than $8.50 per hour, with fuiJ fringe benefits, couM add a million dollars to the city incenrive/finance package, These additional payments will also be offset by Cirrus stock. The incentive payments are made annually over a period of 5 years, and are based on jobs created and maintained throughout the preceding year. In all, over a period of 5 years, the city's direct financial participation in the Cirrus project, could total $2.76 million dollars. This does not include the building, which will be owned by the city and leased at a rate that will earn the city more than half a million dollars.

Cirrus is in the pmcess of selling several million dollars of stock to finance its expansion.

be city's stock will be issued at the sarne cost basis as the stock currently being sold. to the public, Cirrus will provide the city with a dollars worth of its stock for every dollar in assistance that Grand. Forks provides the company. If the company does even reasonably well, this stock should provide a return to the Growth Fund of at $8 to $10 milljon over the next Hve years. This is the unique nature of the assistance package proposed for Cirrus. It offers the potential for the Growth Fund to recover all of its funds, with a substantial mul tiple.

Cirrus plans to build a 10,000-20>000 square foot final assembly and d.etailing facility at the Grand Forks International airport in 1997. City participation in tlris expansion is limited to the proposed tax: increment financing

Other pa.rticip ation j n the Cirrus Financing package includes: $1 million in commercial lending from local banks and the Bank ofNonh Dakota; $150,000 to $300,000 in rural. loan fund. financing; $500,000 in equity purchase by the North Dakota Developmcrrt Fund: a $100,000 relocation gram from d1C Development Fund; additional stock purchases by private mvestors,

The Growth Fund and JDA approval processes involve public meetings. This results in all of these details On the Cirrus financing being available to the media and to the public. Publication of the derails, especially in the print media (which is carefully scrutinized by both -the companies we sed- to recruit to Grand Perks, and other cities that are competing to attract these same .ompanies) however, does a disservice to our economic development initiatives, The GfUC is currently in various stages of negotiation with four other aircraft manufacturers. It should be obvious that publication of the Cirrus p~\Ckage details will tend to undermine the negotiating process with these ocher companies.

Media descriptions of economic development deals in cities I ike Fargo and Bismarck are almost always limited to broad outlines of tbe deal structure. This dearly benefits those who negotiate with other companies on behalf of rhese cities. [f the responsible media represeritarives could limit the descriptions to parameters such as the total rrricipated investment, the nature of the participation (i.c. equity vs grants, tax exemptions, etc.), and to the anticipated return on this investment, it would do the City an important service.