================================================================================
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 JUNE 30, 2002
[ ] 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
_______________________
MOONEY AEROSPACE GROUP, LTD.
(FORMERLY 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 August 16, 2002, the issuer had outstanding 38,647 shares of
Series A 5% Cumulative Convertible Preferred Stock, 71,675,731 shares of Class A
Common Stock, 1,013,572 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.
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1
MOONEY AEROSPACE GROUP, LTD.
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Plan of Operations 22
PART II. OTHER INFORMATION 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
2
MOONEY AEROSPACE GROUP, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEET
June 30, 2002
(Unaudited)
-------------
ASSETS
Current assets:
Cash and cash equivalents $ 925,000
Accounts receivable, net 88,000
Inventories, net 6,117,000
Debt issuance costs, current portion 156,000
Prepaid expenses and other current assets 351,000
-------------
Total current assets 7,637,000
Property, plant and equipment, net 16,644,000
Restricted cash 436,000
Debt issuance costs 508,000
Goodwill 1,287,000
Other assets 314,000
-------------
Total assets $ 26,826,000
=============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $ 710,000
Other accrued liabilities 4,998,000
Capital leases, current portion 144,000
Notes payable, current portion 1,787,000
Convertible debentures, current (net discount of $5,669,000) 625,000
-------------
Total current liabilities 8,264,000
Long-term liabilities:
Capital leases, long-term 12,794,000
Note payable 3,598,000
Convertible debenture, long-term (net discount of $15,061,000) 1,889,000
Deferred land lease 362,000
Deferred revenue 1,808,000
Other liabilities, long-term 538,000
-------------
Total liabilities 29,253,000
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, 38,647 shares
issued and outstanding 3,117,000
Class A Common Stock, par value $.0001 per share; 625,000,000
shares authorized; 71,649,613 shares issued and outstanding 7,000
Class B Common Stock, par value $.0001 per share; 10,000,000 shares
authorized; 1,013,572 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 11,110,000
Public Warrants 473,000
Class A Warrants 11,290,000
Class B Warrants 4,632,000
Additional paid-in capital 66,187,000
Accumulated other comprehensive loss (27,000)
Deficit accumulated during the development stage (99,216,000)
-------------
Total stockholders' deficiency (2,427,000)
-------------
Total liabilities and stockholders' deficiency $ 26,826,000
=============
See accompanying notes to the unaudited consolidated financial statements
3
MOONEY AEROSPACE GROUP, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
Three Months Ended Six Months Ended Period from
June 30, June 30, January 26, 1990
(Unaudited) (Unaudited) (inception) to
----------------------------- ----------------------------- June 30, 2002
2001 2002 2001 2002 (Unaudited)
------------- ------------- ------------- ------------- -------------
Net spare parts sales $ -- $ 369,000 $ -- $ 369,000 $ 369,000
Cost of sales -- 124,000 -- 124,000 124,000
------------- ------------- ------------- ------------- -------------
Gross margin -- 245,000 -- 245,000 245,000
Cost and expenses:
Research and development costs 2,259,000 993,000 4,034,000 2,654,000 47,391,000
Selling, general and administrative expenses 1,027,000 3,488,000 1,964,000 5,639,000 31,875,000
(Gain) loss on sale of assets -- (170,000) -- (170,000) 585,000
Realized loss on sale of investments -- -- -- -- 66,000
In-process research and development acquired -- -- -- -- 761,000
Non-recurring expenses -- -- -- -- 3,823,000
------------- ------------- ------------- ------------- -------------
3,286,000 4,311,000 5,998,000 8,123,000 84,501,000
------------- ------------- ------------- ------------- -------------
Loss from operations (3,286,000) (4,066,000) (5,998,000) (7,878,000) (84,256,000)
Other (expense) income:
Interest expense (1,392,000) (2,764,000) (3,355,000) (4,667,000) (13,919,000)
Interest and other income 14,000 27,000 15,000 68,000 4,349,000
------------- ------------- ------------- ------------- -------------
Loss before extraordinary item (4,664,000) (6,803,000) (9,338,000) (12,477,000) (93,826,000)
Extraordinary loss on retirement of Bridge Notes -- -- -- -- (942,000)
------------- ------------- ------------- ------------- -------------
$ (4,664,000) $ (6,803,000) $ (9,338,000) $(12,477,000) $(94,768,000)
============= ============= ============= ============= =============
Net loss per common share $ (0.21) $ (0.10) $ (0.47) $ (0.21)
============= ============= ============= =============
Weighted average number of common shares outstanding 23,108,000 65,127,000 20,926,000 59,602,000
============= ============= ============= =============
See accompanying notes to unaudited consolidated financial statements.
4
MOONEY AEROSPACE GROUP, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
Statement of Stockholders' Deficiency
(Unaudited)
- --------------------------------------------------- --------------------------------------------------------------------------------
Common Stock
- --------------------------------------------------- --------------------------------------------------------------------------------
Series A
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 $ $ 418,094 $ 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
5a
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----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
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
See accompanying notes to unaudited consolidated financial statements
5b
MOONEY AEROSPACE GROUP, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
Statement of Stockholders' Deficiency (continued)
(Unaudited)
- --------------------------------------------------- --------------------------------------------------------------------------------
Common Stock
- --------------------------------------------------- --------------------------------------------------------------------------------
Series A
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 2,000
Net proceeds from issuance of
common stock at $0.17 per
share 5,300,701 1,000
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 1,000
Unrealized loss on investments
Net loss
----------------------------------------------------------------------------------------------------
Comprehensive loss
----------------------------------------------------------------------------------------------------
Balance at December 31, 2001 46,648 $3,615,000 45,338,850 $ 5,000 1,900,324 $ 4,000,000 $ 4,000,000 $ $6,352,000
====================================================================================================
6a
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----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
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 2,332,000 (183,000) (16,000)
Net proceeds from issuance of
common stock at $0.17 per
share 1,241,000 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 1,578,000 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 $55,663,000 $(29,000) $(86,575,000) $ (4,574,000)
====================================================================================================
See accompanying notes to unaudited consolidated financial statements
6b
MOONEY AEROSPACE GROUP, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
Statement of Stockholders' Deficiency (continued)
(Unaudited)
- --------------------------------------------------- --------------------------------------------------------------------------------
Common Stock
- --------------------------------------------------- --------------------------------------------------------------------------------
Series A
Preferred Stock Class A Class B Class E-1 Class E-2
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Warrants
------------------- --------------------------------------------------------------------------------
Conversion of Preferred Stock
to Class A (8,001) $ (546,000) 5,430,919 $ 1,000 $ $ $ $
Net proceeds from issuance of
common stock and warrants
at $.11 for professional
services 100,000 10,000
Amortization of discount on
Preferred Stock 48,000
Amortization of warrants
attached to common stock
Issuance of warrants attached to
debentures 4,029,000
Beneficial conversion feature
related to debentures
Conversion of Convertible
Debentures to Class A 15,752,221 1,000
Unrealized gain on investments
Issuance of common stock for
professional services 880,000
Conversion of Class B stock
to Class A 886,752 (886,752)
Issuance of common stock to
Mooney Aircraft Corporation 3,260,871
Issuance of warrants to Mooney
Aircraft Corporation 399,000
Issuance of warrants to Dr. Chen 320,000
Net loss
----------------------------------------------------------------------------------------------------
Comprehensive loss
----------------------------------------------------------------------------------------------------
Balance at June 30, 2002
(unaudited) 38,647 $3,117,000 71,649,613 $ 7,000 1,013,572 $ -- 4,000,000 $ -- 4,000,000 $ -- $11,110,000
====================================================================================================
7a
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
Deficit accumulated
Public Class A Class B Additional Accumulated other during the
warrants warrants warrants paid-in capital comprehensive loss development stage Total
----------------------------------------------------------------------------------------------------
Conversion of Preferred Stock
to Class A $ $ $ $ 697,000 $ $ (56,000) $ 96,000
Net proceeds from issuance of
common stock and warrants
at $.11 for professional
services 22,000 32,000
Amortization of discount on
Preferred Stock (48,000) --
Amortization of warrants
attached to common stock 60,000 (60,000) --
Issuance of warrants attached to
debentures 4,029,000
Beneficial conversion feature
related to debentures 7,757,000 7,757,000
Conversion of Convertible
Debentures to Class A 910,000 911,000
Unrealized gain on investments 2,000 2,000
Issuance of common stock for
professional services 178,000 178,000
Conversion of Class B stock
to Class A --
Issuance of common stock to
Mooney Aircraft Corporation 900,000 900,000
Issuance of warrants to Mooney
Aircraft Corporation 399,000
Issuance of warrants to Dr. Chen 320,000
Net loss (12,477,000) (12,477,000)
----------------------------------------------------------------------------------------------------
Comprehensive loss (12,475,000)
----------------------------------------------------------------------------------------------------
Balance at June 30, 2002
(unaudited) $473,000 $11,290,000 $4,632,000 $66,187,000 $(27,000) $(99,216,000) $ (2,427,000)
====================================================================================================
See accompanying notes to unaudited consolidated financial statements
7b
MOONEY AEROSPACE GROUP, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
PERIOD FROM
JANUARY 26
1990
SIX MONTH ENDING JUNE 30, (INCEPTION)
----------------------------- TO JUNE 30,
2001 2002 2002
------------- ------------- -------------
OPERATING ACTIVITIES:
Net loss $ (9,338,000) $(12,477,000) $(94,768,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Noncash stock and warrant compensation expense -- 897,000 2,104,000
Noncash professional service expense -- 140,000 484,000
Noncash interest expense -- 114,000 661,000
Amortization of discount on convertible debentures 2,716,000 2,026,000 4,184,000
Amortization of debt issue costs -- 73,000 146,000
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 685,000 722,000 7,187,000
Loss (gain) on disposal of assets -- (170,000) 3,390,000
Realized loss on sale of investments -- -- 66,000
Changes in operating assets and liabilities:
Increase in accounts receivable -- (88,000) (88,000)
Increase in inventory -- (769,000) (769,000)
Decrease (increase) in prepaid expenses and other current assets 22,000 (283,000) (177,000)
Increase in other assets (109,000) -- (315,000)
Increase (decrease) in accounts payable 224,000 (1,326,000) (627,000)
Increase in accrued liabilities (47,000) 2,190,000 5,311,000
Increase in deferred revenue -- -- 1,605,000
------------- ------------- -------------
Net cash used in operating activities (5,847,000) (8,951,000) (69,567,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in construction in progress -- -- (446,000)
Proceeds from insurance claims upon loss of aircraft -- -- 30,000
Proceeds from disposal of assets -- 170,000 9,973,000
Capital expenditures (274,000) (21,000) (8,222,000)
Assets acquired in business combination -- (4,082,000) (4,082,000)
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) (2,009,000) (11,344,000)
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 1,014,000 -- 5,988,000
Proceeds from issuance of convertible debentures 4,938,000 7,542,000 17,340,000
Proceeds from issuance of warrants -- 4,029,000 10,023,000
Advances from stockholder -- -- 10,728,000
Proceeds from issuance of common stock 897,000 -- 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 (417,000) (70,000) (1,004,000)
Payments on promissory notes -- (297,000) (722,000)
Repayment of bridge financing -- -- (8,100,000)
------------- ------------- -------------
Net cash provided by financing activities 6,432,000 11,204,000 81,836,000
------------- ------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 311,000 244,000 925,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,000 681,000 --
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 324,000 $ 925,000 $ 925,000
============= ============= =============
See accompanying notes to unaudited consolidated financial statements
8
MOONEY AEROSPACE GROUP, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDTED STATEMENT OF CASH FLOWS (continued)
(Unaudited)
PERIOD FROM
JANUARY 26
1990
SIX MONTH ENDING JUNE 30, (INCEPTION)
----------------------------- TO JUNE 30,
2001 2002 2002
------------- ------------- -------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 539,000 $ 939,000 $ 5,361,000
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 -- -- $ 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 -- $ 5,314,000
Issuance of note, stock and warrants for net assets acquired in
business combination -- $ 5,799,000 $ 5,799,000
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
See accompanying notes to unaudited consolidated financial statements
9
MOONEY AEROSPACE GROUP, LTD.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
In the opinion of the Company's management, the accompanying unaudited
consolidated financial statements include all adjustments (which include only
normal recurring adjustments) necessary for a fair presentation of the financial
position of the Company at June 30, 2002 and the results of operations and cash
flows for the three and six months ended June 30, 2002 and June 30, 2001,
respectively, and for the period from January 26, 1990 (inception) to June 30,
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 these consolidated financial statements
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
occurrence 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 "MACorp". On February 6, 2002 the U.S. Bankruptcy Court in San
Antonio, Texas, approved an operating agreement, which allowed the Company to
manage MACorp while a plan of reorganization was prepared for approval. MACorp
had 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 Postion") as senior secured creditor for
MACorp. 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 MACorp. As additional security for the Company's compliance with the
fulfillment of its obligations pursuant to the Assignment and Assumption
Agreement and the acquistion notes, the Company delivered to Congress Financial
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.
10
On March 18, 2002, the bankruptcy courts approved the sale of MACorp's
assets to the Company, which was completed on April 19, 2002. Historically,
MACorp has produced top of the line, single engine piston airplanes including
the Eagle, the Ovation 2, and the Bravo, which are widely considered to be the
performance leaders in the four-passenger single engine aircraft market. For
over 50 years, the MACorp 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.
MACorp's assets are held by a newly formed wholly owned subsidiary of
Mooney Airplane Company, Inc. (MAC). On July 23, 2002, the Company changed its
name from Advanced Aerodynamics & Structures, Inc. to Mooney Aerospace Group,
Ltd. ("the Company"). The accompanying consolidated financial statements are
inclusive of the Company and MAC, however, the results of operations and cash
flows of MAC are only included for the period April 19, 2002 (the date of
acquisition) through June 30, 2002. Refer to Note 9 for additional discussion
and footnote disclosures regarding the acquisition.
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 the Company will review how best to capitalize on the completed
development work.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2001 balances to
conform to the 2002 presentation.
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. There was no effect on the Company's financial position as
of January 1, 2002 due to the adoption of these standards. The effects of the
adoption of these accounting standards on the results of operations and
financial position of the Company as of and for the period ended June 30, 2002,
as it relates to the acquisition of MACorp, are disclosed in Note 9.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which supercedes 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 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 six months ended June 30, 2002.
11
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
and six month periods ended June 30, 2002 and 2001 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 convertible preferred stock, options and
warrants outstanding are anti-dilutive.
4. NOTES PAYABLE
As discussed in Note 1, on February 8, 2002 we entered into an
agreement with Congress Financial Corporation to acquire its position as a
senior secured creditor of MACorp 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% per annum in excess of the Prime Rate, interest payments
being due the first day of each month starting with February 1, 2002; (2) a
Secured Promissory Note for $2,500,000, with an interest rate of 2% per annum in
excess of the Prime Rate with principal payments of $208,000 being due in twelve
consecutive calendar quarterly installments commencing with April 1, 2002 and;
(3) a Secured Promissory Note for $1,500,000, with an interest rate of 2% per
annum in excess of the Prime Rate, with principal and interest payments being
due on the first business day of each calendar quarter commencing on July 1,
2004 with the principal being due January 29, 2007. These notes are secured by
substantially all the assets acquired from MACorp. As of June 30, 2002, a total
of approximately $4,292,000 of these notes remained outstanding, as the first
quarterly payment of $208,000 was paid prior to the end of the period. At June
30, 2002 accrued interest related to these notes totaled approximately $60,000.
The note for $500,000 plus accrued interest was paid on July 29, 2002.
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. Interest accrues at the rate of 2% per annum in excess of the Prime
Rate. This note is a contingent note, and therefore principal and interest are
payable on January 29, 2007, but only in the event that the Company defaults
under the payment terms of the other notes. This note is also secured by
substantially all the assets acquired from MACorp. No events of default have
occurred with respect to these notes.
In May 2002 the Company received $400,000 in cash in order to fund
operations, by signing an unsecured promissory note. The terms of the note call
for the payment of principal and interest accrued at 12% on the sooner of June
24, 2002 or the closing of the next funding. However, in July 2002 a new note
was signed which superseded the terms of this note, including the rate of
interest which was lowered to 8%. Refer to Note 10 regarding the terms of this
new note. At June 30, 2002 $3,000 in accrued interest has been recorded.
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
12
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 six months ended June 30, 2002,
$347,000 has been amortized to interest expense, due to the passage of time and
conversions into shares of common stock.
At March 31, 2002, the Company was in default of one of the covenants
of the agreement for failure to pay accrued interest. On May 20, 2002 the
Company obtained waivers from note holders who participated under the March 27,
2001 Subscription Agreement, that waived their right to call the notes due,
their right to have interest accrued at a penalty rate, and amended the terms of
the note to require the payment of interest at maturity. Per the terms of the
associated Collateral Agreement, the terms of the notes could be changed on
behalf of all subscribers if approval is obtained from subscribers whose
principal balance outstanding represents 60% of the entire balance outstanding,
of which the Company obtained waivers representing 93% of the principal balance
outstanding at May 20, 2002. An insufficient number of waivers were obtained
from those note holders who participated in the July 25, 2001 transaction.
Therefore interest has been accrued at the note face rate of for those who
signed the waivers and at the penalty rate for those who did not. Total interest
accrued at June 30, 2002 under this Subscription Agreement was approximately
$79,000. The balance of $1,027,000 outstanding at June 30, 2002 from the March
27,2001 transaction has been recorded as a long-term liability. The balance of
$205,000 outstanding from the July 25, 2001 transaction has been recorded as a
short-term liability, as the notes were due on July 25, 2002.
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. Pursuant to that
Section, the subscriber is entitled to certain damages, and at June 30, 2002,
the Company has accrued $167,000 in such damages. In addition, as the
non-registration event lasted more than 181 days, an event of default also
occurred. However, on May 20, 2002 the Company obtained a waiver from the note
holder whereby the note holder waived his right to call the note due and amended
the terms of the note to require the payment of interest at maturity. In
addition, the note holder also waived his right to have liquidation damages
accrued during the period May 20, 2002 through August 31, 2002. As a result, the
balance outstanding of $1,000,000 at June 30, 2002 has been record as a long
term liability.
The June 27, 2001 debenture was issued with a various stated conversion
price, 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 six months ended June 30, 2002 approximately
$50,000 was amortized to interest expense. No notes issued under this agreement
were converted as of June 30, 2002.
13
At June 30, 2002, the Company has accrued approximately $102,000 in
interest due at the penalty rate, as the waiver obtained and discussed above did
not waive this note holder's right to collect interest at the penalty rate as
defined in the note agreement.
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 addition, as the non-registration event lasted more than 181 days, an event
of default has also occurred. However, on May 20, 2002, certain note holders
under this Subscription Agreement signed a waiver similar to that discussed
above. According to the terms of the waiver, the note holders waived their right
to call the note due and to have liquidation damages accrued during the period
May 20, 2002 through August 31, 2002. Therefore in accordance with the waiver
and Section 10.4, the Company has accrued $807,000 representing liquidation
damages due to the note holders as a result of the non-registration event.
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. Funding in the amount of
$1,329,000 was obtained through the exercise of this option and is discussed
below within the transaction closed on February 27, 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 six-month period ended June 30, 2002,
approximately $552,000 was amortized to interest expense due to the passage of
time and conversions.
At June 30, 2002, the Company has accrued approximately $455,000 in
interest due the note holders. As interest is due on September 30, 2002, no
event of default has yet occurred with respect to the payment of interest,
however it is expected the Company will be unable to pay the interest due. As
discussed earlier, on May 20, 2002, the Company obtained waivers from certain
note holders. In addition to the rights waived as they relate to
non-registration events, those note holders who signed also amended the terms of
their note agreements to require the payment of interest at maturity. Due to the
event of default noted above, and the anticipated failure to pay interest on
September 30, 2002, the principal balance of $5,468,000 outstanding as of June
30, 2002 under this Agreement and representative of those who signed the waivers
has been recorded as a long-term liability in the balance sheet, while the
remaining outstanding balance of $2,849,000 has been recorded as a current
liability.
14
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 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 there after. 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 we had the 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 will be amortized over the life of the debentures. As of
June 30, 2002, approximately $284,000 was amortized to interest expense due to
the passage of time.
With respect to the three financing deals which closed on February 27,
2002 discussed above, 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 addition, as the
non-registration event lasted more than 181 days, an event of default has also
occurred. However, on May 20, 2002 certain note holders under this Subscription
Agreement signed a waiver similar to that discussed above, and waived their
right to call the note due and to have liquidation damages accrued during the
period May 20, 2002 through August 31, 2002. Therefore in accordance with
Section 10.4, the Company has accrued $214,000 representing liquidation damages
due to the note holders as a result of the non-registration event. In addition,
those who signed the waivers also amended the terms of their note agreements to
require the payment of interest at maturity. As interest is due on September 30,
2002, no event of default has yet occurred with respect to the payment of
interest, however it is expected the Company will be unable to pay the interest
due. At June 30, 2002, the Company has accrued approximately $200,000 in
interest due the note holders. Due to the event of default caused by the
non-registration event and the anticipated failure to pay interest due at
September 30, 2002, the outstanding principal balance of $3,419,000 at June 30,
2002 under this Agreement that is representative of those who signed the waivers
has been recorded as a long-term liability in the balance sheet, while the
remaining outstanding balance of $2,540,000 has been recorded as a current
liability.
15
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. In conjunction with the 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 there after. 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 will be amortized over the life of the debentures. As of June 30, 2002,
approximately $52,000 was amortized to interest expense due to the passage of
time. No notes issued under this agreement were converted during the six months
ended June 30, 2002.
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. However, certain note holders under
this Subscription Agreement signed a waiver similar to that discussed above.
According to the terms of the waiver, the note holder waived his/her right to
have liquidation damages accrued during the period May 20, 2002 through August
31, 2002. Therefore in accordance with the waiver and Section 10.4, the Company
has accrued $5,000 representing liquidation damages due to the note holders as a
result of the non-registration event. In addition, those who signed the waivers
also amended the terms of their note agreements to require the payment of
interest at maturity. As interest is due on September 30, 2002, no event of
default has yet occurred with respect to the payment of interest, however it is
expected the Company will be unable to pay the interest due. At June 30, 2002,
the Company has accrued approximately $34,000 in interest due the note holders.
Due to the anticipated failure to pay interest due at September 30, 2002, the
outstanding principal balance of $1,245,000 at June 30, 2002 under this
Agreement that is representative of those who signed the waivers has been
recorded as a long-term liability in the balance sheet, while the remaining
outstanding balance of $350,000 has been recorded as a current liability.
On April 11, 2002, the Company issued $950,000 in 8% Unsecured
Convertible Notes in a subsequent closing that was part of the new private
placement that closed on February 27, 2002. In conjunction with the closing, the
Company issued an additional $95,000 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 at maturity. Attached to
the notes were warrants to purchase 2,171,000 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. At June 30, 2002 the
Company has accrued $19,000 in interest due the note holders.
The April 11, 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
$661,000 will be amortized over the life of the debentures. As of June 30, 2002,
approximately $32,000 was amortized to interest expense due to the passage of
time. As of June 30, 2002, no notes issued under this agreement had been
converted.
16
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. However, certain note holders under
this Subscription Agreement signed a waiver similar to that discussed above.
According to the terms of the waiver, the note holders waived their right to
have liquidation damages accrued during the period May 20, 2002 through August
31, 2002. Therefore in accordance with the waiver and Section 10.4, the Company
has accrued $4,000 representing liquidation damages due to the note holders as a
result of the non-registration event.
On May 16, 2002, the Company issued $730,000 in 8% Unsecured
Convertible Notes under a new Subscription Agreement. In conjunction with the
closing, the Company issued an additional $73,000 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 May 16, 2007 and interest is due on September
30, 2002 and semi-annually there after. Attached to the notes were warrants to
purchase 1,669,000 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. 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 is prohibited from issuing shares of common stock.
The May 16, 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
$497,000 will be amortized over the life of the debentures. As of June 30, 2002,
approximately $13,000 was amortized to interest expense due to the passage of
time. As of June 30, 2002, no notes issued under this agreement had been
converted.
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. However, as the non-registration
event did not occur prior to June 30, 2002, no damages have been accrued as of
that date.
At June 30, 2002, the Company has accrued $8,000 in interest due the
note holders. As interest is due on September 30, 2002, no event of default has
yet occurred with respect to the payment of interest, however it is expected the
Company will be unable to pay the interest due. On May 20, 2002 as part of the
waivers previously discussed, certain note holders amended the terms of their
note agreements to require payment of interest at maturity. Due to the
anticipated failure to pay interest due at September 30, 2002, the outstanding
principal balance of $453,000 at June 30, 2002 under this Agreement that is
representative of those who signed the waivers has been recorded as a long-term
liability in the balance sheet, while the remaining outstanding balance of
$350,000 has been recorded as a current liability.
On June 6, 2002, the Company issued $325,000 in 8% Unsecured
Convertible Notes in a subsequent closing that was part of the new private
placement dated May 16, 2002. In conjunction with the closing, the Company
issued an additional $32,500 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 May 16, 2002 private placement. The maturity date of the notes
is June 5, 2007 with interest being due at maturity. Attached to the notes were
warrants to purchase 743,000 shares of Class A Common Stock. The warrants may be
exercised under the same terms as the warrants issued in conjunction with the
May 16, 2002 private placement.
The June 6, 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 $230,000 will be
amortized over the life of the debentures. As of June 30, 2002, approximately
$3,000 was amortized to interest expense due to the passage of time. No notes
issued under this agreement were converted during the six months ended June 30,
2002.
17
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. However, as the non-registration
event did not occur prior to June 30, 2002, no damages have been accrued as of
that date.
On June 10, 2002, the Company issued $500,000 in 8% Unsecured
Convertible Notes in a subsequent closing that was part of the new private
placement dated May 16, 2002. In conjunction with the closing, the Company
issued an additional $50,000 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 May 16, 2002 private placement. The maturity date of the notes
is June 10, 2007 with interest being due at maturity. Attached to the notes were
warrants to purchase 1,143,000 shares of Class A Common Stock. The warrants may
be exercised under the same terms as the warrants issued in conjunction with the
May 16, 2002 private placement.
The June 10, 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 $367,000 will be
amortized over the life of the debentures. As of June 30, 2002, approximately
$4,000 was amortized to interest expense due to the passage of time. No notes
issued under this agreement were converted during the six months ended June 30,
2002.
On June 18, 2002, the Company issued $350,000 in 8% Unsecured
Convertible Notes in a subsequent closing that was part of the new private
placement dated May 16, 2002. In conjunction with the closing, the Company
issued an additional $35,000 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 May 16, 2002 private placement. The maturity date of the notes
is June 18, 2007 with interest being due at maturity. Attached to the notes were
warrants to purchase 800,000 shares of Class A Common Stock. The warrants may be
exercised under the same terms as the warrants issued in conjunction with the
May 16, 2002 private placement.
The June 18, 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
$257,000 will be amortized over the life of the debentures. As of June 30, 2002,
approximately $2,000 was amortized to interest expense due to the passage of
time. No notes issued under this agreement were converted during the six months
ended June 30, 2002.
Additionally, on June 28, 2002, the Company issued $2,000,000 in 8%
Unsecured Convertible Notes in a subsequent closing that was part of the new
private placement dated May 16, 2002. The notes are convertible after 120 days
into shares of common stock under the same terms as the May 16, 2002 private
placement. The maturity date of the notes is June 28, 2007 with interest being
due at maturity. Attached to the notes were warrants to purchase 4,000,000
shares of Class A Common Stock. The warrants may be exercised under the same
terms as the warrants issued in conjunction with the May 16, 2002 private
placement.
The June 18, 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
$1,372,000 will be amortized over the life of the debentures. As of June 30,
2002, approximately $3,000 was amortized to interest expense due to the passage
of time. No notes issued under this agreement were converted during the six
months ended June 30, 2002.
18
As of June 30, 2002, various note holders converted a total of $
4,747,000 of Convertible Debentures into 30,713,308 shares of Class A Common
Stock.
6. STOCKHOLDERS' DEFICIENCY
PREFERRED STOCK
Through June 30, 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 38,647 shares of Preferred Stock with a stated value of $3,864,700
and detachable warrants to purchase 1,082,000 shares of common stock. No
Preferred Stock was issued during the six months ended June 30, 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 discount is being amortized
over the life of the warrants. During the six month period ended June 30, 2002,
$48,000 was amortized to Accumulated Deficit as a return on equity. 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.
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 June 30, 2002, the
Company had accumulated dividends in arrears for the Preferred Stock totaling $
372,000 or $ 9.63 per share.
For the six-month period ended June 30, 2002, various preferred
stockholders had converted a total of 8,001 shares plus dividends in arrears
into 5,431,000 shares of Class A Common Stock. No warrants have been exercised
as of June 30, 2002.
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 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, we 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 six-month period ended June 30, 2002.
19
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 June 30, 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. INVENTORIES
A summary of inventories is as follows:
JUNE 30, 2002
---------------
Raw materials and purchased parts $ 1,536,000
Manufactured parts 2,330,000
Work-in-process 3,726,000
---------------
7,592,000
Less allowance for obsolete and
slow-moving parts 1,475,000
---------------
$ 6,117,000
===============
8. 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 mutually agreed upon basis. The Company agreed to
pay Dr. Chen severance of $300,000 over the next two years. In addition, he
received warrants to purchase 2,000,000 shares of Class A Common Stock at an
exercise price of $.25. At June 30, 2002, $100,000 of the cash severance has
been paid. At that date, the Company has accrued compensation expense of
$520,000, representing the liability for the remaining $200,000 cash payment
due, plus the estimated fair value of the warrants 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 13% ownership in the
Company. At June 30, 2002, the Company has accrued $377,000 in compensation
expense representing the estimated fair market value of the vested ownership at
the date.
20
9. BUSINESS COMBINATION
As described in Note 1, on April 19, 2002, the Company completed the
acquisition of certain assets and the assumption of certain liabilities of
MACorp through its newly formed and wholly owned subsidiary, MAC, for
approximately $9,881,000. Of the total amount paid, approximately $4,082,000 was
in cash, $4,500,000 was in the form of notes payable, 3,260,871 shares of Class
A Common Stock were issued with a fair value of $900,000, and warrants to
purchase 3,623,189 shares of Class A Common Stock were issued with a fair value
of $399,000. Assets purchased included inventory and property, plant and
equipment, and totaled $5,348,000 and $5,193,000 respectively. Liabilities
assumed totaled to $1,947,000.
This transaction was accounted for by the purchase method of
accounting, as required by SFAS No. 141, BUSINESS COMBINATIONS, and accordingly,
the purchase price has been allocated to the assets acquired and the liabilities
assumed based upon the estimated fair values at the date of acquisition. The
excess of the purchase price over the estimated fair value of net assets
acquired has been recorded as goodwill in the amount of $1,287,000 at June 30,
2002. The allocation is preliminary, and may be adjusted upon the completion of
an appraisal of the property, plant, and equipment and other future analyses.
The appraisal is expected to be completed by the end of the third quarter.
The operating results of the acquisition are included in the Company's
consolidated results of operations from April 19, 2002. The following unaudited
proforma summary presents the consolidated results of operations as if the
acquisition had occurred at the beginning of the year of acquisition and the
year immediately preceding, after the effect of certain adjustments. These
proforma results have been presented for comparative purposes only and are not
indicative of what would have occurred had the acquisitions been made as of
January 1, 2001, appropriately, or of any potential results which may occur in
the future. The results of operations of MACorp included in the pro forma
information below are not indicative of what the results of operations would be
had MACorp been operating under normal circumstances, as it was operating under
Chapter 11 proceedings during the six months ended June 30, 2002, and was about
to enter bankruptcy during the six months ended June 30, 2001.
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
--------------------------------------- ----------------- ----------------
Pro forma (unaudited)
--------------------------------------- ----------------- ----------------
Revenue $ 829,000 $ 13,408,000
--------------------------------------- ----------------- ----------------
Loss from continuing operations $ (9,722,000) $ (7,644,000)
--------------------------------------- ----------------- ----------------
Net loss $ (14,509,000) $ (11,075,000)
--------------------------------------- ----------------- ----------------
Net loss per share $ (0.24) $ (0.46)
--------------------------------------- ----------------- ----------------
10. SUBSEQUENT EVENTS
On July 10, 2002, the Company issued $250,000 in 8% Unsecured
Convertible Notes under a new Subscription Agreement. In conjunction with the
closing, the Company issued an additional $25,000 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 July 10, 2007 and interest is due on that
date. Attached to the notes were warrants to purchase 71,000 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.
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.
21
On July 31, 2002, the Company issued $300,000 in 8% Unsecured
Convertible Notes under the July 10, 2002 Subscription Agreement. In conjunction
with the closing, the Company paid $30,000 in cash and issued warrants to
purchase 86,000 shares of common stock as finder's fees. The finder's fee
warrants may be exercised after 45 days at a price of $.30 per share. 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 July 31, 2007 and interest is due on that date. Attached to the notes
were warrants to purchase 71,000 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. 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 is prohibited from issuing
shares of common stock.
In July 2002, in order to raise funds for operations, the Company
signed three promissory notes: one in the amount of $1,075,000; and two in the
amount of $100,000 each. The note for $1,075,000 superseded the note signed on
May 24, 2002 for $400,000 disclosed in Note 3, therefore only $675,000 in cash
was received upon the signing of this note. The terms for all notes are
identical and call for repayment on the earliest to occur of: (1) August 30,
2002; or (2) the sale of the first three complete airplanes; or (3) in the event
the Company raises an aggregate of at least $3,000,000 in financing; or (4) the
occurrence of an event of default as defined in the Security Agreement related
to the issuance of convertible notes on July 31, 2002 as described above. The
notes accrue at an annual rate of 8% that increases to 12% should the Company
default on repayment.
In addition to the notes described above, the Company also signed five
promissory notes in the total amount of $502,000 in order to raise funds to pay
off the principal and accrued interest of the $500,000 note due to Congress
discussed in Note 4. The interest and payment terms are identical to those of
the notes in the amount of $1,275,000 discussed above.
On August 15, 2002, Mr. Roy H. Norris, President and Chief Executive
Officer submitted his resignation to the Board of Directors. Mr. Norris
announced that he had accomplished the objectives he established in taking this
position, of recruiting a new management team and setting a new direction for
the company, and was submitting his resignation and turning the company over to
those he recruited for that purpose. Subsequent to Mr. Norris' resignation, Mr.
L. Peter Larson, Chief Operating Officer and Chief Financial Officer, became the
interim President and Chief Executive Officer.
ITEM 2. PLAN OF OPERATIONS
Certain statements contained in this report, including statements
concerning our future cash and financing requirements, our ability to raise
additional capital, our ability to obtain market acceptance of its aircraft, our
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 this
report, our Annual Report on Form 10-KSB and other reports and document that we
file with the Securities and Exchange Commission, all of which may be retrieved
at www.sec.gov.
GENERAL
The new management team previously discussed, consisting of Roy Norris
- - Chairman and CEO, Peter Larson - Executive Vice President and CFO, Dale Ruhmel
- - Executive Vice President of Engineering and Operations, and Nelson Happy -
Executive Vice President and General Counsel, was appointed by the Board on
January 8, 2002 and began implementation of our new strategy.
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 ("MACorp"). On February 6th, the U.S.
Bankruptcy Court in San Antonio, Texas, approved an operating agreement which
allowed us to manage MACorp until a plan of reorganization was approved. The
Bankruptcy Court approved the sale of substantially all of the MACorp assets to
us on March 18, 2002 and on April 19, 2002 we completed the Mooney asset
acquisition.
22
MACorp was the world's leading supplier of high performance single
engine general aviation aircraft primarily serving business and owner-flown
markets. MACorp 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 MACorp's assets and intend to return to full production of
the Mooney aircraft line. MACorp's assets are held by our wholly-owned
subsidiary named Mooney Airplane Company, Inc. ("MAC"). On July 23, 2002, we
changed our name to Mooney Aerospace Group, Ltd.
We believe the acquisition of MACorp'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 MAC to full production and create substantial potential for
earnings growth for the Company and its shareholders. We then recruited Jack
Jansen, who has been in charge of production for a number of general aviation
manufacturers, to take the position of Mooney Airplane Company President and
COO. In July 2002, Nicolas Chabbert joined the company as Executive Vice
President of Sales & Marketing. Mr. Chabbert is considered one of the leading
authorities in the world in General Aviation sales and marketing, having among
his most noteworthy achievements the tremendously successful introduction of the
Socata TBM-700 single engine turboprop aircraft to the United States.
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.
During 2002 and 2003, we intend to focus our efforts on the following
events:
o The restoration to full production of MAC's manufacturing line in
Kerrville, Texas.
o Enhancement and aggressive implementation of our marketing
program.
o 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.
On June 27, 2002 MAC announced that we had received a Federal Aviation
Administration (FAA) production certificate that covers the current Mooney
models: Eagle2 (Mooney M20S), Ovation2 (Mooney M20R) and the Bravo2 (Mooney
M20M). We are making good progress in getting the factory up to full production.
The first airplane was completed, licensed and flown to Oshkosh, Wisconsin for
EAA's AirVenture in July. The aircraft has been sold and delivered to our first
customer.
23
On August 8, 2002 we announced that MAC had received FAA certification
as a repair station. The repair station is co-located with the MAC production
facility in Kerrville, Texas. This will enhance our support to Mooney owners and
provide us with additional business opportunities.
Mr. Norris announced on August 15, 2002 that he had accomplished the
objectives he established in taking this position, of recruiting a new
management team and setting a new direction for the company, and was submitting
his resignation and turning the company over to those he recruited for that
purpose. We have entered into three-year employment agreements with Peter
Larson, Executive Vice President/Chief Operating Officer who will assume the
position as acting CEO; Dale Ruhmel, Executive Vice President of Engineering and
Operations, J. Nelson Happy, Executive Vice-President and General Counsel, and
Nicolas Chabbert, Executive Vice President of Sales and Marketing on terms
designed to reward performance. Over the three-year period Larson, Ruhmel and
Happy will vest in ownership of three percent, two percent and three percent
respectively, of the outstanding shares of the Company and receive annual
salaries of $200,000 plus reimbursement of expenses.
We have generated $369,000 in operating revenues to date, from spare
parts sales, and have incurred losses from our operating activities including
program development costs of $8,123,000 during the six-month period ended June
30, 2002. Included in the loss was a gain of $170,000 from the disposal of a
fully depreciated piece of equipment. We believe we will continue to experience
losses until such time as we attain a sales level of our aircraft on a
commercial scale. No assurance can be made that the we will be able to attain
sales levels of our aircraft in the foreseeable future which will allow us to
generate revenue sufficient to maintain its operations without other sources of
financing.
Our current cash balance, including the additional funding obtained
subsequent to June 30, 2002 described elsewhere (see "Liquidity and Capital
Resources"), has been sufficient to finance our plan of operations and
acquisitions to date. We are currently in negotiations with certain individuals
whose intention is to fund us $8,000,000 over the next six months
, however no firm commitment exists at the current time. Should this
funding be obtained, we believe it will be sufficient to meet our operating
needs for the next 12 months. Should this funding not be obtained, 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. If we are unable to
pay our obligations to Congress, it will have the ability to take legal action
against us under the terms of our various notes payable to Congress. Legal
action taken by Congress could include foreclosure on all of our assets, which
would likely result in cessation of the majority or all of our operations.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, we had a negative working capital of $627,000 and
stockholders' deficiency of $2,427,000. Since our inception in January 1990, we
have experienced continuing negative cash flow from operations, which have
resulted 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 restore
our production processes to full production levels 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. No assurance can be made that the Company will be able to
restore Mooney's production processes, regain market acceptance for our aircraft
or generate positive cash flow in the foreseeable future, or ever. If the
24
Company is unable to generate cash flow through its operations as necessary, it
will have to continue to obtain financing through equity or debt financing. No
assurance can be made that the Company will be able to obtain sufficient equity
or debt financing under terms acceptable to the Company to allow it to maintain
operations according to its current operating plans, or at all.
Our management team has developed a financial plan to address our
working capital requirements. Since early 2001, this has included the issuance
of convertible debentures. The debentures are convertible into shares of Class A
Common Stock at various conversion prices as specified in each transaction's
note agreement. The notes earn interest at the rate stated in the note
agreements and the payment terms vary with each agreement. Based upon the
specific payment terms of the March, June and July 2001 agreements, events of
default have occurred with respect to these transactions due to our failure to
pay the interest due on the appropriate due dates. No such events of default due
to our failure to pay interest have occurred with respect to the transactions
closed on or subsequent to October 26, 2001, as those payment terms call for
payment at maturity or semi-annually beginning September 30, 2002. However,
based upon our current cash balance and expected funding, it is anticipated we
will be unable to pay the interest due on September 30, 2002.
In addition to the events of default that have occurred as described
above, the Company's failure to register the appropriate amount of shares to
cover possible conversions as specified within each transaction's Subscription
Agreement, has led to the occurrence of non-registration events. Should such an
event extend beyond 60 days from the date of the transaction closing, each note
holder shall be entitled to damages that are to be paid either in cash or
additional shares of Class A Common Stock, according to the formula specified in
the Subscription Agreement. As of June 30, 2002, the Company has accrued a total
of $1,198,000 in such damages. In addition, a non-registration event does not
constitute an event of default unless such an event continues for 181 days
beyond the transaction closing date, at which time the note holders have the
right to call the notes due. This is the case for the transactions from June and
October 2001 and February 2002.
Although such events of default and non-registration have occurred, the
Company has obtained waivers and amendments from a number of note holders who
have waived their rights to call their notes due to the events mentioned above,
have amended their note agreements to require the payment of interest at
maturity instead of the original due dates, and in certain cases such note
holders have also waived their rights to receive interest at penalty rates, the
payment of non-registration damages in cash, and the accrual of such damages for
the time period May 20, 2002 through August 31, 2002.
The specific circumstances regarding the events of default and
non-registration and the obtaining of waivers has been discussed in greater
detail within Note 5 of the footnotes to the financial statements, however the
following table summarizes the convertible debenture transactions the Company
has entered into to date, showing each transaction's original principal balance,
the number of warrants issued in conjunction with the debentures, the principal
balance outstanding at June 30, 2002, and whether each transaction has fallen
into an event of non-registration or default, or both, the cause thereof, and
whether the obtaining of waivers and amendments has completely or partially
cured the default for all note holders.
25
Event of Default and
Original Principal Cause (I=interest;
Principal Value Balance Non- R=Registration;
(including Outstanding at Registration FC=fully cured;
Closing Date finders fees) Warrants June 30, 2002 Event PC=partially cured)
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
3/27/2001 $4,456,000 8,254,000 $1,027,000 No Yes-I, FC
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
6/27/2001 $1,000,000 2,646,000 $1,000,000 Yes Yes-I, R, FC
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
7/25/2001 $1,068,000 2,000,000 $205,000 No Yes-I, PC
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
10/26/2001 $8,417,000 17,714,000 $8,317,000 Yes Yes-R, PC
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
2/27/2002 (1) $2,475,000 5,143,000 $2,475,000 Yes Yes-R, PC
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
2/27/2002 (2) $1,462,000 3,037,000 $1,462,000 Yes Yes-R, PC
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
2/27/2002 (3) $2,272,000 4,926,000 $2,022,000 Yes Yes-R, FC
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
3/26/2002 $1,595,000 3,314,000 $1,595,000 Yes No
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
4/11/2002 $1,045,000 2,171,000 $1,045,000 Yes No
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
5/16/2002 $803,000 1,669,000 $803,000 Yes No
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
6/6/2002 $358,000 743,000 $358,000 Yes No
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
6/10/2002 $550,000 1,143,000 $550,000 No No
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
6/18/2002 $385,000 800,000 $385,000 No No
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
6/28/2002 $2,000,000 4,000,000 $2,000,000 No No
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
7/10/2002 $275,000 71,000 $0 No No
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
7/31/2002 $300,000 157,000 $0 No No
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
Totals $28,461,000 57,788,000 $23,244,000
- ------------------ ------------------- -------------- ------------------- ---------------- ---------------------------
Of the total outstanding principal balance recorded at June 30, 2002
only $6,344,000 has been recorded as short-term, either due to the maturity date
of the note, or the failure of the Company to obtain waivers from the note
holders.
26
Of the transactions displayed in the above table, the proceeds raised
from the February 2002 transactions were used to make the cash payment to
Congress in our acquisition of the assets of MACorp as described earlier. 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 June 30, 2002 described above has been sufficient to finance our
plan of operations and acquisitions to date. However, 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.
CRITICAL ACCOUNTING POLICIES
The Plan of Operations discusses our unaudited consolidated 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. Actual results may differ from these estimates under different
assumptions or conditions.
For further information regarding the accounting policies that we
believe to be critical accounting policies and that affect our more significant
judgments and estimates used in preparing our financial statements see our
December 31, 2001 Form 10-KSB.
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. For the year ending December 31,
2002, such earning thresholds would be pre-tax income of $45 million and $56.25
million for Class E-1 and Class E-2 Common Stock, respectively. 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.
27
PART II. OTHER INFORMATION
Item 5. Other Information
On August 15, 2002, Mr. Roy H. Norris, President and Chief Executive
Officer of the Company submitted his resignation to the Board of Directors. The
following is an excerpt from his resignation letter:
"On January 8, 2002, I agreed to your request as a fellow board member
to come out of retirement and assume the responsibilities as interim Chairman,
President, and CEO, following the resignation of Dr. Chen, the former Chairman,
President, & CEO of AASI. I agreed to come on board, recruit and hire a new
management team, and develop and execute a new management strategy. Our strategy
was to move the company in a new direction by acquiring and operating one or
more current producers of top of the line general aviation aircraft and suspend
development of the JetCruzer.
It was always my intention and our joint understanding that this would
be a temporary assignment for me and that, at the appropriate time, I would step
down and transfer my responsibilities to one of the individuals I recruited for
the company for that purpose and who also would be acceptable to the Board of
Directors. With the successful acquisition of Mooney Aircraft Company's assets
and the board's designation of a successor, we are in a position to pursue this
transition.
Accordingly, as we have discussed, I submit my resignation effective
today as Chairman, President, and CEO of Mooney Aerospace Group, Ltd. and its
subsidiaries and affiliates. Also, to facilitate my retirement plans, I submit
my resignation as a member of the Board of Directors of MASG and the Mooney
Airplane Company, Inc. However, I agree to make myself available in a consulting
role to assist the company as an advisor, from time to time as my schedule
permits, if the Board so desires."
The entire resignation letter has been included in this document as
Exhibit 99.2.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.39 Subscription Agreement and Form of Unsecured Note
(Exhibit A to the Subscription Agreement) and For of
Warrant (Exhibit D to the Subscription Agreement)
10.32 Audit Committee Charter adopted July 22, 2002
99.1 Certification of Chief Executive Officer and Chief
Financial Officer
99.2 Resignation Letter of Mr. Roy H. Norris
(b) Reports on Form 8-K
Filed April 26, 2002, regarding the closing of a financing in
the amount of $950,000
File May 9, 2002, and amended July 2, 2002, regarding the
acquisition of the assets of Mooney Aircraft Corporation
Filed May 31, 2002, regarding the closing of a financing in
the amount of $730,000
28
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.
MOONEY AEROSPACE GROUP, LTD.
By: /s/ L.Peter Larson
---------------------------------------------
L. Peter Larson, Chief Financial Officer and
Interim President and Chief Executive Officer
Dated: August 19, 2002